frd20221231_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 December 31, 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 February 9, 2023, the number of shares outstanding of the issuer’s only class of stock was 7,375,588 shares of Common Stock.

Table of Contents

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	22
Item 4. Controls and Procedures	22
Part II — OTHER INFORMATION	24
Item 6. Exhibits	24
SIGNATURES	25

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Part I — FINANCIAL INFORMATION

Item 1. Financial Statements

FRIEDMAN INDUSTRIES, INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS — UNAUDITED

	*DECEMBER 31, 2022*			*MARCH 31, 2022*
ASSETS
CURRENT ASSETS:
Cash	$	3,544,508		$	2,598,102
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
Inventories		97,834,103			67,946,122
Current portion of derivative assets		808,820			4,240,740
Other current assets		3,096,007			14,906,194
TOTAL CURRENT ASSETS		148,356,358			125,361,815
PROPERTY, PLANT AND EQUIPMENT:
Land		1,669,831			1,179,831
Buildings and yard improvements		30,664,230			8,581,676
Machinery and equipment		48,495,480			30,422,066
Construction in process		832,761			15,925,306
Less accumulated depreciation		(27,882,265	)		(26,002,820	)
		53,780,037			30,106,059
OTHER ASSETS:
Cash value of officers’ life insurance and other assets		464,892			157,248
Operating lease right-of-use asset		1,281,996			113,168
Deferred income tax asset		—			2,133,295
Income taxes recoverable		—			1,403,485
TOTAL ASSETS	$	203,883,283		$	159,275,070
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses	$	42,378,677		$	44,803,602
Dividends payable		147,512			137,120
Contribution to retirement plan		350,000			250,000
Employee compensation and related expenses		2,258,823			1,085,676
Income taxes payable		2,631,006			—
Current portion of financing lease		106,214			104,689
Current portion of derivative liability		649,700			14,429,520
TOTAL CURRENT LIABILITIES		48,521,932			60,810,607
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS		96,535			119,591
DEFERRED INCOME TAX LIABILITY		820,960			—
OTHER NON-CURRENT LIABILITIES		1,274,431			221,767
ASSET BASED LENDING FACILITY		44,510,967			18,436,457
TOTAL LIABILITIES		95,224,825			79,588,422
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
Additional paid-in capital		34,926,801			30,442,361
Accumulated other comprehensive loss		(846,905	)		(10,268,509	)
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	)
Retained earnings		73,487,615			58,909,018
TOTAL STOCKHOLDERS’ EQUITY		108,658,458			79,686,648
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	203,883,283		$	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*						*NINE MONTHS ENDED*
	*DECEMBER 31,*						*DECEMBER 31,*
	*2022*			*2021*			*2022*			*2021*
Net Sales	$	111,860,093		$	51,655,943		$	423,355,592		$	210,143,277
Costs and expenses:
Costs of products sold		105,730,259			55,259,964			393,875,438			166,722,381
Selling, general and administrative		4,700,850			1,994,242			15,661,476			10,634,407
		110,431,109			57,254,206			409,536,914			177,356,788
EARNINGS (LOSS) FROM OPERATIONS		1,428,984			(5,598,263	)		13,818,678			32,786,489
Interest expense		(447,551	)		(58,385	)		(1,498,147	)		(153,891	)
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
Provision for (benefit from) income taxes:
Current		447,995			(855,309	)		4,686,413			6,639,198
Deferred		(16,416	)		(112,372	)		(47,141	)		(335,299	)
		431,579			(967,681	)		4,639,272			6,303,899
NET EARNINGS (LOSS)	$	1,375,893		$	(2,961,833	)	$	15,031,175		$	21,527,578

Net earnings (loss) per share:
Basic	$	0.19		$	(0.45	)	$	2.06		$	3.12
Diluted	$	0.19		$	(0.45	)	$	2.06		$	3.12
Cash dividends declared per common share	$	0.02		$	0.02		$	0.06		$	0.06

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME — UNAUDITED

	*THREE MONTHS ENDED*					*NINE MONTHS ENDED*
	*DECEMBER 31,*					*DECEMBER 31,*
	*2022*		*2021*			*2022*		*2021*
Net earnings (loss)	$	1,375,893	$	(2,961,833	)	$	15,031,175	$	21,527,578
Other comprehensive income:
Cash flow hedges, net of tax		669,454		13,795,418			9,421,604		4,329,266
		669,454		13,795,418			9,421,604		4,329,266
Comprehensive income	$	2,045,347	$	10,833,585		$	24,452,779	$	25,856,844

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

	*NINE MONTHS ENDED DECEMBER 31,*
	*2022*			*2021*
OPERATING ACTIVITIES
Net earnings	$	15,031,175		$	21,527,578
Adjustments to reconcile net earnings to cash provided by (used in) operating activities:
Depreciation		1,879,445			994,209
Deferred taxes		(47,141	)		(335,299	)
Compensation expense for restricted stock		224,481			375,935
Change in postretirement benefits		8,237			6,559
Gain recognized on open derivatives not designated for hedge accounting		(1,353,520	)		(1,238,320	)
Deferred realized gain (loss) on derivatives		3,155,821			(3,393,260	)
Forgiveness of Paycheck Protection Program Loan		—			(1,706,614	)
Decrease (increase) in operating assets, net of amounts acquired in business combination:
Accounts receivable		(7,402,263	)		(5,865,531	)
Inventories		47,658,608			(48,538,400	)
Federal income taxes recoverable		1,403,485			—
Other current assets		426,712			(667,196	)
Increase (decrease) in operating liabilities, net of amounts acquired in business combination:
Accounts payable and accrued expenses		(20,790,614	)		17,415,657
Income taxes payable		2,631,006			(206,842	)
Contribution to retirement plan		100,000			150,000
Employee compensation and related expenses		1,173,147			(1,455,785	)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		44,098,579			(22,937,309	)
INVESTING ACTIVITIES
Plateplus business combination		(71,720,208	)		—
Purchase of property, plant and equipment		(8,278,891	)		(7,350,081	)
Proceeds on sale from assets		—			160,542
Increase in cash surrender value of officers’ life insurance		(10,389	)		(8,686	)
NET CASH USED IN INVESTING ACTIVITIES		(80,009,488	)		(7,198,225	)
FINANCING ACTIVITIES
Debt issuance cost		(328,548	)		—
Cash dividends paid		(442,186	)		(414,092	)
Cash paid for principal portion of finance lease		(78,327	)		(76,831	)
Cash paid for share repurchases		(36,572	)		(102,075	)
Asset based lending facility proceeds		26,074,510			15,187,824
NET CASH PROVIDED BY FINANCING ACTIVITIES		25,188,877			14,594,826
DECREASE IN CASH AND RESTRICED CASH		(10,722,032	)		(15,540,708	)
CASH AND RESTRICTED CASH AT BEGINNING OF PERIOD		16,121,518			20,192,486
CASH AND RESTRICTED CASH AT END OF PERIOD	$	5,399,486		$	4,651,778

Cash and restricted cash at December 31, 2022 and March 31, 2022 included $1,854,978 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 December 31, 2022 and March 31, 2022. The Company had $1,585,350 in restricted cash at December 31, 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.

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 reclassification 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, 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 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*
Inventory	$	77,546,000
Property, plant and equipment		18,022,000
Operating lease right-of-use asset		1,237,097
Accounts payable		(19,065,000	)
Operating lease liability		(1,237,097	)
Total	$	76,503,000

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 recorded transaction specific costs of approximately $1.2 million as a component of "Selling, general and administrative" expenses on the Condensed Consolidated Statements of Operations. Information about the debt issuance costs associated with the acquisition financing 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:

	*December 31, 2022*		*March 31, 2022*
Prime Coil Inventory	$	89,007,944	$	50,482,022
Non-Standard Coil Inventory		295,925		1,063,374
Tubular Raw Material		4,542,470		9,049,598
Tubular Finished Goods		3,987,764		7,351,128
	$	97,834,103	$	67,946,122

SEC Form 10-Q filed by Friedman Industries Inc.