FRD 10-Q Quarter ended Dec. 31, 2015

UNITED STATES SECURITIES

AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2015

OR

FROM THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-7521

FRIEDMAN INDUSTRIES, INCORPORATED

(Exact name of registrant as specified in its charter)

19747 HWY 59 N, SUITE 200, HUMBLE, TEXAS 77338

(Address of principal executive offices) (Zip Code)

(713) 672-9433

(Registrant’s telephone number, including area code)

(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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒ No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒ No  ☐

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):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐ No   ☒

At February 16, 2016, the number of shares outstanding of the issuer’s only class of stock was 6,799,444 shares of Common Stock.

TABLE OF CONTENTS

FRIEDMAN INDUSTRIES, INCORPORATED

FRIEDMAN INDUSTRIES, INCORPORATED

FRIEDMAN INDUSTRIES, INCORPORATED

FRIEDMAN INDUSTRIES, INCORPORATED

CONDENSED NOTES TO QUARTERLY REPORT — UNAUDITED

Results of Operations

Nine Months Ended December 31, 2015 Compared to Nine Months Ended December 31, 2014

During the nine months ended December 31, 2015, sales, costs of goods and gross profit decreased $17,319,113, $17,114,211 and $204,902, respectively, from the comparable amounts recorded during the nine months ended December 31, 2014. The decrease in sales was related to both a decrease in the average per ton selling price and a decline in tons sold. The average per ton selling price decreased from approximately $700 per ton in the 2014 period to approximately $569 per ton in the 2015 period. Tons sold declined from approximately 119,000 tons in the 2014 period to approximately 115,000 tons in the 2015 period. The decrease in costs of goods sold was related primarily to a decline in the average per ton cost, which decreased from approximately $660 per ton in the 2014 period to approximately $530 per ton in the 2015 period. Gross profit as a percentage of sales increased from approximately 5.7% in the 2014 period to approximately 6.9% in the 2015 period.

Coil product segment sales decreased approximately $2,324,000 during the 2015 period. This decrease resulted from a decline in the average per ton selling price of coil products partially offset by an increase in tons sold. The average per ton selling price of coil products decreased from approximately $753 per ton in the 2014 period to approximately $570 per ton in the 2015 period. Coil tons shipped increased from approximately 73,000 tons in the 2014 period to approximately 93,000 tons in the 2015 period. The improvement in coil segment sales volume was primarily attributable to sales to customers manufacturing products used in the commercial freight industry. Coil segment operations recorded operating profits of approximately $4,858,000 and $422,000 in the 2015 and 2014 periods, respectively. In the 2015 period, the coil segment results benefitted from a decline in the cost of hot-rolled steel coils and an increase in tons sold. The Company continues to experience intense competition for sales due to general availability of both domestic and foreign hot-rolled sheet and plate.

The Company is primarily dependent on Nucor Steel Company (“NSC”) for its supply of coil inventory. In the 2015 period, NSC continued to supply the Company with steel coils in amounts that were adequate for the Company’s purposes. The Company does not currently anticipate any significant change in such supply from NSC. Loss of NSC as a supplier could have a material adverse effect on the Company’s business.

Tubular product segment sales decreased approximately $14,995,000 during the 2015 period. This decrease resulted from both a decline in tons sold and a decrease in the average per ton selling price. Tubular tons shipped decreased from approximately 45,000 tons in the 2014 period to approximately 23,000 tons in the 2015 period. The average per ton selling price of tubular products decreased from approximately $614 per ton in the 2014 period to $565 per ton in the 2015 period. The tubular product segment recorded an operating loss of approximately $2,324,000 in the 2015 period and an operating profit of approximately $2,225,000 in the 2014 period. Tubular segment results for the 2015 period were negatively impacted by low market prices and reduced demand for the Company’s products used in the oil and gas industry. In the 2015 period, the Company experienced a reduction in tons produced, which had the effect of increasing the per ton cost of production and decreasing margins earned. Management believes the lower demand for its tubular products is related to soft market conditions created by oversupply, foreign competition and a decline in the U.S. energy business.

U. S. Steel Tubular Products, Inc. (“USS”) is the Company’s primary supplier of tubular products and coil material used in pipe manufacturing and is a customer of the Company’s finished tubular products. Certain finished tubular products used in the energy business are manufactured by the Company and sold to USS. Loss of USS as a supplier or customer could have a material adverse effect on the Company’s business. The Company can make no assurances as to orders from USS or the amounts of pipe and coil material that will be available from USS in the future.

Other income in the 2015 period increased $317,276 from the amount recorded in the 2014 period. This increase was related primarily to a $316,310 settlement received by the Company as a member of the settlement class related to steel antitrust litigation brought against certain steel manufacturers. The litigation continues against certain non-settling defendants but the Company is unable to estimate the amount of future proceeds, if any, to be received.

Income taxes in the 2015 period decreased $128,569 from the amount recorded in the 2014 period. This decrease was related primarily to the decrease in earnings before taxes in the 2015 period and to a change in estimate related to state income taxes payable during the 2014 period.

Three Months Ended December 31, 201 5 Compared to Three Months Ended December 31, 201 4

During the three months ended December 31, 2015, sales and costs of goods sold decreased $5,004,389 and $5,212,881, respectively, and gross profit increased $208,492 from the comparable amounts recorded during the three months ended December 31, 2014. The decrease in sales was related to a decrease in the average per ton selling price partially offset by an increase in tons sold. The average per ton selling price decreased from approximately $684 per ton in the 2014 quarter to approximately $509 per ton in the 2015 quarter. Tons sold increased from approximately 34,000 tons in the 2014 quarter to approximately 36,500 tons in the 2015 quarter. The decrease in costs of goods sold was related to a decline in the per ton cost from approximately $647 per ton in the 2014 quarter to approximately $469 per ton in the 2015 quarter. Gross profit as a percentage of sales increased from approximately 5.3% in the 2014 quarter to approximately 7.9% in the 2015 quarter.

Coil product segment sales decreased approximately $778,000 during the 2015 quarter. This decrease resulted from a decline in the average per ton selling price partially offset by an increase in tons sold. The average selling price decreased from approximately $742 per ton in the 2014 quarter to $512 per ton in the 2015 quarter. Coil tons shipped increased from approximately 22,000 tons in the 2014 quarter to approximately 30,000 tons in the 2015 quarter. The improvement in coil segment sales volume was primarily attributable to sales to customers manufacturing products used in the commercial freight industry. Coil segment operations recorded operating profits of approximately $1,817,000 and $416,000 in the 2015 and 2014 quarters, respectively. In the 2015 quarter, the coil segment results benefitted from a decline in the cost of hot-rolled steel coils and an increase in tons sold. The Company continues to experience intense competition for sales due to the general availability of both domestic and foreign hot-rolled sheet and plate.

The Company is primarily dependent on NSC for its supply of coil inventory. In the 2015 quarter, NSC continued to supply the Company with steel coils in amounts that were adequate for the Company’s purposes. The Company does not currently anticipate any significant change in such supply from NSC. Loss of NSC as a supplier could have a material adverse effect on the Company’s business.

Tubular product segment sales decreased approximately $4,227,000 during the 2015 quarter. This decrease resulted from both a decline in tons sold and a decrease in the average per ton selling price. Tubular tons shipped decreased from approximately 13,000 tons in the 2014 quarter to approximately 7,000 tons in the 2015 quarter. The average per ton selling price of tubular products decreased from approximately $587 per ton in the 2014 quarter to approximately $495 per ton in the 2015 quarter. The tubular product segment recorded an operating loss of approximately $977,000 in the 2015 quarter and an operating profit of approximately $128,000 in the 2014 quarter. Tubular segment results for the 2015 quarter were negatively impacted by low market prices and reduced demand for the Company’s products used in the oil and gas industry. In the 2015 quarter, the Company experienced a reduction in tons produced, which had the effect of increasing the per ton cost of production and decreasing margins earned. Management believes the lower demand for its tubular products is related to soft market conditions created by oversupply, foreign competition and a decline in the U.S. energy business.

USS is the Company’s primary supplier of tubular products and coil material used in pipe manufacturing and is a customer of the Company’s finished tubular products. Certain finished tubular products used in the energy business are manufactured by the Company and sold to USS. Loss of USS as a supplier or customer could have a material adverse effect on the Company’s business. The Company can make no assurances as to orders from USS or the amounts of pipe and coil material that will be available from USS in the future.

During the 2015 quarter, general, selling and administrative costs increased $123,352 from the amount recorded during the 2014 quarter. This increase was related primarily to increases in bonuses and commissions associated with the increase in earnings and sales volume.

Other income in the 2015 quarter increased $313,310 from the amount recorded in the 2014 period. This increase was related primarily to a $316,310 settlement received by the Company as a member of the settlement class related to steel antitrust litigation brought against certain steel manufacturers. The litigation continues against certain non-settling defendants but the Company is unable to estimate the amount of future proceeds, if any, to be received.

Income taxes in the 2015 quarter increased $100,973 from the amount recorded in the 2014 quarter. This increase was related primarily to the increase in earnings before taxes in the 2015 quarter.

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

The Company remained in a strong, liquid position at December 31, 2015. The current ratios were 10.4 and 18.9 at December 31, 2015 and March 31, 2015, respectively. Working capital was $47,582,554 at December 31, 2015 and $47,466,244 at March 31, 2015.

At December 31, 2015, the Company maintained assets and liabilities at levels it believed were commensurate with operations. Changes in balance sheet amounts occurred in the ordinary course of business. Cash increased as a result of operating activities partially offset by purchases of property, plant and equipment and the payment of cash dividends. The Company will continue to monitor, evaluate and manage balance sheet components depending on changes in market conditions and the Company’s operations.

The Company is continuing construction of its pipe-finishing facility in Lone Star, Texas. The Company currently estimates the total construction costs for the facility will be approximately $9,200,000. As of December 31, 2015, capitalized expenditures related to the construction of the facility totaled approximately $8,621,000. The Company expects construction of the facility to be completed in the first quarter of fiscal 2017.

The Company has a $5,000,000 revolving line of credit facility (the “Credit Facility”) in place with JPMorgan Chase Bank N.A. The Credit Facility expires on April 30, 2016. As of February 16, 2016, the Company has not borrowed any amounts under the Credit Facility.

The Company believes that its current cash position along with cash flows from operations and borrowing capability are adequate to fund its expected cash requirements for the next 24 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 that 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.

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, as amended) and that involve risk and uncertainty. These forward-looking statements may include, but are not limited to, future changes in the Company’s financial condition or 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 SEC under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 for 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.

Not required

The Company’s management, with the participation of the Company’s principal executive officer (“CEO”) and principal financial officer, 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 Exchange Act), as of the end of the fiscal quarter ended December 31, 2015. Based on this evaluation, the Company’s CEO and principal financial officer have concluded that the Company’s disclosure controls and procedures were effective as of the end of the fiscal quarter ended December 31, 2015 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 principal financial officer, 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, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

FRIEDMAN INDUSTRIES, INCORPORATED

Three Months Ended December 31, 2015

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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