FRIEDMAN INDUSTRIES INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview Friedman Industries, Incorporated is a manufacturer and processor of metals and operates in two reportable segments: flat-roll products and tubular products. The flat-roll product segment consists of flat-roll processing facilities located in Hickman, Arkansas; Decatur, Alabama; Miami, Florida; East Chicago, Indiana; Granite City, Illinois and Sinton, Texas and a flat-roll distribution facility located in Orlando, Florida. The Hickman, Granite City and East Chicago facilities operate temper mills and cut-to-length lines. The Decatur and Sinton facilities operate stretcher leveler cut-to-length lines. The Miami facility operates a corrective leveling cut-to-length line and a coil slitting line. The processing equipment improves the quality of the material and cuts the material into sheet, plate or slit coil. On a combined basis, the facilities are capable of cutting sheet and plate with thicknesses ranging from 30 gauge to 1” thick in widths ranging from 11” wide to 96” wide. The flat-roll segment is able to produce slit coil with thickness ranging from 32 gauge to 10 gauge in widths ranging from 1/2" wide to 60" wide. The vast majority of flat-roll product segment revenue is generated from sales of Company owned inventory but the segment also generates revenue from the processing or storage of customer owned material on a fee basis. The tubular product segment consists of the Company’s Texas Tubular Products division (“TTP”) located in Lone Star, Texas. TTP operates two electric resistance welded pipe mills with a combined outside diameter (“OD”) size range of 2 3/8” OD to 8 5/8” OD. Both pipe mills are American Petroleum Institute (“API”) licensed to manufacture line pipe and oil country pipe and also manufacture pipe for structural purposes that meets other recognized industry standards. All of the tubular segment's revenue is generated from sales of Company owned inventory. Results of Operations Nine Months Ended December 31, 2025 Compared to Nine Months Ended December 31, 2024 During the nine months ended December 31, 2025 (the “ 2025 period”), sales, cost of materials sold and adjusted gross profit increased approximately $139.8 million, $106.1 million and $33.7 million, r espectively, compared to the amounts recorded during the nine months ended December 31, 2024 (the “ 2024 period”). Adjusted gross profit is a non-GAAP measure calculated as sales minus c ost of materials sold. The increase in sales was primarily due to an increase in sales volume. Sales volume for the 2025 period consisted of approximately 458,000 tons from inventory and another 59,000 to ns of toll processing customer owned material compared to the 2024 period volume consisting of approximately 353,000 tons from inventory and 60,000 tons of toll processing. Same facility year-over-year growth accounted for approximately 89,500 tons of the sales volume increase and the acquisition of Century Metals & Supplies contributed approximately 14,500 tons. Adjusted gross profit was approximately $85.9 million for the 2025 period compared to approximately $52.2 million for the 2024 period. Adjusted gross profit as a percentage of sales was approximately 18.9% for the 2025 period compared to approximately 16.6% for the 2024 period. Our operating results are significantly impacted by the market prices of the metals we purchase. Most of the Company's revenue is generated from the processing of hot-rolled steel coil ("HRC") or derivative products from HRC. Entering the 2025 period, HRC price had reached the top of a price cycle. Prices declined approximately 15% from April 2025 until October 2025 when prices increased approximately 14% by the end of the 2025 period. As a result, the Company experienced stronger margins at the start of the 2025 period which then tapered off until slight margin improvement to conclude the 2025 period. Entering the 2024 period, HRC price was on a predominately declining trend dropping approximately 40% from January 2024 through the middle of August 2024. From August 2024 to the end of the 2024 period, HRC price remained relatively stable. As a result, the Company experienced compressed physical margins throughout the 2024 period. The Company utilizes HRC futures, options and swaps to partially manage exposure to commodity price risk. The Company recognized hedging related gains of approximately $2.5 million in the 2025 period compared to hedging related gains of approximately $5.8 million in the 2024 period. Flat-roll Segment Flat-roll product segment sales for the 2025 period totaled approximately $420.4 million compared to approximately $286.9 million for the 2024 period. For a more complete understanding of the average selling prices of goods sold, it is helpful to exclude any sales generated from processing or storage of customer owned material. Sales generated from processing or storage of customer owned material totaled approximately $3.9 million for the 2025 period and approximately $3.7 million for the 2024 period. Sales generated from flat-roll segment inventory totaled approximately $416.5 million for the 2025 period compared to approximately $283.2 million for the 2024 period. The average per ton selling price related to these shipments increased from approximately $868 per ton in the 2024 period to approximately $970 per ton in the 2025 period. Sales volume for the 2025 period consisted of approximately 429,000 tons from inventory and another 59,000 tons of toll processing customer owned material compared to the 2024 period volume consisting of approximately 326,000 tons from inventory and 60,000 tons of toll processing. The increase in sales volume for the 2025 period was related to a combination of stronger demand among some customers, successful commercial efforts to increase capacity utilization and the acquisition of Century. Flat-roll segment operations recorded earnings from operations of approximately $21.8 million and $6.6 million for the 2025 period and 2024 period, respectively. 15 Table of Contents The Company’s flat-roll 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 2025 period totaled approximately $34.7 million compared to approximately $28.5 million for the 2024 period. Sales increased due to a combination of sales volume growth and an increase in the average selling price per ton. Tons sold increased from approximately 26,500 tons in the 2024 period to approximately 29,000 tons in the 2025 period. The average per ton selling price increased from approximately $1,065 per ton for the 2024 period to approximately $1,198 per ton for the 2025 period. The tubular segment recorded earnings from operations of approximat ely $3.6 million for t he 2025 period compared to a loss from operations of approximately $2.0 million for the 2024 period. 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. General, Selling and Administrative Costs During the 2025 period, selling, general and administrative costs increased approximately $6.6 million compared to the 2024 period. This increase was driven by $1.3 million of one-time, non-recurring transaction costs associated with the acquisition of Century, as well as $1.7 million of additional ongoing expenses related to the operation of Century. The remaining increase was primarily attributable to an increase in personnel to support sales growth and execution of our strategic initiatives, along with increased incentive compensation resulting from improved profitability compared to the 2024 period. Income Taxes Income taxes increased from a provision for the 2024 period of approximately $0.1 million to a provision for the 2025 period of approximately $3.3 million. This increase was primarily related to increased earnings before taxes for the 2025 period. The income tax provision as a percentage of earnings before tax was approximately 24.3% and 12.4% for the nine months ended December 31, 2025 and 2024, respectively. For the 2025 period , the effective tax rate differed from the federal statutory rate due primarily to the inclusion of state tax expenses in the provision. For the 2024 period , the effective tax rate differed from the federal statutory rate due primarily to the tax effect of restricted stock vesting during the period with this impact partially reduced by the inclusion of state tax expenses in the provision. Three Months Ended December 31, 2025 Compared to Three Months Ended December 31, 2024 During the three months ended December 31, 2025 (the “ 2025 quarter”), sales, cost of materials sold and adjusted gro ss profit increased approximately $73.9 million, $59.0 million and $14.9 million, respectively, compared to the amounts recorded during the three months ended December 31, 2024 (the “2024 quarter”). Adjusted gross profit is a non-GAAP measure calculated as sales minus cost of materials sold. The increase in sales was primarily due to an increase in sales volume. Sales volume for the 2025 quarter consisted of approximately 162,000 tons from inventory and another 15,500 tons of toll pr ocessing customer owned material compared to the 2024 quarter volume consisting of approximately 112,500 tons from inventory and 18,000 tons of toll processing. Same facility year-over-year growth accounted for approximately 36,000 tons of the sales volume increase and the acquisition of Century Metals & Supplies contributed approximately 11,000 tons. Adjusted gross profit was approximately $30.5 million for the 2025 quarter compared to approximately $15.6 million for the 2024 quarter. Adjusted gross profit as a percentage of sales was approximately 18.2% for the 2025 quarter compared to approximately 16.5% for the 2024 quarter. Our operating results are significantly impacted by the market prices of the metals we purchase. Most of the Company's revenue is generated from the processing of hot-rolled steel coil ("HRC") or derivative products from HRC. HRC price was on a declining trend entering the 2025 quarter but stabilized during October 2025 and increased approximately 11% to end the 2025 quarter. As a result, the Company experienced slight margin improvement at the conclusion of the 2025 quarter. Entering the 2024 quarter, HRC price had reached the bottom of a price cycle after a prolonged decline and remained relatively stable near the bottom during the 2024 quarter. As a result, the Company experienced compressed margins throughout the 2024 quarter. The Company utilizes HRC futures, options and swaps to partially manage exposure to commodity price risk. The Company recognized hedging related gains of approximately $1.4 million and $0.3 million in the 2025 and 2024 quarters, respectively. 16 Table of Contents Flat-roll Segment Flat-roll product segment sales for the 2025 quarter totaled approximately $153.0 million compared to approximately $86.1 million for the 2024 quarter. For a more complete understanding of the average selling prices of goods sold, it is helpful to exclude any sales generated from processing or storage of customer owned material. Sales generated from processing or storage of customer owned material totaled approximately $1.1 million for the 2025 quarter and approximately $1.0 million for the 2024 quarter. Sales generated from flat-roll segment inventory totaled approximately $151.9 million for the 2025 quarter compared to approximately $85.1 million for the 2024 quarter. The average per ton selling price related to these shipments increased from approximately $813 per ton in the 2024 quarter to approximately $1,016 per ton in the 2025 quarter. Sales volume for the 2025 quarter consisted of approxi mately 149,500 tons from inventory and another 15,500 tons of toll processing customer owned material compared to the 2024 quarter volume consisting of approximately 105,000 tons from inventory and 18,000 tons of toll processing. The increase in sales volume for the 2025 quarter was related to a combination of stronger demand among some customers, successful commercial efforts to increase capacity utilization and the acquisition of Century. Flat-roll segment operations recorded earnings from operations of approximately $7.3 million and $1.3 million for the 2025 quarter and 2024 quarter, respectively. The Company’s flat-roll 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 2025 quarter totaled approximately $14.9 million compared to approximately $7.9 million for the 2024 quarter. Sales increased due to a combination of sales volume growth and an increase in the average selling price per ton. Tons sold increased from approximately 8,000 tons in the 2024 quarter to approximately 12,500 tons in 2025 quarter. The average per ton selling price increased from approximately $1,013 per ton for the 2024 quarter to approximately $1,201 per ton for the 2025 quarter. The tubular segment recorded earnings from operations of approxi mately $1.4 million for t he 2025 quarter compared to a loss from operations of approximately $0.2 million for the 2024 quarter. 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. General, Selling and Administrative Costs During the 2025 quarter, selling, general and administrative costs increased approximately $3.3 million compared to the 2024 quarter. This increase was driven by $1.4 million of additional ongoing expenses related to the operation of Century, as well as $0.2 million of one-time, non-recurring transaction costs associated with the acquisition. The remaining increase was primarily attributable to an increase in personnel to support sales growth and execution of our strategic initiatives, along with increased incentive compensation resulting from improved profitability compared to the 2024 quarter. Income Taxes Income taxes increased from a benefit for the 2024 quarter of approximately $0.4 million to a provision for the 2025 quarter of approximat ely $1.0 million. This increase was primarily related to increased earnings before taxes for the 2025 quarter. The income tax provision or benefit as a percentage of earnings before tax was approximately 24.0% and 25.7% for the 2025 quarter and 2024 quarter, respectively. For both quarters, the effective tax rate differed from the federal statutory rate due primarily to the inclusion of state tax expenses in the provision. Non-GAAP Information The non-GAAP measure adjusted gross profit is used in this Management's Discussion and Analysis. Adjusted gross profit is calculated as sales minus cost of materials sold. Cost of materials sold is a discrete line on our statements of operations and represents the cost associated with purchased metals, inbound freight, transfer freight and certain external processing costs. To provide financial statement users with a better understanding of the Company's expenses, cost of sales is disaggregated on our statements of operations into the line items cost of materials sold, processing and warehousing expense, delivery expense and depreciation and amortization. The Company believes adjusted gross profit is a meaningful measure because our cost structure and operating results are significantly impacted by the fluctuating costs associated with purchased metals. The following table reconciles the GAAP measure for gross profit to the non-GAAP measure adjusted gross profit (in thousands): THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, 2025 2024 2025 2024 Gross profit (GAAP measure) $ 11,049 $ 2,325 $ 32,713 $ 9,371 Processing and warehousing expense 11,199 7,472 29,591 24,030 Delivery expense 7,247 4,941 20,781 16,373 Depreciation and amortization 1,007 827 2,791 2,445 Adjusted gross profit (non-GAAP measure presented) $ 30,502 $ 15,565 $ 85,876 $ 52,219 17 Table of Contents FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES The Company’s current ratio was 3.6 a t December 31, 2025 and 4.3 at March 31, 2025 . Working capital was approx imately $167.0 million at December 31, 2025 and $128.1 million at March 31, 2025 . During the nine months ended December 31, 2025, 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 and due to the acquisition of Century Metals & Supplies resulting in notable increases to accounts receivable, inventory, fixed assets, accounts payable and ABL facility debt. The Company ex pects to continue to monitor, evaluate and manage balance sheet components depending on changes in market conditions and the Company’s operations. On December 9, 2025, the Company executed the sixth amendment to its asset-based lending facility ("ABL Facility") increasing the facility size from $125 million to $140 million. The ABL Facility is led by JPMorgan Chase Bank, N.A. with Wells Fargo Bank, N.A. as a 40% syndicated participant. The ABL Facility matures on August 29, 2030 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 1.45% per annum. Term rate borrowings accrue interest at a rate equal to the SOFR rate applicable to the selected term plus 1.65% 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 10% of the revolving commitment or $14 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 1.00 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 up to an aggregate of $60 million, in minimum increments of $5 million. At December 31, 2025, the Company had a balance of approximately $88.6 million under the ABL Facility with an applicable interest rate of 5.3% and the Company's borrowing base calculation supported 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. HEDGING ACTIVITIES The Company utilizes hot-rolled coil futures, options and swaps to manage price risk on unsold inventory and longer-term fixed price sales agreements. The Company has elected hedge accounting for some of its hedging activities previously but most recently the Company has classified its hedging activities as economic hedges of risk with mark-to-market ("MTM") accounting treatment. Hedging decisions are intended to protect the value of the Company's inventory and produce more consistent financial results over price cycles. The Company recognized gains of approximately $2.5 million and $5.8 million in the nine months ended December 31, 2025 and 2024, respectively, related to hedging activities with all of this being classified as economic hedges of risk. With MTM accounting treatment, it is possible that hedging related gains or losses might be recognized in a different fiscal quarter or fiscal year than the corresponding improvement or contraction in our physical margins. See Note 9 for additional information related to the Company's hedging activities. CRITICAL ACCOUNTING ESTIMATES The preparation of financial statements in conformity with U.S. generally accepted accounting principles may require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The determination of fair values related to the Century Metals & Supplies business combination accounting involves significant estimates and judgements in the valuation process. Actual results could differ from any estimates. 18 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, including the adequacy of cash and expectations as to future sales, prices and margins. 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. 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.