FRIEDMAN INDUSTRIES INC

Previous wording

Friedman Industries, Incorporated is a manufacturer and processor of steel products and operates in two reportable segments; flat-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.

Current wording

Friedman Industries, Incorporated is a manufacturer and processor of steel products and operates in two reportable segments: flat-roll products and tubular products.

Previous wording

The flat-roll product segment consists of the operation of five hot-rolled coil processing facilities located in Hickman, Arkansas; Decatur, Alabama; East Chicago, Indiana; Granite City, Illinois and Sinton, 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 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 improve the flatness and surface quality of the coils and cut 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 vast majority of flat-roll product segment revenue is generated from sales of Company owned inventory but the segment also generates revenue from the processing or storage of customer owned coils on a fee basis.

Current wording

The flat-roll product segment consists of the operation of five hot-rolled coil processing facilities located in Hickman, Arkansas; Decatur, Alabama; East Chicago, Indiana; Granite City, Illinois and Sinton, Texas. 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 improve the flatness and surface quality of the coils and cut 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 vast majority of flat-roll product segment revenue is generated from sales of Company owned inventory but the segment also generates revenue from the processing or storage of customer owned coils on a fee basis.

Previous wording

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. All of the tubular segment's revenue is generated from sales of Company owned inventory.

Current wording

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. All of the tubular segment's revenue is generated from sales of Company owned inventory.

Previous wording

Flat-roll product segment sales for the 2023 quarter totaled approximately $106.4 million compared to approximately $100.2 million for the 2022 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. Flat-roll segment sales for the 2022 quarter were reduced by approximately $0.9 million for the recognition of hedging related losses, while 2023 quarter sales were not impacted by any hedging related gains or losses. Sales generated from processing or storage of customer owned material totaled approximately $1.0 million for the 2023 quarter compared to approximately $0.3 million for the 2022 quarter. Sales generated from flat-roll segment inventory, excluding the impact of any hedging related gains or losses, totaled approximately $105.4 million for the 2023 quarter compared to approximately $100.8 million for the 2022 quarter. The average per ton selling price related to these shipments increased from approximately $949 per ton in the 2022 quarter to approximately $960 per ton in the 2023 quarter. Sales volume for the 2023 quarter consisted of approximately 110,000 tons from inventory and another 22,000 tons of toll processing customer owned material compared to the 2022 quarter volume consisting of approximately 106,000 tons from inventory and 13,000 tons of toll processing. The growth in sales volume was primarily related to the increased production at the Company's Sinton, TX facility which commenced operations in October 2022. Flat-roll segment operations recorded operating profits of approximately $8.7 million and $3.3 million for the 2023 quarter and 2022 quarter, respectively. The operating profit for the 2022 quarter included a recognized loss on hedging activities of approximately $0.9 million, while operating profit for the 2023 quarter was not impacted by any hedging related gains or losses.

Current wording

Flat-roll product segment sales for the 2024 quarter totaled approximately $103.4 million compared to approximately $125.2 million for the 2023 quarter. For a more complete understanding of the average selling prices of goods sold, it is helpful to exclude any sales generated from processing or storage of customer owned material. Sales generated from processing or storage of customer owned material totaled approximately $1.6 million for the 2024 quarter compared to approximately $1.2 million for the 2023 quarter. Sales generated from flat-roll segment inventory totaled approximately $101.8 million for the 2024 quarter compared to approximately $124.0 million for the 2023 quarter. The average per ton selling price related to these shipments decreased from approximately $1,038 per ton in the 2023 quarter to approximately $932 per ton in the 2024 quarter. Sales volume for the 2024 quarter consisted of approximately 109,000 tons from inventory and another 24,000 tons of toll processing customer owned material compared to the 2023 quarter volume consisting of approximately 120,000 tons from inventory and 24,000 tons of toll processing. The decline in sales volume for the 2024 quarter was related to a combination of challenging conditions for some of our customers and extended planned downtime for equipment upgrades and maintenance at the Company's Sinton and Decatur facilities. Flat-roll segment operations recorded operating profits of approximately $2.7 million and $11.8 million for the 2024 quarter and 2023 quarter, respectively.

Previous wording

Tubular product segment sales for the 2023 quarter totaled approximately $9.5 million compared to approximately $11.6 million for the 2022 quarter. Tubular segment sales for the 2023 quarter and 2022 quarter were not impacted by any hedging related gains or losses. Sales decreased due to a decrease in the average selling price per ton, partially offset by an increase in the volume sold. The average per ton selling price decreased from approximately $1,648 per ton in the 2022 quarter to approximately $1,164 per ton in the 2023 quarter. Tons sold increased from approximately 7,000 tons in the 2022 quarter to approximately 8,000 tons in the 2023 quarter. The tubular segment recorded an operating loss of approximately $0.1 million for the 2023 quarter compared to recording operating profit of approximately$0.7 million for the 2022 quarter.

Current wording

Tubular product segment sales for the 2024 quarter totaled approximately $11.2 million compared to approximately $12.1 million for the 2023 quarter. Sales decreased due primarily to a decrease in the average selling price per ton from approximately $1,358 per ton for the 2023 quarter to approximately $1,140 per ton for the 2024 quarter. Sales volume was comparable between period with approximately 10,000 tons sold in the 2024 quarter compared to approximately 9,000 tons sold in the 2023 quarter. The tubular segment recorded an operating loss of approximately$1.2 million for the 2024 quarter compared to recording operating profit of approximately$2.3 million for the 2023 quarter.

Previous wording

During the 2023 quarter, selling, general and administrative costs decreased approximately $0.4 million compared to the 2022 quarter. This decrease is primarily related to decreased payroll and benefits expense in the 2023 quarter.

Current wording

During the 2024 quarter, selling, general and administrative costs decreased approximately $1.4 million compared to the 2023 quarter. This decrease is primarily related to lower incentive compensation expense due to the lower earnings in the 2024 quarter.

Previous wording

Income taxes decreased from a provision for the 2022 quarter of approximately $0.4 million to a provision for the 2023 quarter of approximately$0.1 million. This decrease was primarily related to lower earnings before taxes for the 2023 quarter and adjustment to interim tax estimates during the 2023 quarter. The income tax provision as a percentage of earnings before tax was approximately 5.9% and 23.9% for the three months ended December 31, 2023 and 2022, respectively. For the 2023 quarter, the effective tax rate differed from the federal statutory rate due primarily to the adjustment of tax estimates mentioned above. For the 2022 quarter, the effective tax rate differed from the federal statutory rate due primarily to the inclusion of state income taxes in the provision.

Current wording

Income taxes decreased from a provision for the 2023 quarter of approximately $2.6 million to a provision for the 2024 quarter of approximately$0.7 million. This decrease was primarily related to lower earnings before taxes for the 2024 quarter. The income tax provision as a percentage of earnings before tax was approximately 22.2% and 25.0% for the three months ended June 30, 2024 and 2023, respectively. For thethree months ended June 30, 2024, the effective tax rate differed from the federal statutory rate due primarily to the inclusion of state tax expenses in the provision with this impact partially reduced by the tax effect of restricted stock vesting during the quarter. For thethree months ended June 30, 2023, the effective tax rate differed from the federal statutory rate due primarily to the inclusion of state tax expenses in the provision.

Previous wording

The Company’s current ratio was 3.1 at December 31, 2023 and 3.2 at March 31, 2023. Working capital was approximately$116.3 million at December 31, 2023 and $98.6 million at March 31, 2023.

Current wording

The Company’s current ratio amounted to 4.2 at June 30, 2024 and 3.1 at March 31, 2024. Working capital was approximately $123.6 million at June 30, 2024 and $116.0 million at March 31, 2024.

Previous wording

During the nine months ended December 31, 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. Cash and restricted cash increased due primarily to cash generated from operating activities and cash drawn on the Company's credit facility being greater than cash used for investing activities. The Company expects to continue to monitor, evaluate and manage balance sheet components depending on changes in market conditions and the Company’s operations.

Current wording

During the three months ended June 30, 2024, 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. Cash and restricted cash decreased due primarily to cash used in operating activities and investing activities exceeding cash provided by financing activities. The Company expects to continue to monitor, evaluate and manage balance sheet components depending on changes in market conditions and the Company’s operations.

Previous wording

The Company has a $150 million asset-based lending facility ("ABL Facility") which 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, 2023, the Company had a balance of approximately $46.0 million under the ABL Facility with an applicable interest rate of 7.5%. At December 31, 2023, the Company's applicable borrowing base calculation supported access to approximately $106.1 million of the ABL Facility. As of the filing date of this Form 10-Q, the Company had borrowings of approximately $49.9 million outstanding under the ABL Facility and the Company's most recent borrowing base calculation provided access to approximately $110.6 million of the ABL Facility.

Current wording

The Company has a $150 million asset-based lending facility ("ABL Facility") which 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, 2024, the Company had a balance of approximately $46.1 million under the ABL Facility with an applicable interest rate of 7.5%. At June 30, 2024, the Company's applicable borrowing base calculation supported access to approximately $112.4 million of the ABL Facility. As of the filing date of this Form 10-Q, the Company had borrowings of approximately $50.6 million outstanding under the ABL Facility and the Company's most recent borrowing base calculation provided access to approximately $120.2 million of the ABL Facility.

Previous wording

The Company utilizes hot-rolled coil futures to manage price risk on unsold inventory and longer-term fixed price sales agreements. The Company has elected hedge accounting for some of its hedging activities previously but most recently the Company has classified its hedging activities as economic hedges of risk with mark-to-market ("MTM") accounting treatment. Hedging decisions are intended to protect the value of the Company's inventory and produce more consistent financial results over price cycles. The Company recognized a loss related to futures designated for hedge accounting of approximately $0.4 million for the nine months ended December 31, 2023 with all of this recognition occurring during the first fiscal quarter ended June 30, 2023. For the three months ended December 31, 2023, the Company recognized a loss related to economic hedges of risk of approximately $4.1 million. For the nine months ended December 31, 2023, the Company recognized a gain related to economic hedges of risk of approximately $0.7 million. With MTM accounting treatment it is possible that hedging related gains or losses might be recognized in a different fiscal quarter than the corresponding improvement or contraction in our physical margins. The Company experienced an inflection point in steel prices during the quarter ended December 31, 2023 with both HRC price and the futures prices increasing. This resulted in physical margins improving in the second half of the quarter with this margin improvement being partially offset by hedging losses. The Company expects to recognize the appreciation of its inventory value through increased physical margins on fiscal fourth quarter sales. See Note H for additional information related to the Company's hedging activities.

Current wording

The Company utilizes hot-rolled coil futures to manage price risk on unsold inventory and longer-term fixed price sales agreements. The Company has elected hedge accounting for some of its hedging activities previously but most recently the Company has classified its hedging activities as economic hedges of risk with mark-to-market ("MTM") accounting treatment. Hedging decisions are intended to protect the value of the Company's inventory and produce more consistent financial results over price cycles. The Company recognized a gain of approximately $5.4 million in the 2024 quarter related to it hedging activities with all of this being classified as economic hedges of risk. With MTM accounting treatment it is possible that hedging related gains or losses might be recognized in a different fiscal quarter or fiscal year than the corresponding improvement or contraction in our physical margins. See Note G for additional information related to the Company's hedging activities.

Previous wording

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 determining the fair value of assets acquired and liabilities assumed in the business combination discussed in Note B. The determination of fair value 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. Actual results could differ from these estimates.

Current wording

The preparation of financial statements in conformity with U.S. generally accepted accounting principles may require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from any estimates. The Company did not identify any significant estimates or judgements related to the consolidated financial statements and accompanying notes presented in this Form 10-Q filing.