frd20230930_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED September 30, 2023

☐	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 14, 2023, the number of shares outstanding of the issuer’s only class of stock was 7,375,282 shares of Common Stock.

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TABLE OF CONTENTS


Part I — FINANCIAL INFORMATION	3
Item 1. Financial Statements	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3. Quantitative and Qualitative Disclosures About Market Risk	21
Item 4. Controls and Procedures	21
Part II — OTHER INFORMATION	23
Item 6. Exhibits	23
SIGNATURES	24

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Part I — FINANCIAL INFORMATION

Item 1. Financial Statements

FRIEDMAN INDUSTRIES, INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS — UNAUDITED

(In thousands, except for share data)

	*SEPTEMBER 30, 2023*			*MARCH 31, 2023*
ASSETS
CURRENT ASSETS:
Cash	$	3,152		$	2,992
Accounts receivable, net of allowances for bad debts of $138 and $183 at September 30, and March 31, 2023, respectively		52,326			49,367
Inventories		104,501			86,246
Current portion of derivative assets		692			536
Other current assets		4,491			4,515
TOTAL CURRENT ASSETS		165,162			143,656
PROPERTY, PLANT AND EQUIPMENT:
Land		1,670			1,670
Buildings and yard improvements		28,625			28,550
Machinery and equipment		51,040			51,001
Construction in process		3,914			1,167
Less accumulated depreciation		(29,914	)		(28,455	)
		55,335			53,933
OTHER ASSETS:
Cash value of officers’ life insurance and other assets		411			453
Operating lease right-of-use asset		1,219			1,270
TOTAL ASSETS	$	222,127		$	199,312
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses	$	29,414		$	36,847
Income taxes payable		1,902			774
Dividends payable		148			148
Contribution to retirement plan		—			350
Employee compensation and related expenses		3,320			4,650
Current portion of financing lease		108			107
Current portion of derivative liability		400			2,212
TOTAL CURRENT LIABILITIES		35,292			45,088
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS		101			96
DEFERRED INCOME TAX LIABILITY		4,425			4,357
OTHER NON-CURRENT LIABILITIES		1,139			1,222
ASSET BASED LENDING FACILITY		54,361			33,117
TOTAL LIABILITIES		95,318			83,880
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Common stock, par value $1: Authorized shares — 10,000,000; Issued shares — 8,868,716 shares at September 30, and March 31, 2023		8,869			8,869
Additional paid-in capital		35,161			35,005
Accumulated other comprehensive loss		—			(317	)
Treasury stock at cost (1,493,434 shares and 1,493,128 shares at September 30, and March 31, 2023, respectively)		(7,781	)		(7,778	)
Retained earnings		90,560			79,653
TOTAL STOCKHOLDERS’ EQUITY		126,809			115,432
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	222,127		$	199,312

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

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FRIEDMAN INDUSTRIES, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS — UNAUDITED

(In thousands, except per share data)

	*THREE MONTHS ENDED*						*SIX MONTHS ENDED*
	*SEPTEMBER 30,*						*SEPTEMBER 30,*
	*2023*			*2022*			*2023*			*2022*
Net Sales	$	130,748		$	149,692		$	268,046		$	311,495
Costs and expenses:
Costs of products sold		124,927			145,014			245,896			288,145
Selling, general and administrative		4,766			4,607			10,738			10,960
		129,693			149,621			256,634			299,105
EARNINGS FROM OPERATIONS		1,055			71			11,412			12,390
Gain on economic hedges of risk		4,402			3,749			4,832			6,504
Interest expense		(805	)		(621	)		(1,345	)		(1,051	)
Other income		10			7			16			20
EARNINGS BEFORE INCOME TAXES		4,662			3,206			14,915			17,863
Provision for (benefit from) income taxes:
Current		1,165			750			3,745			4,238
Deferred		(16	)		(15	)		(33	)		(30	)
		1,149			735			3,712			4,208
NET EARNINGS	$	3,513		$	2,471		$	11,203		$	13,655

Net earnings per share:
Basic	$	0.48		$	0.34		$	1.52		$	1.88
Diluted	$	0.48		$	0.34		$	1.52		$	1.88
Cash dividends declared per common share	$	0.02		$	0.02		$	0.04		$	0.04

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME — UNAUDITED

(In thousands)

	*THREE MONTHS ENDED*				*SIX MONTHS ENDED*
	*SEPTEMBER 30,*				*SEPTEMBER 30,*
	*2023*		*2022*		*2023*		*2022*
Net earnings	$	3,513	$	2,471	$	11,203	$	13,655
Other comprehensive income:
Cash flow hedges, net of tax		—		1,578		317		8,752
		—		1,578		317		8,752
Comprehensive income	$	3,513	$	4,049	$	11,520	$	22,407

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

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FRIEDMAN INDUSTRIES, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED

(In thousands)

	*SIX MONTHS ENDED SEPTEMBER 30,*
	*2023*			*2022*
OPERATING ACTIVITIES
Net earnings	$	11,203		$	13,655
Adjustments to reconcile net earnings to cash provided by (used in) operating activities:
Depreciation and amortization		1,531			1,173
Deferred taxes		(33	)		(31	)
Compensation expense for restricted stock		156			146
Change in postretirement benefits		4			5
Gain recognized on open derivatives not designated for hedge accounting		(1,969	)		(1,073	)
Deferred realized gain on derivatives		418			1,552
Decrease (increase) in operating assets, net of amounts acquired in business combination:
Accounts receivable		(2,958	)		(18,272	)
Inventories		(18,256	)		56,899
Federal income taxes recoverable		—			1,403
Other current assets		(2,369	)		304
Increase (decrease) in operating liabilities, net of amounts acquired in business combination:
Accounts payable and accrued expenses		(7,411	)		(6,022	)
Income taxes payable		1,128			2,241
Contribution to retirement plan		(350	)		13
Employee compensation and related expenses		(1,330	)		2,657
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		(20,236	)		54,650
INVESTING ACTIVITIES
Plateplus business combination		—			(71,720	)
Purchase of property, plant and equipment		(2,883	)		(7,194	)
Increase in cash surrender value of officers’ life insurance		(7	)		(7	)
NET CASH USED IN INVESTING ACTIVITIES		(2,890	)		(78,921	)
FINANCING ACTIVITIES
Debt issuance cost		—			(394	)
Cash dividends paid		(295	)		(295	)
Cash paid for principal portion of finance lease		(53	)		(52	)
Cash paid for share repurchases		(4	)		(29	)
Asset based lending facility proceeds		21,244			17,783
NET CASH PROVIDED BY FINANCING ACTIVITIES		20,892			17,013
DECREASE IN CASH AND RESTRICTED CASH		(2,234	)		(7,258	)
CASH AND RESTRICTED CASH AT BEGINNING OF PERIOD		5,386			16,122
CASH AND RESTRICTED CASH AT END OF PERIOD	$	3,152		$	8,864

Cash and restricted cash at March 31, 2023 included approximately $2.4 million of cash required to collateralize open derivative positions. This amount is reported in "Other current assets" on the Company's consolidated balance sheet at March 31, 2023. The Company had approximately $2.2 million in restricted cash at September 30, 2022. The Company did not have any restricted cash as of September 30, 2023.

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

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FRIEDMAN INDUSTRIES, INCORPORATED

CONDENSED NOTES TO QUARTERLY REPORT — UNAUDITED

NOTE A — BASIS OF PRESENTATION

The accompanying unaudited, condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and footnotes of Friedman Industries, Incorporated (the “Company”) included in its annual report on Form 10-K for the year ended March 31, 2023.

Business Combinations

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

Reclassifications

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

NOTE B — BUSINESS COMBINATIONS

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

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

The Transaction was accounted for using the acquisition method of accounting, in accordance with Topic 805, Business Combinations, whereby the consideration transferred and the acquired identifiable assets and liabilities assumed are recorded at their respective fair values. The excess of the consideration transferred over the fair values of these identifiable net assets is recorded as goodwill. The Transaction resulted in no residual goodwill.

*Fair value of assets acquired and liabilities assumed (in thousands)*
Inventory	$	77,546
Property, plant and equipment		18,022
Operating lease right of use asset		1,237
Accounts payable		(19,065	)
Operating lease liability		(1,237	)
Total	$	76,503

The Company recorded one-time transaction specific costs of approximately $0.5 million and $1.2 million in the three and six months ended September 30, 2023, respectively, as a component of "Selling, general and administrative" expenses on the condensed consolidated statement of operations.

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NOTE C — INVENTORIES

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

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

	*September 30, 2023*		*March 31, 2023*
Prime Coil Inventory	$	91,832	$	75,917
Non-Standard Coil Inventory		559		278
Tubular Raw Material		5,541		5,193
Tubular Finished Goods		6,569		4,858
	$	104,501	$	86,246

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

NOTE D – DEBT

The Company has a $150 million asset-based lending facility ("ABL Facility") in place with JPMorgan Chase Bank, N.A. as the arranging agent and BMO Harris Bank, N.A. as a one-third syndicated participant. The ABL Facility matures on May 19, 2026 and is secured by substantially all of the assets of the Company. The Company can elect borrowings on a floating rate basis or a term basis. Floating rate borrowings accrue interest at a rate equal to the prime rate minus 1% per annum. Term rate borrowings accrue interest at a rate equal to the SOFR rate applicable to the selected term plus 1.8% per annum. Availability of funds under the ABL Facility is subject to a borrowing base calculation determined as the sum of (a) 90% of eligible accounts receivable, plus (b) the product of 85% multiplied by the net orderly liquidating value percentage identified in the most recent inventory appraisal multiplied by eligible inventory. The ABL Facility contains a springing financial covenant whereby the financial covenant is only tested when availability falls below the greater of 15% of the revolving commitment or $22.5 million. The financial covenant restricts the Company from allowing its fixed charge coverage ratio to be, as of the end of any calendar month, less than 1.10 to 1.00 for the trailing twelve-month period then ending. The fixed charge coverage ratio is calculated as the ratio of (a) EBITDA, as defined in the ABL Facility, minus unfinanced capital expenditures to (b) cash interest expense plus scheduled principal payments on indebtedness plus taxes paid in cash plus restricted payments paid in cash plus capital lease obligation payments plus cash contributions to any employee pension benefit plans. The ABL Facility contains other representations and warranties and affirmative and negative covenants that are usual and customary. If certain conditions precedent are satisfied, the ABL facility may be increased by up to an aggregate of $25 million, in minimum increments of $5 million. At September 30, 2023, the Company had a balance of approximately $54.4 million under the ABL Facility with an applicable interest rate of 7.5%. At September 30, 2023, the Company's applicable borrowing base calculation supported access to approximately $119.3 million of the ABL Facility.

The Company incurred debt issuance costs of approximately $0.4 million in connection with the ABL Facility. The Company recorded these debt issuance costs as non-current other assets and is amortizing these costs on an equal monthly basis over the remaining term of the ABL facility.

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NOTE E — LEASES

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

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

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

	*Three Months Ended*				*Six Months Ended*
	*September 30,*				*September 30,*
	*2023*		*2022*		*2023*		*2022*
Finance lease – amortization of ROU asset	$	26	$	26	$	52	$	52
Finance lease – interest on lease liability		1		1		2		2
Operating lease expense		34		34		68		61
	$	61	$	61	$	122	$	115

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

	*September 30, 2023*		*March 31, 2023*		*Balance Sheet Classification*
Assets
Operating lease right-of-use asset	$	1,219	$	1,270	Operating lease right-of-use asset
Finance lease right-of-use asset		417		430	Property, plant & equipment
Total right-of-use assets	$	1,636	$	1,700
Liabilities
Operating lease liability, current	$	80	$	101	Accrued expenses
Finance lease liability, current		108		107	Current portion of finance lease
Operating lease liability, non-current		1,139		1,168	Other non-current liabilities
Finance lease liability, non-current		—		54	Other non-current liabilities
Total lease liabilities	$	1,327	$	1,430

As of September 30, 2023, the weighted-average remaining lease term was 19.4 years for operating leases and 1.0 years for finance leases. The weighted average discount rate was 2.6% for operating leases and 1.9% for finance leases.

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

	*Operating Leases*			*Finance Leases*
Fiscal 2024 (remainder of fiscal year)		67			55
Fiscal 2025		80			54
Fiscal 2026		75			—
Fiscal 2027		75			—
Fiscal 2028 and beyond		1,237			—
Total undiscounted lease payments	$	1,534		$	109
Less: imputed interest		(315	)		(1	)
Present value of lease liability	$	1,219		$	108

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NOTE F — PROPERTY, PLANT AND EQUIPMENT

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

At September 30, 2023, the Company's construction in process balance of approximately $3.9 million consisted primarily of projects at the Decatur, AL facility which include approximately $1.2 million associated with a building expansion, $1.1 million associated with upgrading a component of the processing line and $0.5 million associated with expansion of the storage yard. The total of the three projects is estimated to cost $4.4 million with completion expected during the March 31, 2024 quarter. The remaining construction in process balance is comprised of several smaller projects.

NOTE G — STOCK BASED COMPENSATION

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

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

				*Weighted Average*
	*Number of Shares*			*Grant Date Fair Value Per Share*
Unvested at March 31, 2023		100,366		$	6.08
Cancelled or forfeited		—			—
Granted		—			—
Vested		(14,000	)		4.32
Unvested at September 30, 2023		86,366		$	6.37

The Company measures compensation expense for RSUs at the market price of the common stock as of the grant date. Compensation expense is recognized over the requisite service period applicable to each award. The Company recorded compensation expense of approximately $0.2 million and $0.1 million in the six months ended September 30, 2023 and 2022, respectively, relating to the RSUs issued under the Plan. As of September 30, 2023, unrecognized compensation expense related to unvested RSUs was approximately $0.2 million which is expected to be recognized over a weighted average period of approximately 1.2 years. As of September 30, 2023, a total of 122,485 shares were still available to be issued under the Plan.

NOTE H — DERIVATIVE FINANCIAL INSTRUMENTS

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

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

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

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

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

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

During the six months ended September 30, 2023 and 2022, the Company 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 for these periods.

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

	*Asset Derivatives*			*Liability Derivatives*
	*Balance Sheet*			*Balance Sheet*
Derivatives not designated as hedging instruments:	*Location*	*Fair Value*		*Location*	*Fair Value*
Hot-rolled coil steel contracts	Current portion of derivative assets	$	692	Current portion of derivative liability	$	400

	*Asset Derivatives*			*Liability Derivatives*
	*Balance Sheet*			*Balance Sheet*
Derivatives not designated as hedging instruments:	*Location*	*Fair Value*		*Location*	*Fair Value*
Hot-rolled coil steel contracts	Current portion of derivative assets	$	536	Current portion of derivative liability	$	2,212

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

At September 30, 2023 and March 31, 2023, the Company reported approximately $3.0 million and $1.6 million, respectively, in "Other current assets" on its Consolidated Balance Sheet related to futures contracts which were closed but were pending cash settlement.

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

	*Pre-Tax Gain Recognized in OCI*		*Location of Loss Reclassified from AOCI into Net Earnings*	*Pre- Tax Loss Reclassified from AOCI into Net Earnings*
For the three months ended September 30, 2023:
Hot-rolled coil steel contracts	$	—	*Sales*	$	—
Total	$	—		$	—

For the three months ended September 30, 2022:
Hot-rolled coil steel contracts	$	590	*Sales*	$	(1,490	)
Total	$	590		$	(1,490	)

For the six months ended September 30, 2023:
Hot-rolled coil steel contracts	$	—	*Sales*	$	(418	)
Total	$	—		$	(418	)

For the six months ended September 30, 2022:
Hot-rolled coil steel contracts	$	9,424	*Sales*	$	(2,117	)
Total	$	9,424		$	(2,117	)

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

		*Gain Recognized in Earnings*
	*Location of Gain*	*for the Three Months Ended*
	*Recognized in Earnings*	*September 30, 2023*
Hot-rolled coil steel contracts	Gain on economic hedges of risk	$	4,402

		*Gain Recognized in Earnings*
	*Location of Gain*	*for the Six Months Ended*
	*Recognized in Earnings*	*September 30, 2023*
Hot-rolled coil steel contracts	Gain on economic hedges of risk	$	4,832

		*Gain Recognized in Earnings*
	*Location of Gain*	*for the Three Months Ended*
	*Recognized in Earnings*	*September 30, 2022*
Hot-rolled coil steel contracts	Gain on economic hedges of risk	$	3,749

		*Gain Recognized in Earnings*
	*Location of Gain*	*for the Six Months Ended*
	*Recognized in Earnings*	*September 30, 2022*
Hot-rolled coil steel contracts	Gain on economic hedges of risk	$	6,504

The notional amount (quantity) of our derivative instruments not designated as hedging instruments at September 30, 2023 consisted of 22,100 tons of short positions with maturity dates ranging from October 2023 to June 2024.

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

	*Gain (Loss) on*
	*Derivatives*
Balance at March 31, 2023	$	(317	)
Other comprehensive income, net of loss, before reclassification		—
Total loss reclassified from AOCI (1)		317
Net current period other comprehensive income		317
Balance at September 30, 2023	$	—

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

	*Gain (Loss) on*
	*Derivatives*
Balance at March 31, 2022	$	(10,269	)
Other comprehensive income, net of loss, before reclassification		7,147
Total loss reclassified from AOCI (1)		1,606
Net current period other comprehensive income		8,753
Balance at September 30, 2022	$	(1,516	)

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

At March 31, 2023, cash of approximately $2.4 million was held by our clearing agent to collateralize our open derivative positions. The cash requirement is included in "Other current assets" on the Company's Consolidated Balance Sheet at March 31, 2023. The Company did not have any restricted cash as of September 30, 2023.

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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:

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SEC Form 10-Q filed by Friedman Industries Inc.