EX-13.1 2 h82893exv13w1.htm EX-13.1 exv13w1
EXHIBIT 13.1
 
THE COMPANY’S ANNUAL
REPORT TO SHAREHOLDERS FOR
THE FISCAL YEAR ENDED MARCH 31, 2011


 

FRIEDMAN
INDUSTRIES,
INCORPORATED
 
2011
ANNUAL REPORT
 


 

 
FRIEDMAN INDUSTRIES, INCORPORATED
 
 
 
FINANCIAL HIGHLIGHTS
 
                 
    2011   2010
 
Net sales
    $131,709,492       $65,132,170  
Net earnings
    $8,155,637       $652,024  
Net earnings per share (Basic)
    $1.20       $0.10  
Cash dividends per share
    $0.84       $0.06  
Stockholders’ equity
    $58,802,514       $56,358,410  
Working capital
    $45,094,969       $41,126,841  
 
 
TO OUR SHAREHOLDERS:
 
 
Due primarily to strong demand for tubular products associated with the energy sector of the U.S. economy, the Company experienced excellent earnings in fiscal 2011. The Company earned $8,155,637 ($1.20 per share diluted) on sales of $131,709,492.
 
The steel industry, as a whole, is very cyclical. Currently, the Company is experiencing volatility in the market for its products and services. As always, management is focused on balancing operational requirements with changing market conditions.
 
Harold Friedman resigned as a Director of the Company and as Chairman of the Board of Directors in October 2010. Harold had been associated with the Company for more than 60 years. He was a leading force in taking the Company public in 1972. Through the years, he served as Chairman of the Board, President and Chief Operating Officer as well as many other executive positions. Harold’s honesty, integrity, leadership and good judgment have had a strong influence on the Company and its associates.
 
You are invited to attend the Annual Meeting of Shareholders scheduled to start at 11 a.m. (central time) on Thursday, September 1, 2011, in the offices of Fulbright & Jaworski L.L.P., 1301 McKinney, Houston, Texas.
 
Sincerely,
 
     
-s- William E. Crow    
William E. Crow
Chief Executive Officer and President
   


1


 

 
FRIEDMAN INDUSTRIES, INCORPORATED
 
OFFICERS
 
William E. Crow
Chief Executive Officer and
President
 
Benny B. Harper
Senior Vice President — Finance
and Secretary/Treasurer
 
Thomas N. Thompson
Senior Vice President — Sales and Marketing
 
Ronald L. Burgerson
Vice President
 
Howard Henderson
Vice President of Operations — Texas Tubular Division
 
Robert McCain
Vice President — Decatur Division
 
Dale Ray
Vice President
 
Robert Sparkman
Vice President of Sales — Coil Divisions
 
Charles W. Hall
Assistant Secretary
 
COMPANY OFFICES AND WEB SITE
 
  CORPORATE OFFICE
  P.O. Box 21147
  Houston, Texas 77226
  713-672-9433
 
  SALES OFFICE — COIL PRODUCTS
  1121 Judson Road
  Longview, Texas 75606
  903-758-3431
 
  SALES OFFICE — TUBULAR PRODUCTS
  P.O. Box 0388
  Lone Star, Texas 75668
  903-639-2511
 
  WEB SITE
  www.friedmanindustries.com
 
COUNSEL
Fulbright & Jaworski L.L.P.
Fulbright Tower
1301 McKinney, Suite 5100
Houston, Texas 77010
 
AUDITORS
Hein & Associates LLP
500 Dallas Street, Suite 2900
Houston, TX 77002
 
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company
59 Maiden Lane
New York, New York 10007
 
DIRECTORS
 
William E. Crow
Chief Executive Officer and
President
Longview, Texas
 
Durga D. Agrawal
President, Piping Technology & Products, Inc.
(pipe fabrication)
Houston, Texas
 
Charles W. Hall
Fulbright & Jaworski L.L.P. (law firm)
Houston, Texas
 
Alan M. Rauch
President, Ener-Tex
International, Inc.
(oilfield equipment sales)
Houston, Texas
 
Max Reichenthal
President, Texas Iron and Metal
(steel product sales)
Houston, Texas
 
Hershel M. Rich
Private investor and
business consultant
Houston, Texas
 
Joel Spira
Private investor; formerly, Partner, Weinstein Spira & Company (accounting firm)
Houston, Texas
 
Joe L. Williams
Partner, PozmantierWilliams Insurance
Consultants, LLC
(insurance and risk management consultants)
Houston, Texas
 
ANNUAL REPORT ON FORM 10-K
 
Shareholders may obtain without charge a copy of the Company’s Annual Report on Form 10-K for the year ended March 31, 2011 as filed with the Securities and Exchange Commission. Written requests should be addressed to: Ben Harper, Senior Vice President, Friedman Industries, Incorporated, P.O. Box 21147, Houston, Texas 77226.


2


 

 
FRIEDMAN INDUSTRIES, INCORPORATED
 
DESCRIPTION OF BUSINESS
 
Friedman Industries, Incorporated (the “Company”) is engaged in steel processing, pipe manufacturing and processing and steel and pipe distribution.
 
At its facilities in Hickman, Arkansas and Decatur, Alabama, the Company processes hot-rolled steel coils into flat, finished sheet and plate and sells these products on a wholesale, rapid-delivery basis in competition with steel mills, importers and steel service centers. The Company also processes customer-owned coils on a fee basis. Through its XSCP Division located in Hickman, Arkansas, the Company purchases and markets non-standard hot-rolled coils. The Company purchases a substantial amount of its annual coil tonnage from Nucor Steel Company (“NSC”). Loss of NSC as a source of coil supply could have a material adverse effect on the Company’s business.
 
The Company sells its coil products and processing services directly through the Company’s own sales force to approximately 170 customers located primarily in the midwestern, southwestern and southeastern sections of the United States. These products and services are sold principally to steel distributors and to customers fabricating steel products such as storage tanks, steel buildings, farm machinery and equipment, construction equipment, transportation equipment, conveyors and other similar products.
 
The Company, through its Texas Tubular Products Division (“TTP”) located in Lone Star, Texas, manufactures, purchases, processes and markets tubular products (“pipe”). The Company sells pipe nationally to approximately 150 customers including, in recent years, a substantial amount of manufactured pipe to U.S. Steel Tubular Products, Inc. (“USS”), an affiliate of United States Steel Corporation. In recent years, the Company has also purchased a substantial portion of its annual supply of pipe and coil material used in pipe production from USS.
 
In February 2009, USS announced that it was temporarily idling its plant in Lone Star, Texas, due to weak market conditions. From February 2009 until February 2010, the Company received few orders from USS and a significantly reduced supply of pipe and coil material from USS. During this period, USS reopened its Lone Star facility and since February 2010, the Company has received from USS an increase in orders for finished tubular products and an increase in supply of tubular products and coil material used in the production of pipe. Loss of USS as a supplier or customer could have an 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.
 
The downturn of the U.S. economy along with the significant decrease in orders from USS and the reduction in the supply of pipe and coil material from USS had an adverse effect on the Company’s tubular business in fiscal 2010. From February 2009 until February 2010, the Company downsized its TTP division to a level more commensurate with operations. Since February 2010, the Company increased the level of operations of TTP to support an increase in production requirements.
 
Significant financial information relating to the Company’s two product groups, coil and tubular products, is contained in Note 7 of Notes to the Company’s Consolidated Financial Statements appearing herein.
 
RANGE OF HIGH AND LOW SALES PRICES OF COMMON STOCK
 
                                 
    Fiscal 2011   Fiscal 2010
    High   Low   High   Low
 
First Quarter
  $ 6 .39     $5 .13   $ 6 .95   $ 4 .47
Second Quarter
    6 .90     5 .24     6 .67     5 .00
Third Quarter
    8 .94     6 .50     6 .22     4 .21
Fourth Quarter
    10 .45     7 .82     6 .10     5 .43
 
 
CASH DIVIDENDS DECLARED PER SHARE OF COMMON STOCK
 
                 
    Fiscal 2011   Fiscal 2010
 
First Quarter
    $ .04   $ .03  
Second Quarter
      .08     .01  
Third Quarter
      .11     .01  
Special
      .50      
Fourth Quarter
      .11     .01  
 
 
The Company’s Common Stock is traded principally on the NYSE-Amex Stock Exchange (trading symbol FRD).
 
The approximate number of shareholders of record of the Company as of May 13, 2011 was 310.


3


 

 
FRIEDMAN INDUSTRIES, INCORPORATED
 
CONSOLIDATED BALANCE SHEETS
 
ASSETS
 
                 
    March 31  
    2011     2010  
CURRENT ASSETS:
               
Cash and cash equivalents
  $ 7,210,290     $ 19,812,881  
Accounts receivable, net of allowances for bad debts and cash discounts of $37,276 at March 31, 2011 and 2010, respectively
    12,594,954       8,686,151  
Inventories
    34,679,270       20,122,296  
Other
    77,830       81,791  
                 
TOTAL CURRENT ASSETS
    54,562,344       48,703,119  
PROPERTY, PLANT AND EQUIPMENT:
               
Land
    1,082,331       1,082,331  
Buildings and yard improvements
    7,014,180       7,000,839  
Machinery and equipment
    29,876,767       29,374,766  
Less accumulated depreciation
    (23,841,491 )     (21,963,333 )
                 
      14,131,787       15,494,603  
OTHER ASSETS:
               
Cash value of officers’ life insurance and other assets
    890,000       834,000  
                 
TOTAL ASSETS
  $ 69,584,131     $ 65,031,722  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
                 
    March 31  
    2011     2010  
CURRENT LIABILITIES:
               
Accounts payable and accrued expenses
  $ 7,338,762     $ 6,912,741  
Dividends payable
    747,939       67,994  
Current portion of long-term debt
          13,507  
Income taxes payable
    350,961       94,563  
Contribution to profit sharing plan
    50,000       44,000  
Employee compensation and related expenses
    979,713       443,473  
                 
TOTAL CURRENT LIABILITIES
    9,467,375       7,576,278  
DEFERRED INCOME TAXES
    536,699       414,403  
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
    777,543       682,631  
COMMITMENTS AND CONTINGENCIES
           
STOCKHOLDERS’ EQUITY:
               
Common stock, par value $1:
               
Authorized shares — 10,000,000
               
Issued shares — 7,975,160 at March 31, 2011 and 2010, respectively
    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 March 31, 2011 and 2010, respectively)
    (5,475,964 )     (5,475,964 )
Retained earnings
    27,299,644       24,855,540  
                 
TOTAL STOCKHOLDERS’ EQUITY
    58,802,514       56,358,410  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 69,584,131     $ 65,031,722  
                 
 
See accompanying notes.


4


 

 
FRIEDMAN INDUSTRIES, INCORPORATED
 
CONSOLIDATED STATEMENTS OF EARNINGS
 
                 
    Year Ended March 31  
    2011     2010  
 
Net sales
  $ 131,709,492     $ 65,132,170  
Costs and expenses:
               
Cost of products sold
    114,401,307       60,206,969  
Selling, general and administrative
    5,251,610       3,840,619  
                 
      119,652,917       64,047,588  
                 
      12,056,575       1,084,582  
Interest and other income
    57,138       86,490  
                 
EARNINGS BEFORE INCOME TAXES
    12,113,713       1,171,072  
Income taxes:
               
Current
    3,835,780       468,509  
Deferred
    122,296       50,539  
                 
      3,958,076       519,048  
                 
NET EARNINGS
  $ 8,155,637     $ 652,024  
                 
Weighted average number of common shares outstanding:
               
Basic
    6,799,444       6,799,444  
Diluted
    6,799,444       6,799,444  
Net earnings per share:
               
Basic
  $ 1.20     $ 0.10  
Diluted
  $ 1.20     $ 0.10  
 
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY
                                 
          Additional
             
    Common
    Paid-In
    Treasury
    Retained
 
    Stock     Capital     Stock     Earnings  
 
BALANCE AT MARCH 31, 2009
  $ 7,975,160     $ 29,003,674     $ (5,475,964 )   $ 24,611,482  
Net earnings
                      652,024  
Cash dividends ($0.06)
                      (407,966 )
                                 
BALANCE AT MARCH 31, 2010
    7,975,160       29,003,674       (5,475,964 )     24,855,540  
Net earnings
                      8,155,637  
Cash dividends ($0.84)
                      (5,711,533 )
                                 
BALANCE AT MARCH 31, 2011
  $ 7,975,160     $ 29,003,674     $ (5,475,964 )   $ 27,299,644  
                                 
 
See accompanying notes.


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FRIEDMAN INDUSTRIES, INCORPORATED
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                 
    Year Ended March 31  
    2011     2010  
OPERATING ACTIVITIES
               
Net earnings
  $ 8,155,637     $ 652,024  
Adjustments to reconcile net earnings to net cash provided by operating activities:
               
Depreciation
    1,878,158       1,890,375  
Deferred taxes
    122,296       50,539  
Change in post-retirement benefits other than pensions
    94,912       67,303  
Changes in operating assets and liabilities:
               
Accounts receivable, net
    (3,908,803 )     (3,694,912 )
Inventories
    (14,556,974 )     (719,595 )
Prepaid income taxes
          1,299,796  
Other
    3,961       17,740  
Accounts payable and accrued expenses
    426,021       4,250,532  
Contribution to profit sharing plan
    6,000       4,000  
Employee compensation and related expenses
    536,240       186,669  
Income taxes payable
    256,398       94,563  
                 
Net cash provided (used) by operating activities
    (6,986,154 )     4,099,034  
INVESTING ACTIVITIES
               
Purchase of property, plant and equipment
    (515,342 )     (374,291 )
Increase in cash value of officers’ life insurance
    (56,000 )     (58,000 )
                 
Net cash used in investing activities
    (571,342 )     (432,291 )
FINANCING ACTIVITIES
               
Cash dividends paid
    (5,031,588 )     (679,944 )
Principal payments on long-term debt
    (13,507 )     (54,028 )
                 
Net cash used in financing activities
    (5,045,095 )     (733,972 )
                 
Increase (decrease) in cash and cash equivalents
    (12,602,591 )     2,932,771  
Cash and cash equivalents at beginning of year
    19,812,881       16,880,110  
                 
Cash and cash equivalents at end of year
  $ 7,210,290     $ 19,812,881  
                 
 
See accompanying notes.


6


 

 
FRIEDMAN INDUSTRIES, INCORPORATED
 
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
 
1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 
BASIS OF CONSOLIDATION:  The consolidated financial statements include the accounts of Friedman Industries, Incorporated and its subsidiary (collectively, the “Company”). All material intercompany amounts and transactions have been eliminated.
 
REVENUE RECOGNITION:  Revenues are recognized upon shipment of products. The terms of shipments made by the Company are free on board shipping point.
 
TRADE RECEIVABLES:  The Company’s receivables are recorded when billed, advanced or accrued and represent claims against third parties that will be settled in cash. The carrying value of the Company’s receivables, net of the allowance for doubtful accounts and cash discounts allowed, represents their estimated net realizable value. The Company estimates its allowance for doubtful accounts based on historical collection trends, the age of outstanding receivables and existing economic conditions. Trade receivables are generally considered past due after 30 days from invoice date. Past-due receivable balances are written-off when the Company’s internal collection efforts have been unsuccessful in collecting the amount due.
 
CASH AND CASH EQUIVALENTS:  Cash and cash equivalents is composed of cash and, prior to its discontinuance in September 2009, money fund investments pursuant to a bank sweep arrangement.
 
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. At March 31, 2011 and March 31, 2010, replacement cost exceeded LIFO cost by approximately $10,860,000 and $7,430,000, respectively. In fiscal 2010, LIFO inventories were partially liquidated. Since the replacement costs and liquidation costs of material associated with this liquidation were approximately equal in the year, no meaningful gain or loss resulted from this partial liquidation. Cost for non-standard coil inventory is determined using the specific identification method. Cost for tubular inventory is determined using the weighted average method. Obsolete or slow-moving inventories are not significant based on the Company’s review of inventories. Accordingly, no allowance has been provided for such items.
 
The following is a summary of inventory by product group:
 
                 
    March 31  
    2011     2010  
 
Prime coil inventory
  $ 7,239,465     $ 4,643,951  
Non-standard coil inventory
    1,722,224       504,351  
Tubular raw material
    6,086,291       3,698,531  
Tubular finished goods
    19,631,290       11,275,463  
                 
    $ 34,679,270       20,122,296  
                 


7


 

 
FRIEDMAN INDUSTRIES, INCORPORATED
 
1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
PROPERTY, PLANT AND EQUIPMENT:  Property, plant and equipment is stated at cost. Depreciation is calculated primarily by the straight-line method over the estimated useful lives of the various classes of assets as follows:
 
         
Buildings
    20 years  
Machinery and equipment
    10 years  
Yard improvements
    5 to 10 years  
Loaders and other rolling stock
    5 to 10 years  
 
Interest costs related to construction projects were not capitalized as part of the cost of fixed assets for the years presented. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. No impairments were necessary at March 31, 2011 or 2010.
 
Maintenance and repairs are expensed as incurred.
 
SHIPPING COSTS:  Sales are credited for freight billed to customers and freight costs are charged to cost of products sold.
 
SUPPLEMENTAL CASH FLOW INFORMATION:  The Company paid no interest in 2011 and 2010. The Company paid income taxes of approximately $3,738,000 in 2011. In 2010, the Company received tax refunds in excess of taxes paid of approximately $909,000. In fiscal 2011 and 2010, noncash financing activity consisted of accrued dividends of $5,711,533 and $407,966, respectively.
 
INCOME TAXES:  The Company accounts for income taxes under the liability method, whereby the Company recognizes, on a current and long-term basis, deferred tax assets and liabilities which represent differences between the financial and income tax reporting bases of its assets and liabilities. Deferred tax assets and liabilities are determined based on temporary differences between income and expenses reported for financial reporting and tax reporting. The Company has assessed, using all available positive and negative evidences, the likelihood that the deferred tax assets will be recovered from future taxable income.
 
USE OF ESTIMATES:  The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
 
FINANCIAL INSTRUMENTS:  Since the Company’s financial instruments are considered short-term in nature, their carrying values approximate fair value.
 
EARNINGS PER SHARE:  Net income per basic common share is computed using the weighted average number of common shares outstanding during the period. Net income per diluted common share is computed using the weighted average number of common shares and potential common shares outstanding during the period. Potential common shares result from the assumed exercise of outstanding common stock options having a dilutive effect using the treasury stock method.
 
ECONOMIC RELATIONSHIP:  U.S. Steel Tubular Products, Inc. (“USS”) and Nucor Steel Company supply a significant amount of steel products to the Company. Loss of either of these mills as a source of supply could have a material adverse effect on the Company. Additionally, the Company derives revenue by selling a substantial amount of its manufactured pipe to USS. In February 2009, USS idled its plant in Lone Star, Texas, due to weak market conditions. From February 2009 until February 2010, the Company received few orders from USS and a significantly reduced supply of materials from USS. During this period, USS reopened its Lone Star facility, and since February 2010, the Company has received from USS an increase in orders for finished tubular products and an increase in supply of tubular products and coil material used in the production of pipe. Total sales to USS were approximately 20% and 4% of total Company sales in fiscal 2011 and 2010, respectively. Loss of USS as a customer could have a material


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FRIEDMAN INDUSTRIES, INCORPORATED
 
1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
adverse effect on the Company’s business. Other than USS, no customer accounted for 10% of total sales in the two years ended March 31, 2011.
 
The Company’s sales are concentrated primarily in the midwestern, southwestern, and southeastern sections of the United States and are primarily to customers in the steel distributing and fabricating industries. The Company performs periodic credit evaluations of the financial conditions of its customers and generally does not require collateral. Generally, receivables are due within 30 days.
 
NEW ACCOUNTING PRONOUNCEMENTS:
 
Effective July 1, 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) that codifies generally accepted accounting principles in the United States (“GAAP”). Although ASC did not change GAAP, it did change the way the Company references authoritative literature. Effective July 1, 2009, the Company adopted ASC.
 
ASC Topic 855, “Subsequent Events” (“ASC 855”) establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. ASC 855 provides guidance on the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The Company adopted ASC 855 during the quarter ended June 30, 2009, and its application had no impact on the Company’s consolidated condensed financial statements. The Company evaluated subsequent events through the date of filing Form 10-K for fiscal 2011.
 
2.  STOCK OPTIONS AND CAPITAL STOCK
 
 
In fiscal 2011 and 2010, the Company maintained no stock option plans. Accordingly, no options were outstanding and no options were granted in either fiscal year.
 
The Company has 1,000,000 authorized shares of Cumulative Preferred Stock with a par value of $1 per share. The stock may be issued in one or more series, and the Board of Directors is authorized to fix the designations, preferences, rights, qualifications, limitations, and restrictions of each series, except that any series must provide for cumulative dividends and must be convertible into common stock. There were no shares of Cumulative Preferred Stock issued as of March 31, 2011 and March 31, 2010.
 
3.  LONG-TERM DEBT AND COMMITMENTS AND CONTINGENCIES
 
 
Effective May 18, 2007, the Company renewed a credit arrangement with a bank which provided for a revolving line of credit facility (the “revolving facility”). Pursuant to the revolving facility which expired April 1, 2010, the Company could borrow up to $10 million at the bank’s prime rate or at 1.5% over LIBOR. The revolving facility required that the Company maintain a tangible net worth as adjusted of $36,724,000, maintain a working capital ratio of 2 to 1 and maintain a debt to equity ratio of 1.1 to 1. At March 31, 2010, the Company maintained a tangible net worth of approximately $56,358,000, a working capital ratio of approximately 6 to 1 and a debt to equity ratio of approximately .15 to 1. No collateral was required pursuant to the revolving facility. There were no amounts outstanding under the revolving facility at March 31, 2010. The Company did not pay a commitment fee relative to the revolving facility.
 
Historically, the revolving facility was renewed approximately one year before its expiration date. As a result of the current lending environment and the Company’s strong cash position, the Company chose not to renew the revolving facility in fiscal 2010.
 
The Company is obligated under noncancelable operating leases for its Longview, Texas and Houston, Texas office buildings, which expire April 30, 2013 and August 31, 2011, respectively. The


9


 

 
FRIEDMAN INDUSTRIES, INCORPORATED
 
3.  LONG-TERM DEBT AND COMMITMENTS AND CONTINGENCIES (Continued)
 
following is a schedule of future minimum annual rental payments for the next five years required under these operating leases as of March 31, 2011:
 
         
2012
  $ 37,084  
2013
    30,084  
2014
    2,507  
2015
     
2016
     
         
Total
  $ 69,675  
         
 
Rental expenses for leased properties were approximately $47,000 during fiscal 2011 and 2010, respectively.
 
4.  EARNINGS PER SHARE
 
 
Basic and dilutive net earnings per share is computed based on the following information:
 
                 
    Year Ended March 31  
    2011     2010  
 
Basic
               
Net earnings
  $ 8,155,637     $ 652,024  
                 
Weighted average common shares
    6,799,444       6,799,444  
                 
Dilutive
               
Net earnings
  $ 8,155,637     $ 652,024  
                 
Weighted average common shares and common share equivalents
    6,799,444       6,799,444  
                 
 
5.  INCOME TAXES
 
 
Components of tax expense (benefit) are as follows:
 
                 
    Year Ended March 31  
    2011     2010  
 
Federal
               
Current
  $ 3,531,397     $ 536,886  
Deferred
    122,296       50,539  
                 
      3,653,693       587,425  
State
               
Current
    304,383       (68,377 )
                 
      304,383       (68,377 )
                 
Total
  $ 3,958,076     $ 519,048  
                 


10


 

 
FRIEDMAN INDUSTRIES, INCORPORATED
 
5.  INCOME TAXES (Continued)
 
The U.S. federal statutory income tax rate is reconciled to the effective rate as follows:
 
                 
    Year Ended March 31  
    2011     2010  
 
Income Tax Expense at
U.S. federal statutory rate
    34.0 %     34.0 %
Benefit of tax deduction allowed to manufacturing companies
    (3.0 )     (2.0)  
State and local income tax rates net of federal income tax benefit
    1.7       1.3  
True-up of income taxes on prior year filings
          11.0  
                 
Provision for income taxes
    32.7 %     44.3 %
                 
 
In fiscal 2010, the effective tax rate of 44.3% was unusually high due primarily to true-up adjustments on prior year filings that were applied to substantially reduced earnings before income taxes in fiscal 2010.
 
The Company’s tax returns may be subject to examination by the Internal Revenue Service for the fiscal years ending March 31, 2008 through March 31, 2010. State and local returns may be subject to examination for fiscal years ended March 31, 2008 through March 31, 2010.
 
Deferred income taxes are provided for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s consolidated deferred tax assets (liabilities) are as follows:
 
                 
    March 31  
    2011     2010  
 
Deferred tax liabilities:
               
Depreciation
  $ (1,812,570 )   $ (1,654,379 )
                 
Total deferred tax liabilities
    (1,812,570 )     (1,654,379 )
Deferred tax assets:
               
Inventory capitalization
    169,092       172,438  
LIFO Inventory
    783,645       783,611  
Postretirement benefits other than pensions
    264,365       232,095  
Other
    58,769       51,832  
                 
Total deferred tax assets
    1,275,871       1,239,976  
                 
Net deferred tax liability
  $ (536,699 )   $ (414,403 )
                 
 
6.  PROFIT SHARING PLAN
 
 
Effective May 1, 2007, the Company merged its defined contribution retirement plan and its 401(k) plan into the Friedman Industries, Inc. Employees’ Retirement and 401(k) Plan (the “Plan”). In addition, the Plan year end was changed to December 31. Employees fully vest in the Plan upon 6 years of service.
 
The retirement portion of the Plan covers substantially all employees, including officers. The Company’s contribution expenses, which are determined at the discretion of the Board of Directors in an amount not to exceed 15% of the total compensation paid during the year to all eligible employees, were $200,000 for the year ended March 31, 2011, and $160,000 for the year ended March 31, 2010. Contributions, Plan earnings and forfeitures of nonvested accounts of terminated participants are allocated to the remaining individual accounts determined by a point schedule based on years of employment with the Company.


11


 

 
FRIEDMAN INDUSTRIES, INCORPORATED
 
6.  PROFIT SHARING PLAN (Continued)
 
Employees may participate in the 401(k) portion of the Plan. Employees are eligible to participate in the Plan when the employee has completed one year of service. Under the Plan, participating employees may defer a portion of their pretax earnings up to certain limits prescribed by the Internal Revenue Service. The Company provides matching contributions under the provisions of the Plan. Contribution expense related to the 401(k) portion of the Plan was approximately $49,000 and $26,000 for the years ended March 31, 2011 and 2010, respectively.
 
7.  INDUSTRY SEGMENT DATA
 
 
The Company is engaged in the steel processing, pipe manufacturing and processing and steel and pipe distribution business. Within the Company, there are two product groups: coil and tubular. Coil product involves converting steel coils into flat sheet and plate steel cut to customer specifications and reselling steel coils. Through its tubular operation, the Company purchases, processes, manufactures and markets tubular products. The following is a summary of significant financial information relating to the product groups:
 
                 
    Year Ended March 31  
    2011     2010  
 
NET SALES:
               
Coil
  $ 62,030,202     $ 36,359,462  
Tubular
    69,679,290       28,772,708  
                 
TOTAL NET SALES
  $ 131,709,492     $ 65,132,170  
                 
OPERATING PROFIT (LOSS):
               
Coil
  $ 1,368,244     $ (841,082 )
Tubular
    13,391,903       3,728,236  
                 
TOTAL OPERATING PROFIT
    14,760,147       2,887,154  
General corporate expenses
    (2,703,572 )     (1,802,572 )
Interest and other income
    57,138       86,490  
                 
TOTAL EARNINGS BEFORE INCOME TAXES
  $ 12,113,713     $ 1,171,072  
                 
IDENTIFIABLE ASSETS:
               
Coil
  $ 25,150,156     $ 20,376,579  
Tubular
    36,333,623       24,005,953  
                 
      61,483,779       44,382,532  
General corporate assets
    8,100,352       20,649,190  
                 
TOTAL ASSETS
  $ 69,584,131     $ 65,031,722  
                 
DEPRECIATION:
               
Coil
  $ 1,210,800     $ 1,239,764  
Tubular
    665,110       643,135  
Corporate and other
    2,248       7,476  
                 
    $ 1,878,158     $ 1,890,375  
                 
CAPITAL EXPENDITURES:
               
Coil
  $ 24,591     $ 188,002  
Tubular
    490,751       186,289  
                 
    $ 515,342     $ 374,291  
                 
 
Operating profit is total net sales less operating expenses, excluding general corporate expenses, interest expense and interest and other income. General corporate expenses reflect general and administrative expenses not directly associated with segment operations and consist primarily of corporate and accounting salaries, professional fees and services, bad debts, accrued profit sharing expense, accrued quarterly incentive bonuses, corporate insurance expenses and office supplies. Corporate assets consist


12


 

 
FRIEDMAN INDUSTRIES, INCORPORATED
 
7.  INDUSTRY SEGMENT DATA (Continued)
 
primarily of cash and cash equivalents and the cash value of officers’ life insurance. Although inventory is transferred at cost between product groups, there are no sales between product groups.
 
8.  SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (Unaudited)
 
 
The following is a summary of unaudited quarterly results of operations for the years ended March 31, 2011 and 2010:
 
                                 
    Quarter Ended  
    June 30,
    September 30,
    December 31,
    March 31,
 
    2010     2010     2010     2011  
 
Net sales
  $ 29,222,232     $ 29,353,262     $ 31,135,887     $ 41,998,111  
Gross profit
    3,437,938       3,887,713       3,770,753       6,211,781  
Net earnings (loss)
    1,435,137       1,784,431       1,733,494       3,202,575  
Basic(1)
    .21       .26       .25       .47  
Diluted(1)
    .21       .26       .25       .47  
 
 
                                 
    Quarter Ended  
    June 30,
    September 30,
    December 31,
    March 31,
 
    2009     2009     2009     2010  
 
Net sales
  $ 12,246,219     $ 16,086,330     $ 13,470,721     $ 23,328,900  
Gross profit
    587,580       625,958       866,022       2,845,641  
Net earnings (loss)
    (162,748 )     (206,247 )     (41,239 )     1,062,258  
Basic
    (.02 )     (.03 )     (.01 )     .16  
Diluted
    (.02 )     (.03 )     (.01 )     .16  
 
 
(1) The sum of the quarterly earnings per share does not equal the annual amount reported as per share amounts were computed independently for each quarter.
 


13


 

 
FRIEDMAN INDUSTRIES, INCORPORATED
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
Board of Directors and Shareholders
Friedman Industries, Incorporated
Houston, Texas
 
We have audited the consolidated balance sheets of Friedman Industries, Incorporated (the “Company”) as of March 31, 2011 and 2010, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for each of the two years in the period ended March 31, 2011. Our audits also included the financial statement schedule of Friedman Industries, Incorporated listed in Item 15(a). These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Friedman Industries, Incorporated as of March 31, 2011 and 2010, and the results of their operations and their cash flows for each of the two years in the period ended March 31, 2011, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
 
We were not engaged to examine management’s assertion about the effectiveness of the Company’s internal control over financial reporting as of March 31, 2011 included in the accompanying management’s report on internal control over financial reporting and, accordingly, we do not express an opinion thereon.
 
/s/  Hein & Associates LLP
 
Houston, Texas
June 27, 2011

14


 

 
FRIEDMAN INDUSTRIES, INCORPORATED
 
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed under the supervision of our principal executive and principal financial officers, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with policies or procedures may deteriorate.
 
Our management assessed the effectiveness of our internal control over financial reporting as of the end of our most recent fiscal year. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework. Based on such assessment, management concluded that, as of March 31, 2011, our internal control over financial reporting is effective based on that criteria.
 
This annual report does not include an attestation report of our registered, independent public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.


15


 

 
FRIEDMAN INDUSTRIES, INCORPORATED
 
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 
RESULTS OF OPERATIONS
 
Year ended March 31, 2011 compared to year ended March 31, 2010
 
During the year ended March 31, 2011, sales, costs of goods sold and gross profit increased $66,577,322, $54,194,338 and $12,382,984, respectively, from the comparable amounts recorded during the year ended March 31, 2010. The increase in sales was related primarily to a substantial increase in tons sold which increased from approximately 107,000 tons in fiscal 2010 to approximately 175,000 tons in fiscal 2011. Also, the average per ton selling price increased from approximately $606 per ton in fiscal 2010 to $751 per ton in fiscal 2011. The increase in costs of goods sold was related primarily to the increase in tons sold and an increase in average per ton cost which increased from approximately $560 per ton in fiscal 2010 to $652 in fiscal 2011. Gross profit benefited from the sales increase as well as a significant increase in gross margins. Gross profit as a percentage of sales increased from approximately 7.6% in fiscal 2010 to approximately 13.1% in fiscal 2011. During fiscal 2010, the Company experienced a significant economic downturn in the U.S. economy and the Company’s operations were adversely affected by extremely soft market conditions for durable goods and energy related products. In fiscal 2011, the Company experienced improved market conditions for its tubular products but market demand for coil products remained somewhat soft. Accordingly, the improvement in results of operations during fiscal 2011 was related primarily to the tubular product segment of the Company.
 
Coil product segment sales increased approximately $25,670,740 during fiscal 2011. This increase resulted primarily from an increase in tons sold and a significant increase in the average selling price. Coil tons sold increased from approximately 63,000 tons in fiscal 2010 to approximately 85,000 tons in fiscal 2011 and the average per ton selling price increased from approximately $580 per ton in fiscal 2010 to $732 per ton in fiscal 2011. Operating profit as percentage of coil product sales increased from a loss of approximately 2.3% in fiscal 2010 to a profit of 2.2% in fiscal 2011. Margins earned on sales of coil products were adversely impacted in both fiscal 2010 and 2011 by soft demand. Management believes that market conditions for coil products will not improve until the U.S. economy improves and generates significant improvement in the demand for durable goods.
 
In August 2008, the Company began operating its coil facility in Decatur, Alabama. This operation produced an operating loss of approximately $890,000 and $1,614,000 in fiscal 2011 and 2010, respectively. The Company expects that this facility will continue to produce a loss until demand for coil products improves.
 
The Decatur facility was struck by a tornado in April 2011. The Company expects that its insurance coverage will cover the resulting damages and income loss and that net costs associated with the tornado will be insignificant.
 
The Company is primarily dependent on Nucor Steel Company (“NSC”) for its supply of coil inventory. In fiscal 2011, 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 increased approximately $40,906,582 during fiscal 2011. This increase primarily resulted from an increase in tons sold which increased from approximately 45,000 tons in fiscal 2010 to approximately 91,000 tons sold in fiscal 2011. The average per ton selling price of tubular products increased from approximately $642 per ton in fiscal 2010 to $768 per ton in fiscal 2011. Tubular product segment operating profits as a percentage of segment sales were approximately 13.0% and 19.2% in fiscal 2010 and 2011, respectively. Our tubular product segment experienced extremely soft market conditions during much of fiscal 2010 as compared to stronger market conditions in fiscal 2011.


16


 

 
FRIEDMAN INDUSTRIES, INCORPORATED
 
Also, since February 2010, the Company has received an increase in orders for finished tubular products from U.S. Steel Tubular Products, Inc. (“USS”), an affiliate of United States Steel Corporation.
 
In recent years, USS has been the Company’s primary supplier of tubular products and coil material used in pipe manufacturing and has been a major customer of finished tubular products. Certain finished tubular products used in the energy business are manufactured by the Company and sold to USS. Beginning in December 2008, USS reduced orders for these finished tubular products. Also, in February 2009, USS announced that it was temporarily idling its plant in Lone Star, Texas, due to weak market conditions. From February 2009 until February 2010, the Company received few orders from USS and a significantly reduced supply of pipe and coil material from USS. During this period, USS reopened its Lone Star facility and since February 2010, the Company has received from USS an increase in orders for finished tubular products and an increase in supply of tubular products and coil material used in the production of pipe. Loss of USS as a supplier or customer could have an 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.
 
From February 2009 until February 2010, the Company downsized its tubular division to a level more commensurate with operations. Since February 2010, the Company increased the level of operations of the tubular division to support an increase in production requirements.
 
During fiscal 2011, general, selling and administrative costs increased $1,410,991 from the amount recorded in fiscal 2010. This increase was related primarily to increases in bonuses and commissions associated with increased earnings and volume.
 
Income taxes increased $3,439,028 from the amount recorded fiscal 2010. This increase was related primarily to the increase in earnings before taxes. Effective tax rates were 32.7% and 44.3% in fiscal 2011 and 2010, respectively. The effective rate for fiscal 2010 was unusually high due to true-up adjustments on prior year filings that were applied to substantially reduced earnings before income taxes in fiscal 2010.
 
FINANCIAL CONDITION, LIQUIDITY AND SOURCES OF CAPITAL
 
 
The Company remained in a strong, liquid position at March 31, 2011. Current ratios were 5.8 and 6.4 at March 31, 2011 and March 31, 2010, respectively. Working capital was $45,094,969 at March 31, 2011 and $41,126,841 at March 31, 2010.
 
During the year ended March 31, 2011, the Company maintained assets and liabilities at levels it believed were commensurate with operations. Changes in balance sheet amounts primarily occurred in the ordinary course of business. Cash decreased primarily as a result of increases in inventories and accounts receivable associated with a general increase in business. In addition, the Company paid to its shareholders a special cash dividend of $0.50 per share in December 2010. The Company expects to continue to monitor, evaluate and manage balance sheet components depending on changes in market conditions and the Company’s operations.
 
The Company had a credit arrangement with a bank which provided for a revolving line of credit facility (the “revolving facility”). Pursuant to the revolving facility, which expired April 1, 2010, the Company could borrow up to $10 million at an interest rate of the bank’s prime rate or 1.5% over LIBOR. The revolving facility required that the Company maintain a tangible net worth as adjusted of $36,724,000, maintain a working capital ratio of 2 to 1 and maintain a debt to equity ratio of 1.1 to 1. At March 31, 2010, the Company maintained a tangible net worth of approximately $56,358,000, a working capital ratio of approximately 6 to 1 and a debt to equity ratio of approximately .15 to 1. No collateral was required pursuant to the revolving facility. The Company used the revolving facility to support cash flows and borrowed and repaid funds as working capital was required. There were no amounts outstanding under the revolving facility at March 31, 2010.
 
Historically, the Company renewed the revolving facility approximately one year before its expiration date. As a result of the current lending environment and the Company’s strong cash position, the Company chose not to renew its revolving facility in fiscal 2010. The Company may in the future seek to reinstate a similar credit facility although it currently has no plans to do so.


17


 

 
FRIEDMAN INDUSTRIES, INCORPORATED
 
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 funds on a term basis.
 
The Company believes that its current cash position along with cash flows from operations and borrowing capability due to its strong balance sheet are adequate to fund its expected cash requirements for the next 24 months.
 
OFF-BALANCE SHEET ARRANGEMENTS
 
The Company has no off-balance sheet arrangements.
 
INFLATION
 
During fiscal 2011 and 2010, the Company believes that the general level of inflation had little effect on its operations.
 
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 Company’s 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) 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 for 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.


18


 

FRIEDMAN INDUSTRIES, INCORPORATED
 
TEN YEAR FINANCIAL SUMMARY
 
                                                                                 
    Year Ended March 31  
    2011     2010     2009     2008     2007     2006     2005     2004     2003     2002  
 
Net sales
  $ 131,709,492     $ 65,132,170     $ 208,779,750     $ 178,785,110     $ 199,726,619     $ 181,900,351     $ 188,022,253     $ 116,158,567     $ 106,082,738     $ 97,817,956  
Net earnings
  $ 8,155,637     $ 652,024     $ 13,673,406     $ 4,465,127     $ 7,018,318 (1)   $ 6,453,888     $ 6,246,043     $ 2,535,991     $ 1,432,017     $ 940,039  
Current assets
  $ 54,562,344     $ 48,703,119     $ 42,673,377     $ 49,422,594     $ 51,731,369     $ 47,551,003     $ 43,498,759     $ 37,829,701     $ 34,769,500     $ 35,806,988  
Current liabilities
  $ 9,467,375     $ 7,576,278     $ 3,353,013     $ 14,784,366     $ 23,266,583     $ 18,383,193     $ 14,959,516     $ 12,639,763     $ 11,035,388     $ 10,797,106  
Working capital
  $ 45,094,969     $ 41,126,841     $ 39,320,364     $ 34,638,228     $ 28,464,786     $ 29,167,810     $ 28,539,243     $ 25,189,938     $ 23,734,112     $ 25,009,882  
Total assets
  $ 69,584,131     $ 65,031,722     $ 60,460,064     $ 66,958,392     $ 65,871,706     $ 55,930,889     $ 50,796,342     $ 46,028,123     $ 42,778,926     $ 43,986,455  
Stockholders’ equity
  $ 58,802,514     $ 56,358,410     $ 56,114,352     $ 44,956,741     $ 42,109,998     $ 37,097,335     $ 35,354,550     $ 33,031,604     $ 31,246,751     $ 30,491,351  
Net earnings as a percent of
                                                                               
Net sales
    6.2       1.0       6.5       2.5       3.5       3.5       3.3       2.2       1.3       1.0  
Stockholders’ equity
    13.9       1.2       24.4       9.9       16.7       17.4       17.7       7.7       4.6       3.1  
Weighted average number of common shares outstanding: Basic
    6,799,444       6,799,444       6,799,444       6,733,942       6,685,577       7,072,637       7,418,410       7,574,070       7,572,239       7,571,239  
Per share
                                                                               
Net earnings per share:
                                                                               
Basic
  $  1.20     $ 0.10     $ 2,01     $ 0.66     $ 1.05 (1)   $ 0.91     $  0.84     $  0.33     $  0.19     $  0.12  
Stockholders’ equity
  $  8.65     $ 8.29     $ 8.25     $ 6.68     $ 6.30     $ 5.25     $  4.77     $  4.36     $  4.13     $  4.03  
Cash dividends per common
share
  $  0.84     $ 0.06     $ 0.37     $ 0.27     $ 0.34     $ 0.32     $  0.29     $  0.10     $  0.09     $  0.11  
 
 
(1)  Includes an after tax gain of $866,474 ($.13 per share basic) related to a gain on the sale of assets.