e10vq
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2008 |
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OR |
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| [ ] |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FROM THE TRANSITION PERIOD FROM TO |
COMMISSION FILE NUMBER 1-7521
FRIEDMAN INDUSTRIES, INCORPORATED
(Exact name of registrant as specified in its charter)
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TEXAS
(State or other jurisdiction of
incorporation or organization) |
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74-1504405
(I.R.S. Employer Identification
Number) |
4001 HOMESTEAD ROAD, HOUSTON, TEXAS 77028-5585
(Address of principal executive office) (zip code)
Registrant’s telephone number, including area code (713) 672-9433
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
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| Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting company) |
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Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
At December 31, 2008, the number of shares outstanding of the issuer’s only
class of stock was 6,799,444 shares of Common Stock.
TABLE OF CONTENTS
Part I — FINANCIAL INFORMATION
Item 1. Financial Statements
FRIEDMAN INDUSTRIES, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
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December 31, 2008 |
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March 31, 2008 |
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(Unaudited) |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
9,489,475 |
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$ |
2,643,922 |
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Accounts receivable, net of allowances for bad debts and cash discounts of
$37,276 at December 31 and March 31, 2008 |
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14,514,867 |
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16,742,000 |
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Inventories |
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28,091,915 |
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29,900,327 |
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Other |
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479,701 |
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136,345 |
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TOTAL CURRENT ASSETS |
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52,575,958 |
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49,422,594 |
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PROPERTY, PLANT AND EQUIPMENT: |
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Land |
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1,082,331 |
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1,082,331 |
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Construction in progress |
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— |
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8,706,172 |
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Buildings and yard improvements |
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7,000,838 |
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3,494,294 |
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Machinery and equipment |
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29,082,540 |
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21,879,259 |
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Less accumulated depreciation |
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(19,574,683 |
) |
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(18,389,983 |
) |
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17,591,026 |
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16,772,073 |
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OTHER ASSETS: |
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Cash value of officers’ life insurance and other assets |
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762,000 |
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720,001 |
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Deferred income taxes |
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— |
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43,724 |
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TOTAL ASSETS |
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$ |
70,928,984 |
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$ |
66,958,392 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable and accrued expenses |
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$ |
8,469,245 |
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$ |
13,499,314 |
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Current portion of long-term debt |
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54,028 |
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54,028 |
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Dividends payable |
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815,933 |
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339,972 |
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Income taxes payable |
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2,424,769 |
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70,069 |
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Contribution to profit sharing plan |
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275,500 |
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259,500 |
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Employee compensation and related expenses |
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1,246,416 |
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561,483 |
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TOTAL CURRENT LIABILITIES |
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13,285,891 |
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14,784,366 |
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LONG-TERM DEBT LESS CURRENT PORTION |
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27,014 |
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6,667,536 |
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DEFERRED INCOME TAXES |
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261,967 |
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— |
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POSTRETIREMENT BENEFITS OTHER THAN PENSIONS |
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598,933 |
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549,749 |
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STOCKHOLDERS’ EQUITY: |
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Common stock, par value $1: |
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Authorized shares — 10,000,000 |
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Issued
shares — 7,975,160 at December 31 and March 31, 2008 |
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7,975,160 |
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7,975,160 |
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Additional paid-in capital |
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29,003,674 |
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29,003,674 |
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Treasury
stock at cost (1,175,716 shares at December 31 and March 31, 2008) |
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(5,475,964 |
) |
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(5,475,964 |
) |
Retained earnings |
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25,252,309 |
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13,453,871 |
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TOTAL STOCKHOLDERS’ EQUITY |
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56,755,179 |
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44,956,741 |
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
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$ |
70,928,984 |
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$ |
66,958,392 |
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2
FRIEDMAN INDUSTRIES, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS-UNAUDITED
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Three Months Ended |
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Nine Months Ended |
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December 31, |
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December 31, |
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2008 |
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2007 |
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2008 |
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2007 |
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Net sales |
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$ |
56,182,665 |
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$ |
38,062,240 |
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$ |
186,855,501 |
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$ |
129,747,321 |
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Costs and expenses |
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Costs of goods sold |
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47,775,322 |
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36,092,428 |
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160,237,068 |
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121,575,529 |
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General, selling and
administrative costs |
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1,585,716 |
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1,024,178 |
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5,433,524 |
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3,530,341 |
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Interest
expense |
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— |
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— |
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23,310 |
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47,740 |
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49,361,038 |
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37,116,606 |
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165,693,902 |
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125,153,610 |
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Interest and other income |
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(26,584 |
) |
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(65,875 |
) |
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(130,761 |
) |
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(163,175 |
) |
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Earnings before income taxes |
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6,848,211 |
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1,011,509 |
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21,292,360 |
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4,756,886 |
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Provision for income taxes: |
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Current |
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2,192,149 |
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317,913 |
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7,012,409 |
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1,523,175 |
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Deferred |
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101,897 |
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33,389 |
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305,691 |
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100,167 |
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2,294,046 |
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351,302 |
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7,318,100 |
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1,623,342 |
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Net income |
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$ |
4,554,165 |
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$ |
660,207 |
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$ |
13,974,260 |
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$ |
3,133,544 |
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Weighted average number of common shares outstanding: |
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Basic |
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6,799,444 |
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6,712,108 |
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6,799,444 |
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6,712,108 |
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Diluted |
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6,799,444 |
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6,771,995 |
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6,799,444 |
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6,776,592 |
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Net income per share: |
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Basic |
|
$ |
0.67 |
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$ |
0.10 |
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$ |
2.06 |
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$ |
0.47 |
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Diluted |
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$ |
0.67 |
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$ |
0.10 |
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$ |
2.06 |
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$ |
0.46 |
|
Cash dividends declared per common share |
|
$ |
0.12 |
|
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$ |
0.06 |
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$ |
0.32 |
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$ |
0.22 |
|
3
FRIEDMAN INDUSTRIES, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS — UNAUDITED
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Nine Months Ended |
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December
31, |
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2008 |
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|
2007 |
|
OPERATING ACTIVITIES |
|
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Net income |
|
$ |
13,974,260 |
|
|
$ |
3,133,544 |
|
Adjustments to reconcile net income to cash provided by operating activities: |
|
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|
|
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Depreciation |
|
|
1,184,701 |
|
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|
847,200 |
|
Provision for deferred taxes |
|
|
305,691 |
|
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|
100,167 |
|
Provision for postretirement benefits |
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|
49,184 |
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|
39,706 |
|
Decrease (increase) in operating assets: |
|
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Accounts receivable |
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2,227,133 |
|
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|
5,563,741 |
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Inventories |
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1,808,412 |
|
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|
5,967,870 |
|
Prepaid federal income taxes |
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|
— |
|
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|
(424,739 |
) |
Other |
|
|
(343,356 |
) |
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|
(83,796 |
) |
Increase (decrease) in operating liabilities: |
|
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|
|
|
|
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Accounts payable and accrued expenses |
|
|
(5,030,069 |
) |
|
|
(9,049,723 |
) |
Contribution to profit-sharing plan |
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|
16,000 |
|
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(62,500 |
) |
Employee compensation and related expenses |
|
|
684,933 |
|
|
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(168,507 |
) |
Federal income taxes |
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|
2,354,700 |
|
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(46,742 |
) |
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NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
|
17,231,589 |
|
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|
5,816,221 |
|
INVESTING ACTIVITIES |
|
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|
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Purchases of property, plant and equipment |
|
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(2,003,655 |
) |
|
|
(3,921,132 |
) |
Increase in cash value of officers’ life insurance and other assets |
|
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(41,999 |
) |
|
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(35,400 |
) |
|
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NET CASH USED IN INVESTING ACTIVITIES |
|
|
(2,045,654 |
) |
|
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(3,956,532 |
) |
FINANCING ACTIVITIES |
|
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|
|
|
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|
Cash dividends paid |
|
|
(1,699,861 |
) |
|
|
(1,610,907 |
) |
Principal payments on notes payable and revolving credit facility |
|
|
(6,640,521 |
) |
|
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(27,014 |
) |
Long-term debt |
|
|
— |
|
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|
162,084 |
|
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NET CASH
USED IN FINANCING ACTIVITIES |
|
|
(8,340,382 |
) |
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(1,475,837 |
) |
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INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
6,845,553 |
|
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|
383,852 |
|
Cash and cash equivalents at beginning of period |
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|
2,643,922 |
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|
1,039,030 |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
9,489,475 |
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$ |
1,422,882 |
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4
FRIEDMAN INDUSTRIES, INCORPORATED
CONDENSED NOTES TO QUARTERLY REPORT — UNAUDITED
NOTE A
— BASIS OF PRESENTATION
The accompanying unaudited condensed, consolidated financial statements have been prepared in accordance
with the instructions to Form 10-Q and do not include all of the
information and footnotes required
by generally accepted accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. For further information, refer to the financial statements and
footnotes included in the Company’s annual report on Form 10-K for the year ended March 31, 2008.
NOTE B
— INVENTORIES
Inventories consist of prime coil,
non-standard coil and tubular materials. Prime coil inventory
consists primarily of raw materials, non-standard coil inventory consists primarily of finished
goods and tubular inventory consists of both raw materials and
finished goods. Inventories are valued at the lower of cost or
replacement market. Cost for prime coil inventory is determined under
the last-in, first-out (“LIFO”) method. Cost
for non-standard coil inventory is determined using the specific identification method. Cost for
tubular inventory is determined using the weighted average method.
During
the nine months ended December 31, 2008, LIFO inventories were
reduced and are not expected to be
replaced by March 31, 2009. The Company expects that the
replacement cost and the liquidated cost of material will be
approximately equal at March 31, 2009 and that no significant
gain or loss will be experienced in the year ended March 31,
2009 as a result of this liquidation. Accordingly, no gain or loss
from this liquidation was recognized in the quarter ended
December 31, 2008.
In December 2008, average selling prices for finished tubular products declined
significantly. As a result, the Company recorded an adjustment of approximately $1,436,000 to
reduce the inventory value of finished tubular goods to reflect the
required lower of cost or market valuation at December 31, 2008. This adjustment had the effect of increasing costs of goods sold and
reducing earnings before taxes by approximately $1,436,000.
A
summary of inventory values by product group follows:
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December 31, |
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March 31, |
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2008 |
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|
2008 |
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Prime Coil Inventory |
|
$ |
6,672,787 |
|
|
$ |
8,121,728 |
|
Non-Standard Coil Inventory |
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|
228,802 |
|
|
|
918,334 |
|
Tubular Raw Material |
|
|
8,130,543 |
|
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|
7,444,805 |
|
Tubular
Finished Goods |
|
|
13,059,783 |
|
|
|
13,415,460 |
|
|
|
|
|
|
|
|
|
|
$ |
28,091,915 |
|
|
$ |
29,900,327 |
|
|
|
|
|
|
|
|
NOTE C — LONG-TERM DEBT
The Company has a $10 million revolving credit facility (the “revolver”) which expires April
1, 2010. There were no amounts outstanding pursuant to the revolver
at December 31, 2008. At March
31, 2008, the Company owed $6,600,000 pursuant to the revolver at an average interest rate of
approximately 4.4%. These loans were paid off in April and May 2008.
In June 2007, the Company
incurred an interest free, long-term liability of $162,084 related to
the purchase of pipe loading equipment which is payable in 36 equal
monthly payments and has a balance
due of $81,042 at December 31, 2008.
NOTE D — STOCK BASED COMPENSATION
Under the Company’s 1989 and 1996
Stock Option Plans, options were granted to certain officers
and key employees to purchase common stock of the Company. Pursuant
to the terms of the plans, no
additional options may be granted. All options have ten-year terms and become fully exercisable at
the end of six months of continued employment. The following is a summary of activity relative to
options outstanding during each of the quarters ended December 31:
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| |
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2008 |
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2007 |
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| |
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|
Weighted |
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|
Weighted |
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| |
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Average |
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Average |
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| |
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|
Exercise |
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|
Exercise |
|
| |
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
Outstanding at beginning of quarter |
|
|
— |
|
|
|
— |
|
|
|
88,836 |
|
|
$ |
2.33 |
|
Granted |
|
|
— |
|
|
|
— |
|
|
|
— |
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|
— |
|
Exercised |
|
|
— |
|
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|
— |
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|
— |
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|
— |
|
Canceled or expired |
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— |
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— |
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— |
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— |
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| |
Outstanding at end of quarter |
|
|
— |
|
|
|
— |
|
|
|
88,836 |
|
|
$ |
2.33 |
|
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5
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| |
|
2008 |
|
|
2007 |
|
| |
|
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|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
| |
|
|
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|
|
Average |
|
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|
|
Average |
|
| |
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
| |
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
Exercisable at the end of the quarter |
|
|
— |
|
|
|
— |
|
|
|
88,836 |
|
|
$ |
2.33 |
|
Weighted average fair value of options granted during the quarter |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Since no
options were outstanding at December 31, 2008, intrinsic value was not
applicable.
NOTE E — SEGMENT INFORMATION
| |
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| |
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Three Months Ended
December 31, |
|
Nine Months Ended
December 31, |
| |
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|
|
|
| |
|
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
(in thousands) |
|
(in thousands) |
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Coil |
|
$ |
13,977 |
|
|
$ |
19,204 |
|
|
$ |
62,864 |
|
|
$ |
59,854 |
|
| |
Tubular |
|
|
42,206 |
|
|
|
18,858 |
|
|
|
123,992 |
|
|
|
69,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total net sales |
|
$ |
56,183 |
|
|
$ |
38,062 |
|
|
$ |
186,856 |
|
|
$ |
129,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Coil |
|
$ |
1,188 |
|
|
$ |
458 |
|
|
$ |
(559 |
) |
|
$ |
1,938 |
|
| |
Tubular |
|
|
6,323 |
|
|
|
887 |
|
|
|
24,871 |
|
|
|
4,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total operating profit |
|
|
7,511 |
|
|
|
1,345 |
|
|
|
24,312 |
|
|
|
6,350 |
|
| |
General corporate expenses |
|
|
690 |
|
|
|
399 |
|
|
|
3,128 |
|
|
|
1,708 |
|
| |
Interest
Expense |
|
|
— |
|
|
|
— |
|
|
|
23 |
|
|
|
48 |
|
| |
Interest & other income |
|
|
(27 |
) |
|
|
(66 |
) |
|
|
(131 |
) |
|
|
(163 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total earnings before taxes |
|
$ |
6,848 |
|
|
$ |
1,012 |
|
|
$ |
21,292 |
|
|
$ |
4,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
March 31, |
|
| |
|
2008 |
|
|
2008 |
|
| |
|
(in thousands) |
|
|
(in thousands) |
|
Segment assets |
|
|
|
|
|
|
|
|
Coil |
|
$ |
22,482 |
|
|
$ |
29,469 |
|
Tubular |
|
|
38,178 |
|
|
|
34,041 |
|
|
|
|
|
|
|
|
|
|
|
60,660 |
|
|
|
63,510 |
|
Corporate assets |
|
|
10,269 |
|
|
|
3,448 |
|
|
|
|
|
|
|
|
|
|
$ |
70,929 |
|
|
$ |
66,958 |
|
|
|
|
|
|
|
|
Corporate expenses reflect general and administrative expenses not directly associated with segment
operations and consist primarily of corporate
executive and accounting salaries, professional fees and services, bad debts, accrued profit
sharing expense, corporate insurance expenses and
office supplies. Corporate assets consist primarily of cash and cash equivalents and the cash value
of officers’ life insurance.
NOTE F —
SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid income taxes of approximately $4,243,000
and $2,282,000 in the nine months
ended December 31, 2008 and 2007, respectively. Interest paid
in the nine months ended December 31, 2008 and
2007 was approximately $23,000 and $48,000, respectively.
NOTE G — NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157
establishes a framework for measuring fair value in accordance with generally accepted accounting principles, clarifies the
definition of fair value within that framework, and expands disclosures about fair value measurements. SFAS No. 157
applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, except for the measurement
of share-based payments. The standard does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective,
for the Company, beginning the first quarter of fiscal year 2009. For certain types of financial instruments, SFAS No. 157
requires a limited form of retrospective transition, whereby the cumulative impact of the change in principle is recognized in the opening balance
of retained earnings in the fiscal year of adoption. All other
provisions of SFAS No. 157 were applied prospectively beginning
in the first quarter of fiscal year 2009. Adoption of SFAS No. 157 did not
have a material impact on our consolidated financial statements in
the nine months ended December 31, 2008.
6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Nine Months Ended December 31, 2008
Compared to Nine Months Ended December 31, 2007
During the nine months ended December 31, 2008, sales, costs of goods sold and gross profit
increased $57,108,180, $38,661,539 and $18,446,641, respectively, from the comparable amounts
recorded during the nine months ended December 31, 2007. The increase in sales was related
primarily to an increase in average selling prices. The average per ton selling price increased
from approximately $622 per ton in the 2007 period to approximately $950 per ton in the 2008
period. Total tons shipped declined from approximately 208,000 tons in the 2007 period to 197,000
tons in the 2008 period. The increase in costs of goods sold was primarily related to an increase
in the average per ton cost of goods which increased from approximately $583 per ton in the 2007
period to $815 per ton in the 2008 period. The increase in gross profit in the 2008 period was
related to substantially improved margins earned on pipe sales. Gross profit as a percentage of
sales increased from approximately 6.3% in the 2007 period to 14.2% in the 2008 period. The
Company experienced strong demand for its pipe products in the 2008 period and margins improved
significantly. In addition, the Company benefited from lower cost inventory sold at substantially
improved selling prices.
Coil product segment sales increased approximately $3,010,000 during the 2008 period. This
increase resulted primarily from an increase in the average per ton selling price which increased
from approximately $648 per ton in the 2007 period to $950 per ton in the 2008 period. In the
2008 period, the Company experienced a loss of approximately $559,000
related to the coil
operations compared to a profit of $1,938,000 in the 2007 period. Coil products are used primarily
in durable goods and demand for such products was depressed in the 2008 period. As a result, tons
sold declined from approximately 92,000 tons during the 2007 period to approximately 66,000 tons in
the 2008 period. Also, the Company incurred a significant increase in cost of coil products
during the 2008 period. Average per ton cost increased from approximately $616 per ton in the 2007
period to $939 per ton in the 2008 period. The Company was unable to pass all of this increased
cost to its customers in the 2008 period. The Company believes that market conditions for coil
products will remain soft until the U. S. economy improves and generates improved demand for
durable goods.
In the 2008 period, LIFO inventory of coil products was reduced and is not expected to be replaced
by March 31, 2009. Cost of material related to this liquidation had a cost approximately the same
as the current replacement cost. Accordingly, this liquidation had no significant impact on
earnings in the 2008 period.
In August 2008, the Company began operations at the new coil facility located at Decatur, Alabama.
This operation produced a loss of approximately $555,000 during the 2008 period. The Company
expects that this facility will continue to produce a loss during the ramp up period and until
demand for coil products improves.
The Company is primarily dependent on Nucor Steel Company (“NSC”) for its supply of coil inventory.
NSC continues to supply the Company with steel coils in amounts that are adequate for the
Company’s purposes. Loss of NSC as a supplier could have an adverse effect on the Company’s
business.
Tubular product segment sales increased approximately $54,099,000 during the 2008 period. This
increase resulted from both an increase in average selling prices and an increase in tons sold.
The average selling price per ton increased from approximately $602 per ton in the 2007 period to
$950 per ton in the 2008 period. The Company sold approximately
116,000 tons of pipe in the 2007
period compared to approximately 132,000 tons in the 2008 period. Tubular product segment
operating profit as a percentage of segment sales improved from 6.3%
in the 2007 period to 20.1%
in the 2008 period. The Company experienced strong market conditions for its pipe products in the
2008 period and margins improved significantly. In addition, the Company benefited from lower
cost inventory sold at substantially improved selling prices.
Beginning in December 2008, the Company experienced a significant decline in average selling prices
for finished tubular products. As a result,
the Company recorded an adjustment of approximately $1,436,000 to reduce the value of
finished tubular products to reflect the
required lower of cost or market valuation at December 31, 2008. This adjustment had the effect of reducing earnings before income taxes
by $1,436,000 during the 2008 period. The Company believes that the decline in average selling
prices is a result of lack of demand related primarily to the decline in the U. S. economy.
U. S. Steel Tubular Products, Inc. (“USS”), an affiliate of United States Steel Corporation, is the Company’s primary supplier of
tubular products and coil material used in pipe manufacturing and is a major customer of finished
tubular products. In the 2008 period, USS accounted for approximately
30% of total Company sales. Certain finished tubular products are used in the energy business and are
manufactured by the Company and sold to USS. Beginning in December 2008 and continuing in the
quarter ending March 31, 2009, USS reduced orders for these finished tubular products. The Company
expects that reduced orders for finished tubular products will continue until the U. S. economy
recovers and generates improved demand for these products. Loss of USS as a supplier or customer
could have an adverse effect on the Company’s business.
During the 2008 period, general, selling and administrative costs increased $1,903,183 from the
amount recorded during the 2007 period. This increase was related primarily to increases in
commissions and bonuses associated with the increase in earnings.
Income
taxes increased $5,694,758 from the comparable amount recorded during the 2007 period.
This increase was primarily related to the increase in earnings before taxes. Effective tax rates
were 34.4% and 34.1% in the 2008 and 2007 periods, respectively. The Company incurred an increase
in state income taxes in the 2008 period.
7
Three Months Ended December 31, 2008 Compared to Three Months
Ended December 31, 2007
During the three months ended December 31, 2008, sales, costs of goods sold and gross profit
increased $18,120,425, $11,682,894 and $6,437,531, respectively, from the comparable amounts
recorded during the three months ended December 31, 2007. The sales increase was primarily
related to an increase in the average selling price which increased from approximately $601 per ton
in the 2007 quarter to approximately $1,061 per ton in the 2008 quarter. In the 2007 quarter, the
Company sold approximately 63,000 tons compared to approximately 57,000 tons in the 2008 quarter.
The increase in costs of goods sold was primarily related to an increase in the average per ton
cost of goods which increased from approximately $570 per ton in the 2007 quarter to $902 per ton
in the 2008 quarter. The increase in gross profit in the 2008 quarter was related to
substantially improved margins earned on pipe sales. Gross profit as a percentage of sales
increased from approximately 5.2% in the 2007 quarter to 15.0% in the 2008 quarter. The Company
experienced strong demand for its pipe products in the 2008 quarter and margins improved
significantly. In addition, the Company benefited from lower cost inventory sold at substantially
improved selling prices.
Coil product segment sales decreased approximately $5,227,000 during the 2008 quarter.
This decrease resulted from a decrease in tons sold that was
partially offset by an increase in the average per ton selling
price.
The average selling price per ton increased from approximately $620
per ton in the 2007 quarter to $954 per ton in the 2008 quarter. Tons sold declined from
approximately 31,000 tons during the 2007 quarter to approximately 15,000 tons in the 2008 quarter.
Operating profit in the 2008 quarter increased approximately $730,000. Coil operations benefited
from a significant reduction in the cost of coil material in the 2008 quarter which had the effect
of reducing the current cost applied to revenue. Coil products are used primarily in durable goods
and demand for such products continued to be depressed in the 2008 quarter. The Company believes
that market conditions for coil products will remain soft until the U. S. economy improves and
generates improved demand for durable goods.
In August 2008, the Company began operations at the new coil facility located at Decatur, Alabama.
This operation produced a loss of approximately $465,000 during the 2008 quarter. The Company
expects that this facility will continue to produce a loss during the ramp up period and until
demand for coil products improves.
The Company is primarily dependent on Nucor Steel Company (“NSC”) for its supply of coil inventory.
NSC continues to supply the Company with steel coils in amounts that are adequate for the
Company’s purposes. Loss of NSC as a supplier could have an adverse effect on the Company’s
business.
Tubular product segment sales increased approximately $23,348,000 during the 2008 quarter. This
increase resulted from both an increase in average selling prices and an increase in tons sold.
The average selling price per ton increased from approximately $582 per ton in the 2007 quarter to
$1,102 per ton in the 2008 quarter. The Company sold approximately 32,000 tons pipe in the 2007
quarter compared to approximately 38,000 tons in the 2008 quarter. Tubular product segment
operating profits as a percentage of segment sales improved from 4.7% in the 2007 quarter to 15.0%
in the 2008 quarter. The Company experienced strong market conditions for its pipe products in
the 2008 quarter and margins improved significantly. In addition, the Company benefited from
lower cost inventory sold at substantially improved selling prices.
Beginning in December 2008, the Company experienced a significant decline in average selling prices
for finished tubular products. As a result,
the Company recorded an adjustment of approximately $1,436,000 to reduce the value of
finished tubular products to reflect the
required lower of cost or market valuation at December 31, 2008. This adjustment had the effect of reducing earnings before income taxes
by $1,436,000 during the 2008 quarter. The Company believes that the decline in average selling
prices is a result of a lack of demand related primarily to the decline in the U. S. economy.
U. S. Steel Tubular Products, Inc. (“USS”), an affiliate of United States Steel Corporation, is the Company’s primary supplier of
tubular products and coil material used in pipe manufacturing and is a major customer of finished
tubular products. Certain finished tubular products are used in the energy business and are
manufactured by the Company and sold to USS. Beginning in December 2008 and continuing in the
quarter ending March 31, 2009, USS reduced orders for these finished tubular products. The Company
expects that reduced orders for finished tubular products will continue until the U. S. economy
recovers and generates improved demand for these products. Loss of USS as a supplier or customer
could have an adverse effect on the Company’s business.
During the 2008 quarter, general, selling and administrative costs increased $561,538 from the
amount recorded during the 2007 quarter. This increase was related primarily to increases in
commissions and bonuses associated with the increase in earnings.
Income taxes increased $1,942,744 from the comparable amount recorded during the 2007 quarter.
This increase was primarily related to the increase in earnings before taxes. Effective tax rates
were 33.5% and 34.7% in the 2008 and 2007 quarters, respectively. In the 2008 quarter, the
Company benefited from a domestic manufacturing credit allowed for federal income taxes and from a
reduction in state taxes.
8
FINANCIAL POSITION, LIQUIDITY AND
CAPITAL RESOURCES
The
Company remained in a strong, liquid position at December 31, 2008.
Current ratios were 4.0 and 3.3 at December 31, 2008 and
March 31, 2008, respectively. Working
capital was $39,290,067 at December 31, 2008 and $34,638,228 at
March 31, 2008.
During
the nine months ended December 31, 2008, the Company maintained
assets and liabilities at levels it believed were commensurate with
operations. Changes in current assets and liabilities during the 2008
period were related primarily to the ordinary course of business of the
Company. During the 2008 period, cash increased primarily as the
result of net income and a reduction in accounts receivable and inventories. Cash was used primarily to reduce accounts payable, pay off long term debt, purchase property and equipment and pay cash dividends. The Company expects to
continue to monitor, evaluate and manage balance sheet components depending on changes in market conditions and the Company’s operations.
During
the nine months ended December 31, 2008, the Company purchased
approximately $2,000,000 in fixed assets. These assets were related
primarily to equipment associated with the new coil operating
facility located in Decatur, Alabama which began operations in August 2008.
At the Decatur facility, the Company operates a steel temper mill and a steel cut-to-length line including a leveling line. At December 31,
2008, the Company had invested approximately $10,000,000 in this
facility.
The Company has an arrangement with a bank which provides for a
revolving line of credit facility (the “revolver”).
Pursuant to the revolver, which expires April 1, 2010,
the Company may borrow up to $10 million at the bank’s
prime rate or 1.5% over LIBOR. The Company uses
the revolver to support cash flow and will borrow and repay
the note as working capital is required. At December 31, 2008, the Company had no borrowings
outstanding under the revolver.
At March 31, 2008, the Company owed $6,600,000 pursuant to the revolver at an average interest rate of 4.4%. These loans were paid off in April and May 2008.
The Company has
in the past and may in the future borrow funds on a term basis to build or improve facilities. The Company
currently has no plans to borrow any significant amount of funds on a term basis.
Notwithstanding the current market conditions, the Company believes its
cash flows from operations and borrowing capability under its revolver
are adequate to fund its expected cash requirements for the next twenty-four
months.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements requires the Company
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. One such accounting policy which requires
significant estimates and judgments is the valuation of LIFO inventories in the
Company’s quarterly reporting. The quarterly valuation of inventory
requires estimates of the year end quantities which is inherently difficult.
Historically, these estimates have been materially correct. On an ongoing basis, the Company evaluates estimates and
judgments. The Company bases its estimates on historical experience and on
various other assumptions that it believes to be reasonable under the
circumstances.
FORWARD-LOOKING STATEMENTS
From time to time, the Company may make certain statements that contain
“forward-looking” information (as defined in the Private Securities Litigation
Reform Act of 1996) and that involve risk and uncertainty. These forward-looking
statements may include, but are not limited to, future results of operations,
future production capacity, product quality and proposed expansion plans. Forward-looking statements may
be made by management orally or in writing including, but not limited to, this
Management’s Discussion and Analysis of Financial Condition and Results of
Operations and other sections of the Company’s filings with the Securities and
Exchange Commission under the Securities Act of 1933 and the Securities Exchange
Act of 1934. Actual results and trends in the future may differ materially
depending on a variety of factors including, but not limited to, changes in the
demand and prices of the Company’s products, changes in the demand for steel and
steel products in general and the Company’s success in executing its internal
operating plans, including any proposed expansion plans.
9
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of
business the Company is exposed to market risks primarily from changes in the cost of steel in inventory and in interest rates. The Company closely monitors exposure to market risks and develops appropriate strategies to manage risk. With respect to steel purchases, there is no recognized market to purchase derivative financial instruments to reduce the inventory
exposure risk on changing commodity prices.
The exposure to market risk associated with interest rates relates
primarily to debt. Recent debt balances are minimal and, as a
result, direct exposure to interest rates changes is not significant.
Item 4. Controls and Procedures
The
Company’s management, with the participation of the Company’s principal executive officer
(CEO) and principal financial officer (CFO), evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)), as of the end of the fiscal quarter
ended December 31, 2008. Based on this
evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures
were effective as of the end of the fiscal quarter ended December 31, 2008 to ensure that information
that is required to be disclosed by the Company in the reports it files or submits under the
Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified
in the SEC’s rules and forms and (ii) accumulated and communicated to the Company’s management,
including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
There were no changes in the Company’s internal control over financial reporting that occurred
during the fiscal quarter ended December 31, 2008 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial reporting.
10
FRIEDMAN INDUSTRIES, INCORPORATED
Three
Months Ended December 31, 2008
Part
II — OTHER INFORMATION
Item 1.
Legal Proceedings
Not applicable
Item 1A.
Risk Factors
Not applicable
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
a). Not applicable
b). Not applicable
c). Not applicable
Item 3.
Defaults Upon Senior Securities
a). Not applicable
b). Not applicable
Item 4.
Submission of Matters to a Vote of Security Holders
None
Item 5.
Other Information
Not applicable
Item 6.
Exhibits
a). Exhibits
10.1
—Consulting agreement dated October 31, 2008, by and between
Jack Friedman and Friedman Industries, Incorporated (incorporated
by reference from Exhibit 10.1 to the Company’s current report
on Form 8-K filed with the Commission on November 6, 2008).
31.1 —Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by
William E. Crow
31.2 —Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by Ben Harper
32.1 —Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, signed by
William E. Crow
32.2 —Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, signed by
Ben Harper
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| |
|
|
|
|
| Date February 13, 2009 |
FRIEDMAN INDUSTRIES, INCORPORATED
|
|
| |
By: |
/s/ BEN HARPER
|
|
| |
|
Ben Harper. Senior Vice President-Finance |
|
| |
|
(Principal Financial and Accounting Officer) |
|
| |
12
EXHIBIT INDEX
| |
|
|
| Exhibit No. |
|
Description |
|
|
|
| |
|
Exhibit 10.1
|
|
— Consulting agreement dated October 31, 2008, by and between
Jack Friedman and Friedman Industries, Incorporated (incorporated
by reference from Exhibit 10.1 to the Company’s current report
on Form 8-K filed with the Commission on November 6, 2008). |
| |
|
Exhibit 31.1
|
|
— Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, signed by William E. Crow |
| |
|
Exhibit 31.2
|
|
— Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, signed by Ben Harper
|
| |
|
Exhibit 32.1
|
|
— Certification Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002, signed
by William E. Crow
|
| |
|
Exhibit 32.2
|
|
— Certification Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002, signed
by Ben Harper
|