FRIEDMAN INDUSTRIES INC 10-Q

frd20210930b_10q.htm   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 September 30, 2021   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 November 19, 2021 , the number of shares outstanding of the issuer’s only class of stock wa s 6,905,537  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 15 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     2 Table of Contents       Part I — FINANCIAL INFORMATION   Item 1. Financial Statements   FRIEDMAN INDUSTRIES, INCORPORATED   CONDENSED CONSOLIDATED BALANCE SHEETS — UNAUDITED       SEPTEMBER 30, 2021     MARCH 31, 2021   ASSETS                 CURRENT ASSETS:                 Cash   $ 2,943,597     $ 8,191,001   Accounts receivable, net of allowances for bad debts and cash discounts of $ 32,834 at September 30, and March 31, 2021     32,333,608       20,377,967   Inventories     67,737,618       36,016,093   Current portion of derivative assets     1,832,840       622,400   Other current assets     6,807,381       12,327,174   TOTAL CURRENT ASSETS     111,655,044       77,534,635   PROPERTY, PLANT AND EQUIPMENT:                 Land     1,179,831       1,179,831   Buildings and yard improvements     8,567,916       9,199,704   Machinery and equipment     30,375,429       35,253,000   Construction in process     5,994,357       9,614   Less accumulated depreciation     ( 25,340,164 )     ( 30,180,893 )       20,777,369       15,461,256   OTHER ASSETS:                 Cash value of officers’ life insurance and other assets     287,154       148,494   Deferred income tax asset     5,102,939       1,864,424   TOTAL ASSETS   $ 137,822,506     $ 95,008,809   LIABILITIES AND STOCKHOLDERS’ EQUITY                 CURRENT LIABILITIES:                 Accounts payable and accrued expenses   $ 26,748,702     $ 15,185,038   Dividends payable     138,111       138,117   Contribution to retirement plan     150,000       50,000   Employee compensation and related expenses     4,354,803       2,643,538   Income taxes payable     3,331,540       1,455,099   Current portion of financing lease     103,684       102,689   Current portion of derivative liability     4,600,440       7,979,380   Current portion of Paycheck Protection Program loan     —       1,518,410   TOTAL CURRENT LIABILITIES     39,427,280       29,072,271   POSTRETIREMENT BENEFITS OTHER THAN PENSIONS     112,982       108,609   OTHER NON-CURRENT LIABILITIES     3,368,756       315,978   ASSET BASED LENDING FACILITY     14,578,487       —   LONG TERM PORTION OF PAYCHECK PROTECTION PROGRAM LOAN     —       171,975   TOTAL LIABILITIES     57,487,505       29,668,833   COMMITMENTS AND CONTINGENCIES                     STOCKHOLDERS’ EQUITY:                 Common stock, par value $ 1 : Authorized shares — 10,000,000 ; Issued shares — 8,340,785 shares and 8,334,785 shares at September 30, and March 31, 2021, respectively     8,340,785       8,334,785   Additional paid-in capital     30,245,203       30,003,462   Accumulated other comprehensive loss     ( 20,653,993 )     ( 11,187,841 ) Treasury stock at cost ( 1,435,248 shares at September 30, and March 31, 2021)     ( 7,203,342 )     ( 7,203,342 ) Retained earnings     69,606,348       45,392,912   TOTAL STOCKHOLDERS’ EQUITY     80,335,001       65,339,976   TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 137,822,506     $ 95,008,809     The accompanying notes are an integral part of these financial statements.   3 Table of Contents     FRIEDMAN INDUSTRIES, INCORPORATED   CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS — UNAUDITED       THREE MONTHS ENDED     SIX MONTHS ENDED       SEPTEMBER 30,     SEPTEMBER 30,       2021     2020     2021     2020   Net Sales   $ 92,570,895     $ 24,861,680     $ 158,487,334     $ 48,386,280   Costs and expenses:                                 Costs of products sold     62,875,913       23,770,583       111,462,417       47,038,429   Selling, general and administrative     5,290,055       1,401,888       8,640,165       2,793,642   Interest expense     72,296       6,255       95,506       12,208         68,238,264       25,178,726       120,198,088       49,844,279   EARNINGS (LOSS) FROM OPERATIONS     24,332,631       ( 317,046 )     38,289,246       ( 1,457,999 ) Other income (loss), net     ( 6,840,317 )     4,325       ( 6,528,255 )     8,648   EARNINGS (LOSS) BEFORE INCOME TAXES     17,492,314       ( 312,721 )     31,760,991       ( 1,449,351 ) Provision for (benefit from) income taxes:                                 Current     4,426,619       46,005       7,494,507       ( 123,041 ) Deferred     ( 111,919 )     ( 108,721 )     ( 222,927 )     ( 217,443 )       4,314,700       ( 62,716 )     7,271,580       ( 340,484 ) NET EARNINGS (LOSS)   $ 13,177,614     $ ( 250,005 )   $ 24,489,411     $ ( 1,108,867 )                                   Weighted average number of common shares outstanding:                                 Basic     6,903,450       7,067,898       6,901,504       7,074,137   Diluted     6,903,450       7,067,898       6,901,504       7,074,137   Net earnings (loss) per share:                                 Basic   $ 1.91     $ ( 0.04 )   $ 3.55     $ ( 0.16 ) Diluted   $ 1.91     $ ( 0.04 )   $ 3.55     $ ( 0.16 ) Cash dividends declared per common share   $ 0.02     $ 0.02     $ 0.04     $ 0.04       CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) — UNAUDITED       THREE MONTHS ENDED     SIX MONTHS ENDED       SEPTEMBER 30,     SEPTEMBER 30,       2021     2020     2021     2020   Net earnings (loss)   $ 13,177,614     $ ( 250,005 )   $ 24,489,411     $ ( 1,108,867 ) Other comprehensive income (loss):                                 Cash flow hedges, net of tax     4,227,185       —       ( 9,466,152 )     —         4,227,185       —       ( 9,466,152 )     —   Comprehensive income (loss)   $ 17,404,799     $ ( 250,005 )   $ 15,023,259     $ ( 1,108,867 )   The accompanying notes are an integral part of these financial statements.   4 Table of Contents     FRIEDMAN INDUSTRIES, INCORPORATED   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED       SIX MONTHS ENDED SEPTEMBER 30,       2021     2020   OPERATING ACTIVITIES                 Net earnings (loss)   $ 24,489,411     $ ( 1,108,867 ) Adjustments to reconcile net earnings (loss) to cash provided by (used in) operating activities:                 Depreciation     663,164       530,968   Deferred taxes     ( 222,927 )     ( 217,443 ) Compensation expense for restricted stock     247,741       221,627   Change in postretirement benefits     4,373       5,933   Lower of cost or net realizable value inventory adjustment     —       274,093   Gain recognized on open derivatives not designated for hedge accounting     ( 1,551,840 )     —   Deferred realized loss on derivatives     ( 17,052,580 )     —   Forgiveness of Paycheck Protection Program Loan     ( 1,706,614 )     —   Decrease (increase) in operating assets:                 Accounts receivable     ( 11,955,641 )     426,318   Inventories     ( 31,721,525 )     8,894,641   Federal income taxes recoverable     —       ( 109,230 ) Other current assets     ( 1,274,124 )     ( 1,075,916 ) Increase (decrease) in operating liabilities:                 Accounts payable and accrued expenses     11,801,806       ( 4,199,863 ) Income taxes payable     1,876,441       —   Contribution to retirement plan     100,000       100,500   Employee compensation and related expenses     1,711,265       ( 26,484 ) NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES     ( 24,591,050 )     3,716,277   INVESTING ACTIVITIES                 Purchase of property, plant and equipment     ( 2,905,751 )     ( 2,933,637 ) Proceeds from sale of assets     160,542       —   Increase in cash surrender value of officers’ life insurance     ( 5,791 )     ( 8,647 ) NET CASH USED IN INVESTING ACTIVITIES     ( 2,751,000 )     ( 2,942,284 ) FINANCING ACTIVITIES                 Paycheck Protection Program loan proceeds     —       1,690,385   Cash dividends paid     ( 275,981 )     ( 283,218 ) Cash paid for principal portion of finance lease     ( 51,097 )     ( 50,121 ) Cash paid for share repurchases     —       ( 410,221 ) Asset based lending facility proceeds     14,578,487       —   NET CASH PROVIDED BY FINANCING ACTIVITIES     14,251,409       946,825   INCREASE (DECREASE) IN CASH AND RESTRICED CASH     ( 13,090,641 )     1,720,818   CASH AND RESTRICTED CASH AT BEGINNING OF PERIOD     20,192,486       17,057,751   CASH AND RESTRICTED CASH AT END OF PERIOD   $ 7,101,845     $ 18,778,569     Cash and restricted cash at September 30, 2021 and March 31, 2021 included $4,158,248 and $12,001,485, 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 September 30, 2021 and March 31, 2021. At September 30, 2021, the Company had a margin call position of $422,877 to further collateralize open derivative positions. This margin requirement was funded subsequent to quarter end.  The Company had $118,125 in restricted cash at September 30, 2020.    The accompanying notes are an integral part of these financial statements.     5 Table of Contents   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, 2021 .     NOTE B — NEW ACCOUNTING PRONOUNCEMENTS   In December 2019, the FASB issued Accounting Standards Update 2019 - 12, Income Taxes (Topic 740 ): Simplifying the Accounting for Income Taxes (“ASU 2019 - 12” ), which simplifies accounting for income taxes by revising or clarifying existing guidance in ASC 740, as well as removing certain exceptions within ASC 740. We adopted this guidance on April 1, 2021. The adoption of this guidance did not have a material impact on the Company's Condensed Consolidated Financial Statements.     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:       September 30, 2021     March 31, 2021   Prime Coil Inventory   $ 55,050,920     $ 23,079,012   Non-Standard Coil Inventory     1,307,105       1,419,055   Tubular Raw Material     6,596,781       2,607,197   Tubular Finished Goods     4,782,812       8,910,829       $ 67,737,618     $ 36,016,093     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 and new mill reject pipe the Company has purchased from U.S. Steel Tubular Products, Inc.     NOTE D – DEBT                     On June  22, 2021, the Small Business Administration authorized full forgiveness of our 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 (loss), net" on the Company's Condensed Consolidated Statement of Operations for the six months ended September 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  14, 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 with the Bank that amends and restates the Interim Credit Facility and provides for asset-based revolving loans in an aggregate principal amount up to $ 40 million (the "ABL Facility"). The ABL Facility matures on May 19, 2026 and replaced the Interim Credit Facility in its entirety. The ABL Facility is secured by substantially all of the assets of the Company and borrowings bear interest at a rate equal to LIBOR plus 1.7 % per annum. Availability of funds under the ABL Facility is subject to a borrowing base calculation determined as the sum of (a) 85 % 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 and plus (c) a machinery and equipment component that is the lesser of 85 % of the net orderly liquidating value of eligible equipment or the machinery and equipment component limit which is initially $ 5 million and reduces over the term of the facility. The ABL Facility contains a financial covenant restricting the Company from allowing its fixed charge coverage ratio 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 $ 10 million, in minimum increments of $ 5 million. At  September 30, 2021 , the Company had a balance of $ 14,578,487  under the ABL Facility with an applicable interest rate of  1.79 %. At  September 30, 2021 , the Company's borrowing base calculation provided full access to the ABL Facility and the Company was in compliance with all covenants related to the ABL Facility.      6 Table of Contents      NOTE E — LEASES   The Company’s lease of its office space in Longview, Texas is the only operating lease included in the Company's right-of-use ("ROU") asset and lease liability. 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 and six months ended September 30, 2021  and 2020 are as follows:       Three Months Ended     Six Months Ended       September 30,     September 30,       2021     2020     2021     2020   Finance lease – amortization of ROU asset   $ 25,610     $ 25,121     $ 51,097     $ 50,121   Finance lease – interest on lease liability     1,613       2,102       3,349       4,325   Operating lease expense     14,634       14,634       29,268       27,018       $ 41,857     $ 41,857     $ 83,714     $ 81,464     The following table illustrates the balance sheet classification for ROU assets and lease liabilities as of September 30, 2021  and March 31, 2021:       September 30, 2021     March 31, 2021   Balance Sheet Classification Assets                   Operating lease right-of-use asset   $ 137,967     $ 4,850   Other assets Finance lease right-of-use asset     468,914       481,880   Property, plant & equipment Total right-of-use assets   $ 606,881     $ 486,730     Liabilities                   Operating lease liability, current   $ 50,477     $ 4,850   Accrued expenses Finance lease liability, current     103,684       102,689   Current portion of finance lease Operating lease liability, non-current     87,490       —   Other non-current liabilities Finance lease liability, non-current     213,466       265,557   Other non-current liabilities Total lease liabilities   $ 455,117     $ 373,096       As of September 30, 2021 , the weighted-average remaining lease term was 2.6  years for operating leases and 3.0  years for finance leases. The weighted average discount rate was 7 % for operating leases and 1.9 % for finance leases.   Maturities of lease liabilities as of September 30, 2021 were as follows:       Operating Leases     Finance Leases   Fiscal 2022 (remainder of fiscal year)     29,268       54,446   Fiscal 2023     58,536       108,888   Fiscal 2024     58,536       108,888   Fiscal 2025     4,878       54,445   Fiscal 2026     —       —   Total undiscounted lease payments   $ 151,218     $ 326,667   Less: imputed interest     ( 13,251 )     ( 9,517 ) Present value of lease liability   $ 137,967     $ 317,150     7 Table of Contents     NOTE F — PROPERTY, PLANT AND EQUIPMENT   On May 25, 2021, the Company announced plans for a new facility in Sinton, Texas that will be part of the coil product segment. The new facility will be on the campus of Steel Dynamics, Inc.'s ("SDI") new flat roll steel mill currently under construction in Sinton, Texas. The Company's new location will consist 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 has selected 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 the location to commence operations in April 2022  and estimates the total cost of the project to be $ 21 million. At  September 30, 2021 ,  the Company's construction in process related to the Sinton project was $ 5,994,357 consisting of $ 2,760,289 in cash payments and $ 3,234,068 of accrued capital expenditures.   During the  three and six months ended September 30, 2021 , the Company wrote off fully depreciated fixed assets that were no longer in use with an original cost and accumulated depreciation of approximately $ 115,578 and $2,060,226, respectively. During the  three months ended September 30, 2021 , the Company disposed of the temper mill that was taken out of the Decatur facility prior to the new stretcher leveler coil processing line being installed. The Company received $ 160,542 in proceeds from the disposal of the equipment which had an original cost of $ 3,604,209 and accumulated depreciation of $ 3,447,465 .     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 six months ended September 30, 2021 :               Weighted Average       Number of Shares     Grant Date Fair Value Per Share   Unvested at March 31, 2021     339,625     $ 6.07   Cancelled or forfeited     —       —   Granted     6,000       13.00   Vested     ( 25,000 )     4.41   Unvested at September 30, 2021     320,625     $ 6.33     Compensation expense is recognized over the requisite service period applicable to each award. The Company recorded compensation expense o f $ 247,741  and $ 221,627  in the six months ended September 30, 2021 and 2020 , respectively, relating to the stock awards issued under the Plan. As of September 30, 2021 , unrecognized compensation expense related to stock awards was approximatel y $ 696,921 , which is expected to be recognized over a weighted average period of approximately 2.6  years. As of September 30, 2021 , a total of 134,375 shares were still available to be issued under the Plan.     NOTE H — DERIVATIVE FINANCIAL INSTRUMENTS   In June 2020, the Company implemented its first commodity price risk management activities by transacting hot-rolled coil futures. 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.   8 Table of Contents   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 a forward physical purchase supply agreement in place with one of its suppliers for a portion of its monthly physical steel needs. This supply agreement is not subject to mark-to-market accounting due to the Company electing the normal purchase normal sale exclusion provided in ASC 815.     At September 30, 2021  and   March 31, 2021 , 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 and six month periods ended  September 30, 2021 , some of the Company's cash flow hedges were closed prior to expiration but the hedged transactions were still expected to occur as originally forecasted resulting in the realized gain or loss being deferred in other comprehensive income until the hedged transactions occur and affect earnings.  At September 30, 2021, the Company removed some derivative instruments from hedge accounting due to the hedged transactions no longer being expected to occur. This was the result of the Company reducing its forecasted sales for the quarter ending December 31, 2021 due to anticipated customer reaction to plateauing and declining steel prices. Since these hedged sales are no longer expected to occur, a loss of $ 9,930,720 associated with these instruments was immediately recognized into earnings and is reported as a component of “Other income (loss), net” on the Condensed Consolidated Statement of Operations. During the three and six month periods ended September 30, 2021 , 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 September 30, 2021 :     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   $ 1,282,600   Current portion of derivative liability   $ 4,549,120   Hot-rolled coil steel contracts hedging sales           Other non-current liabilities   $ 67,800                         Derivatives not designated as hedging instruments:                     Hot-rolled coil steel contracts Current portion of derivative assets   $ 550,240   Current portion of derivative liability   $ 51,320     All derivatives are presented on a gross basis on the Consolidated Balance Sheet.   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, 2021 :     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 purchases Current portion of derivative assets   $ 530,640             Hot-rolled coil steel contracts hedging sales Current portion of derivative assets   $ 91,760   Current portion of derivative liability   $ 7,890,700   Hot-rolled coil steel contracts hedging sales           Other non-current liabilities   $ 50,420                         Derivatives not designated as hedging instruments:                     Hot-rolled coil steel contracts           Current portion of derivative liability   $ 88,680     All derivatives are presented on a gross basis on the Consolidated Balance Sheet.   At September 30, 2021 , the Company reported $ 1,049,320  in "Other current assets" on its Consolidated Balance Sheet related to futures contracts for the month of  September 2021  that reached expiration but were pending cash settlement. At  March 31, 2021 , the Company reported $ 501,360 in "Accounts payable and accrued expenses" on its Consolidated Balance Sheet related to futures contracts for the month of March 2021  that had reached expiration but were pending cash settlement.    The notional amounts (quantities) of our cash flow hedges outstanding at September 30, 2021  consisted of 22,500  tons hedging sales with maturity dates ranging from January 2022  to December 2022.   9 Table of Contents   The following table summarizes the pre-tax 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 September 30, 2021:                   Hot-rolled coil steel contracts   $ 1,557,820   Sales   $ ( 3,086,780 )           Costs of goods sold     9,001,500   Total   $ 1,557,820       $ 5,914,720                       For the six months ended September 30, 2021:                   Hot-rolled coil steel contracts   $ ( 20,013,560 ) Sales   $ ( 8,184,800 )           Costs of goods sold     10,583,700   Total   $ ( 20,013,560 )     $ 2,398,900     The estimated amount of losses recognized in AOCI at September 30, 2021  expected to be reclassified into net earnings (loss) within the succeeding twelve months is $ 26,353,840 . This amount consists of $ 23,467,120 in realized losses associated with closed hedges and $ 2,886,720 associated with open hedges that was computed using the fair value of the cash flow hedges as of September 30, 2021 and is subject to change before actual reclassification from AOCI to net earnings (loss).   The following table summarizes the loss recognized in earnings for derivative instruments not designated as hedging instruments during the  three and six month periods ended September 30, 2021 :         Loss Recognized in Earnings     Location of Loss   for the Three Months Ended     Recognized in Earnings   September 30, 2021   Hot-rolled coil steel contracts Other income (loss), net   $ ( 6,830,780 )         Loss Recognized in Earnings     Location of Loss   for the Six Months Ended     Recognized in Earnings   September 30, 2021   Hot-rolled coil steel contracts Other income (loss), net   $ ( 8,219,740 )     The notional amount (quantity) of our derivative instruments not designated as hedging instruments at September 30, 2021 consisted of 9,160  tons of long positions with maturity dates ranging from October 2021 to  January  2022  and 3,440  tons of short positions with maturity dates ranging from October 2021 to December 2022.   The following table reflects the change in accumulated other comprehensive income (loss), net of tax, for the  six months ended September 30, 2021 :       Gain (Loss) on       Derivatives   Balance at March 31, 2021   $ ( 11,187,841 ) Other comprehensive loss, net of income, before reclassification     (15,178,284 ) Total loss reclassified from AOCI (1)     5,712,132   Net current period other comprehensive loss     (9,466,152 ) Balance at September 30, 2021   $ (20,653,993 )   ( 1 ) The loss reclassified from AOCI is presented net of taxes of $ 1,819,688   which are included in provision for (benefit from) income taxes on the Company's Consolidated Statement of Operations for the  six month period ended September 30, 2021 .   At  September 30, 2021  and  March 31, 2021 , cash of $ 4,158,248  and $ 12,001,485 , 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   September 30, 2021  and  March 31, 2021 . At September 30, 2021, the Company had a margin call position of $ 422,877 to further collateralize open derivative positions. This margin requirement was funded subsequent to quarter end.   The Company had no cash flow hedges during the three and six months ended September 30, 2020 , thus no AOCI or other comprehensive income or loss related to hedges.   10 Table of Contents     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  September 30, 2021 , 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   $ ( 2,835,400 )   $ —     $ —     $ ( 2,835,400 ) Total   $ ( 2,835,400 )   $ —     $ —     $ ( 2,835,400 )   At  March 31, 2021 , 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   $ ( 7,407,400 )   $ —     $ —     $ ( 7,407,400 ) Total   $ ( 7,407,400 )   $ —     $ —     $ ( 7,407,400 )   At  September 30, 2021  and  March 31, 2021 , the Company did not have any fair value measurements on a non-recurring basis.   11 Table of Contents     NOTE J — SEGMENT INFORMATION (in thousands)       Three Months Ended     Six Months Ended       September 30,     September 30,       2021     2020     2021     2020   Net sales                                 Coil   $ 78,324     $ 18,456     $ 131,019     $ 33,889   Tubular     14,247       6,406       27,468       14,497   Total net sales   $ 92,571     $ 24,862     $ 158,487     $ 48,386                                     Operating profit (loss)                                 Coil   $ 24,273     $ 751     $ 37,529     $ 291   Tubular     1,997       ( 344 )     4,598       ( 285 ) Total operating profit     26,270       407       42,127       6   General corporate expenses     1,866       718       3,742       1,452   Interest expense     72       6       96       12   Other income (loss), net     ( 6,840 )     4       ( 6,528 )     9   Total earnings (loss) before income taxes   $ 17,492     $ ( 313 )   $ 31,761     $ ( 1,449 )         September 30, 2021     March 31, 2021   Segment assets                 Coil   $ 112,826     $ 56,670   Tubular     17,399       17,884         130,225       74,554   Corporate assets     7,598       20,455       $ 137,823     $ 95,009     Operating profit is total net sales less operating expenses, excluding general corporate expenses, interest expense and other income (loss). 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 the three months ended September 30, 2021 consisted primarily of a $6,830,780 loss related to derivatives not designated for hedge accounting. Other income (loss) for the  six months ended September 30, 2021  consisted primarily of a $ 8,219,740  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 and the cash value of officers’ life insurance. Although inventory is transferred at cost between product groups, there are no sales between product groups.   12 Table of Contents     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 the manufacture, distribution and processing of steel pipe. Tubular segment revenue consists of three main product or service types: Manufactured Pipe, Mill Reject Pipe and Pipe Finishing Services. The Company did not generate any revenue from pipe finishing services during either of the three month or six month periods ended September 30, 2021 or September 30, 2020 . The pipe finishing facility is currently idled due to market conditions. The following table disaggregates our revenue by product for each of our reportable business segments for the three and six month periods ended  September 30, 2021 and 2020 , respectively:       Three Months Ended     Six Months Ended       September 30,     September 30,       2021     2020     2021     2020   Coil Segment:                                 Prime Coil     74,928,149       17,049,230       124,507,742       30,356,698   Non-standard Coil     3,028,787       1,201,135       5,851,990       3,142,138   Customer Owned Coil     366,991       205,721       658,925       390,034         78,323,927       18,456,086       131,018,657       33,888,870   Tubular Segment:                                 Manufactured Pipe     11,376,626       5,296,334       20,983,436       12,458,184   Mill Reject Pipe     2,870,342       1,109,260       6,485,241       2,039,226         14,246,968       6,405,594       27,468,677       14,497,410       NOTE L — STOCKHOLDERS’ EQUITY   The following tables reflect the changes in stockholders’ equity for each of the six month periods ended  September 30, 2021 and September 30, 2020 :               Accumulated                                               Other                                               Comprehensive     Additional                               Common     Loss,     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                 Accumulated                                               Other                                             Comprehensive     Additional                               Common     Income,     Paid-In     Treasury     Retained               Stock     Net of Tax     Capital     Stock     Earnings     Total   BALANCE AT MARCH 31, 2020   $ 8,295,160       —     $ 29,565,416     $ ( 5,525,964 )   $ 34,530,755     $ 66,865,367   Net loss     —       —       —       —       ( 858,862 )     ( 858,862 ) Issuance of restricted stock     11,000       —       (11,000)       —       —       —   Paid in capital – restricted stock awards     —       —       110,814       —       —       110,814   Cash dividends ($0.02 per share)     —       —       —       —       ( 143,229 )     ( 143,229 ) BALANCE AT JUNE 30, 2020   $ 8,306,160     $ —     $ 29,665,230     $ ( 5,525,964 )   $ 33,528,664     $ 65,974,090   Net loss     —       —       —       —       ( 250,005 )     ( 250,005 ) Paid in capital – restricted stock awards     —       —       110,813       —       —       110,813   Repurchase of shares     —       —       —       ( 410,221 )     —       ( 410,221 ) Cash dividends ($0.02 per share)     —       —       —       —       ( 143,181 )     ( 143,181 ) BALANCE AT SEPTEMBER 30, 2020   $ 8,306,160     $ —     $ 29,776,043     $ ( 5,936,185 )   $ 33,135,478     $ 65,281,496       13 Table of Contents     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 September  30,       2021       Before-Tax     Tax     Net-of-Tax                             Cash flow hedges   $ 5,573,820     $ ( 1,346,635 )   $ 4,227,185   Other comprehensive income (loss)   $ 5,573,820     $ ( 1,346,635 )   $ 4,227,185         Six  Months Ended September   30,       2021       Before-Tax     Tax Benefit     Net-of-Tax                             Cash flow hedges   $ ( 12,481,740 )   $ 3,015,588     $ ( 9,466,152 ) Other comprehensive income (loss)   $ ( 12,481,740 )   $ 3,015,588     $ ( 9,466,152 )   For the six month period ended September 30, 2020 , the Company did not have transactions to report in comprehensive income.     NOTE N — SUPPLEMENTAL CASH FLOW INFORMATION   The Company paid interest of approximately $ 96,000 during the six  months ended September 30, 2021 and $ 12,000  during the six  months ended September 30, 2020 . The Company paid income taxes of approximately $ 5,645,000 and $ 10,000 during the six  months ended September 30, 2021  and  September 30, 2020 , respectively.   At September 30, 2021 , the “Construction in process” balance of $5,994,357 consisted of $ 3,234,068 of accrued capital expenditures for which cash outlay had not occurred.     NOTE O — INCOME TAXES   For the six months ended September 30, 2021 , the Company recorded an income tax provision of $7,271,580, or 22.9 % of earnings before income taxes, compared to a tax benefit of $340,484, or 23.5 % of loss before income taxes for the six months ended September 30, 2020 .  Typically, the Company’s effective tax rate differs from the federal statutory rate due to the inclusion of state tax expenses or benefits in the provision. However, for the six months ended September 30, 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. For the six months ended September 30, 2020 , the effective tax rate differed from the federal statutory rate due primarily to the inclusion of state tax benefits in the provision.     14 Table of Contents     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; coil products and tubular products.   The coil product segment includes the operation of two hot-rolled coil processing facilities; one in Hickman, Arkansas and the other in Decatur, Alabama. The Hickman facility operates a temper mill and a cut-to-length line. The temper mill improves the flatness and surface qualities of the coils and the cut-to-length line levels the steel and cuts the coils into sheet and plate of prescribed lengths. The Hickman facility is capable of cutting sheet and plate with thicknesses ranging from 14 gauge to ½” thick in widths ranging from 36” wide to 72” wide. The Decatur facility underwent an equipment replacement project during our fiscal year ended March 31, 2021 and now operates a stretcher leveler cut-to-length line that was placed into service in March 2021. This new equipment expands the coil segment’s processing capabilities to include material up to 96” wide and material of higher grades and allows the Decatur facility to cut material that is up to ½” thick compared to the previous equipment’s capability of 5/16” thick. In addition, sheet and plate that has been stretcher leveled is preferable to some customers and applications compared to material that has been leveled through the temper mill process. The coil product segment sells its prime grade inventory under 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-owned coils on a fee basis.    On May 25, 2021, the Company announced plans for the construction of a new facility in Sinton, Texas that will be part of the coil product segment. The new facility will be on the campus of Steel Dynamics, Inc.'s ("SDI") new flat roll steel mill currently under construction in Sinton, Texas. The Company's new location will consist of an approximately 70,000 square foot building located on approximately 26.5 acres leased from SDI under a 99-year agreement. The lease agreement calls for an annual rental payment of $1. The Company has selected Red Bud Industries to build 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 Company expects the location to commence operations in April 2022 and estimates the total cost of the project to be $21 million. At  September 30, 2021 , the Company's construction in process related to the Sinton project was $5,994,357 consisting of $2,760,289 in cash payments and $3,234,068 of accrued capital expenditures. 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.  After an initial ramp up period during calendar 2022, the Company expects the facility’s annual shipments could be in the range of 110,000 tons to 140,000 tons for calendar 2023.   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 an API licensed pipe finishing facility that threads and couples oil country tubular goods and performs other services that are customary in the pipe finishing process. The pipe finishing facility is currently idled due to market conditions. TTP’s inventory consists of raw materials and finished goods. Raw material inventory consists of hot-rolled steel coils that TTP will manufacture into pipe. Finished goods inventory consists of pipe TTP has manufactured and new mill reject pipe that TTP purchased from U.S. Steel Tubular Products, Inc.   15 Table of Contents   Results of Operations   Six Months Ended September 30, 2021 Compared to Six Months Ended September 30, 2020   During the six months ended September 30, 2021 (the “ 2021 period”), sales, costs of goods sold and gross profit increased $110,101,054, $64,423,988 and $45,677,066, respectively, compared to the amounts recorded during the six months ended September 30, 2020 (the “ 2020 period”). The increase in sales was related to both an increase in the average per ton selling price and an increase in tons sold. Tons sold increased from approximately 81,500 tons for the 2020 period to approximately 108,500 tons for the 2021 period. Sales volume for the 2020 period was negatively impacted by both the initial effects of the COVID-19 pandemic and the removal of the processing equipment at the Decatur, AL facility for an equipment replacement project. For the 2021 period, sales volume recovered well from the initial pandemic decline and because the new Decatur equipment was operational. Discussion of the change in sales is expanded upon at the segment level in the following paragraphs. Gross profit increased from $1,347,851 for the 2020 period to $47,024,917 for the 2021 period. Gross profit as a percentage of sales increased from approximately 2.8% for the 2020 period to approximately 29.7% for the 2021 period. Gross profit for the 2021 period included $2,398,900 of recognized net gains associated with hedging activities while the 2020 period did not have any significant recognized hedging related gains or losses. Excluding the effect of hedging activities, gross profit related to physical material as a percentage of sales was approximately 26.8% for the 2021 period. Our operating results are significantly impacted by the market price of hot-rolled steel coil. The improved results for the  2021 period were driven by a historic rise in steel prices with prices for the 2021 period being approximately 245% higher than prices for the 2020 period. The impact of this rise in steel prices on each of our segments is discussed further in the following paragraphs.   Coil Segment   Coil product segment sales for the 2021 period totaled $131,018,657 compared to $33,888,870 for the 2020 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 of customer owned material. Coil segment sales for the 2021 period were reduced by $7,751,460 for the recognition of hedging related losses. Coil segment sales for the 2020 period were not impacted by any hedging related gains or losses. Sales generated from processing of customer owned material totaled $658,925 for the 2021 period compared to $390,034 for the 2020 period. Sales generated from coil segment inventory, excluding the impact of any hedging related gains or losses, totaled $138,111,192 for the 2021 period compared to $33,498,836 for the 2020 period. The average per ton selling price related to these shipments increased from approximately $556 per ton for the 2020 period to approximately $1,681 per ton for the 2021 period. Inventory tons sold increased from approximately 60,000 tons in the 2020 period to approximately 82,000 tons in the 2021 period. Sales volume for the 2020 period was significantly impacted by the onset of the COVID-19 pandemic with volume for the 2020 period being down approximately 21% compared to pre-pandemic average volumes for the fiscal year ended March 31, 2020 ("fiscal 2020"). Volume for the 2021 period was approximately 8% higher than pre-pandemic average volumes for fiscal 2020. Volume for the 2021 period benefitted from the new equipment at the Decatur facility being placed into service in March 2021. The prior equipment at the Decatur facility was removed during the 2020 period for the equipment replacement project. We have been pleased with the initial customer response to Decatur's new capabilities. Sales volume for the Decatur plant averaged approximately 2,800 tons per month for the 2021 period. Based on prior years with the prior equipment in place, the Decatur plant's average monthly sales volume was approximately 1,700 tons. The Decatur plant is currently staffed to operate a single shift with a monthly processing capability of approximately 5,500 tons based on operating a single shift. Coil segment operations recorded an operating profit of approximately $37,529,000 for the 2021  period compared to an operating profit of approximately $291,000 for the  2020 period. Operating results for the 2021 period benefitted from a significant increase in steel prices and associated improvement in our margins. Operating profit for the 2021 period includes recognized net profit on hedging activities of approximately $2,609,000 while the Company did not have any significant hedging related gains or losses affecting operating results for the  2020 period. The 2020 period was negatively impacted by low margins associated with declines in hot-rolled steel prices.   The Company’s coil 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 2021 period totaled $27,468,677 compared to $14,497,410 for the 2020 period. Sales increased due to both an increase in the volume sold and an increase in the average selling price per ton. 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 2021 period were reduced by $433,340 for the recognition of hedging related losses. Tubular segment sales for the 2020 period were not impacted by any hedging related gains or losses. Sales generated from tubular segment inventory, excluding the impact of any hedging related gains or losses, totaled $27,902,017 for the 2021 period compared to $14,497,410 for the 2020 period. The average per ton selling price related to these shipments increased from approximately $680 per ton in the 2020 period to approximately $1,060 per ton in the 2021 period. Tons sold increased from approximately 21,000 tons in the  2020 period to approximately 26,500 tons in the  2021 period. Sales volume for the 2020 period was significantly impacted by the onset of the COVID-19 pandemic with volume for the 2020 period being down approximately 26% compared to pre-pandemic average volumes for fiscal 2020. Volume for the 2021 period was approximately 4% lower than pre-pandemic average volumes for fiscal 2020. The tubular segment operations recorded operating profit of approximately $4,598,000 for the  2021 period compared to an operating loss of approximately $285,000 for the   2020 period. Operating results for the 2021 period benefitted from a significant increase in steel prices and associated improvement in our margins. Operating profit for the 2021 period includes recognized net losses on hedging activities of approximately $210,000 while the Company did not have any significant hedging related gains or losses affecting operating results for the  2020 period. The 2020 period was negatively impacted by low margins associated with declines in hot-rolled steel prices  and weak energy industry conditions.   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. In March 2020, U.S. Steel announced the idling of their Lone Star Tubular Operations which was our 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 September 30, 2021 , we had approximately 8,900 tons of mill reject inventory which we believe to be slightly less than one year of inventory. We expect the idling to have a negative impact on our operations as we eventually sell out of mill reject pipe inventory. For the 2021 period, sales of mill reject pipe totaled approximately $6,485,000 and accounted for approximately $2,393,000 of the tubular segment's operating profit for the period with approximately $805,000 of allocated operating, administrative and selling expenses included in the calculation of operating profit related to mill reject pipe. For the fiscal year ended March 31, 2021, sales of mill reject pipe totaled approximately $5,283,645 and accounted for approximately $1,313,000 of the tubular segment's operating profit for the period with approximately $802,000 of allocated operating, administrative and selling expenses included in the calculation of operating profit related to mill reject pipe.    16 Table of Contents   General, Selling and Administrative Costs   During the 2021 period, general, selling and administrative costs increased $5,846,523 compared to the 2020 period. The increase was related primarily to incentive compensation associated with increased earnings and professional fees.   Other Income   During the 2021 period, the Company reported other loss of $6,528,255. This loss consists primarily of a loss of $8,219,740 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.   Income Taxes   Income taxes increased from a benefit for the  2020 period of $340,484 to a provision for the  2021  period of $7,271,580. This increase was related primarily to the shift from a loss before taxes for the  2020 period to having earnings before tax for the  2021 period.   Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020   During the three months ended September 30, 2021 (the “ 2021 quarter”), sales, costs of goods sold and gross profit increased $67,709,215, $39,105,330 and $28,603,885, respectively, compared to the amounts recorded during the three months ended September 30, 2020 (the “ 2020 quarter”). The increase in sales was related to both an increase in the average per ton selling price and an increase in tons sold. Tons sold increased from approximately 43,000 tons in the 2020 quarter to approximately 54,500 tons in the 2021 quarter. Sales volume for the 2020 quarter was negatively impacted by both the initial effects of the COVID-19 pandemic and the removal of the processing equipment at the Decatur, AL facility for an equipment replacement project. For the 2021 quarter, sales volume had recovered well from the initial pandemic decline and because the new Decatur equipment was operational. Discussion of the change in sales is expanded upon at the segment level in the following paragraphs. Gross profit increased from $1,091,097 for the 2020 quarter to $29,694,982 for the 2021 quarter. Gross profit as a percentage of sales increased from approximately 4.4% in the 2020 quarter to approximately 32.1% in the 2021 quarter. Gross profit for the 2021 quarter included $5,914,720 in recognized net gains associated with hedging activities while the 2020 quarter did not have any significant recognized hedging related gains or losses. Excluding the impact of hedging activities, gross profit related to physical material as a percentage of sales was approximately 24.9% for the 2021 quarter. Our operating results are significantly impacted by the market price of hot-rolled steel coil. The improved results for the  2021 quarter were driven by a historic rise in steel prices with prices for the 2021 quarter being approximately 280% higher than prices for the 2020 quarter. The impact of this rise in steel prices on each of our segments is discussed further in the following paragraphs.   Coil Segment   Coil product segment sales for the 2021 quarter totaled $78,323,927 compared to $18,456,086 for the 2020 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 of customer owned material. Coil segment sales for the 2021 quarter were reduced by $3,065,780 for the recognition of hedging related losses. Coil segment sales for the 2020 quarter were not impacted by any hedging related gains or losses. Sales generated from processing of customer owned material totaled $366,991 for the 2021 quarter compared to $205,721 for the 2020 quarter. Sales generated from coil segment inventory, excluding the impact of any hedging related gains or losses, totaled $81,022,716 for the 2021 quarter compared to $18,250,365 for the 2020 quarter. The average per ton selling price related to these shipments increased from approximately $548 per ton in the 2020 quarter to approximately $1,884 per ton in the 2021 quarter. Inventory tons sold increased from approximately 33,000 tons in the 2020 quarter to approximately 43,000 tons in the 2021 quarter. Sales volume for the 2020 quarter was impacted by the onset of the COVID-19 pandemic with volume for the 2020 quarter being down approximately 13% compared to pre-pandemic average volumes for the fiscal year ended March 31, 2020 ("fiscal 2020"). Volume for the 2021 quarter was approximately 13% higher than pre-pandemic average volumes for fiscal 2020.Volume for the 2021 quarter benefitted from the new equipment at the Decatur facility being placed into service in March 2021. Coil segment operations recorded an operating profit of approximately $24,273,000 for the 2021  quarter compared to an operating profit of approximately $751,000 for the  2020 quarter. Operating results for the 2021 quarter benefitted from a significant increase in steel prices and associated improvement in our margins. Operating profit for the 2021 quarter includes recognized net gains on hedging activities of approximately $5,712,000 while the Company did not have any significant hedging related gains or losses affecting operating results for the  2020 quarter. The 2020 quarter was negatively impacted by low margins associated with declines in hot-rolled steel prices.   17 Table of Contents   The Company’s coil 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 2021 quarter totaled $14,246,968 compared to $6,405,594 for the 2020 quarter. Sales increased due to both an increase in the volume sold and an increase in the average selling price per ton. 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 2021 quarter were reduced by $21,000 for the recognition of hedging related losses. Tubular segment sales for the 2020 quarter were not impacted by any hedging related gains or losses. Sales generated from tubular segment inventory, excluding the impact of any hedging related gains or losses, totaled $14,267,968 for the 2021 quarter compared to $6,405,594 for the 2020 quarter. The average per ton selling price related to these shipments increased from approximately $634 per ton in the 2020 quarter to approximately $1,223 per ton in the 2021 quarter. Tons sold increased from approximately 10,000 tons in the  2020 quarter to approximately 11,500 tons in the  2021 quarter. Sales volume for the 2020 quarter was significantly impacted by the onset of the COVID-19 pandemic with volume for the 2020 quarter being down approximately 29% compared to pre-pandemic average volumes for fiscal 2020. Volume for the 2021 quarter was approximately 15% lower than pre-pandemic average volumes for fiscal 2020. The tubular segment recorded operating profit of approximately $1,997,000 for the  2021 quarter compared to an operating loss of approximately $344,000 for the   2020 quarter. Operating results for the 2021 quarter benefitted from a significant increase in steel prices and associated improvement in our margins. Operating profit for the 2021 quarter includes recognized net gains on hedging activities of approximately $203,000 while the Company did not have any significant hedging related gains or losses affecting operating results for the  2020 quarter. The 2020 quarter was negatively impacted by low margins associated with declines in hot-rolled steel prices  and weak energy industry conditions.   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. As disclosed previously, the Company is no longer supplied with mill reject pipe from U.S. Steel's Lone Star Tubular Operations due to the idling of that facility. At September 30, 2021 , we had approximately 8,900 tons of mill reject inventory which we believe to be slightly less than one year of inventory. We expect the idling to have a negative impact on our operations as we eventually sell out of mill reject pipe inventory.    General, Selling and Administrative Costs   During the 2021 quarter, general, selling and administrative costs increased $3,888,167 compared to the 2020 quarter. The increase was related primarily to incentive compensation associated with increased earnings and professional fees.   Other Income   During the 2021 quarter, the Company reported other loss of $6,840,317. This loss consists primarily of a $6,830,780 loss on derivative instruments not designated for hedge accounting.   Income Taxes   Income taxes increased from a benefit for the  2020 quarter of $62,716 to a provision for the  2021  quarter of $4,314,700. This increase was related primarily to the shift from a loss before taxes for the  2020 quarter to having earnings before tax for the  2021 quarter.   18 Table of Contents   FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES   The Company’s current ratio was 2.8 at September 30, 2021 and 2.7 at March 31, 2021 . Working capital was $72,227,764 at September 30, 2021 and $48,462,364 at March 31, 2021 .   During the six months ended September 30, 2021, 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. Accounts receivable, inventories and accounts payable increased significantly due primarily to the significant increase in steel prices. Inventories and accounts payable were also impacted by the timing of inventory receipts. Derivative liabilities are primarily associated with short positions on hot-rolled coil futures.  Cash decreased primarily from the Company's operating activities and from the purchase of property, plant and equipment partially offset by cash provided from 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 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 with the Bank that amends and restates the Interim Credit Facility and provides for asset-based revolving loans in an aggregate principal amount up to $40 million (the "ABL Facility"). The ABL Facility matures on May 19, 2026 and replaced the Interim Credit Facility. The ABL Facility is secured by substantially all of the assets of the Company and interest shall accrue on outstanding borrowings at a rate equal to LIBOR plus 1.7% per annum. More details regarding the ABL Facility may be found in Note D. As of the filing date of this Form 10-Q, the Company had borrowings of $11,758,879 outstanding under the ABL Facility and the Company had full access to 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. All of the derivatives designated for hedge accounting during the three month and six month periods ended September 30, 2021 were classified as cash flow hedges. From time to time, the Company may also transact futures contracts where hedge accounting is not elected. The Company recognized gains related to derivatives designated for hedge accounting of $5,914,720 and $2,398,900 for the three month and six month periods ended September 30, 2021, respectively. The Company recognized losses related to derivatives not designated for hedge accounting of $6,830,780 and $8,219,740 for the three month and six month periods ended September 30, 2021, respectively. See Note H for further information.   OUTLOOK   The Company expects margins to decline slightly during its fiscal third quarter ending December 31, 2021 but to remain at a level well above historical average margins. A modest decline in sales volume is expected due to a combination of typical demand seasonality around the holidays and customer hesitancy with steel prices showing decline in the third quarter. The Company also expects to reclassify a loss of approximately $14,717,000 into earnings during the third quarter related to derivatives designated for hedge accounting.   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 include forecasted purchases of hot-rolled coil and forecasted sales of prime coil inventory and manufactured pipe inventory in relation to hedging activities and the fair value of the pipe-finishing facility, when impaired. From time to time, the Company hedges these forecasted purchases and sales and may designate those transactions for hedge accounting. If the actual volume of these purchases and sales differs from the forecasted volumes, it may impact the application of hedge accounting related to those transactions and may disallow the use of hedge accounting on a go forward basis. Determination of forecasted purchases of hot-rolled coil and forecasted sales of prime coil inventory and manufactured pipe inventory require the Company 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 facility and estimates related to the replacement cost and value in exchange for the assets. Actual results could differ from these estimates.   19 Table of Contents   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 and our expectations for the construction and performance of our new Sinton, TX facility. 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 internal control over financial reporting was 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 weakness previously identified and disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2021.   Notwithstanding the identified material weakness, 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 six month periods ended September 30, 2021 and 2020 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, 2021, management, in connection with our independent auditors, identified a material weakness in our controls related to the review of the annual income tax provision prepared by a third-party firm. Specifically, we did not maintain effective controls to sufficiently review the completeness and accuracy of the annual tax provision.   20 Table of Contents   Plan for Remediation of Material Weakness   Our Company is relatively small with 106 e mployees as of the filing date of this Quarter Report on Form 10-Q. Our accounting and finance team consisted of two degreed accountants as of March 31, 2021. Leading up to, and during the financial statement audit period, considerable time was expended by our accounting and finance team to finalize the ABL facility and to select our general contractor and equipment manufacturer related to our planned new facility in Sinton, Texas and to finalize contracts with such parties. This resulted in the Company falling behind in the timeline necessary to complete the audit process and regulatory filings in a timely manner. In an effort to meet regulatory deadlines, the Company did not perform a sufficient review of third-party materials. The Company concludes that the best remediation of the material weakness is an investment in human capital that will allow it to meet its regulatory requirements and growth objectives. On May 24, 2021, the Company hired an additional degreed accountant. The timing of this hire in relation to the audit process made it difficult for the hire to have a beneficial impact on the process related to our fiscal year end March 31, 2021. However, the Company believes the investment in human capital will provide sufficient remediation in future periods and the Company will continue to evaluate the appropriate level of staffing to ensure the controls over financial reporting are adhered to and the Company can meet its regulatory requirements in a timely manner.   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 described above will remediate the material weakness the Company has identified. However, this material weakness 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 September 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.   21 Table of Contents   FRIEDMAN INDUSTRIES, INCORPORATED Three Months Ended September 30, 2021   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.         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.       104 — Cover Page Interactive File (formatted as Inline XBRL and contained in Exhibit 101)   22 Table of Contents     SIGNATURES   Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.       FRIEDMAN INDUSTRIES, INCORPORATED         Date: November 19 , 2021   By /s/    ALEX LARUE               Alex LaRue, Chief Financial Officer – Secretary and Treasurer (Principal Financial Officer)   23