frd20220630_10q.htm

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 June 30, 2022

☐	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 October 12, 2022, the number of shares outstanding of the issuer’s only class of stock was 7,368,613 shares of Common Stock.

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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	16
Item 3. Quantitative and Qualitative Disclosures About Market Risk	20
Item 4. Controls and Procedures	20
Part II — OTHER INFORMATION	22
Item 6. Exhibits	22
SIGNATURES	23

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Part I — FINANCIAL INFORMATION

Item 1. Financial Statements

FRIEDMAN INDUSTRIES, INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS — UNAUDITED

	*JUNE 30, 2022*			*MARCH 31, 2022*
ASSETS
CURRENT ASSETS:
Cash	$	2,408,776		$	2,598,102
Accounts receivable, net of allowances for bad debts and cash discounts of $99,819 at June 30, and March 31, 2022		76,480,080			35,670,657
Inventories		123,879,630			67,946,122
Current portion of derivative assets		3,480,720			4,240,740
Other current assets		2,722,402			14,906,194
TOTAL CURRENT ASSETS		208,971,608			125,361,815
PROPERTY, PLANT AND EQUIPMENT:
Land		1,669,831			1,179,831
Buildings and yard improvements		20,691,676			8,581,676
Machinery and equipment		36,094,594			30,422,066
Construction in process		19,422,533			15,925,306
Less accumulated depreciation		(26,533,922	)		(26,002,820	)
		51,344,712			30,106,059
OTHER ASSETS:
Cash value of officers’ life insurance and other assets		413,055			157,248
Operating lease right-of-use asset		1,330,241			113,168
Deferred income tax asset		—			2,133,295
Income taxes recoverable		—			1,403,485
TOTAL ASSETS	$	262,059,616		$	159,275,070
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses	$	47,566,633		$	44,803,602
Dividends payable		147,372			137,120
Contribution to retirement plan		175,000			250,000
Employee compensation and related expenses		3,093,819			1,085,676
Income taxes payable		1,576,267			—
Current portion of financing lease		105,195			104,689
Current portion of derivative liability		2,675,400			14,429,520
TOTAL CURRENT LIABILITIES		55,339,686			60,810,607
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS		122,337			119,591
DEFERRED INCOME TAX LIABILITY		136,767			—
OTHER NON-CURRENT LIABILITIES		1,378,789			221,767
ASSET BASED LENDING FACILITY		102,367,007			18,436,457
TOTAL LIABILITIES		159,344,586			79,588,422
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Common stock, par value $1: Authorized shares — 10,000,000; Issued shares — 8,861,016 shares and 8,344,975 shares at June 30, and March 31, 2022, respectively		8,861,016			8,344,975
Additional paid-in capital		34,783,173			30,442,361
Accumulated other comprehensive loss		(3,094,392	)		(10,268,509	)
Treasury stock at cost (1,492,403 shares and 1,488,966 shares at June 30, and March 31, 2022, respectively)		(7,770,465	)		(7,741,197	)
Retained earnings		69,935,698			58,909,018
TOTAL STOCKHOLDERS’ EQUITY		102,715,030			79,686,648
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	262,059,616		$	159,275,070

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

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FRIEDMAN INDUSTRIES, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS — UNAUDITED

	*THREE MONTHS ENDED*
	*JUNE 30,*
	*2022*			*2021*
Net Sales	$	161,803,090		$	65,916,439
Costs and expenses:
Costs of products sold		143,131,162			48,586,504
Selling, general and administrative		6,352,792			3,350,110
Interest expense		429,381			23,210
		149,913,335			51,959,824
EARNINGS FROM OPERATIONS		11,889,755			13,956,615
Other income, net		2,767,703			312,062
EARNINGS BEFORE INCOME TAXES		14,657,458			14,268,677
Provision for (benefit from) income taxes:
Current		3,488,446			3,067,888
Deferred		(15,362	)		(111,008	)
		3,473,084			2,956,880
NET EARNINGS	$	11,184,374		$	11,311,797

Net earnings per share:
Basic	$	1.55		$	1.64
Diluted	$	1.55		$	1.64
Cash dividends declared per common share	$	0.02		$	0.02

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) — UNAUDITED

	*THREE MONTHS ENDED*
	*JUNE 30,*
	*2022*		*2021*
Net earnings	$	11,184,374	$	11,311,797
Other comprehensive income (loss):
Cash flow hedges, net of tax		7,174,117		(13,693,337	)
		7,174,117		(13,693,337	)
Comprehensive income (loss)	$	18,358,491	$	(2,381,540	)

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

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FRIEDMAN INDUSTRIES, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED

	*THREE MONTHS ENDED JUNE 30,*
	*2022*			*2021*
OPERATING ACTIVITIES
Net earnings	$	11,184,374		$	11,311,797
Adjustments to reconcile net earnings to cash provided by (used in) operating activities:
Depreciation		531,102			337,358
Deferred taxes		(15,362	)		(111,008	)
Compensation expense for restricted stock		73,153			121,704
Change in postretirement benefits		2,746			2,186
(Gain) loss recognized on open derivatives not designated for hedge accounting		(686,640	)		2,953,960
Deferred realized gain (loss) on derivatives		(1,450,919	)		(3,812,820	)
Forgiveness of Paycheck Protection Program Loan		—			(1,706,614	)
Decrease (increase) in operating assets, net of amounts acquired in business combination:
Accounts receivable		(40,809,423	)		(9,606,421	)
Inventories		21,613,081			(31,159,940	)
Federal income taxes recoverable		1,403,485			—
Other current assets		584,045			233,347
Increase (decrease) in operating liabilities, net of amounts assumed in business combination:
Accounts payable and accrued expenses		(17,283,626	)		29,300,241
Income taxes payable		1,576,267			2,167,025
Contribution to retirement plan		(75,000	)		50,000
Employee compensation and related expenses		2,008,143			2,037,042
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		(21,344,574	)		2,117,857
INVESTING ACTIVITIES
Plateplus business combination		(71,720,208	)		—
Purchase of property, plant and equipment		(2,811,797	)		(2,756,265	)
Increase in cash surrender value of officers’ life insurance		(3,463	)		(2,896	)
NET CASH USED IN INVESTING ACTIVITIES		(74,535,468	)		(2,759,161	)
FINANCING ACTIVITIES
Debt issuance cost		(239,887	)		—
Cash dividends paid		(147,442	)		(137,991	)
Cash paid for principal portion of finance lease		(25,983	)		(25,486	)
Cash paid for share repurchases		(29,268	)		—
Asset based lending facility proceeds		83,930,550			10,863,213
NET CASH PROVIDED BY FINANCING ACTIVITIES		83,487,970			10,699,736
INCREASE (DECREASE) IN CASH AND RESTRICTED CASH		(12,392,072	)		10,058,432
CASH AND RESTRICTED CASH AT BEGINNING OF PERIOD		16,121,518			20,192,486
CASH AND RESTRICTED CASH AT END OF PERIOD	$	3,729,446		$	30,250,918

Cash and restricted cash at June 30, 2022 and March 31, 2022 included $1,320,670 and $13,523,416, respectively, of cash required to collateralize open derivative positions. These amounts are reported in "Other current assets" on the Company's consolidated balance sheets at June 30, 2022 and March 31, 2022. The Company had $29,360,060 in restricted cash at June 30, 2021.

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

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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, 2022.

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.

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 and Decatur, AL and the Sinton, TX location where construction is concluding. 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 all the ownership interests in the assets noted above, for a total consideration of $76.5 million, of which $71.7 million was cash consideration (inclusive of a final net working capital adjustment of $7.9 million accrued and reported as a component of "Accounts payable and accrued expenses" on the Condensed Consolidated Balance Sheet at June 30, 2022) and $4.8 million related to 516,041 shares of common stock issued by the Company. 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, the Transaction was funded with net borrowings of $64.0 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 subsequent to June 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*
Inventory	$ 77,546,000
Property, plant and equipment	18,022,000
Accounts payable	(19,065,000)
Total	$ 76,503,000

In addition to the above, the Company recognized an initial right-of-use ("ROU") asset and lease liability of $1,237,097 during the June 30, 2022 quarter related to the Granite City location. Additional information about this lease is provided in Note E.

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 June 30
		2022		2021
Net sales	$	181,203,523	$	113,143,769
Earnings from operations	$	11,608,382	$	14,387,891

Our consolidated statement of operations for the period ended June 30, 2022, includes net sales and earnings from operations of approximately $53.6 million and $4.3 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. In addition to the East Chicago and Granite City sales and earnings from operations, our consolidated statement of operations for the period ended June 30, 2022, includes net sales and earnings from operations of approximately $28.6 million and $2.1 million, respectively, attributable to sales of inventory from Houston and Loudon where the fixed assets were not acquired. The Company recorded transaction specific costs of approximately $750,000 million in the period ended June 30, 2022 as a component of "Selling, general and administrative" expenses on the Condensed Consolidated Statement of Operation. Additional information about the debt issuance costs is provided in Note D.

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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:

	*June 30, 2022*		*March 31, 2022*
Prime Coil Inventory	$	106,359,822	$	50,482,022
Non-Standard Coil Inventory		325,424		1,063,374
Tubular Raw Material		13,354,943		9,049,598
Tubular Finished Goods		3,839,441		7,351,128
	$	123,879,630	$	67,946,122

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 as a component of "Other income, net" on the Company's Condensed Consolidated Statement of Operations for the three months ended June 30, 2021.

On March 8, 2021, the Company entered into a Credit Agreement providing for a $10 million revolving line of credit facility (the "Interim Credit Facility) with JPMorgan Chase Bank, N.A. (the "Bank"). The term of the Interim Credit Facility had an expiration date of July 15, 2021 because 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 Amended 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 amends the ABL facility in order to increase the asset-based revolving loans available thereunder from an aggregate principal amount of up to $75 million to an aggregate principal amount of up to $150 million. 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 June 30, 2022, the Company had a balance of $102,367,007 under the ABL Facility with an applicable interest rate of 3.20%. At June 30, 2022, the Company's borrowing base supported full access to the ABL Facility and the Company was in compliance with all covenants related to the ABL Facility.

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

On July 6, 2022, the Company entered into a Third Amendment to the ABL Facility. The Third Amendment amends the ABL Facility in order to provide 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.

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NOTE E — LEASES

During the three months ended June 30, 2022, 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 Transaction. The current lease expires August 31, 2023 but contains a 20 year extension option in favor of the Company which the Company expects to exercise. The lease calls for quarterly rental payments of $18,832. The Company recognized an initial right-of-use ("ROU") asset and lease liability of $1,237,097 during the June 30, 2022 quarter related to this lease. The anticipated 20 year extension 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 $4,878 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 received a new heavy-duty forklift under a 5-year finance lease arrangement with a financed amount of $518,616 and a monthly payment of $9,074.

The components of expense related to leases for the three months ended June 30, 2022 and 2021 are as follows:

	*Three Months Ended*
	*June 30,*
	*2022*		*2021*
Finance lease – amortization of ROU asset	$	25,983	$	25,487
Finance lease – interest on lease liability		1,240		1,736
Operating lease expense		27,188		14,634
	$	54,411	$	41,857

The following table illustrates the balance sheet classification for ROU assets and lease liabilities as of June 30, 2022 and March 31, 2022:

	*June 30, 2022*		*March 31, 2022*		*Balance Sheet Classification*
Assets
Operating lease right-of-use asset	$	1,330,241	$	113,168	Operating lease right-of-use asset
Finance lease right-of-use asset		449,465		455,948	Property, plant & equipment
Total right-of-use assets	$	1,779,706	$	569,116
Liabilities
Operating lease liability, current	$	98,289	$	52,270	Accrued expenses
Finance lease liability, current		105,195		104,689	Current portion of finance lease
Operating lease liability, non-current		1,244,409		60,898	Other non-current liabilities
Finance lease liability, non-current		134,380		160,869	Other non-current liabilities
Total lease liabilities	$	1,582,273	$	378,726

As of June 30, 2022, the weighted-average remaining lease term was 19.7 years for operating leases and 2.3 years for finance leases. The weighted average discount rate was 2.8% for operating leases and 1.9% for finance leases.

Maturities of lease liabilities as of June 30, 2022 were as follows:

	*Operating Leases*			*Finance Leases*
Fiscal 2023 (remainder of fiscal year)		100,397			81,669
Fiscal 2024		133,863			108,892
Fiscal 2025		80,205			54,446
Fiscal 2026		75,327			—
Fiscal 2027 and beyond		1,311,941			—
Total undiscounted lease payments	$	1,701,733		$	245,007
Less: imputed interest		(359,035	)		(5,432	)
Present value of lease liability	$	1,342,698		$	239,575

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NOTE F — PROPERTY, PLANT AND EQUIPMENT

On May 25, 2021, the Company announced plans for a new facility in Sinton, Texas that would be 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 with an annual rental payment of $1. The Company contracted with Red Bud Industries to build a stretcher leveler cut-to-length line for the facility that is capable of handling material up to 1” thick, widths up to 96” and yields exceeding 100,000 psi. The Company expects to put the facility into service during October 2022 and estimates the total cost of the project to be approximately $22 million. The total estimated cost increased $1 million from previous estimates due primarily to adding a railcar mover, an additional heavy-duty forklift and additional railroad spur into the project. At June 30, 2022, the Company's construction in process related to the Sinton project was $19,422,533 consisting of $11,823,576 in cash payments and $7,598,957 of accrued capital expenditures.

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 to whom awards will be granted and shall determine the amount and applicable restrictions of each award. Forfeitures are accounted for upon their occurrence.

The following table summarizes the activity related to restricted stock awards for the three months ended June 30, 2022:

				*Weighted Average*
	*Number of Shares*			*Grant Date Fair Value Per Share*
Unvested at March 31, 2022		139,523		$	5.96
Cancelled or forfeited		—			—
Granted		—			—
Vested		(14,000	)		8.51
Unvested at June 30, 2022		125,523		$	5.68

Compensation expense is recognized over the requisite service period applicable to each award. The Company recorded compensation expense of $73,153 and $121,704 in the three months ended June 30, 2022 and 2021, respectively, relating to the stock awards issued under the Plan. As of June 30, 2022, unrecognized compensation expense related to stock awards was approximately $472,000, which is expected to be recognized over a weighted average period of approximately 2.0 years. As of June 30, 2022, a total of 130,185 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.

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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.

At June 30, 2022 and March 31, 2022, 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 are 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 months ended June 30, 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.

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 June 30, 2022:

	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	$	1,333,860

Derivatives not designated as hedging instruments:
Hot-rolled coil steel contracts	Current portion of derivative assets	$	2,146,860	Current portion of derivative liability	$	2,675,400

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

	*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

Derivatives not designated as hedging instruments:
Hot-rolled coil steel contracts	Current portion of derivative assets	$	4,240,740	Current portion of derivative liability	$	5,524,020

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

At June 30, 2022 and March 31, 2022, the Company reported $330,200 and $933,200, respectively, in "Other current assets" on its Consolidated Balance Sheets related to futures contracts which were closed but were pending cash settlement.

The notional amounts (quantities) of our cash flow hedges outstanding at June 30, 2022 consisted of 9,980 tons hedging sales with maturity dates ranging from July 2022 to September 2022.

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

	*Pre-Tax Gain (Loss)*			*Location of Gain (Loss) Reclassified*	*Pre- Tax Gain (Loss) Reclassified from*
	*Recognized in OCI*			*from AOCI into Net Earnings*	*AOCI into Net Earnings*
For the three months ended June 30, 2022:
Hot-rolled coil steel contracts	$	8,833,360		*Sales*	$	(626,180	)
Total	$	8,833,360			$	(626,180	)

For the three months ended June 30, 2021:
Hot-rolled coil steel contracts	$	(32,807,460	)	*Sales*	$	(5,098,020	)
Hot-rolled coil steel contracts				*Costs of goods sold*	$	1,582,200
Total	$	(32,807,460	)		$	(3,515,820	)

The estimated amount of net losses recognized in AOCI at June 30, 2022 expected to be reclassified into net earnings (loss) within the succeeding twelve months is $4,080,160. This amount consists of $5,745,540 in realized losses associated with closed hedges and net unrealized gains of $1,665,380 associated with open hedges that was computed using the fair value of the cash flow hedges as of June 30, 2022 and is subject to change before actual reclassification from AOCI to net earnings (loss).

The following table summarizes the gain recognized in earnings for derivative instruments not designated as hedging instruments during the three months ended June 30, 2022:

		*Gain Recognized in Earnings*
	*Location of Gain*	*for the Three Months Ended*
	*Recognized in Earnings*	*June 30, 2022*
Hot-rolled coil steel contracts	Other income (loss), net	$	2,754,240

The following table summarizes the loss recognized in earnings for derivative instruments not designated as hedging instruments during the three months ended June 30, 2021:

		Loss Recognized in Earnings
	*Location of Loss*	*for the Three Months Ended*
	*Recognized in Earnings*	*June 30, 2021*
Hot-rolled coil steel contracts	Other income, net	$	(1,388,960)

The notional amount (quantity) of our derivative instruments not designated as hedging instruments at June 30, 2022 consisted of 6,980 tons of long positions with maturity dates ranging from August 2022 to December 2022 and 18,800 tons of short positions with maturity dates ranging from July 2022 to February 2023.

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

	*Gain (Loss) on*
	*Derivatives*
Balance at March 31, 2022	$	(10,268,509	)
Other comprehensive income, net of loss, before reclassification		6,699,222
Total loss reclassified from AOCI (1)		474,895
Net current period other comprehensive income		7,174,117
Balance at June 30, 2022	$	(3,094,392	)

(1) The loss reclassified from AOCI is presented net of tax benefits of $151,285 which are included in the provision for (benefit from) income taxes on the Company's Consolidated Statement of Operations for the three months ended June 30, 2022.

	*Gain (Loss) on*
	*Derivatives*
Balance at March 31, 2021	$	(11,187,841	)
Other comprehensive loss, net of income, before reclassification		(16,359,735	)
Total loss reclassified from AOCI (1)		2,666,398
Net current period other comprehensive loss		(13,693,337	)
Balance at June 30, 2021	$	(24,881,178	)

(1) The loss reclassified from AOCI is presented net of tax benefits of $849,422 which are included in the provision for (benefit from) income taxes on the Company's Consolidated Statement of Operations for the three months ended June 30, 2021.

At June 30, 2022 and March 31, 2022, cash of $1,320,670 and $13,523,416, respectively, was held by our clearing agent to collateralize our open derivative positions. These cash requirements are included in "Other current assets" on the Company's Consolidated Balance Sheets at June 30, 2022 and March 31, 2022.

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 June 30, 2022, our financial assets, net, measured at fair value on a recurring basis were as follows:

	*Quoted Prices*
	*in Active*		*Significant*
	*Markets for*		*Other*		*Significant*
	*Identical*		*Observable*		*Unobservable*
	*Assets*		*Inputs*		*Inputs*
	*(Level 1)*		*(Level 2)*		*(Level 3)*		*Total*
Commodity futures – financial assets, net	$	805,320	$	—	$	—	$	805,320
Total	$	805,320	$	—	$	—	$	805,320

At March 31, 2022, our financial liabilities, net, measured at fair value on a recurring basis were as follows:

	*Quoted Prices*
	*in Active*			*Significant*
	*Markets for*			*Other*		*Significant*
	*Identical*			*Observable*		*Unobservable*
	*Assets*			*Inputs*		*Inputs*
	*(Level 1)*			*(Level 2)*		*(Level 3)*		*Total*
Commodity futures – financial liabilities, net	$	(10,188,780	)	$	—	$	—	$	(10,188,780	)
Total	$	(10,188,780	)	$	—	$	—	$	(10,188,780	)

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

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NOTE J — SEGMENT INFORMATION (in thousands)

	*Three Months Ended*
	*June 30,*
	*2022*		*2021*
Net sales
Coil	$	142,877	$	52,695
Tubular		18,926		13,221
Total net sales	$	161,803	$	65,916

Operating profit
Coil	$	13,543	$	13,256
Tubular		2,104		2,600
Total operating profit		15,647		15,856
General corporate expenses		3,329		1,876
Interest expense		429		23
Other income, net		2,768		312
Total earnings before income taxes	$	14,657	$	14,269

	*June 30, 2022*		*March 31, 2022*
Segment assets
Coil	$	233,397	$	115,232
Tubular		24,314		24,017
		257,711		139,249
Corporate assets		4,349		20,026
	$	262,060	$	159,275

Operating profit is total net sales less operating expenses, excluding general corporate expenses, interest expense and other income. General corporate expenses reflect general and administrative expenses not directly associated with segment operations and consist primarily of corporate and accounting salaries, professional fees and services, bad debts, retirement plan contribution expense, corporate insurance expenses, restricted stock plan compensation expense and office supplies. Other income for the three months ended June 30, 2022 consisted primarily of a $2,754,240 gain related to derivatives not designated for hedge accounting. Other income for the three months ended June 30, 2021 consisted primarily of a $1,706,614 gain from the PPP Loan forgiveness partially offset by a $1,388,960 loss related to derivatives not designated for hedge accounting. Corporate assets consist primarily of cash, restricted cash and the cash value of officers’ life insurance. Although inventory is transferred at cost between product groups, there are no sales between product groups.

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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 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: Coil and Tubular. Coil primarily generates revenue from cutting to length hot-rolled steel coils. Coil segment revenue consists of three main product types: Prime Coil, Non-Standard Coil and Customer Owned Coil. Tubular primarily generates revenue from manufacturing and distributing steel pipe. Tubular segment revenue consists of two main product types: 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. 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 months ended June 30, 2022 and 2021, respectively:

	*Three Months Ended*
	*June 30,*
	*2022*		*2021*
Coil Segment:
Prime Coil		140,980,354		49,751,884
Non-standard Coil		1,531,306		2,823,203
Customer Owned Coil		365,312		119,643
		142,876,972		52,694,730
Tubular Segment:
Manufactured Pipe		18,472,098		9,606,810
Mill Reject Pipe		454,020		3,614,899
		18,926,118		13,221,709

NOTE L — STOCKHOLDERS’ EQUITY

The following tables reflect the changes in stockholders’ equity for each of the three months ended June 30, 2022 and June 30, 2021:

			*Accumulated*
			*Other*
			*Comprehensive*			*Additional*
	*Common*		*Income,*			*Paid-In*		*Treasury*			*Retained*
	*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
Net earnings		—		—			—		—			11,184,374			11,184,374
Other comprehensive income		—		7,174,117			—		—			—			7,174,117
Paid in capital – restricted stock awards		—		—			73,153		—			—			73,153
Shares issued - Plateplus business combination		516,041		—			4,267,659		—			—			4,783,700
Repurchase of shares		—		—			—		(29,268	)		—			(29,268	)
Cash dividends ($0.02 per share)		—		—			—		—			(157,694	)		(157,694	)
BALANCE AT JUNE 30, 2022	$	8,861,016	$	(3,094,392	)	$	34,783,173	$	(7,770,465	)	$	69,935,698		$	102,715,030

			*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

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NOTE M — OTHER COMPREHENSIVE INCOME

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

	*Three Months Ended June 30, 2022*
	*Before-Tax*		*Tax*			*Net-of-Tax*

Cash flow hedges	$	9,459,540	$	(2,285,423	)	$	7,174,117
Other comprehensive income (loss)	$	9,459,540

SEC Form 10-Q filed by Friedman Industries Inc.