Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q


 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED December 31, 2022September 30, 2023

 

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

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

1121 Judson Road, Suite 124, Longview, Texas 75601

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code (903)758-3431

 

Former name, former address and former fiscal year, if changed since last report

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol

 

Name of each exchange
on which registered

Common Stock, $1 Par Value

 

FRD

 

NYSE American

 


 

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 every Interactive Data File required to be submitted 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 such files).    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

    

Non-accelerated filer

Smaller reporting company

    
  

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

At February 9,November 14, 2023, the number of shares outstanding of the issuer’s only class of stock was 7,375,5887,375,282 sharesof Common Stock.

 



 

 

 
 

TABLE OF CONTENTS

 

  

Part I — FINANCIAL INFORMATION

3

Item 1. Financial Statements

3

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

Item 3. Quantitative and Qualitative Disclosures About Market Risk

2221

Item 4. Controls and Procedures

2221

Part II — OTHER INFORMATION

2423

Item 6. Exhibits

2423

SIGNATURES

2524

  

2

 

 

 

Part I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

FRIEDMAN INDUSTRIES, INCORPORATED

 

CONDENSED CONSOLIDATED BALANCE SHEETS — UNAUDITED

(In thousands, except for share data)

 

 

DECEMBER 31, 2022

  

MARCH 31, 2022

  

SEPTEMBER 30, 2023

  

MARCH 31, 2023

 

ASSETS

            

CURRENT ASSETS:

          

Cash

 $3,544,508  $2,598,102  $3,152  $2,992 

Accounts receivable, net of allowances for bad debts and cash discounts of $99,819 at December 31, and March 31, 2022

 43,072,920  35,670,657 

Accounts receivable, net of allowances for bad debts of $138 and $183 at September 30, and March 31, 2023, respectively

 52,326  49,367 

Inventories

 97,834,103  67,946,122  104,501  86,246 

Current portion of derivative assets

 808,820 4,240,740  692 536 

Other current assets

  3,096,007   14,906,194   4,491   4,515 

TOTAL CURRENT ASSETS

 148,356,358  125,361,815  165,162  143,656 

PROPERTY, PLANT AND EQUIPMENT:

          

Land

 1,669,831  1,179,831  1,670  1,670 

Buildings and yard improvements

 30,664,230  8,581,676  28,625  28,550 

Machinery and equipment

 48,495,480  30,422,066  51,040  51,001 

Construction in process

 832,761  15,925,306  3,914  1,167 

Less accumulated depreciation

  (27,882,265)  (26,002,820)  (29,914)  (28,455)
 53,780,037  30,106,059  55,335  53,933 

OTHER ASSETS:

          

Cash value of officers’ life insurance and other assets

 464,892  157,248  411  453 

Operating lease right-of-use asset

 1,281,996 113,168   1,219  1,270 

Deferred income tax asset

   2,133,295 

Income taxes recoverable

     1,403,485 

TOTAL ASSETS

 $203,883,283  $159,275,070  $222,127  $199,312 

LIABILITIES AND STOCKHOLDERS’ EQUITY

            

CURRENT LIABILITIES:

          

Accounts payable and accrued expenses

 $42,378,677  $44,803,602  $29,414  $36,847 

Income taxes payable

 1,902  774 

Dividends payable

 147,512  137,120  148  148 

Contribution to retirement plan

 350,000  250,000    350 

Employee compensation and related expenses

 2,258,823  1,085,676  3,320  4,650 

Income taxes payable

 2,631,006   

Current portion of financing lease

 106,214  104,689  108  107 

Current portion of derivative liability

 649,700 14,429,520  400 2,212 

TOTAL CURRENT LIABILITIES

  48,521,932   60,810,607   35,292   45,088 

POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

 96,535  119,591  101  96 

DEFERRED INCOME TAX LIABILITY

 820,960    4,425  4,357 

OTHER NON-CURRENT LIABILITIES

 1,274,431  221,767  1,139  1,222 

ASSET BASED LENDING FACILITY

 44,510,967  18,436,457  54,361  33,117 

TOTAL LIABILITIES

  95,224,825   79,588,422   95,318   83,880 

COMMITMENTS AND CONTINGENCIES

              

STOCKHOLDERS’ EQUITY:

          

Common stock, par value $1: Authorized shares — 10,000,000; Issued shares — 8,868,716 shares and 8,344,975 shares at December 31, and March 31, 2022, respectively

 8,868,716  8,344,975 

Common stock, par value $1: Authorized shares — 10,000,000; Issued shares — 8,868,716 shares at September 30, and March 31, 2023

 8,869  8,869 

Additional paid-in capital

 34,926,801  30,442,361  35,161  35,005 

Accumulated other comprehensive loss

 (846,905) (10,268,509)   (317)

Treasury stock at cost (1,493,128 shares and 1,488,966 shares at December 31, and March 31, 2022, respectively)

 (7,777,769) (7,741,197)

Treasury stock at cost (1,493,434 shares and 1,493,128 shares at September 30, and March 31, 2023, respectively)

 (7,781) (7,778)

Retained earnings

  73,487,615   58,909,018   90,560   79,653 

TOTAL STOCKHOLDERS’ EQUITY

  108,658,458   79,686,648   126,809   115,432 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 $203,883,283  $159,275,070  $222,127  $199,312 

 

The accompanying notes are an integral part of these financial statements.

 

3

 

 

FRIEDMAN INDUSTRIES, INCORPORATED

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS — UNAUDITED

(In thousands, except per share data)

 

 

THREE MONTHS ENDED

 

NINE MONTHS ENDED

  

THREE MONTHS ENDED

 

SIX MONTHS ENDED

 
 

DECEMBER 31,

  

DECEMBER 31,

  

SEPTEMBER 30,

  

SEPTEMBER 30,

 
 

2022

  

2021

  

2022

  

2021

  

2023

  

2022

  

2023

  

2022

 

Net Sales

 $111,860,093  $51,655,943  $423,355,592  $210,143,277  $130,748  $149,692  $268,046  $311,495 

Costs and expenses:

  

Costs of products sold

 105,730,259  55,259,964  393,875,438  166,722,381  124,927  145,014  245,896  288,145 

Selling, general and administrative

  4,700,850   1,994,242   15,661,476   10,634,407   4,766   4,607   10,738   10,960 
  110,431,109   57,254,206   409,536,914   177,356,788   129,693   149,621   256,634   299,105 

EARNINGS (LOSS) FROM OPERATIONS

 1,428,984  (5,598,263) 13,818,678  32,786,489 

EARNINGS FROM OPERATIONS

  1,055   71   11,412   12,390 

Gain on economic hedges of risk

 4,402 3,749 4,832 6,504 
Interest expense (447,551) (58,385) (1,498,147) (153,891) (805) (621) (1,345) (1,051)

Other income (loss), net

  826,039   1,727,134   7,349,916   (4,801,121)

EARNINGS (LOSS) BEFORE INCOME TAXES

 1,807,472  (3,929,514) 19,670,447  27,831,477 

Other income

  10   7   16   20 

EARNINGS BEFORE INCOME TAXES

 4,662  3,206  14,915  17,863 

Provision for (benefit from) income taxes:

  

Current

 447,995  (855,309) 4,686,413  6,639,198  1,165  750  3,745  4,238 

Deferred

  (16,416)  (112,372)  (47,141)  (335,299)  (16)  (15)  (33)  (30)
  431,579   (967,681)  4,639,272   6,303,899   1,149   735   3,712   4,208 

NET EARNINGS (LOSS)

 $1,375,893  $(2,961,833) $15,031,175  $21,527,578 

NET EARNINGS

 $3,513  $2,471  $11,203  $13,655 
  

Net earnings (loss) per share:

 

Net earnings per share:

 

Basic

 $0.19  $(0.45) $2.06  $3.12  $0.48  $0.34  $1.52  $1.88 

Diluted

 $0.19  $(0.45) $2.06  $3.12  $0.48  $0.34  $1.52  $1.88 

Cash dividends declared per common share

 $0.02  $0.02  $0.06  $0.06  $0.02  $0.02  $0.04  $0.04 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME — UNAUDITED

(In thousands)

 

 

THREE MONTHS ENDED

 

NINE MONTHS ENDED

  

THREE MONTHS ENDED

 

SIX MONTHS ENDED

 
 

DECEMBER 31,

  

DECEMBER 31,

  

SEPTEMBER 30,

  

SEPTEMBER 30,

 
 

2022

  

2021

  

2022

  

2021

  

2023

  

2022

  

2023

  

2022

 

Net earnings (loss)

 $1,375,893  $(2,961,833) $15,031,175  $21,527,578 

Net earnings

 $3,513  $2,471  $11,203  $13,655 

Other comprehensive income:

  

Cash flow hedges, net of tax

  669,454   13,795,418   9,421,604   4,329,266      1,578   317   8,752 
  669,454   13,795,418   9,421,604   4,329,266      1,578   317   8,752 

Comprehensive income

 $2,045,347  $10,833,585  $24,452,779  $25,856,844  $3,513  $4,049  $11,520  $22,407 

 

The accompanying notes are an integral part of these financial statements.

 

4

 

 

FRIEDMAN INDUSTRIES, INCORPORATED

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED

(In thousands)

 

 

NINE MONTHS ENDED DECEMBER 31,

  

SIX MONTHS ENDED SEPTEMBER 30,

 
 

2022

  

2021

  

2023

  

2022

 

OPERATING ACTIVITIES

          

Net earnings

 $15,031,175  $21,527,578  $11,203  $13,655 

Adjustments to reconcile net earnings to cash provided by (used in) operating activities:

          

Depreciation

 1,879,445  994,209 

Depreciation and amortization

 1,531  1,173 

Deferred taxes

 (47,141) (335,299) (33) (31)

Compensation expense for restricted stock

 224,481  375,935  156  146 

Change in postretirement benefits

 8,237  6,559  4  5 

Gain recognized on open derivatives not designated for hedge accounting

 (1,353,520) (1,238,320) (1,969) (1,073)

Deferred realized gain (loss) on derivatives

 3,155,821 (3,393,260)

Forgiveness of Paycheck Protection Program Loan

  (1,706,614)

Deferred realized gain on derivatives

 418 1,552 

Decrease (increase) in operating assets, net of amounts acquired in business combination:

          

Accounts receivable

 (7,402,263) (5,865,531) (2,958) (18,272)

Inventories

 47,658,608  (48,538,400) (18,256) 56,899 

Federal income taxes recoverable

 1,403,485      1,403 

Other current assets

 426,712  (667,196) (2,369) 304 

Increase (decrease) in operating liabilities, net of amounts acquired in business combination:

          

Accounts payable and accrued expenses

 (20,790,614) 17,415,657  (7,411) (6,022)

Income taxes payable

 2,631,006  (206,842) 1,128  2,241 

Contribution to retirement plan

 100,000  150,000  (350) 13 

Employee compensation and related expenses

  1,173,147   (1,455,785)  (1,330)  2,657 

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

 44,098,579  (22,937,309) (20,236) 54,650 

INVESTING ACTIVITIES

          

Plateplus business combination

 (71,720,208)    (71,720)

Purchase of property, plant and equipment

 (8,278,891) (7,350,081) (2,883) (7,194)

Proceeds on sale from assets

  160,542 

Increase in cash surrender value of officers’ life insurance

  (10,389)  (8,686)  (7)  (7)

NET CASH USED IN INVESTING ACTIVITIES

 (80,009,488) (7,198,225) (2,890) (78,921)

FINANCING ACTIVITIES

          

Debt issuance cost

 (328,548)    (394)

Cash dividends paid

 (442,186) (414,092) (295) (295)

Cash paid for principal portion of finance lease

 (78,327) (76,831) (53) (52)

Cash paid for share repurchases

 (36,572) (102,075) (4) (29)

Asset based lending facility proceeds

  26,074,510  15,187,824   21,244  17,783 

NET CASH PROVIDED BY FINANCING ACTIVITIES

  25,188,877   14,594,826   20,892   17,013 

DECREASE IN CASH AND RESTRICED CASH

 (10,722,032) (15,540,708)

DECREASE IN CASH AND RESTRICTED CASH

 (2,234) (7,258)

CASH AND RESTRICTED CASH AT BEGINNING OF PERIOD

  16,121,518   20,192,486   5,386   16,122 

CASH AND RESTRICTED CASH AT END OF PERIOD

 $5,399,486  $4,651,778  $3,152  $8,864 

 

Cash and restricted cash at December 31, 2022 and March 31, 20222023 included $1,854,978 and $13,523,416, respectively,approximately $2.4 million of cash required to collateralize open derivative positions. These amounts areThis amount is reported in "Other current assets" on the Company's consolidated balance sheetssheet at December 31, 2022 and March 31, 2022.2023. The Company had $1,585,350approximately $2.2 million in restricted cash at December 31, 2021September 30, 2022The Company did not have any restricted cash as of  September 30, 2023.

 

The accompanying notes are an integral part of these financial statements.

 

 

5

 

FRIEDMAN INDUSTRIES, INCORPORATED

 

CONDENSED NOTES TO QUARTERLY REPORT — UNAUDITED

 

 

NOTE A — BASIS OF PRESENTATION

 

The accompanying unaudited, condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and footnotes of Friedman Industries, Incorporated (the “Company”) included in its annual report on Form 10-K for the year ended March 31, 20222023.

 

Business Combinations

 

The results of a business acquired in a business combination are included in the Company’s financial statements from the date of acquisition. The Company allocates the purchase price to the identifiable assets and liabilities of the acquired business at their acquisition date fair values. The excess of the purchase price over the amount allocated to the identifiable assets and liabilities, if any, is recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management to make significant judgments and estimates, including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates and selection of comparable companies. Acquisition-related transaction costs are expensed in the period in which the costs are incurred. Please refer to Note B for additional discussion of the acquisition completed by the Company during the quarter ended June 30, 2022.

 

Reclassifications

 

The unaudited condensed consolidated financial statements for the previous year may include certain reclassifications to conform to the current presentation. To conform with the current year presentation, “Interest expense” on the unaudited condensed consolidated statements of operations was moved below the calculation of "Earnings (Loss) From Operations". This reclassificationTo conform with the current year presentation, gains of approximately $3.7 million and $6.5 million for the three and six month periods, respectively, reported in the prior year as components of "Other income, net" on the unaudited condensed consolidated statement of operations were moved to the line item "Gain on economic hedges of risk". These reclassifications had no impact on previously reported net earnings or stockholder's equity.

 

NOTE B — BUSINESS COMBINATIONS

 

On April 30, 2022, (the “Acquisition Date”), the Company acquired certain assets and liabilities of Plateplus, Inc. (“Plateplus”), a wholly owned subsidiary of Metal One, Inc. (“Metal One” or “Seller”), whereby the Company acquired the real estate, buildings, equipment, inventory, and other assets of Plateplus’ East Chicago, IN and Granite City, IL facilities and certain steel inventory at Plateplus’ Loudon, TN and Houston, TX facilities (the “Transaction”). The East Chicago and Granite City facilities are steel coil processing facilities that produce the same type of products as the Company's facilities in Hickman, AR; Decatur, AL and  Sinton, TX. As a result of the Transaction, the Company expanded its footprint and distribution capabilities in the mid-western United States.

 

The Transaction resulted in the Company acquiring the assets noted above, for a total consideration of $76.5 million, of which $71.7 million was cash consideration and $4.8 million related to 516,041 shares of the Company's common stock issued to the Seller. The fair value of the 516,041 shares issued was determined based on the closing market price of the Company’s common stock on April 29, 2022, the last trading day prior to the Acquisition Date. At the Acquisition Date, theThe Transaction was funded with net borrowings of $64.0$71.9 million made under the Company's asset-based lending facility ("ABL Facility") provided by JPMorgan Chase Bank. An additional $7.9 million was funded by the ABL Facility during the quarter ended September 30, 2022 to pay the final net working capital adjustment.

 

The Transaction was accounted for using the acquisition method of accounting, in accordance with Topic 805, Business Combinations, whereby the consideration transferred and the acquired identifiable assets and liabilities assumed are recorded at their respective fair values. The excess of the consideration transferred over the fair values of these identifiable net assets is recorded as goodwill. The Transaction resulted in no residual goodwill. The estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the Acquisition Date to estimate the fair value of assets acquired and liabilities assumed. Therefore, the provisional measurements of fair value reflected are subject to change and such changes could be significant. The Company expects to finalize its fair value estimates as soon as practicable but no later than one year from the Acquisition Date.

 

Fair value of assets acquired and liabilities assumed

  

Fair value of assets acquired and liabilities assumed (in thousands)

  

Inventory

 $77,546,000  $77,546 

Property, plant and equipment

 18,022,000  18,022 
Operating lease right-of-use asset  1,237,097 

Operating lease right of use asset

 1,237 

Accounts payable

  (19,065,000)  (19,065)
Operating lease liability  (1,237,097)  (1,237)

Total

 $76,503,000  $76,503 

 

The following unaudited pro forma consolidated operating results give effect to the Transaction as if it had been completed as of April 1, 2021. These pro forma amounts are not necessarily indicative of the operating results that would have occurred if the Transaction had occurred on such date. The pro forma adjustments are based on certain assumptions that we believe are reasonable.

  

Three Months Ended December 31,

  

Nine Months Ended December 31,

 
  

2022

  

2021

  

2022

  

2021

 

Net sales

 $111,860,093  $122,495,733  $442,756,025  $391,652,365 

Earnings (loss) from operations

 $981,433  $(20,068,874) $12,291,240  $14,918,837 

Our consolidated statements of operations for the three month and nine month periods ended December 31, 2022, include net sales of approximately $52.0 million and $175.0 million, respectively, and earnings from operations of approximately $4.6 million and $10.3 million, respectively, attributable to the East Chicago and Granite City facilities acquired from Plateplus. At the Acquisition Date, the Company acquired the inventory on hand at Plateplus' Houston and Loudon facilities and also assumed inventory on order related to these locations. Plateplus provided toll processing services for this material for a period of time following the Acquisition Date with these services having concluded by August 31, 2022 resulting in no impact to sales and earnings from operations for the three months ended December 31, 2022. In addition to the East Chicago and Granite City sales and earnings from operations, our consolidated statement of operations for the nine month period ended December 31, 2022, include net sales of approximately $43.4 million and earnings from operations of approximately $300,000 attributable to sales of inventory from Houston and Loudon where the fixed assets were not acquired. The Company did not have any transaction specific costs during the three months ended December 31, 2022. For the nine months ended December 31, 2022, the Company recordedone-time transaction specific costs of approximately $0.5 million and $1.2 million in the three and six months ended September 30, 2023, respectively, as a component of "Selling, general and administrative" expenses on the Condensed Consolidated Statementscondensed consolidated statement of Operations. Information about the debt issuance costs associated with the acquisition financing is provided in Note D.operations.

 

6

 
 

NOTE C — 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 raw materials and tubular inventory consists of both raw materials and finished goods. Cost for prime coil inventory is determined using the average cost method. Cost for non-standard coil inventory is determined using the specific identification method. Cost for tubular inventory is determined using the average cost method. All inventories are valued at the lower of cost or net realizable value.

 

A summary of inventory values by product group follows:follows (in thousands):

 

 

December 31, 2022

  

March 31, 2022

  

September 30, 2023

  

March 31, 2023

 

Prime Coil Inventory

 $89,007,944  $50,482,022  $91,832  $75,917 

Non-Standard Coil Inventory

 295,925  1,063,374  559  278 

Tubular Raw Material

 4,542,470  9,049,598  5,541  5,193 

Tubular Finished Goods

  3,987,764   7,351,128   6,569   4,858 
 $97,834,103  $67,946,122  $104,501  $86,246 

 

Tubular raw material inventory consists of hot-rolled steel coils that the Company will manufacture into pipe. Tubular finished goods inventory consists of pipe the Company has manufactured.

 

 

NOTE D – DEBT

         

         On June 22,2021, the Small Business Administration authorized full forgiveness of the Company's Paycheck Protection Program loan. The gain of $1,706,614 from this extinguishment of debt included both principal and interest and is recorded asCompany has a component of "Other income (loss), net" on the Company's Condensed Consolidated Statement of Operations for the nine months ended December 31, 2021.

On March 8, 2021, the Company entered into a Credit Agreement providing for a $10$150 million revolving line of creditasset-based lending facility (the "Interim Credit Facility)("ABL Facility") in place with JPMorgan Chase Bank, N.A. (the "Bank"). The Interim Credit Facility had an expiration date of July 15, 2021 becauseas the Company was evaluating options for longer term credit arrangements. On April 12, 2021, the Company executed a first amendment to the Interim Credit Facility that increased the size of the facility from $10 million to $20 million. On May 19, 2021, the Company entered into an Amendedarranging agent and Restated Credit Agreement ("ABL Facility") with the Bank that amended and restated the Interim Credit Facility and provided for asset-based revolving loans in an aggregate principal amount up to $40 million. On March 11, 2022, the Company executed a first amendment to the ABL Facility which increased the size of the facility from $40 million to $75 million. On April 29, 2022, the Company entered into a Second Amendment to the ABL Facility. The Second Amendment increased the revolving loans available under the ABL facility from an aggregate principal amount of up to $75 million to an aggregate principal amount of up to $150 million. On July 6, 2022, the Company entered into a Third Amendment to the ABL Facility. The Third Amendment to the ABL Facility provided for the syndication of the asset-based revolving loans available thereunder with BMO Harris Bank, N.A. ("BMO") with JPMorgan Chase Bank serving as the arranging agent (the "Agent"). The Third Amendment also amended provisions of the ABL Facility authorizing the Agent to make protective advances under the ABL Facility and added a covenant requiring each of the Company and its subsidiaries to maintain the Agent as its principal depository bank. In connection with the Third Amendment, the Company also entered into a Revolving Note payable to BMO in a principal amount of up to $50 million establishing BMO as a one-third syndicated participant in the Company's ABL facility.participant. The ABL Facility matures on May 19, 2026 and is secured by substantially all of the assets of the Company. The Company can elect borrowings on a floating rate basis or a term basis. Floating rate borrowings accrue interest at a rate equal to the prime rate minus 1% per annum. Term rate borrowings accrue interest at a rate equal to the SOFR rate applicable to the selected term plus 1.8% per annum. Availability of funds under the ABL Facility is subject to a borrowing base calculation determined as the sum of (a) 90% of eligible accounts receivable, plus (b) the product of 85% multiplied by the net orderly liquidating value percentage identified in the most recent inventory appraisal multiplied by eligible inventory. The ABL Facility contains a springing financial covenant whereby the financial covenant is only tested when availability falls below the greater of 15% of the revolving commitment or $22.5 million. The financial covenant restricts the Company from allowing its fixed charge coverage ratio to be, as of the end of any calendar month, less than 1.10 to 1.00 for the trailing twelve-month period then ending. The fixed charge coverage ratio is calculated as the ratio of (a) EBITDA, as defined in the ABL Facility, minus unfinanced capital expenditures to (b) cash interest expense plus scheduled principal payments on indebtedness plus taxes paid in cash plus restricted payments paid in cash plus capital lease obligation payments plus cash contributions to any employee pension benefit plans. The ABL Facility contains other representations and warranties and affirmative and negative covenants that are usual and customary. If certain conditions precedent are satisfied, the ABL facility may be increased by up to an aggregate of $25 million, in minimum increments of $5 million. At December 31, 2022September 30, 2023, the Company had a balance of $44,510,967approximately $54.4 million under the ABL Facility with an applicable interest rate of 6.5%7.5%. At December 31, 2022September 30, 2023, the Company's applicable borrowing base calculation supported access to $99approximately $119.3 million of the ABL Facility.

 

The Company incurred debt issuance costs of $239,887approximately $0.4 million in connection with the Second Amendment to the ABL Facility and $154,000 in connection with the Third Amendment to the ABL Facility. The Company recorded these debt issuance costs as non-current other assets and will amortizeis amortizing these costs on an equal monthly basis over the remaining term of the ABL facility.

 

7

 

 

 NOTE E — LEASES

 

The Company was assigned an operating lease associated with the real property and leasehold improvements for the Granite City, IL facility acquired from Plateplus pursuant to the Transactiontransaction disclosed in Note B. The current lease expirescontained an expiration date of August 31, 2023 but contains a 20 year extension option in favor ofand the Company whichis in the Company expects to exercise.process of renewing the lease. The lease calls for quarterly rental payments of $18,832.approximately $19,000. The Company recognized an initial right-of-use ("ROU") asset and lease liability of $1,237,097approximately $1.2 million during the June 30, 2022 quarter related to this lease. The anticipated 20 year extensionrenewal of this lease is included in the ROU asset and lease liability calculation. The Company’s lease of its office space in Longview, Texas is the only other operating lease included in the Company's ROU assets and lease liabilities. The lease calls for monthly rent payments of $4,878approximately $5,000 and expires on April 30, 2024. The Company’s other operating leases for items such as IT equipment and storage space are either short-term in nature or immaterial.

 

In October 2019, the Company receivedacquired a new heavy-duty forklift under a 5-year finance lease arrangement with a financed amount of $518,616approximately $0.5 million and a monthly payment of $9,074.approximately $9,000.

 

The components of expense related to leases for the three and ninesix months ended December 31, 2022September 30, 2023 and 20212022 are as follows:follows (in thousands):

 

 

Three Months Ended

 

Nine Months Ended

  

Three Months Ended

 

Six Months Ended

 
 

December 31,

  

December 31,

  

September 30,

  

September 30,

 
 

2022

  

2021

  

2022

  

2021

  

2023

  

2022

  

2023

  

2022

 

Finance lease – amortization of ROU asset

 $26,235  $25,734  $78,327  $76,831  $26  $26  $52  $52 

Finance lease – interest on lease liability

 988  1,489  3,342  4,838  1  1  2  2 

Operating lease expense

  33,466   14,634   94,120   43,902   34   34   68   61 
 $60,689  $41,857  $175,789  $125,571  $61  $61  $122  $115 

 

The following table illustrates the balance sheet classification for ROU assets and lease liabilities as of December 31, 2022September 30, 2023 and March 31, 20222023 (in thousands):

 

 

December 31, 2022

  

March 31, 2022

 

Balance Sheet Classification

 

September 30, 2023

  

March 31, 2023

 

Balance Sheet Classification

Assets

            

Operating lease right-of-use asset

 $1,281,996  $113,168 

Operating lease right-of-use asset

 $1,219  $1,270 

Operating lease right-of-use asset

Finance lease right-of-use asset

  436,499   455,948 

Property, plant & equipment

  417   430 

Property, plant & equipment

Total right-of-use assets

 $1,718,495  $569,116   $1,636  $1,700  

Liabilities

            

Operating lease liability, current

 $100,744  $52,270 

Accrued expenses

 $80  $101 

Accrued expenses

Finance lease liability, current

 106,214  104,689 

Current portion of finance lease

 108  107 

Current portion of finance lease

Operating lease liability, non-current

 1,193,415  60,898 

Other non-current liabilities

 1,139  1,168 

Other non-current liabilities

Finance lease liability, non-current

  81,016   160,869 

Other non-current liabilities

     54 

Other non-current liabilities

Total lease liabilities

 $1,481,389  $378,726   $1,327  $1,430  

 

As of December 31, 2022September 30, 2023, the weighted-average remaining lease term was 19.619.4 years for operating leases and 1.71.0 years for finance leases. The weighted average discount rate was 2.7%2.6% for operating leases and 1.9% for finance leases.

 

Maturities of lease liabilities as of December 31, 2022September 30, 2023 were as follows:follows (in thousands):

 

 

Operating Leases

  

Finance Leases

  

Operating Leases

  

Finance Leases

 

Fiscal 2023 (remainder of fiscal year)

 33,466  27,223 

Fiscal 2024

 133,863  108,892 

Fiscal 2024 (remainder of fiscal year)

 67  55 

Fiscal 2025

  80,205   54,446   80   54 

Fiscal 2026

 75,327    75   

Fiscal 2027 and beyond

  1,311,941    

Fiscal 2027

 75   

Fiscal 2028 and beyond

  1,237    

Total undiscounted lease payments

 $1,634,802  $190,561  $1,534  $109 

Less: imputed interest

  (340,643)  (3,331)  (315)  (1)

Present value of lease liability

 $1,294,159  $187,230  $1,219  $108 

 

8

 
 

NOTE F — PROPERTY, PLANT AND EQUIPMENT

 

OnIn May 25, 2021,October 2022, the Company announced plans for acompleted its new facility in Sinton, Texas, that would bewhich is part of the flat-roll product segment (previously referred to as the coil product segment.segment) at a total completed cost of approximately $22.2 million. The new facility is on the campus of Steel Dynamics, Inc.'s ("SDI") new flat roll steel mill in Sinton, Texas. The Company's new locationTexas and consists of an approximately 70,000 square foot building located on approximately 26.5 acres leased from SDI under a 99-year agreement with an annual rental payment of $1.$1. The facility is equipped with a stretcher leveler cut-to-length line that is capable of handling material up to 1” thick, widths up to 96” and yields exceeding 100,000 psi. The Company put

At September 30, 2023, the facility into serviceCompany's construction in process balance of approximately $3.9 million consisted primarily of projects at the end of October 2022 and estimates the total costDecatur, AL facility which include approximately $1.2 million associated with a building expansion, $1.1 million associated with upgrading a component of the project to be approximately $22.3 million. At December 31, 2022,processing line and $0.5 million associated with expansion of the Company had paid approximately $14,826,000 related to the project and accrued approximately $7,448,000 to be paid duringstorage yard. The total of the three months endingprojects is estimated to cost $4.4 million with completion expected during the March 31, 2023.2024 quarter. The remaining construction in process balance is comprised of several smaller projects.

 

 

NOTE G — STOCK BASED COMPENSATION

 

The Company maintains the Friedman Industries, Incorporated 2016 Restricted Stock Plan (the “Plan”). The Plan is administered by the Compensation Committee (the “Committee”) of the Board of Directors (the “Board”) and continues indefinitely until terminated by the Board or until all shares allowed by the Plan have been awarded and earned. The aggregate number of shares of the Company’s Common Stock eligible for award under the Plan is 500,000 shares. Subject to the terms and provisions of the Plan, the Committee may, from time to time, select the employees, directors or consultants to whom awards will be granted and shall determine the amount and applicable restrictions of each award. Restricted awards entitle recipients to vote and receive non-forfeitable dividends during the restriction period. Because dividends are non-forfeitable, they are reflected in retained earnings. Forfeitures are accounted for upon their occurrence. Because the Company accounts for forfeitures as they occur, the non-forfeitable dividends are reclassified from retained earnings to additional stock compensation for the actual forfeitures that occurred.

 

The following table summarizes the activity related to restricted stock units ("RSUs") for the ninesix months ended December 31, 2022September 30, 2023:

 

    

Weighted Average

     

Weighted Average

 
 

Number of Shares

  

Grant Date Fair Value Per Share

  

Number of Shares

  

Grant Date Fair Value Per Share

 

Unvested at March 31, 2022

 139,523  $5.96 

Unvested at March 31, 2023

 100,366  $6.08 

Cancelled or forfeited

        

Granted

 7,700  9.10     

Vested

  (46,857)  7.65   (14,000)  4.32 

Unvested at December 31, 2022

  100,366  $5.41 

Unvested at September 30, 2023

  86,366  $6.37 

 

The Company measures compensation expense for RSUs at the market price of the common stock as of the grant date. Compensation expense is recognized over the requisite service period applicable to each award. The Company recorded compensation expense of $224,481approximately $0.2 million and $375,935$0.1 million in the ninesix months ended December 31, 2022September 30, 2023 and 20212022, respectively, relating to the RSUs issued under the Plan. As of December 31, 2022September 30, 2023, unrecognized compensation expense related to unvested RSUs was approximately $391,000,$0.2 million which is expected to be recognized over a weighted average period of approximately 1.51.2 years. As of December 31, 2022September 30, 2023, a total of 122,485 shares were still available to be issued under the Plan.

 

 

NOTE H — DERIVATIVE FINANCIAL INSTRUMENTS

 

From time to time, we expect to use derivative financial instruments to minimize our exposure to commodity price risk that is inherent in our business. At the time derivative contracts are entered into, we assess whether the nature of the instrument qualifies for hedge accounting treatment according to the requirements of ASC 815 – Derivatives and Hedging (“ASC 815”). By using derivatives, the Company is exposed to credit and market risk. The Company’s exposure to credit risk includes the counterparty’s failure to fulfill its performance obligations under the terms of the derivative contract. The Company attempts to minimize its credit risk by entering into transactions with high quality counterparties and uses exchange-traded derivatives when available. Market risk is the risk that the value of the financial instrument might be adversely affected by a change in commodity prices. The Company manages market risk by continually monitoring exposure within its risk management strategy and portfolio. For those transactions designated as hedging instruments for accounting purposes, we document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking the various hedge transactions. We also assess, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting changes in cash flows or fair value of hedged items.

 

From time to time, derivatives designated for hedge accounting may be closed prior to contract expiration. The accounting treatment of closed positions depends on whether the closure occurred due to the hedged transaction occurring early or if the hedged transaction is still expected to occur as originally forecasted. For hedged transactions that occur early, the closure results in the realized gain or loss from closure being recognized in the same period the accelerated hedged transaction affects earnings. For hedged transactions that are still expected to occur as originally forecasted, the closure results in the realized gain or loss being deferred until the hedged transaction affects earnings.

 

If it is determined that hedged transactions associated with cash flow hedges are no longer probable of occurring, the gain or loss associated with the instrument is recognized immediately into earnings. 

 

From time to time, we may have derivative financial instruments for which we do not elect hedge accounting. 

 

The Company has forward physical purchase supply agreements in place with some of its suppliers for a portion of its monthly physical steel needs. These supply agreements are not subject to mark-to-market accounting due to the Company electing the normal purchase normal sale exclusion provided in ASC 815. 

 

9

 

At December 31, 2022September 30, 2023 the Company did not have any hot-rolled coil futures contracts designated as hedging instruments and classified as cash flow hedges. At March 31, 20222023, the Company held hot-rolled coil futures contracts which were designated as hedging instruments and classified as cash flow hedges, either as hedges of variable purchase prices or as hedges of variable sales prices. Accordingly, realized and unrealized gains and losses associated with the instruments arewere reported as a component of other comprehensive income and reclassified into earnings during the period in which the hedged transaction affects earnings. 

During the three and ninesix months ended December 31, September 30, 2023 and 2022,, the Company also entered into hot-rolled coil futures contracts that were not designated as hedging instruments for accounting purposes. Accordingly, the change in fair value related to these instruments was immediately recognized in earnings.earnings for these periods.  

 

The following table summarizes the fair value of the Company’s derivative financial instruments and the respective line in which they were recorded in the Consolidated Balance Sheet as of December 31, 2022September 30, 2023 (in thousands):

 

Asset Derivatives

 

Liability Derivatives

 

Asset Derivatives

 

Liability Derivatives

 

Balance Sheet

   

Balance Sheet

   

Derivatives designated as cash flow hedges:

Location

 

Fair Value

 

Location

 

Fair Value

 

Hot-rolled coil steel contracts hedging sales

Current portion of derivative assets

 $22,100     
        

Balance Sheet

   

Balance Sheet

   

Derivatives not designated as hedging instruments:

        

Location

 

Fair Value

 

Location

 

Fair Value

 

Hot-rolled coil steel contracts

Current portion of derivative assets

 $786,720 

Current portion of derivative liability

 $649,700 

Current portion of derivative assets

 $692 

Current portion of derivative liability

 $400 
        

 

The following table summarizes the fair value of the Company’s derivative financial instruments and the respective line in which they were recorded in the Consolidated Balance Sheet as of March 31, 20222023 (in thousands):

 

Asset Derivatives

 

Liability Derivatives

 

Asset Derivatives

 

Liability Derivatives

 

Balance Sheet

   

Balance Sheet

   

Derivatives designated as cash flow hedges:

Location

 

Fair Value

 

Location

 

Fair Value

 

Hot-rolled coil steel contracts hedging sales

    

Current portion of derivative liability

 $8,905,500 
        

Balance Sheet

   

Balance Sheet

   

Derivatives not designated as hedging instruments:

        

Location

 

Fair Value

 

Location

 

Fair Value

 

Hot-rolled coil steel contracts

Current portion of derivative assets

 $4,240,740 

Current portion of derivative liability

 $5,524,020 

Current portion of derivative assets

 $536 

Current portion of derivative liability

 $2,212 

 

All derivatives are presented on a gross basis on the Consolidated Balance Sheets.

 

At September 30, 2023 and March 31, 20222023, the Company reported $933,200approximately $3.0 million and $1.6 million, respectively, in "Other current assets" on its Consolidated Balance Sheet related to futures contracts which were closed but were pending cash settlement. At December 31, 2022, the Company did not have any closed futures contracts pending cash settlement.

The notional amount (quantity) of our cash flow hedges outstanding at December 31, 2022 consisted of 2,080 tons hedging sales with maturity dates ranging from February 2023 to March 2023.

 

The following table summarizes the pre-tax gain (loss) recognized in other comprehensive income and the gain (loss)loss reclassified from accumulated other comprehensive loss into earnings for derivative financial instruments designated as cash flow hedges for the periods presented:presented (in thousands):

 

 

Pre-Tax Gain (Loss)

 

Location of Gain (Loss) Reclassified

 

Pre- Tax Gain (Loss) Reclassified from

  

Pre-Tax Gain Recognized in OCI

 

Location of Loss Reclassified from AOCI into Net Earnings

 

Pre- Tax Loss Reclassified from AOCI into Net Earnings

 
 

Recognized in OCI

 

from AOCI into Net Earnings

 

AOCI into Net Earnings

 

For the three months ended December 31, 2022:

 

For the three months ended September 30, 2023:

       

Hot-rolled coil steel contracts

 $22,100 

Sales

 $(860,620) $ 

Sales

 $ 

Total

 $22,100   $(860,620) $   $ 
        

For the three months ended December 31, 2021:

 

Hot-rolled coil steel contracts

 $3,473,300 

Sales

 $(14,766,060)

For the three months ended September 30, 2022:

       

Hot-rolled coil steel contracts

   

Costs of goods sold

 49,200  $590 

Sales

 $(1,490)

Total

 $3,473,300   $(14,716,860) $590   $(1,490)
        

For the nine months ended December 31, 2022:

 

For the six months ended September 30, 2023:

       

Hot-rolled coil steel contracts

 $9,445,840 

Sales

 $(2,977,160) $ 

Sales

 $(418)

Total

 $9,445,840   $(2,977,160) $   $(418)
        

For the nine months ended December 31, 2021:

 

Hot-rolled coil steel contracts

 $(6,609,540)

Sales

 $(22,950,860)

For the six months ended September 30, 2022:

       

Hot-rolled coil steel contracts

   

Costs of goods sold

 10,632,900  $9,424 

Sales

 $(2,117)

Total

 $(6,609,540)  $(12,317,960) $9,424   $(2,117)

 

The estimated amount of net losses recognized in AOCI at December 31, 2022 expected to be reclassified into net earnings (loss) within the succeeding twelve months is $1,116,700. This amount consists of $1,138,800 in realized losses associated with closed hedges and $22,100 in unrealized gains associated with open hedges that was computed using the fair value of the cash flow hedges as of December 31, 2022 and is subject to change before actual reclassification from AOCI to net earnings (loss).

 

10

 

The following table summarizes the gains recognized in earnings for derivative instruments not designated as hedging instruments during the three and ninesix months ended December 31, 2022September 30, 2023 (in thousands):

 

   

Gain Recognized in Earnings

 
 

Location of Gain

 

for the Three Months Ended

 
 

Recognized in Earnings

 December 31, 2022 

Hot-rolled coil steel contracts

Other income (loss), net

 $822,200 
   

Gain Recognized in Earnings

 
 

Location of Gain

 

for the Three Months Ended

 
 

Recognized in Earnings

 September 30, 2023 

Hot-rolled coil steel contracts

Gain on economic hedges of risk

 $4,402 

 

   

Gain Recognized in Earnings

 
 

Location of Gain

 

for the Nine Months Ended

 
 

Recognized in Earnings

 

December 31, 2022

 

Hot-rolled coil steel contracts

Other income (loss), net

 $7,325,860 
   

Gain Recognized in Earnings

 
 

Location of Gain

 

for the Six Months Ended

 
 

Recognized in Earnings

 

September 30, 2023

 

Hot-rolled coil steel contracts

Gain on economic hedges of risk

 $4,832 

 

The following table summarizes the lossesgains recognized in earnings for derivative instruments not designated as hedging instruments during the three and ninesix months ended December 31, 2021:September 30, 2022(in thousands):

 

   

Gain Recognized in Earnings

 
 

Location of Gain

 

for the Three Months Ended

 
 

Recognized in Earnings

 

December 31, 2021

 

Hot-rolled coil steel contracts

Other income (loss), net

 $1,721,700 
   

Gain Recognized in Earnings

 
 

Location of Gain

 

for the Three Months Ended

 
 

Recognized in Earnings

 

September 30, 2022

 

Hot-rolled coil steel contracts

Gain on economic hedges of risk

 $3,749 

 

   

Loss Recognized in Earnings

 
 

Location of Loss

 

for the Nine Months Ended

 
 

Recognized in Earnings

 

December 31, 2021

 

Hot-rolled coil steel contracts

Other income (loss), net

 $(6,498,040)
   

Gain Recognized in Earnings

 
 

Location of Gain

 

for the Six Months Ended

 
 

Recognized in Earnings

 

September 30, 2022

 

Hot-rolled coil steel contracts

Gain on economic hedges of risk

 $6,504 

 

The notional amount (quantity) of our derivative instruments not designated as hedging instruments at December 31, 2022September 30, 2023 consisted of 35,04022,100 tons of short positions with maturity dates ranging from January October 2023to December 2023.June 2024.

 

The following table reflectstables reflect the change in accumulated other comprehensive income (loss), net of tax, for the periods presented (in thousands)::

 

 

Gain (Loss) on

  

Gain (Loss) on

 
 

Derivatives

  

Derivatives

 

Balance at March 31, 2022

 $(10,268,509)

Balance at March 31, 2023

 $(317)

Other comprehensive income, net of loss, before reclassification

 7,163,726   

Total loss reclassified from AOCI (1)

  2,257,878   317 

Net current period other comprehensive income

  9,421,604   317 

Balance at December 31, 2022

 $(846,905)

Balance at September 30, 2023

 $ 

 

(1) The loss reclassified from AOCI is presented net of tax benefits of $719,282approximately $0.1 million which are included in the provision for (benefit from) income taxes on the Company's Consolidated Statement of Operations for the ninesix months ended December 31, 2022.September 30, 2023.

 

  

Gain (Loss) on

 
  

Derivatives

 

Balance at March 31, 2021

 $(11,187,841)

Other comprehensive loss, net of income, before reclassification

  (5,012,675)

Total loss reclassified from AOCI (1)

  9,341,941 

Net current period other comprehensive income

  4,329,266 

Balance at December 31, 2021

 $(6,858,575)
  

Gain (Loss) on

 
  

Derivatives

 

Balance at March 31, 2022

 $(10,269)

Other comprehensive income, net of loss, before reclassification

  7,147 

Total loss reclassified from AOCI (1)

  1,606 

Net current period other comprehensive income

  8,753 

Balance at September 30, 2022

 $(1,516)

 

(1) The loss reclassified from AOCI is presented net of tax benefits of $2,976,019approximately $0.5 million which are included in the provision for (benefit from) income taxes on the Company's Consolidated Statement of Operations for the ninesix months ended December 31, 2021.September 30, 2022.

 

At December 31, 2022 and March 31, 20222023, cash of $1,854,978 and $13,523,416, respectively,approximately $2.4 million was held by our clearing agent to collateralize our open derivative positions. TheseThe cash requirements arerequirement is included in "Other current assets" on the Company's Consolidated Balance SheetsSheet at December 31, 2022 and March 31, 20222023. The Company did not have any restricted cash as ofSeptember 30, 2023.

 

11

 
 

NOTE I — FAIR VALUE MEASUREMENTS

 

Accounting standards provide a comprehensive framework for measuring fair value and sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs. Levels within the hierarchy are defined as follows:

 

 

Level 1 – Quoted prices for identical assets and liabilities in active markets.

 

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the assets and liabilities, either directly or indirectly.

 

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities.

 

Recurring Fair Value Measurements

 

At December 31, 2022September 30, 2023, our financial assets, net, measured at fair value on a recurring basis were as follows:follows (in thousands):

 

 

Quoted Prices

          

Quoted Prices

         
 

in Active

 

Significant

       

in Active

 

Significant

      
 

Markets for

 

Other

 

Significant

    

Markets for

 

Other

 

Significant

   
 

Identical

 

Observable

 

Unobservable

    

Identical

 

Observable

 

Unobservable

   
 

Assets

 

Inputs

 

Inputs

    

Assets

 

Inputs

 

Inputs

   
 

(Level 1)

  

(Level 2)

  

(Level 3)

  

Total

  

(Level 1)

  

(Level 2)

  

(Level 3)

  

Total

 

Commodity futures – financial assets, net

 $159,120  $  $  $159,120  $292  $  $  $292 

Total

 $159,120  $  $  $159,120  $292  $  $  $292 

 

At March 31, 20222023, our financial liabilities, net, measured at fair value on a recurring basis were as follows:follows (in thousands):

 

 

Quoted Prices

          

Quoted Prices

         
 

in Active

 

Significant

       

in Active

 

Significant

      
 

Markets for

 

Other

 

Significant

    

Markets for

 

Other

 

Significant

   
 

Identical

 

Observable

 

Unobservable

    

Identical

 

Observable

 

Unobservable

   
 

Assets

 

Inputs

 

Inputs

    

Assets

 

Inputs

 

Inputs

   
 

(Level 1)

  

(Level 2)

  

(Level 3)

  

Total

  

(Level 1)

  

(Level 2)

  

(Level 3)

  

Total

 

Commodity futures – financial liabilities, net

 $(10,188,780) $  $  $(10,188,780) $(1,676) $  $  $(1,676)

Total

 $(10,188,780) $  $  $(10,188,780) $(1,676) $  $  $(1,676)

 

At December 31, 2022September 30, 2023 and March 31, 20222023, the Company did not have any fair value measurements on a non-recurring basis.

 

12

 

 

NOTE J — SEGMENT INFORMATION (in thousands)

 

  

Three Months Ended

  

Nine Months Ended

 
  

December 31,

  

December 31,

 
  

2022

  

2021

  

2022

  

2021

 

Net sales

                

Coil

 $100,231  $41,795  $372,830  $172,814 

Tubular

  11,629   9,861   50,526   37,329 

Total net sales

 $111,860  $51,656  $423,356  $210,143 
                 

Operating profit (loss)

                

Coil

 $3,259  $(4,032) $15,684  $33,497 

Tubular

  692   (647)  6,136   3,951 

Total operating profit (loss)

  3,951   (4,679)  21,820   37,448 

General corporate expenses

  2,522   920   8,002   4,662 

Interest expense

  448   58   1,498   154 

Other income (loss), net

  826   1,727   7,350   (4,801)

Total earnings (loss) before income taxes

 $1,807  $(3,930) $19,670  $27,831 

The Flat-roll segment was previously referred to as the Coil segment. The Company is now using Flat-roll to describe the segment due to it being a more common term used in the Company's industry. 

 

  

December 31, 2022

  

March 31, 2022

 

Segment assets

        

Coil

 $185,210  $115,232 

Tubular

  12,651   24,017 
   197,861   139,249 

Corporate assets

  6,022   20,026 
  $203,883  $159,275 
  

Three Months Ended

  

Six Months Ended

 
  

September 30,

  

September 30,

 
  

2023

  

2022

  

2023

  

2022

 

Net sales

                

Flat-roll

 $120,527  $129,722  $245,724  $272,599 

Tubular

  10,221   19,970   22,322   38,896 

Total net sales

 $130,748  $149,692  $268,046  $311,495 
                 

Operating profit (loss)

                

Flat-roll

 $3,142  $(1,118) $14,956  $12,425 

Tubular

  16   3,341   2,280   5,445 

Total operating profit

  3,158   2,223   17,236   17,870 

General corporate expenses

  (2,103)  (2,152)  (5,824)  (5,480)

Gain on economic hedges of risk

  4,402   3,749   4,832   6,504 

Interest expense

  (805)  (621)  (1,345)  (1,051)

Other income

  10   7   16   20 

Total earnings before income taxes

 $4,662  $3,206  $14,915  $17,863 

  

September 30, 2023

  

March 31, 2023

 

Segment assets

        

Flat-roll

 $197,279  $179,780 

Tubular

  19,700   15,858 
   216,979   195,638 

Corporate assets

  5,148   3,674 
  $222,127  $199,312 

 

Operating profit is total net sales less operating expenses, excluding general corporate expenses, gain on economic hedges of risk, interest expense and other income (loss).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, retirement plan contribution expense, corporate insurance expenses, restricted stock plan compensation expense and office supplies. Other income (loss) for theAt threeSeptember 30, and nine month periods ended DecemberMarch 31, 2022 2023consisted primarily of gains related to derivatives not designated for hedge accounting of $822,200 and $7,325,860, respectively. Other income (loss) for the three months ended December 31, 2021 consisted primarily of a $1,721,700 gain related to derivatives not designated for hedge accounting. Other income (loss) for the nine months ended December 31, 2021 consisted primarily of a $6,498,040 loss related to derivatives not designated for hedge accounting partially offset by a $1,706,614 gain from the PPP Loan forgiveness., Corporate assets consist primarily of cash, restricted cash, unamortized debt issuance costs and the cash value of officers’ life insurance. Although inventory is transferred at cost between product groups, there are no sales between product groups.

 

13

 

 

NOTE K — REVENUE

 

Revenue is generated primarily from contracts to manufacture or process steel products. Most of the Company’s revenue is generated by sales of material out of the Company’s inventory, but a portion of the Company’s revenue is derived from processing or storage of customer owned material. Generally, the Company’s performance obligations are satisfied, control of our products is transferred, and revenue is recognized at a single point in time, when title transfers to our customer for product shipped or when services are provided. Revenues are recorded net of any sales incentives. Shipping and other transportation costs charged to customers are treated as fulfillment activities and are recorded in both revenue and cost of sales at the time control is transferred to the customer. Costs related to obtaining sales contracts are incidental and expensed when incurred. Because customers are invoiced at the time title transfers and the Company’s rights to consideration are unconditional at that time, the Company does not maintain contract asset balances. Additionally, the Company does not maintain contract liability balances, as performance obligations are satisfied prior to customer payment for product. The Company offers industry standard payment terms.

 

The Company has two reportable segments: CoilFlat-roll and Tubular. CoilFlat-roll primarily generates revenue from cutting to length hot-rolled steel coils. CoilFlat-roll segment revenue consists of three main product types: Prime Coil, Non-Standard Coil and Customer Owned Coil. Tubular primarily generates revenue from manufacturing and distributingselling steel pipe. Tubular segment revenuepipe it has consisted of two mainmanufactured resulting in a single product types:type: Manufactured Pipe and Mill Reject Pipe. In March 2020, U.S. Steel announced the idling of their Lone Star Tubular Operations which was the Company's sole supplier of mill reject pipe. U.S. Steel's facility was idled as announced and the Company's receipts of mill reject pipe ceased in August 2020. At June 30, 2022, the Company was sold out of mill reject pipe so manufactured pipe was the sole revenue stream for the tubular segment for the three months ended December 31, 2022. The Company has expanded its focus on manufactured pipe sales to counteract the impact of mill reject pipe revenue concluding. The following table disaggregates our revenue by product for each of our reportable business segments for the three and ninesix months ended December 31, 2022September 30, 2023 and 20212022, respectively:respectively (in thousands):

 

 

Three Months Ended

 

Nine Months Ended

  

Three Months Ended

 

Six Months Ended

 
 

December 31,

  

December 31,

  

September 30,

  

September 30,

 
 

2022

  

2021

  

2022

  

2021

  

2023

  

2022

  

2023

  

2022

 

Coil Segment:

        

Flat-roll Segment:

        

Prime Coil

 $99,100,019  $39,588,438  $368,583,106  $164,096,180  

$

118,835  $128,503  $242,657  $269,483 

Non-standard Coil

 796,112  1,852,272  3,219,043  7,704,262  360  891  511  2,423 

Customer Owned Coil

  334,870   354,876   1,028,037   1,013,801 

Processing or Storage of Customer Owned Coil

  1,332   328   2,556   693 
 $100,231,001  $41,795,586  $372,830,186  $172,814,243  $120,527  $129,722  $245,724  $272,599 

Tubular Segment:

                

Manufactured Pipe

 $11,629,092  $6,906,450  $50,071,386  $27,889,886  $10,221  $19,970  $22,322  $38,896 

Mill Reject Pipe

     2,953,907   454,020   9,439,148 
 $11,629,092  $9,860,357  $50,525,406  $37,329,034  $10,221  $19,970  $22,322  $38,896 

 

 

NOTE L — STOCKHOLDERS’ EQUITY

 

The following tables reflect the changes in stockholders’ equity for each of the ninesix months ended December 31, 2022September 30, 2023 and December 31, 2021September 30, 2022 (in thousands):

 

    

Accumulated

                

Accumulated

            
    

Other

                

Other

            
    

Comprehensive

 

Additional

             

Comprehensive

 

Additional

         
 

Common

 

Income,

 

Paid-In

 

Treasury

 

Retained

    

Common

 

Income,

 

Paid-In

 

Treasury

 

Retained

   
 

Stock

  

Net of Tax

  

Capital

  

Stock

  

Earnings

  

Total

  

Stock

  

Net of Tax

  

Capital

  

Stock

  

Earnings

  

Total

 

BALANCE AT MARCH 31, 2022

 $8,344,975  $(10,268,509) $30,442,361  $(7,741,197) $58,909,018  $79,686,648 

BALANCE AT MARCH 31, 2023

 $8,869  (317) $35,005  $(7,778) $79,653  $115,432 

Net earnings

         11,184,374  11,184,374          7,690  7,690 

Other comprehensive income

   7,174,117        7,174,117    317        317 

Paid in capital – restricted stock awards

     73,153      73,153 

Shares issued – Plateplus business combination

 516,041  4,267,659   4,783,700 

Paid in capital – restricted stock units

     78      78 

Cash dividends ($0.02 per share)

       (148) (148)

BALANCE AT JUNE 30, 2023

 $8,869 $ $35,083 $(7,778) $87,195 $123,369 

Net earnings

     3,513 3,513 

Paid in capital – restricted stock units

   78   78 

Repurchase of shares

    (29,268)  (29,268)       (3)   (3)

Cash dividends ($0.02 per share)

              (157,694)  (157,694)          (148)  (148)

BALANCE AT JUNE 30, 2022

 $8,861,016  $(3,094,392) $34,783,173  $(7,770,465) $69,935,698  $102,715,030 

Net earnings

     2,470,908 2,470,908 

Other comprehensive income

  1,578,033    1,578,033 

Paid in capital – restricted stock awards

   73,153   73,153 

Cash dividends ($0.02 per share)

          (147,372)  (147,372)

BALANCE AT SEPTEMBER 30, 2022

 $8,861,016 $(1,516,359) $34,856,326 $(7,770,465) $72,259,234 $106,689,752 

Net earnings

     1,375,893 1,375,893 

Other comprehensive income

  669,454    669,454 

Issuance of restricted stock

 7,700  (7,700)    

Paid in capital – restricted stock awards

   78,175   78,175 

Repurchase of shares

    (7,304)  (7,304)

Cash dividends ($0.02 per share)

          (147,512)  (147,512)

BALANCE AT DECEMBER 31, 2022

 $8,868,716 $(846,905) $34,926,801 $(7,777,769) $73,487,615 $108,658,458 

BALANCE AT SEPTEMBER 30, 2023

 $8,869  $  $35,161  $(7,781) $90,560  $126,809 

 

14

 
      

Accumulated

                 
      Other                 
      

Comprehensive

  

Additional

             
  

Common

  

Income,

  

Paid-In

  

Treasury

  

Retained

     
  

Stock

  

Net of Tax

  

Capital

  

Stock

  

Earnings

  

Total

 

BALANCE AT MARCH 31, 2021

 $8,334,785  $(11,187,841) $30,003,462  $(7,203,342) $45,392,912  $65,339,976 

Net earnings

              11,311,797   11,311,797 

Other comprehensive loss

     (13,693,337)           (13,693,337)

Paid in capital – restricted stock awards

        121,704         121,704 

Cash dividends ($0.02 per share)

              (137,865)  (137,865)

BALANCE AT JUNE 30, 2021

 $8,334,785  $(24,881,178) $30,125,166  $(7,203,342) $56,566,844  $62,942,275 

Net earnings

              13,177,614   13,177,614 

Other comprehensive income

     4,227,185            4,227,185 

Issuance of restricted stock

  6,000      (6,000)         

Paid in capital – restricted stock awards

        126,037         126,037 

Cash dividends ($0.02 per share)

              (138,110)  (138,110)

BALANCE AT SEPTEMBER 30, 2021

 $8,340,785  $(20,653,993) $30,245,203  $(7,203,342) $69,606,348  $80,335,001 

Net loss

              (2,961,833)  (2,961,833)

Other comprehensive income

     13,795,418            13,795,418 

Issuance of restricted stock

  4,190      (4,190)         

Paid in capital – restricted stock awards

        128,194         128,194 

Repurchase of shares

           (102,075)     (102,075)

Cash dividends ($0.02 per share)

              (138,024)  (138,024)

BALANCE AT DECEMBER 31, 2021

 $8,344,975  $(6,858,575) $30,369,207  $(7,305,417) $66,506,491  $91,056,681 
      

Accumulated

                 
      Other                 
      

Comprehensive

  

Additional

             
  

Common

  

Income,

  

Paid-In

  

Treasury

  

Retained

     
  

Stock

  

Net of Tax

  

Capital

  

Stock

  

Earnings

  

Total

 

BALANCE AT MARCH 31, 2022

 $8,345   (10,269) $30,442  $(7,741) $58,909  $79,686 

Net earnings

              11,184   11,184 

Other comprehensive income

     7,174            7,174 

Paid in capital – restricted stock units

        73         73 

Shares issued - Plateplus business combination

  516      4,268         4,784 

Repurchase of shares

           (29)     (29)

Cash dividends ($0.02 per share)

              (157)  (157)

BALANCE AT JUNE 30, 2022

 $8,861  $(3,095) $34,783  $(7,770) $69,936  $102,715 

Net earnings

              2,471   2,471 

Other comprehensive income

     1,579            1,579 

Paid in capital – restricted stock units

        73         73 

Cash dividends ($0.02 per share)

              (148)  (148)

BALANCE AT SEPTEMBER 30, 2022

 $8,861  $(1,516) $34,856  $(7,770) $72,259  $106,690 

 

 

NOTE M — OTHER COMPREHENSIVE INCOME

 

The following table summarizes the tax effects on each component of Other Comprehensive Income (Loss) for the periods presented:presented (in thousands):

 

  

Three Months Ended December 31, 2022

 
  

Before-Tax

  

Tax

  

Net-of-Tax

 
             

Cash flow hedges

 $882,720  $(213,266) $669,454 

Other comprehensive income (loss)

 $882,720  $(213,266) $669,454 

Three Months Ended September 30, 2023

Before-Tax

Tax

Net-of-Tax

Cash flow hedges

$$$

Other comprehensive income

$$$

 

 

Three Months Ended December 31, 2021

  

Three Months Ended September 30, 2022

 
 

Before-Tax

  

Tax

  

Net-of-Tax

  

Before-Tax

  

Tax

 ��

Net-of-Tax

 
  

Cash flow hedges

 $18,190,160  $(4,394,742) $13,795,418  $2,081  $(503) $1,578 

Other comprehensive income (loss)

 $18,190,160  $(4,394,742) $13,795,418 

Other comprehensive income

 $2,081  $(503) $1,578 

   

 

Nine Months Ended December 31, 2022

  

Six Months Ended September 30, 2023

 
 

Before-Tax

  

Tax

  

Net-of-Tax

  

Before-Tax

  

Tax

  

Net-of-Tax

 
  

Cash flow hedges

 $12,423,000  $(3,001,396) $9,421,604  $418  $(101) $317 

Other comprehensive income (loss)

 $12,423,000  $(3,001,396) $9,421,604 

Other comprehensive income

 $418  $(101) $317 

 

 

Nine Months Ended December 31, 2021

  

Six Months Ended September 30, 2022

 
 

Before-Tax

  

Tax

  

Net-of-Tax

  

Before-Tax

  

Tax

  

Net-of-Tax

 
  

Cash flow hedges

 $5,708,420  $(1,379,154) $4,329,266  $11,540  $(2,788) $8,752 

Other comprehensive income (loss)

 $5,708,420  $(1,379,154) $4,329,266 

Other comprehensive income

 $11,540  $(2,788) $8,752 

 

15

  
 

NOTE N — EARNINGS PER SHARE

 

Basic and dilutive net earnings per share is computed based on the following information:information (in thousands, except for share data):

 

 

Three Months Ended

 

Nine Months Ended

  

Three Months Ended

 

Six Months Ended

 
 

December 31,

  

December 31,

  

September 30,

  

September 30,

 
 

2022

  

2021

  

2022

  

2021

  

2023

  

2022

  

2023

  

2022

 

Numerator (basic and diluted)

                

Net earnings (loss)

 $1,375,893  $(2,961,833) $15,031,175  $21,527,578 

Net earnings

 $3,513  $2,471  $11,203  $13,655 

Less: Allocation to unvested restricted stock units

  18,656   5,992   240,482   966,761   41   42   131   236 

Net earnings (loss) attributable to common shareholders

 $1,357,237  $(2,967,825) $14,790,693  $20,560,817 

Net earnings attributable to common shareholders

 $3,472  $2,429  $11,072  $13,419 
  

Denominator (basic and diluted)

                

Weighted average common shares outstanding

  7,275,212   6,610,204   7,196,452   6,593,343   7,288,906   7,243,080   7,288,906   7,157,073 

 

For the threesix and nine month periodsmonths ended December 31, 2022September 30, 2023 and 2021,2022, the Company allocated dividends and undistributed earnings to the unvested restricted stock units. 

 

As the restricted stock qualifies as participating securities, the following restricted stock units were not accounted in the computation of weighted average diluted common shares outstanding under the two-class method:

 

  

Three Months Ended

  

Nine Months Ended

 
  

December 31,

  

December 31,

 
  

2022

  

2021

  

2022

  

2021

 

Restricted Stock Units

  56,621   239,485   48,510   232,601 
  

Three Months Ended

  

Six Months Ended

 
  

September 30,

  

September 30,

 
  

2023

  

2022

  

2023

  

2022

 

Restricted Stock Units

  72,910   76,811   67,712   73,211 

  

 

NOTE O — SUPPLEMENTAL CASH FLOW INFORMATION

 

The Company paid interest of approximately $1,316,000$1.2 million and $0.6 million during the ninesix months ended December 31, 2022September 30, 2023 and $154,000 during2022, respectively. Additionally, the nine months ended December 31, 2021. The Company paid income taxes of approximately $428,000$2.7 million and $0.4 million during the ninesix months ended December 31, 2022September 30, 2023 and paid income taxes of approximately $7,487,000, net of a tax refund of approximately $423,000, during2022, respectively. During the ninesix months ended December 31, 2021. At December 31, 2022, the “Machinery and equipment” balance on the Consolidated Balance Sheet includes non-cash investing activities of approximately $7,448,000 in accrued capital expenditures for the balance due related to the new Sinton, Texas facility. During the nine months ended December 31,September 30, 2022, the Company issued 516,041 shares of common stock as part of the Plateplus business combination resulting in non-cash investing activity of $4,783,700. During the three months ended December 31, 2022, there was a non-cash transaction of approximately $31,000 for the transfer of ownership of a life insurance policy maintained by the Company with respect to an officer from the Company to such officer upon his retirement.$4.8 million.

 

 

NOTE P — INCOME TAXES

 

For the ninesix months ended December 31, September 30, 2023 and 2022, the Company recorded an income tax provision of $4,639,272, or 23.6% of earnings before income taxes, compared to an income tax provision of $6,303,899, or 22.7% of earnings before income taxes forapproximately $3.7 million and $4.2 million, respectively. For the ninesix months ended December 31, 2021September 30, 2023. For the and nine months ended December 31, 2022, the effective tax rate differed from the federal statutory rate due primarily to the inclusion of state tax expenses in the provision. For the nine months ended December 31, 2021, the Company’s effective tax rate differed from the federal statutory rate due to a combination of the inclusion of state tax expenses in the provision and the exclusion of the non-taxable gain associated with forgiveness of the Company’s PPP Loan from the provision.

 

16

 
 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

Friedman Industries, Incorporated is a manufacturer and processor of steel products and operates in two reportable segments; coilflat-roll products and tubular products. The flat-roll segment was previously referred to as the coil segment. The Company is now using flat-roll to describe the segment due to it being a more common term used in the Company's industry.

 

The coilflat-roll product segment includesconsists of the operation of five hot-rolled coil processing facilities located in Hickman, AR;Arkansas; Decatur, AL;Alabama; East Chicago, Indiana; Granite City, IL; East Chicago, INIllinois and Sinton, TX.Texas. The facilities in Granite City and East Chicago were acquired on April 30, 2022 from Plateplus, Inc ("Plateplus"). More information about the Plateplus transaction can be found in Note B to the Company's Financial Statements.condensed consolidated financial statements. The facility in Sinton is a newly constructed facility that commenced operations during October 2022. The Hickman, Granite City and East Chicago facilities operate temper mills and cut-to-length lines. The Decatur and Sinton facilities operate stretcher leveler cut-to-length lines. The equipment at all locations improvesimprove the flatness and surface quality of the coils and cutscut the coils into sheet and plate of prescribed lengths. On a combined basis, the facilities are capable of cutting sheet and plate with thicknesses ranging from 16 gauge to 1” thick in widths ranging from 36” wide to 96” wide. The coilvast majority of flat-roll product segment sells its prime graderevenue is generated from sales of Company owned inventory underbut the Friedman Industries name but also maintains an inventory of non-standard coil products, consisting primarily of mill secondary and excess prime coils, which are sold through the Company’s XSCP division. The coil product segment also processes customer-ownedgenerates revenue from the processing or storage of customer owned coils on a fee basis.

 

As discussed above, the Company commenced operations at its new facility in Sinton, Texas in October 2022 which is part of the coil product segment. The new facility is on the campus of Steel Dynamics, Inc.'s ("SDI") new flat roll steel mill in Sinton, Texas. The Company's new location consists of an approximately 70,000 square foot building located on approximately 26.5 acres leased from SDI under a 99-year agreement. The facility is equipped with one of the world’s largest stretcher leveler cut-to-length lines, capable of handling material up to 1” thick, widths up to 96” and yields exceeding 100,000 psi. The total cost of the project is estimated to be approximately $22.3 million. At December 31, 2022, the Company had paid approximately $14,826,000 related to the project and accrued approximately $7,448,000 to be paid during the three months ended March 31, 2023. The Company expects to fund the remainder of the Sinton capital expenditure through a combination of cash generated from operations and funds drawn under the ABL Facility. The Company expects the remainder of fiscal 2023 to be a ramp up period for the facility and then expects the facility’s annual shipments could be in the range of 110,000 tons to 140,000 tons for fiscal 2024.

The tubular product segment consists of the Company’s Texas Tubular Products division (“TTP”) located in Lone Star, Texas. TTP operates two electric resistance welded pipe mills with a combined outside diameter (“OD”) size range of 2 3/8” OD to 8 5/8” OD. Both pipe mills are American Petroleum Institute (“API”) licensed to manufacture line pipe and oil country pipe and also manufacture pipe for structural purposes that meets other recognized industry standards. TTP has a pipe finishing facility capable of applying threads and couplings to oil country tubular goods and performing other services that are customary in the pipe finishing process. The pipe finishing facility is currently idled. TTP’s inventory consistsAll of raw materials and finished goods. Raw material inventory consiststhe tubular segment's revenue is generated from sales of hot-rolled steel coils that TTP will manufacture into pipe. Finished goods inventory consists of pipe TTP has manufactured.Company owned inventory.

 

17

 

Results of Operations

 

NineSix Months Ended December 31, 2022September 30, 2023 Compared to NineSix Months Ended December 31, 2021September 30, 2022

 

During the ninesix months ended December 31, 2022September 30, 2023 (the “20222023 period”), sales, and costs of goods sold increased $213,212,315 and $227,153,057, respectively, and gross profit decreased $13,940,742approximately $43.4 million, $42.2 million and $1.2 million, respectively, compared to the amounts recorded during the ninesix months ended December 31, 2021September 30, 2022 (the “20212022 period”). The increase decrease in sales was primarily related to a decline in the average selling price partially offset by an increase in tons sold.sold. Tons sold increased from approximately 147,500221,500 tons in the 20212022 period to approximately 335,000257,000 tons in the 20222023 period. The significant growth in sales volume was primarily related to the Company's Sinton, TX facility which commenced operations in October 2022 and the 2022 period containing only five months of sales activity following the April 30, 2022 acquisition of facilities and inventory from Plateplus, Inc. which is discussed in more detail in Note B to the Company's Financial Statements. Discussion of the change in sales is expanded upon at the segment level in the following paragraphs.Plateplus. Gross profit decreased from $43,420,896approximately $23.4 million for the 20212022 period to approximately $29,480,15422.2 million for the 20222023 period. Gross profit as a percentage of sales decreasedincreased from approximately 20.7% for the 2021 period to approximately 7.0% for the 2022 period. Gross profit7.5% for the 2022 period to approximately 8.3% for the 2023period. Gross profit for the 2023 period included $2,977,160 ina recognized losses loss of approximately $0.4 million related to hedging activities while gross profit for the 20212022 period included $12,317,960 ina recognized net lossesloss of approximately $2.1 million related to hedging activities. Excluding the recognized hedging losses, gross profit related to physical material as a percentage of sales was approximately 7.6%8.4% for the 20222023 period compared to approximately 23.9%8.1% for the 20212022 period.

 

Our operating results are significantly impacted by the market price of hot-rolled steel coil ("HRC"). The Company experienced significant volatility in steel price during both the 20222023 period and the 20212022 period. Entering the 2022 period, HRC prices were onexperienced a historic rise entering the 2021 period that continued until reaching an all-time high of approximately $1,950 per ton at the end of August 2021. These circumstances created a high margin environment during the 2021 periodsharp and abrupt increase in a period of historically high steel prices. From September 2021reaction to February 2022, HRC prices declined approximately 52% until the Russian invasion of Ukraine triggered a sharp and abrupt increase. HRC prices increasedincreasing approximately 60% from the beginning of March 2022 to the end of April 2022 and2022. HRC prices then declined approximately 60% until the middle of December 2022. InFrom late November 2022 and December 2022,until April 2023, domestic steel producers announced several rounds of price increases which causedwith HRC prices to increase atincreasing approximately 95% during this time. From the middle of April 2023 and until the end of the 2023 period, HRC prices declined approximately 45%. For both the 2023 and 2022 periods, the Company experienced significant increases in steel prices entering the periods with an inflection point in steel price occurring early in each period. These circumstances created strongAs a result both periods experienced stronger margins to start the 2022 period and then margin compression for the remainder offirst quarter followed by compressed margins for the 2022 period due to the prevailing downward trend in HRC price.second quarter.

 

CoilFlat-roll Segment

 

CoilFlat-roll product segment sales for the 20222023 period totaled $372,830,186  approximately $245.7 million compared to $172,814,243approximately $272.6 million for the 20212022 period. For a more complete understanding of the average selling prices of goods sold, it is helpful to exclude any hedging related gains or losses that are captured in sales and any sales generated from processing or storage of customer owned material. CoilFlat-roll segment sales for the 20222023 period were reduced by $2,977,160approximately $0.4 million for the recognition of hedging related losses. Coillosses. Flat-roll segment sales for the 20212022 period were reduced by $20,920,640approximately $2.1 million for the recognition of hedging related losses. Sales generated from processing or storage of customer owned material totaled $1,028,037approximately $2.6 million for the 20222023 period compared to $1,013,801 approximately $0.7 million��for the 20212022 period. Sales generated from coilflat-roll segment inventory, excluding the impact of any hedging related gains or losses, totaled $374,779,309approximately  $243.5 million for the 20222023 period compared to $192,721,082approximately $274.0 million for the 20212022 period. The average per ton selling price related to these shipments decreased from approximately $1,737$1,367 per ton in the 20212022 period to approximately $1,222$1,011 per ton in the 20222023 period. Inventory tons sold increased from approximately 111,000200,500 tons in the 20212022 period to approximately 306,500 241,000 tons in the 20222023 period. The significant increasegrowth in sales volume was primarily attributablerelated to the Company's Sinton, TX facility which commenced operations in October 2022 and the 2022 period containing only five months of sales activity following the April 30, 2022 acquisition of facilities and inventory acquired from PlateplusPlateplus which account for approximately 170,000 tons of the 306,500 tons sold in the 2022 period. Coil. Flat-roll segment operations recorded operating profits of approximately $15,684,000 $15.0 million and $33,497,000$12.4 million for the 20222023 period and 20212022 period, respectively. The operating profit for the 20222023 period includes a recognized net losses loss on hedging activities of $2,977,160 approximately $0.4 million while the 20212022 period operating profit included a recognized net lossesloss on hedging activities of $10,511,300.approximately $2.1 million.

 

The Company’s coilflat-roll segment purchases its inventory from a limited number of suppliers. Loss of any of these suppliers could have a material adverse effect on the Company’s business.

 

Tubular Segment

 

Tubular product segment sales for the 20222023 period totaled $50,525,406approximately $22.3 million compared to $37,329,034approximately $38.9 million for the 20212022 period. Sales increased due to an increase in the average selling price per ton, partially offset by a decline in the volume sold. For a more complete understanding of the average selling prices of goods sold, it is helpful to exclude any hedging related gains or losses that are captured in sales. Tubular segment sales for the 2023 period and 2022 period were not impacted by any hedging related gains or losses. Tubular segment sales forSales decreased due to a decrease in the 2021 period were reducedaverage selling price per ton, accompanied by $2,030,220 fora decline in the recognition of hedging related losses. Sales generated from tubular segment inventory, excluding the impact of any hedging related gains or losses, totaled $50,525,406 for the 2022 period compared to $39,359,254 for the 2021 period.volume sold. The average per ton selling price related to these shipments increaseddecreased from approximately $1,074$1,831 per ton in the 20212022 period to approximately $1,785$1,392 per ton in the 20222023 period. Tons sold decreased from approximately 36,50021,000 tons in the 20212022 period to approximately 28,50016,000 tons in the 20222023 period. The decline in sales volume was primarily related to a decline in mill reject pipe sales partially offset by an increase in manufactured pipe sales. U.S. Steel's Lone Star Tubular Operations was the Company's sole source of supply for mill reject pipe. With U.S. Steel's idling of their Lone Star Operations, the Company's receipts of mill reject pipe ceased in August 2020 and the inventory balance started to decline steadily each quarter. The Company sold out of mill reject pipe during the quarter ended June 30, 2022. Mill reject pipe sales volume was approximately 1,000 tons for the 2022 period compared to approximately 19,500 tons for the 2021 period. Manufactured pipe sales volume was approximately 27,500 tons for the 2022 period compared to approximately 17,000 tons for the 2021 period. The average selling price increase was also primarily related to this shift in sales mix between manufactured pipe and mill reject pipe. The selling price associated with manufactured pipe is typically much higher than the selling prices associated with mill reject pipe. The Company will continue to focus on the expansion of its manufactured pipe operations to counteract the impact of mill reject pipe sales ending. The tubular segment recorded operating profits of approximately $6,136,0002.3 million and $3,951,000$5.4 million for the 20222023 period and 20212022 period, respectively. The operating profit for the 2021 period included recognized net losses on hedging activities of $1,806,660 while the Company did not have any hedging related gains or losses affecting operating results for the 2022 period.

 

The tubular segment purchases its inventory from a limited number of suppliers. Loss of any of these suppliers could have a material adverse effect on the Company’s business. 

 

18

 

General, Selling and Administrative Costs

 

During the 20222023 period, selling, general selling and administrative costs increased $5,027,069decreased approximately $0.2 million compared to the 20212022 period. This increasedecrease is primarily associated withrelated to the 2022 period containing one-time costs associated with the Plateplus transaction and increased personnel butwith this decrease being partially offset by less incentive based compensationincreased payroll and benefits expense forin the 2022 period. Cost for the 20222023 period includes approximately $1.2 million of one-time expenses related to the Plateplus transaction. Cost for the 2022 period includes approximately $2.9 million of general, selling and administrative costs associated with the East Chicago and Granite City locations acquired from Plateplus and  approximately $1.4 million in personnel costs for additional sales, accounting, IT and corporate employees hired during the 2022 period.

Other Income

For the 2022 period, the Company reported other income of $7,349,916. This income consists primarily of a $7,325,860 gain on derivative instruments not designated for hedge accounting. For the 2021 period, the Company reported other loss of $4,801,121. This loss consists primarily of a loss of $6,498,040 on derivative instruments not designated for hedge accounting partially offset by a $1,706,614 gain associated with the forgiveness of the Company's Paycheck Protection Program loan.higher employee count.

 

Income Taxes

 

Income taxes decreased from a provision for the 20212022 period of $6,303,899approximately $4.2 million to a provision for the 20222023 period of approximately $4,639,2723.7 million. This decrease was primarily related to the lower earnings before income tax for the 2022 period but partially offset by the non-taxable treatment of the Paycheck Protection Program loan forgiveness which was recognized2023 period. The income tax provision as parta percentage of earnings before tax was approximately 24.9% and 23.6% for the 2023 period and 2022 period, respectively. For both periods, the effective tax rate differed from the federal statutory rate due primarily to the inclusion of state income taxes forin the 2021 period.provision.

 

Three Months Ended December 31, 2022September 30, 2023 Compared to Three Months Ended December 31, 2021September 30, 2022

 

DuringDuring the three months ended December 31, 2022September 30, 2023 (the “20222023 quarter”), sales and costs of goods sold decreased approximately $18.9 million and $20.1 million, respectively, and gross profit increased $60,204,150, $50,470,295 and $9,733,855, respectively, approximately $1.2 million compared to the amounts recorded during the three months ended December 31, 2021September 30, 2022 (the “20212022 quarter”). The increase decrease in sales was primarily related to a decline in the average selling price partially offset by an increase in tons sold. Tons sold increased from approximately 39,000 tons in the 2021 quarter to approximately 113,000117,000 tons in the 2022 quarter to approximately 129,000 tons in the 2023quarter. The significant growth in sales volume was primarily related to the acquisition of facilities and inventoryCompany's Sinton, TX facility which commenced operations in October 2022. Gross profit increased from Plateplus, Inc. which is discussed in more detail in Note B to the Company's Financial Statements. Discussion of the change in sales is expanded upon at the segment level in the following paragraphs. Gross margin improved from a loss of $3,604,021 for the 2021 quarter to a profit of $6,129,834approximately $4.7 million for the 2022 quarter to approximately $5.9 million for the 2023 quarter. Gross marginprofit as a percentage of sales improvedincreased from a negative margin of approximately 7.0% for the 2021 quarter to a positive margin of approximately 5.5% for the 2022 quarter. Gross margin3.1% for the 2022 quarter to approximately 4.5% for the 2023 quarter. Gross profit for the 2022 quarter included $860,620 in a recognized lossesloss of approximately $1.5 million related to hedging activities, while gross margin for the 20212023 quarter included $14,716,860 in recognized net losses related to hedgingwas not effected by any hedge activities. Excluding the recognized hedging gains and losses, gross profit related to physical material as a percentage of sales was approximately 6.2%4.1% for the 2022 quarter compared to approximately 16.7% for the 2021 quarter.

 

Our operating results are significantly impacted by the market price of hot-rolled steel coil ("HRC")HRC. The Company experienced similar HRC pricing dynamics entering and during both the 2023 and 2022 quarters. HRC price declined approximately 25% during the 2023 quarter with this decline being part of a downward price cycle which commenced in April 2023. From April 2023 and to the end of the 2023 quarter, HRC price declined approximately 45%. EnteringHRC price declined approximately 23% during the 2022 quarter with this decline being part of a downward price cycle which commenced in April 2022. From April 2022 and to the end of the 2022 quarter, HRC prices had seen an overall declining trend since April 2022. The downward trend continued until Decemberprice declined approximately 47%. These pricing dynamics created physical margin compression during both the 2023 and 2022 when HRC prices stabilized and started increasing in response to price increase announcements from various domestic steel producers. The Company experienced lower physical margins during the 2022 quarter due to the declining HRC price environment. Physical margins for the 2021 quarter were declining after HRC prices reached an all-time high in August 2021 but were still at a historically higher level because margins declined from all-time high levels.quarters.

 

CoilFlat-roll Segment

 

CoilFlat-roll product segment sales for the 20222023 quarter totaled $100,231,001 approximately $120.5 million compared to $41,795,586approximately $129.7 million for the 20212022 quarter. For a more complete understanding of the average selling prices of goods sold, it is helpful to exclude any hedging related gains or losses that are captured in sales and any sales generated from processing or storage of customer owned material. CoilFlat-roll segment sales for the 2022 quarter were reduced by $860,620approximately $1.5 million for the recognition of hedging related losses. Coil segment sales forlosses, while the 20212023 quarter were reducedwas not effected by $13,169,420 for the recognition of hedginghedge related gains or losses. Sales generated from processing or storage of customer owned material totaled $334,870approximately $1.3 million for the 20222023 quarter compared to $354,876approximately $0.3 million for the 20212022 quarter. Sales generated from coilflat-roll segment inventory, excluding the impact of any hedging related gains or losses, totaled $100,756,751approximately  $119.2 million for the 20222023 quarter compared to $54,610,130approximately $130.9 million for the 20212022 quarter. The average per ton selling price related to these shipments decreased from approximately $1,899$1,229 per ton in the 20212022 quarter to approximately $949$983 per ton in the 20222023 quarter. Inventory tons sold increased from approximately 29,000106,500 tons in the 20212022 quarter to approximately 106,000121,000 tons in the 20222023 quarter. The significant increasegrowth in sales volume was primarily attributablerelated to the facilities acquired fromCompany's Sinton, TX facility which commenced operations in October 2022. Plateplus which account for approximately 51,500 tons of the 106,000 tons sold in the 2022 quarter. CoilFlat-roll segment operations recorded an operating profitprofits of approximately $3,259,000 $3.1 million for the 20222023 quarter compared to an operating loss of approximately $4,032,000$1.1 million for the 20212022 quarter. The operating profitloss for the 2022 quarter includesincluded a recognized net lossesloss on hedging activities of $860,620approximately $1.5 million, while the 2021 quarter operatingthere was no gain or loss included recognized net losses onfrom hedging activities of $13,120,220.for the 2023 quarter.

 

19

The Company’s coilflat-roll segment purchases its inventory from a limited number of suppliers. Loss of any of these suppliers could have a material adverse effect on the Company’s business.

 

Tubular Segment

 

Tubular product segment sales for the 20222023 quarter totaled $11,629,092 approximately $10.2 million compared to $9,860,357approximately $20.0 million for the 20212022 quarter. Sales increased due to an increase in the average selling price per ton, offset by a decrease in tons sold. For a more complete understanding of the average selling prices of goods sold, it is helpful to exclude any hedging related gains or losses that are captured in sales. Tubular segment sales for the 2023 quarter and 2022 quarter were not impacted by any hedging related gains or losses. Tubular segment sales forSales decreased due to a decrease in the 2021 quarter were reducedaverage selling price per ton, accompanied by $1,596,640 fora decline in the recognition of hedging related losses. Sales generated from tubular segment inventory, excluding the impact of any hedging related gains or losses, totaled $11,629,092 for the 2022 quarter compared to $11,456,997 for the 2021 quarter.volume sold. The average per ton selling price related to these shipments increaseddecreased from approximately $1,111$1,883 per ton in the 20212022 quarter to approximately $1,648$1,301 per ton in the 20222023 quarter. Tons sold decreased from approximately 10,500 tons in the 20212022 quarter to approximately 7,0008,000 tons in the 20222023 quarter. The decline in sales volume was primarily related to a decline in mill reject pipe sales partially offset by an increase in manufactured pipe sales. U.S. Steel's Lone Star Tubular Operations was the Company's sole source of supply for mill reject pipe. With U.S. Steel's idling of their Lone Star Operations, the Company's receipts of mill reject pipe ceased in August 2020 and the inventory balance started to decline steadily each quarter. The Company sold out of mill reject pipe during the quarter ended June 30, 2022. Mill reject pipe sales were approximately 6,000 tons for the 2021 quarter. All of the 2022 quarter's sales volume of approximately 7,000 tons was from manufactured pipe sales compared to approximately 4,500 tons for the 2021 period. The average selling price increase was also primarily related to this shift in sales mix between manufactured pipe and mill reject pipe. The selling price associated with manufactured pipe is typically much higher than the selling prices associated with mill reject pipe. The Company will continue to focus on the expansion of its manufactured pipe operations to counteract the impact of mill reject pipe sales ending. The tubular segment recordedoperated at a break-even level for the 2023 quarter compared to recording operating profit of approximately $692,000 for the 2022 quarter compared to an operating loss of approximately $647,000 for the 2021 quarter. The operating loss for the 2021 quarter included recognized net losses on hedging activities of $1,596,640 while the Company did not have any hedging related gains or losses affecting operating results$3.3 million for the 2022 quarter.

 

The tubular segment purchases its inventory from a limited number of suppliers. Loss of any of these suppliers could have a material adverse effect on the Company’s business. 

 

General, Selling and Administrative Costs

During the 20222023 quarter, selling, general selling and administrative costs increased $2,706,608 compared approximately $0.2 million compared to the 20212022 quarter. This increase is due primarily related to increased payroll expensesand benefits expense in the 2023 quarter associated with a higher employee count with this increase being partially offset by the 2022 quarter containing one-time costs associated with the additional sales, purchasing and administrative personnel that converted to Friedman employment after the Plateplus transaction, increased professional fees, increased insurance expenses, increased IT expenses and increased incentive related compensation. Approximately $600,000 of the increase is associated with the East Chicago and Granite City locations acquired from Plateplus and approximately $900,000 of the increase is associated with other additional sales, accounting, IT and corporate personnel employed during the 2022 quarter. In addition to these amounts, accrued incentive based compensation was approximately $400,000 higher for the 2022 quarter compared to the 2021 quarter.

Other Income

For the 2022 quarter, the Company reported other income of $826,039. This income consists primarily of a $822,200 gain on derivative instruments not designated for hedge accounting. For the 2021 quarter, the Company reported other income of $1,727,134. This income consists primarily of a $1,721,700 gain on derivative instruments not designated for hedge accounting.

transaction.

Income Taxes

 

Income taxes increased from a benefit for the 2021 quarter of $967,681 to a provision for the 2022 quarter of $431,579. The increase in the approximately $0.7 million to a provision for income taxes isthe 2023 quarter of approximately $1.1 million. This increase was primarily associated withrelated to the higher earnings before income taxestax for the 2023 quarter. The income tax provision as a percentage of earnings before tax was approximately 24.6% and 22.9% for the three months ended September 30, 2023 and 2022 quarter., respectively. For both periods, the effective tax rate differed from the federal statutory rate due primarily to the inclusion of state income taxes in the provision.

 

2019

 

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

 

The Company’s current ratio was 3.14.7 at December 31, 2022September 30, 2023 and 2.13.2 at March 31, 20222023. Working capital was approximately $99,834,426129.9 million at December 31, 2022September 30, 2023 and $64,551,208$98.6 million at March 31, 20222023.

 

During the ninesix months ended December 31, 2022,September 30, 2023, 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 and due to the transaction with Plateplus described in Note B. Accounts receivable and inventories increased significantly due primarily to the Plateplus transaction.business. Cash and restricted cash decreased due primarily due to the Plateplus acquisition investing activities partially offset by cash generated from the Company'sused in operating activities and byinvesting activities being greater than cash provided fromdrawn on the Company's credit facility. The Company expects to continue to monitor, evaluate and manage balance sheet components depending on changes in market conditions and the Company’s operations.

 

In June 2021, the Small Business Administration authorized full forgiveness of the Company's Paycheck Protection Program loan.

On April 29, 2022, theThe Company entered intohas a Second Amendment to its$150 million asset-based lending facility ("ABL Facility") provided by JPMorgan Chase Bank, N.A. The Second Amendment increased the revolving loans available under the ABL facility from an aggregate principal amount of up to $75 million to an aggregate principal amount of up to $150 million. The ABL Facilitywhich matures on May 19, 2026 and is secured by substantially all of the assets of the Company. The Company can elect borrowings on a floating rate basis or a term basis. Floating rate borrowings accrue interest at a rate equal to the prime rate minus 1% per annum. Term rate borrowings accrue interest at a rate equal to the SOFR rate applicable to the selected term plus 1.8% per annum. Availability of funds under the ABL Facility is subject to a borrowing base calculation determined as the sum of (a) 90% of eligible accounts receivable, plus (b) the product of 85% multiplied by the net orderly liquidating value percentage identified in the most recent inventory appraisal multiplied by eligible inventory. The ABL Facility contains a springing financial covenant whereby the financial covenant is only tested when availability falls below the greater of 15% of the revolving commitment or $22.5 million. The financial covenant restricts the Company from allowing its fixed charge coverage ratio to be, as of the end of any calendar month, less than 1.10 to 1.00 for the trailing twelve month period then ending. The fixed charge coverage ratio is calculated as the ratio of (a) EBITDA, as defined in the ABL Facility, minus unfinanced capital expenditures to (b) cash interest expense plus scheduled principal payments on indebtedness plus taxes paid in cash plus restricted payments paid in cash plus capital lease obligation payments plus cash contributions to any employee pension benefit plans. The ABL Facility contains other representations and warranties and affirmative and negative covenants that are usual and customary. If certain conditions precedent are satisfied, the ABL facility may be increased by up to an aggregate of $25 million, in minimum increments of $5 million. On July 6, 2022, the Company entered into a Third Amendment to the ABL Facility. The Third Amendment to the ABL Facility provides for the syndication of the asset based revolving loans available thereunder with BMO Harris Bank, N.A. ("BMO") with JPMorgan Chase Bank serving as the arranging agent (the "Agent"). The Third Amendment also amends provisions of the ABL Facility authorizing the Agent to make protective advances under the ABL Facility and adds a covenant requiring each of the Company and its subsidiaries to maintain the Agent as its principal depository bank. In connection with the Third Amendment, the Company also entered into a Revolving Note payable to BMO in a principal amount of up to $50 million establishing BMO as a one-third syndicated participant in the Company's ABL facility. At December 31, 2022,September 30, 2023, the Company had a balance of $44,510,967approximately $54.4 million under the ABL Facility with an applicable interest rate of 6.5%7.5%. At December 31, 2022,September 30, 2023, the Company's applicable borrowing base calculation supported access to approximately $99$119.3 million of the ABL Facility. As of the filing date of this Form 10-Q, the Company had borrowings of approximately $44$34.2 million outstanding under the ABL Facility and the Company's most recent borrowing base calculation provided access to approximately $100$114.5 million of the ABL Facility.

 

The Company believes that its current cash position along with cash flows from operations and borrowing capability due to its financial position are adequate to fund its expected cash requirements for the next 12 months.

 

DERIVATIVE CONTRACTS

 

From time to time, the Company may use futures contracts to partially manage exposure to commodity price risk. The Company elects hedge accounting for some of its derivatives and classifies the transactions as either cash flow hedges or fair value hedges. From time to time, the Company may also transact futures contracts where hedge accounting is not elected. The Company recognized lossesa loss related to derivatives designated for hedge accounting of $860,620 and $2,977,160approximately $0.4 million for the three month and nine month periodssix months ended December 31, 2022.September 30, 2023. For derivatives not designated for hedge accounting, the Company recognized gainsa gain of $822,200 and $7,325,860approximately $4.8 million for the three month and nine month periodssix months ended December 31, 2022.September 30, 2023. See Note H for further information.

 

OUTLOOK

 

From the end of the second quarter and through the filing date of this Form 10-Q, multiple domestic steel producers have announced price increases for HRC. According to these announcements, the base price for HRC has increased approximately $300 per ton in total. The Company is currently seeing the lead time for production at steel mills extend into calendar 2024 which is supportive of the increasing HRC prices. The Company believes it is positioned well to support our customers’ needs and expects margin improvement during the third quarter and continuing into the fourth quarter. The Company expects sales volume of approximately 115,000 tons to 125,000 tons for its fourththe third quarter of fiscal 2023. The fourth2024 to be slightly lower than the second quarter volume expectation is higher than the third quarter due primarily to increasing sales volume at the new Sinton, Texas facility and the third quarter volume being impacted by holidays and fewer shipping days. The Company expects margin improvement during the fourth quarter. From November 2022 to February 2023, four roundsseasonal impact of hot-rolled coil price increases were announced by multiple domestic steel producers. The Company expects margin improvement during the fourth quarter due to the rising price environment.holidays.

 

CRITICAL ACCOUNTING ESTIMATES

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The more significant estimates and judgements for the Company include forecasted purchases of hot-rolled coil and forecasted sales of prime coil inventory and manufactured pipe inventory in relation to hedging activities anddetermining the fair value of the pipe-finishing facility, when impaired. From time to time, the Company hedges these forecasted purchasesassets acquired and sales and may designate those transactions for hedge accounting. If the original forecasts are subsequently reduced, it could resultliabilities assumed in the Company’s hedged positions exceeding revised forecasts, thus warranting immediate recognitionbusiness combination discussed in earningsNote B. The determination of previously deferred hedge income or losses associated with excess hedges. A pattern of missed forecasts could call into question the Company’s ability to accurately predict forecasted transactions and the propriety of using hedge accounting in the future for similar forecasted transactions. To mitigate against the negative consequences of missing forecasts we have set an internal policy to designate hedging instruments for accounting purposes only up to 75% of forecasted sales or purchases. Determination of forecasted purchases of hot-rolled coil and forecasted sales of prime coil inventory and manufactured pipe inventory require the Companyfair value requires management to make assumptions related to customer demand and the volume and timing of inventory purchases. The pipe-finishing facility impairment analysis requires assumptions related to future operations of the facilitysignificant judgments and estimates, related toincluding the replacement costselection of valuation methodologies, estimates of future revenue and value in exchange for the assets.cash flows, discount rates and selection of comparable companies. Actual results could differ from these estimates.

 

2120

 

CAUTIONARY NOTE REGARDING 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. Such statements may include those risks disclosed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this report, including the adequacy of cash and expectations as to future sales, prices and margins and our expectations for the construction and performance of our new Sinton, TX facility.margins. 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 U.S. Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including the Company’s Annual Report on Form 10-K and its other Quarterly Reports on Form 10-Q. Forward-looking statements include those preceded by, followed by or including the words “will,” “expect,” “intended,” “anticipated,” “believe,” “project,” “forecast,” “propose,” “plan,” “estimate,” “enable,” and similar expressions, including, for example, statements about our business strategy, our industry, our future profitability, growth in the industry sectors we serve, our expectations, beliefs, plans, strategies, objectives, prospects and assumptions, and estimates and projections of future activity and trends in the oil and natural gas industry. These forward-looking statements are not guarantees of future performance. These statements are based on management’s expectations that involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. Although forward-looking statements reflect our current beliefs, reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. 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 government policy regarding steel, changes in the demand for steel and steel products in general and the Company’s success in executing its internal operating plans, changes in and availability of raw materials, unplanned shutdowns of our production facilities due to equipment failures or other issues, increased competition from alternative materials and risks concerning innovation, new technologies, products and increasing customer requirements. Accordingly, undue reliance should not be placed on our forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise, except to the extent law requires.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not required

 

Item 4. Controls and Procedures

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15(d)-15(f) promulgated under the Securities Exchange Act of 1934, as amended). We have established disclosure controls and procedures designed to ensure that material information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission and that any material information relating to us is recorded, processed, summarized and reported to our management including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating our disclosure controls and procedures, our management recognizes that controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving desired control objectives. In reaching a reasonable level of assurance, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based upon our evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of the end of the period covered by this Quarterly Report on Form 10-Q because the Company has not yet completed its remediation of the material weaknesses previously identified and disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2022 and because the Company's Form 10-K for the fiscal year ended March 31, 2022 and Form 10-Q's for the three months ended June 30, 2022 and the three and six months ended September 30, 2022 were not filed timely.2023.

 

Notwithstanding the identified material weaknesses, the Company's management, including our Chief Executive Officer and Chief Financial Officer, believes that the consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present in all material respects our financial condition and results of operations for the three month and nine month periodsmonths ended December 31, 2022 and 2021September 30, 2023 in accordance with U.S. Generally Accepted Accounting Principles.

 

Material Weakness in Internal Control Over Financial Reporting

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.

 

During the audit process related to our fiscal year ended March 31, 2022,2023, management, in connection with our independent auditors, identified the following material weaknesses:

 

-  The Company did not design relevant control activities necessary to address all identified risks of material misstatement or in some circumstances, controls were designed appropriately but were implemented late in the fiscal year not allowing a sufficient period of time to evidence operating effectiveness.

-  The Company did not design and implement control activities to ensure completeness and accuracy of key reports used in the performance of certain controls.

-  Management review were not designed to operate at a level of precision sufficient to identify all potential material errors.

-  Certain controls were not executed or performed or were performed without sufficient documentation supporting the execution of the controls.

-  The Company had inadequate segregation of duties for certain business transactions.

 

2221

 

Plan for Remediation of Material Weakness

 

TheIn the prior year, the Company has determinedidentified that the number of accounting personnel and the limited utilization of information technology in its control structure arewere the primary contributing factors to the material weaknesses identified. As a partThe Company hired additional personnel during the fiscal year ended March 31, 2023 ("fiscal 2023") and believes it is adequately staffed to execute the remediation plans developed by management. The previously identified material weaknesses have not been remediated due to ongoing post-acquisition integration during fiscal 2023. The operation of the transaction with Plateplus, the Company had eight additional accounting personnel convert from Plateplus employment to Friedman employment with five of these individuals becoming Friedman employees on September 1, 2022 and the remaining three individuals becoming Friedman employees on October 1, 2022. The Company also hired an individual with an internal audit and SOX internal control background during September 2022. Additionally, as part of the Plateplus transaction, the Company transferred thefull business in a new enterprise resource planning (“ERP”("ERP") system that was in place at Plateplus to Friedmanis the most significant piece of this integration. All of the Company's flat-roll segment locations were integrated into the new ERP system as of February 2023. The Company's tubular segment went live under the new ERP system at the endstart of August 2022. The Company is currently working to integrate all of its operations into the transferred ERP system. The Company expects the additional accounting personnel to allow for improved segregation of duties and consistent execution of controls.2023. The Company expects the new ERP system to allow for many of the Company’s current manual controls and missing controls to be performed by the design and capabilities of the ERP system rather than relying on manual human execution. With most of the post-acquisition integration completed, the Company expects its additional personnel will be able to dedicate the necessary time during the fiscal year ended March 31, 2024 to improve the design, documentation and execution of internal controls. The Company has also engaged a consultant to assist with remediation efforts and to support the Company's design, documentation and testing of internal controls. 

 

We will continue to monitor the design and effectiveness of these procedures and controls and make any further changes the Company determines appropriate. We believe the additional investment in human capital and technology described above will allow the Company to remediate the material weaknesses the Company has identified. However, the material weaknesses will not be considered remediated until the applicable remedial actions operate effectively for a sufficient period of time.

 

Changes in Internal Controls over Financial Reporting

 

Except as discussed above, there were no changes in the Company's internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2022September 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

 

2322

 

FRIEDMAN INDUSTRIES, INCORPORATED

Three Months Ended December 31, 2022September 30, 2023

 

Part II — OTHER INFORMATION

 

Item 6. Exhibits

 

Exhibits

 

 

   

  3.1

Articles of Incorporation of the Company, as amended (incorporated by reference from Exhibit 3.1 to the Company’s Form S-8 filed on December 21, 2016).

   

  3.2

Articles of Amendment to the Articles of Incorporation of the Company, as filed with the Texas Secretary of State on September 22, 1987 (incorporated by reference from Exhibit 3.1 to the Company’s Form S-8 filed on December 21, 2016).

   

  3.3

Amended and Restated Bylaws of the Company, as amended on November 8, 2021. (incorporated by reference from Exhibit 3.3 to the Company's Form 10-Q filed on November 19, 2021).

   

  31.1

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by Michael J. Taylor.

   

  31.2

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by Alex LaRue.

   

  32.1

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Michael J. Taylor.

   

  32.2

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

   

101.INS

Inline XBRL Instance Document.

   

101.SCH

Inline XBRL Taxonomy Schema Document.

   

101.CAL

Inline XBRL Calculation Linkbase Document.

   

101.DEF

Inline XBRL Definition Linkbase Document.

   

101.LAB

Inline XBRL Label Linkbase Document.

   

101.PRE

Inline XBRL Presentation Linkbase Document.

   
104Cover Page Interactive File (formatted as Inline XBRL and contained in Exhibit 101)

 

2423

 

 

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: February 9,November 14, 2023

 

By

/s/    ALEX LARUE        

 

 

 

Alex LaRue, Chief Financial Officer – Secretary and

Treasurer (Principal Financial Officer)

 

2524