e10vq
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| |
|
|
| þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
FOR
THE QUARTERLY PERIOD ENDED JUNE 30, 2008
OR
| |
|
|
| o |
|
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)
| |
|
|
TEXAS
(State or other jurisdiction of
incorporation or organization)
|
|
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.
Yes þ No o
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):
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer o
(Do not check if a smaller reporting company) | Smaller reporting company þ |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
At June 30, 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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|
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|
| |
|
JUNE 30, 2008 |
|
|
MARCH 31, 2008 |
|
| |
|
(Unaudited) |
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
12,213,256 |
|
|
$ |
2,643,922 |
|
Accounts receivable, net of allowances for bad debts and cash discounts of
$37,276 at June 30 and March 31, 2008 |
|
|
15,825,152 |
|
|
|
16,742,000 |
|
Inventories |
|
|
19,316,064 |
|
|
|
29,900,327 |
|
| |
Other |
|
|
240,075 |
|
|
|
136,345 |
|
|
|
|
|
|
|
|
TOTAL CURRENT ASSETS |
|
|
47,594,547 |
|
|
|
49,422,594 |
|
PROPERTY, PLANT AND EQUIPMENT: |
|
|
|
|
|
|
|
|
Land |
|
|
1,082,331 |
|
|
|
1,082,331 |
|
Construction in progress |
|
|
9,546,244 |
|
|
|
8,706,172 |
|
Buildings and yard improvements |
|
|
3,494,293 |
|
|
|
3,494,294 |
|
Machinery and equipment |
|
|
22,186,113 |
|
|
|
21,879,259 |
|
Less accumulated depreciation |
|
|
(18,693,583 |
) |
|
|
(18,389,983 |
) |
|
|
|
|
|
|
|
|
|
|
17,615,398 |
|
|
|
16,772,073 |
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS: |
|
|
|
|
|
|
|
|
Cash value of officers’ life insurance and other assets |
|
|
734,000 |
|
|
|
720,001 |
|
Deferred income taxes |
|
|
— |
|
|
|
43,724 |
|
|
|
|
|
|
|
|
| |
TOTAL ASSETS |
|
$ |
65,943,945 |
|
|
$ |
66,958,392 |
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
10,707,598 |
|
|
$ |
13,499,314 |
|
Current portion of long-term debt |
|
|
54,028 |
|
|
|
54,028 |
|
Deferred credit for LIFO replacement |
|
|
2,456,108 |
|
|
|
— |
|
Dividends payable |
|
|
543,956 |
|
|
|
339,972 |
|
Income taxes payable |
|
|
1,750,585 |
|
|
|
70,069 |
|
Contribution to profit sharing plan |
|
|
149,500 |
|
|
|
259,500 |
|
Employee compensation and related expenses |
|
|
1,215,430 |
|
|
|
561,483 |
|
|
|
|
|
|
|
|
| |
TOTAL CURRENT LIABILITIES |
|
|
16,877,205 |
|
|
|
14,784,366 |
|
LONG-TERM DEBT LESS CURRENT PORTION |
|
|
54,028 |
|
|
|
6,667,536 |
|
DEFERRED INCOME TAXES |
|
|
58,173 |
|
|
|
— |
|
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS |
|
|
566,093 |
|
|
|
549,749 |
|
STOCKHOLDERS’ EQUITY: |
|
|
|
|
|
|
|
|
Common stock, par value $1: |
|
|
|
|
|
|
|
|
Authorized shares — 10,000,000 |
|
|
|
|
|
|
|
|
Issued shares — 7,975,160 at June 30 and March 31, 2008 |
|
|
7,975,160 |
|
|
|
7,975,160 |
|
Additional paid-in capital |
|
|
29,003,674 |
|
|
|
29,003,674 |
|
Treasury stock at cost (1,175,716 shares at June 30 and March 31, 2008) |
|
|
(5,475,964 |
) |
|
|
(5,475,964 |
) |
Retained earnings |
|
|
16,885,576 |
|
|
|
13,453,871 |
|
|
|
|
|
|
|
|
| |
TOTAL STOCKHOLDERS’ EQUITY |
|
|
48,388,446 |
|
|
|
44,956,741 |
|
|
|
|
|
|
|
|
| |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
$ |
65,943,945 |
|
|
$ |
66,958,392 |
|
|
|
|
|
|
|
|
2
FRIEDMAN INDUSTRIES, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS — UNAUDITED
| |
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|
|
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|
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|
THREE MONTHS ENDED JUNE 30, |
|
| |
|
2008 |
|
|
2007 |
|
Net Sales |
|
$ |
59,598,696 |
|
|
$ |
50,530,510 |
|
Costs and expenses |
|
|
|
|
|
|
|
|
Costs of goods sold |
|
|
51,533,953 |
|
|
|
46,760,892 |
|
General, selling and administrative costs |
|
|
1,981,023 |
|
|
|
1,419,493 |
|
Interest expense |
|
|
23,310 |
|
|
|
47,740 |
|
|
|
|
|
|
|
|
|
|
|
53,538,286 |
|
|
|
48,228,125 |
|
Interest and other income |
|
|
(41,418 |
) |
|
|
(41,770 |
) |
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
6,101,828 |
|
|
|
2,344,155 |
|
Provision for income taxes: |
|
|
|
|
|
|
|
|
Current |
|
|
2,024,271 |
|
|
|
758,315 |
|
Deferred |
|
|
101,897 |
|
|
|
33,389 |
|
|
|
|
|
|
|
|
|
|
|
2,126,168 |
|
|
|
791,704 |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
3,975,660 |
|
|
$ |
1,552,451 |
|
|
|
|
|
|
|
|
Average number of common shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
6,799,444 |
|
|
|
6,712,108 |
|
Diluted |
|
|
6,799,444 |
|
|
|
6,779,583 |
|
Net earnings per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.58 |
|
|
$ |
0.23 |
|
Diluted |
|
$ |
0.58 |
|
|
$ |
0.23 |
|
Cash dividends declared per common share |
|
$ |
0.08 |
|
|
$ |
0.08 |
|
3
FRIEDMAN INDUSTRIES, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
| |
|
|
|
|
|
|
|
|
| |
|
THREE MONTHS ENDED JUNE 30, |
|
| |
|
2008 |
|
|
2007 |
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
3,975,660 |
|
|
$ |
1,552,451 |
|
Adjustments to reconcile net earnings to cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
303,600 |
|
|
|
279,300 |
|
Provision for deferred taxes |
|
|
101,897 |
|
|
|
33,389 |
|
Change in post retirement benefits |
|
|
16,344 |
|
|
|
13,235 |
|
Decrease (increase) in operating assets: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
916,848 |
|
|
|
356,414 |
|
Inventories |
|
|
10,584,263 |
|
|
|
7,558,581 |
|
Other current assets |
|
|
(103,731 |
) |
|
|
13,239 |
|
Increase (decrease) in operating liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
|
(2,791,716 |
) |
|
|
(9,262,507 |
) |
Contribution to profit-sharing plan |
|
|
(110,000 |
) |
|
|
(191,500 |
) |
Employee compensation and related expenses |
|
|
653,947 |
|
|
|
109,112 |
|
Income taxes payable |
|
|
1,680,516 |
|
|
|
615,602 |
|
Deferred credit for LIFO replacement |
|
|
2,456,108 |
|
|
|
— |
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
|
17,683,736 |
|
|
|
1,077,316 |
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment |
|
|
(1,146,924 |
) |
|
|
(1,259,545 |
) |
(Increase) in cash surrender value of officers’
life insurance |
|
|
(13,998 |
) |
|
|
(11,800 |
) |
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES |
|
|
(1,160,922 |
) |
|
|
(1,271,345 |
) |
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Cash dividends paid |
|
|
(339,972 |
) |
|
|
(536,969 |
) |
Long-term debt |
|
|
(6,613,508 |
) |
|
|
162,084 |
|
|
|
|
|
|
|
|
NET CASH (USED) IN FINANCING ACTIVITIES |
|
|
(6,953,480 |
) |
|
|
(374,885 |
) |
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
9,569,334 |
|
|
|
(568,914 |
) |
Cash and cash equivalents at beginning of period |
|
|
2,643,922 |
|
|
|
1,039,030 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
12,213,256 |
|
|
$ |
470,116 |
|
|
|
|
|
|
|
|
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 quarter ended June 30, 2008, LIFO inventories were reduced but are expected to be
replaced by March 31, 2009. A deferred credit of $2,456,108 was
recorded at June 30, 2008 to reflect
replacement cost in excess of LIFO cost.
A
summary of inventory values by product group follows:
| |
|
|
|
|
|
|
|
|
| |
|
June 30, |
|
|
March 31, |
|
| |
|
2008 |
|
|
2008 |
|
Prime Coil Inventory |
|
$ |
4,407,068 |
|
|
$ |
8,121,728 |
|
Non-Standard Coil Inventory |
|
|
1,116,894 |
|
|
|
918,334 |
|
Tubular Raw Material |
|
|
2,979,335 |
|
|
|
7,444,805 |
|
Tubular
Finished Goods |
|
|
10,812,767 |
|
|
|
13,415,460 |
|
|
|
|
|
|
|
|
|
|
$ |
19,316,064 |
|
|
$ |
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 June 30, 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 $108,056 at June 30, 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 June 30:
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| |
|
2008 |
|
|
2007 |
|
| |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
| |
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
| |
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
| |
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
Outstanding at beginning of quarter |
|
|
— |
|
|
|
— |
|
|
|
88,836 |
|
|
$ |
2.33 |
|
Granted |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Exercised |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Canceled or expired |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Outstanding at end of quarter |
|
|
— |
|
|
|
— |
|
|
|
88,836 |
|
|
$ |
2.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
| |
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|
|
| |
|
2008 |
|
|
2007 |
|
| |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
| |
|
|
|
|
|
Average |
|
|
|
|
|
|
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 June 30, 2008, intrinsic value was not
applicable.
NOTE E — SEGMENT INFORMATION
| |
|
|
|
|
|
|
|
|
| |
|
THREE MONTHS ENDED |
|
| |
|
JUNE 30, |
|
| |
|
2008 |
|
|
2007 |
|
| |
|
(in thousands) |
|
Net sales |
|
|
|
|
|
|
|
|
Coil |
|
$ |
26,007 |
|
|
$ |
21,076 |
|
Tubular |
|
|
33,592 |
|
|
|
29,455 |
|
|
|
|
|
|
|
|
| |
Total net sales |
|
$ |
59,599 |
|
|
$ |
50,531 |
|
|
|
|
|
|
|
|
| |
Operating profit |
|
|
|
|
|
|
|
|
Coil |
|
$ |
585 |
|
|
$ |
936 |
|
Tubular |
|
|
6,884 |
|
|
|
2,257 |
|
|
|
|
|
|
|
|
| |
Total operating profit |
|
|
7,469 |
|
|
|
3,193 |
|
Corporate expenses |
|
|
1,385 |
|
|
|
843 |
|
Interest expense |
|
|
23 |
|
|
|
48 |
|
Interest & other income |
|
|
(41 |
) |
|
|
(42 |
) |
|
|
|
|
|
|
|
| |
Total earnings before taxes |
|
$ |
6,102 |
|
|
$ |
2,344 |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
June 30, |
|
|
March 31, |
|
| |
|
2008 |
|
|
2008 |
|
Segment assets |
|
|
|
|
|
|
|
|
Coil |
|
$ |
26,254 |
|
|
$ |
29,469 |
|
Tubular |
|
|
26,709 |
|
|
|
34,041 |
|
|
|
|
|
|
|
|
|
|
|
52,963 |
|
|
|
63,510 |
|
Corporate assets |
|
|
12,981 |
|
|
|
3,448 |
|
|
|
|
|
|
|
|
|
|
$ |
65,944 |
|
|
$ |
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 $371,000
and $173,000 in the quarter
ended June 30, 2007 and 2008, respectively. Interest paid in the quarter ended June 30, 2007 and
2008 was approximately $0 and $34,000, 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 will be 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
quarter ended June 30, 2008.
6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Three Months Ended June 30, 2008
Compared to Three Months Ended June 30, 2007
During the three months ended June 30, 2008, sales, costs of goods sold and gross profit increased
$9,068,186, $4,773,061 and $4,295,125, respectively, from the comparable amounts recorded during
the three months ended June 30, 2007. The sales increase was primarily related to an increase in
the average selling price which increased from approximately $643 per ton in the 2007 quarter to
approximately $781 per ton in the 2008 quarter. In the 2007 quarter, the Company sold
approximately 79,000 tons compared to approximately 76,000 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 $595 per ton in the 2007 quarter to $675 per ton in the 2008
quarter. The increase in gross profit in the 2008 quarter was primarily related to substantially
improved margins earned on sales, primarily pipe product sales. Gross profit as a percentage of
sales increased from approximately 7.5% in the 2007 quarter to 13.5% 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. As inventory is replaced with higher material cost, the Company expects
a reduction in margins earned on the sale of pipe products.
Coil product segment sales increased approximately $4,931,000 during the 2008 quarter. This
increase resulted primarily from an increase in the average per ton selling price which increased
from approximately $676 per ton in the 2007 quarter to $841 per ton in the 2008 quarter. The
Company sold approximately 31,000 tons in each of the quarters. Coil operating profit as a
percentage of coil segment sales decreased from approximately 4.4% in the 2007 quarter to 2.2% in
the 2008 quarter. During the 2008 quarter, the Company incurred a significant increase in cost of
coil products. Average per ton cost increased from approximately $634 per ton in the 2007 quarter
to $811 per ton in the 2008 quarter. The Company was unable to pass all of this increased cost to
its customers in the 2008 quarter.
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.
Tubular product segment sales increased approximately $4,137,000 during the 2008 quarter. This
increase resulted from an increase in the average selling price per ton which increased from
approximately $621 per ton in the 2007 quarter to $739 per ton in the 2008 quarter. The Company
sold approximately 47,000 tons of pipe in the 2007 quarter compared to approximately 45,000 tons in
the 2008 quarter. Tubular product segment operating profits as a percentage of segment sales
improved from 7.7% in the 2007 quarter to 20.5% 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. As inventory is replaced with higher material cost, the Company expects a
reduction in margins earned on the sale of pipe products.
U. S. Steel Tubular Products, Inc. (“USS”), an affiliate of United States Steel Corporation that
succeeded to the operations of Lone Star Steel Company, is the Company’s primary supplier of tubular
products and coil material used in pipe manufacturing and is a major
customer of manufactured pipe. In the 2008 quarter, USS continued to supply
the Company with pipe in quantities that were adequate for the Company’s purposes. Loss of USS as a
supplier or customer might have an adverse effect on the Company’s business.
During the 2008 quarter, general, selling and administrative costs increased $561,530 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 $1,334,464 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 34.8% and 33.8% in the 2008 and 2007 quarters, respectively. The Company incurred an
increase in state income taxes in the 2008 quarter.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
The Company remained in a strong, liquid position at June 30, 2008. Current ratios were 2.8
and 3.3 at June 30, 2008 and March 31, 2008, respectively.
Working capital was $30,717,342 at June
30, 2008 and $34,638,228 at March 31, 2008.
During the three months ended
June 30, 2008, the Company maintained assets and liabilities at
levels it believed were commensurate with operations. Cash and cash equivalents was generated primarily from earnings and
from a substantial decline in inventory and was used to pay off long-term debt and pay down
accounts payable. Due to the high price of raw steel, the Company has intensified its monitoring of
inventory positions and its effort to be efficient in the management of these assets. 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 quarter ended
June 30, 2008, the Company purchased approximately $1,147,000 in fixed
assets. These assets were related primarily to equipment associated with the new coil operation
in Decatur, Alabama, which is expected to be in production in August 2008. In connection with this
new operation, the Company phased out its coil processing facility in Lone Star, Texas in the 2006
quarter and redeployed certain of these assets to this new coil facility. At the Decatur processing
facility, the Company will operate a steel temper mill and a steel cut-to-length line including a
leveling line. In addition to the funds used to purchase the real property in Alabama, the
Company’s Board of Directors authorized up to an additional $16 million to be used for capital
expenditures and operational cash requirements at this location. Currently, this facility is in a
start-up mode and the cost to complete is not expected to be significant. Construction in progress assets were not being depreciated as of June 30, 2008.
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 an interest rate of 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 June
30, 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 approximately
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 revolving facility 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. At June 30, 2008, LIFO inventories were reduced but are expected to be replaced by March 31,
2009. A deferred credit of $2,456,108 was recorded at June 30, 2008, to reflect the replacement costs in excess of the LIFO cost associated with liquidated inventory.
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 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.
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.
7
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 June 30, 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 June 30, 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 June 30, 2008 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial reporting.
8
FRIEDMAN INDUSTRIES, INCORPORATED
Three Months Ended June 30, 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
Exhibits
| |
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 |
9
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.
| |
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FRIEDMAN INDUSTRIES, INCORPORATED
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| Date August 12, 2008 |
|
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By |
/s/ BEN HARPER
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| |
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Ben Harper, Senior Vice President-Finance |
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| |
|
(Principal Financial and Accounting Officer) |
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10
EXHIBIT INDEX
| |
|
|
| Exhibit No. |
|
Description |
| |
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 |