FRIEDMAN INDUSTRIES INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

OR

[ ] 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 74-1504405
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) 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

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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 X No ___

At September 30, 2002, the number of shares outstanding of the issuer's
only class of stock was 7,571,239 shares of Common Stock.
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PART I -- FINANCIAL INFORMATION

FRIEDMAN INDUSTRIES, INCORPORATED
CONSOLIDATED BALANCE SHEETS -- UNAUDITED

ASSETS

1

FRIEDMAN INDUSTRIES, INCORPORATED

CONSOLIDATED STATEMENTS OF EARNINGS -- UNAUDITED

2

FRIEDMAN INDUSTRIES, INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS -- UNAUDITED

3

FRIEDMAN INDUSTRIES, INCORPORATED

NOTES TO QUARTERLY REPORT -- UNAUDITED
SIX MONTHS ENDED SEPTEMBER 30, 2002

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 accounting principles
generally accepted in the United States 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, 2002.

NOTE B -- INVENTORIES

Inventories consist of prime coil, non-standard coil and tubular materials.
Prime coil inventory ("prime 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. Prime inventory is
valued using the last-in, first-out (LIFO) method and non-standard coil and
tubular inventories are valued using the first-in, first-out method.

Beginning April 1, 2002, the Company combined two prime inventory LIFO
pools into one LIFO pool to consolidate inventories of similar characteristics.
There was no cumulative effect and no material impact on income during each of
the last five fiscal years resulting from the combination. This combination did
not significantly affect earnings for the quarter or the six months ended
September 30, 2002.

LIFO inventories were liquidated during each of the quarters ended
September 30, 2001 and September 30, 2002. In connection with the replacement of
these liquidations, the Company charged costs of goods sold and recorded a
deferred credit for $572,396 and $195,647 at September 30, 2001 and September
30, 2002, respectively. During the quarter ended September 30, 2001, the Company
recorded an increase in earnings before taxes of approximately $131,000 due to
the liquidation and non-replacement of LIFO inventories carried at costs
prevailing in preceding years as compared to current cost at September 30, 2001.

NOTE C -- SEGMENT INFORMATION -- UNAUDITED

NOTE D -- ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS

Effective April 1, 2002, the Company adopted FAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supercedes FAS 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions
of Accounting Principles Board Opinion No. 30, Reporting the Results of
Operations, for a disposal of a segment or a business.

In November 2001, the Company ceased operations at its Houston coil
facility (the "facility"). To the extent possible, sales and production were
transferred to other Company locations. Machinery and equipment associated with
the facility other than the overhead cranes attached to the buildings will be
deployed at other Company locations. Land and buildings and improvements with
carrying values net of accumulated depreciation of $35,942 and $69,969,
respectively are expected to be sold in the next 12 months. Estimated proceeds
are expected to exceed the net book value.

5

FRIEDMAN INDUSTRIES, INCORPORATED

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS

SIX MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
2001

During the six months ended September 30, 2002, sales and costs of goods
sold increased $476,123 and $771,678, respectively, and related gross profit
declined $295,555 from the comparable amounts recorded during the six months
ended September 30, 2001. During the 2002 period, an increase of $4,143,727 in
sales of coil products was offset by a decrease of $3,667,604 in sales of
tubular products. Tons of coil products sold increased approximately 12% and the
average per ton selling price increased approximately 4% from the levels
recorded during the 2001 period. A decline in coil sales associated with the
closure of the Houston coil facility in November 2001 was more than offset by an
increase in sales relative to the XSCP Division which began operations in
December 2001. During the 2002 period, tubular tons sold and the average selling
price per ton declined approximately 5% and 9%, respectively. Coil operations
benefited from somewhat stronger market conditions while tubular operations were
adversely impacted by soft market conditions during the 2002 period. Management
believes the soft market conditions for tubular products were related to the
overall weakness in the energy sector of the United States economy. An increase
in gross profit of $688,518 related to coil operations was offset by a decline
in gross profit of $984,073 associated with tubular operations. Gross profits as
a percentage of sales were approximately 6.8% and 6.1% during the 2001 and 2002
periods, respectively. This decrease was related primarily to reduced margins
experienced by tubular operations.

Interest expense decreased $146,401 from the amount recorded during the
2001 period. This decrease was primarily related to a reduction in interest
rates paid on borrowings and in long-term debt.

Interest and other income increased $25,257 from the 2001 period amount
primarily as a result of an increase in invested cash positions during the 2002
period.

Federal income taxes decreased $46,991 from the comparable amount recorded
during the 2001 period. This decrease was related to the decrease in earnings
before taxes as the effective tax rates were the same for both periods.

THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001

During the quarter ended September 30, 2002, sales, costs of goods sold and
gross profit increased $2,800,488, $2,693,068 and $107,420, respectively, from
the comparable amounts recorded during the quarter ended September 30, 2001.
During the 2002 quarter, an increase of $4,110,533 in sales of coil products was
partially offset by a decrease of $1,310,045 in sales of tubular products. Tons
of coil products sold and the average per ton selling price increased
approximately 21% and 10%, respectively, from the levels recorded during the
2001 quarter. A decline in coil sales associated with the closure of the Houston
coil facility in November 2001 was more than offset by an increase in sales
relative to the XSCP Division which began operations in December 2001. During
the 2002 period, tubular tons sold decreased approximately 6% and the average
selling price per ton declined approximately 5% from respective amounts recorded
in the 2001 quarter. Coil operations benefited from somewhat stronger market
conditions while tubular operations were adversely impacted by soft market
conditions during the 2002 quarter. Management believes the soft market
conditions for tubular products were related to the overall weakness in the
energy sector of the United States economy. An increase in gross profit of
$285,662 related to coil operations was offset by a decline in gross profit of
$178,242 associated with tubular operations. Gross profits as a percentage of
sales were approximately 6.8% and 6.5% during the 2001 and 2002 quarters,
respectively.

Interest expense decreased $67,433 from the amount recorded during the 2001
quarter. This decrease was related primarily to a decrease in long term debt.

6

Federal income taxes increased $36,948 from the comparable amount recorded
during the 2001 quarter. This increase was related to the increase in earnings
before taxes as the effective tax rates were the same for both quarters.

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

The Company remained in a strong, liquid position at September 30, 2002.
Current ratios were 3.2 and 3.3 at September 30, 2002 and March 31, 2002,
respectively. Working capital was $23,629,414 at September 30, 2002 and
$25,009,882 at March 31, 2002. During the quarter ended September 30, 2002, the
Company maintained assets and liabilities at levels it believed were
commensurate with operations. The Company expects to continue to monitor and
evaluate these balance sheet components depending on changes in market
conditions and the Company's operations.

The Company has a credit arrangement with a bank which provides for a
revolving line of credit facility (the "revolving facility") and a term credit
facility (the "term facility"). Pursuant to the revolving facility which expires
April 1, 2004, the Company may borrow up to $10 million at an interest rate no
greater than the bank's prime rate. At September 30, 2002, the Company had no
borrowings outstanding under the revolving facility. The amount outstanding
under the term facility bears interest at a stated rate of LIBOR plus 1.25% and
requires quarterly principal payments of $200,000 plus accrued interest through
March 1, 2003. In July 1997, the Company entered into a swap transaction with
the bank pursuant to which it exchanged the term facility's LIBOR-based interest
rate obligation for a fixed interest rate obligation of 8% to remain in effect
for the entire term of the term facility. As of September 30, 2002, the
principal amount of indebtedness outstanding under the term facility was $0.4
million.

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. On an ongoing basis,
the Company evaluates estimates and judgments. The Company bases its estimates
on historical experience and on various other assumptions that it believes to be
reasonable under the circumstances.

FORWARD-LOOKING STATEMENTS

From time to time, the Company may make certain statements that contain
"forward-looking" information (as defined in the Private Securities Litigation
Reform Act of 1996) and that involve risk and uncertainty. These forward-looking
statements may include, but are not limited to, future results of operations,
future production capacity and product quality. 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not material.

7

ITEM 4. CONTROLS AND PROCEDURES

Based on an evaluation of the disclosure controls and procedures conducted
within 90 days prior to the filing date of this report on Form 10-Q, the
principal executive officer and principal financial officer of the Company have
concluded that the disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) promulgated under the Securities Exchange Act of 1934,
as amended) are effective. There were no significant changes in the internal
controls or in other factors that could significantly affect those controls
subsequent to the date of the evaluation thereof.

8

FRIEDMAN INDUSTRIES, INCORPORATED
SIX MONTHS ENDED SEPTEMBER 30, 2002

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not applicable

ITEM 2. CHANGES IN SECURITIES

a). Not applicable

b). Not applicable

c). Not applicable

d). 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

At the Annual Meeting of Shareholders held on September 4, 2002, the
Company's shareholders elected eight directors to the Company's Board of
Directors. The number of shares voted for and withheld with respect to the
election of each director was as follows:

ITEM 5. OTHER INFORMATION

Not applicable

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a). Exhibits

99.1 -- Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
signed by Jack Friedman

99.2 -- 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

b). Reports on Form 8-K

None

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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.

FRIEDMAN INDUSTRIES, INCORPORATED

Date November 13, 2002 By /s/ BEN HARPER
------------------------------------
Ben Harper, Senior Vice
President-Finance
(Chief Accounting Officer)

Date November 13, 2002 By /s/ HAROLD FRIEDMAN
------------------------------------
Harold Friedman, Vice Chairman
of the Board

I, Jack Friedman, the Chairman of the Board and Chief Executive Officer of
Friedman Industries, Incorporated, a Texas corporation, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Friedman Industries,
Incorporated;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Dated: November 13, 2002 /s/ JACK FRIEDMAN
Chairman of the Board and
Chief Executive Officer

10

I, Ben Harper, Senior Vice President-Finance and Secretary/Treasurer of Friedman
Industries, Incorporated, a Texas corporation, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Friedman Industries,
Incorporated;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Dated: November 13, 2002 /s/ BEN HARPER
Senior Vice President-Finance and
Secretary/Treasurer

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EXHIBIT INDEX