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 Three Months Ended June 30, 2026 Compared to Three Months Ended June 30, 2025 During the three months ended June 30, 2026 (the “ 2026 quarter”), sales, cost of materials sold and adjusted gro ss profit increased approximately $105.2 million, $78.5 million and $26.7 million, respectively, compared to the amounts recorded during the three months ended June 30, 2025 (the “2025 quarter”). Adjusted gross profit is a non-GAAP measure calculated as sales minus cost of materials sold. The increase in sales was due to an increase in the average selling price per ton and an increase in sales volume. Sales volume for the 2026 quarter consisted of approximately 188,500 tons from inventory and another 17,500 tons of toll pr ocessing customer owned material compared to the 2025 quarter volume consisting of approximately 141,500 tons from inventory and 19,000 tons of toll processing. Same facility year-over-year growth accounted for approximately 33,500 tons of the sales volume increase and the acquisition of Century Metals & Supplies contributed approximately 12,000 tons. Adjusted gross profit was approximately $55.8 million for the 2026 quarter compared to approximately $29.1 million for the 2025 quarter. Adjusted gross profit as a percentage of sales was approximately 23.2% for the 2026 quarter compared to approximately 21.6% for the 2025 quarter. Our operating results are influenced by changes in the market prices of the metals we purchase. The majority of the Company's revenue is generated from processing hot-rolled steel coil ("HRC") and products derived from HRC. Entering the 2026 quarter, HRC prices were in a sustained upward trend, increasing approximately 28% during the preceding quarter and an additional 10% throughout the 2026 quarter. This favorable pricing environment contributed to margin expansion during the quarter. By comparison, entering the 2025 quarter, HRC prices had reached the peak of a pricing cycle and remained relatively stable before declining modestly toward the end of the quarter. As a result, the Company also experienced favorable margins during the 2025 quarter, although the margin expansion was less pronounced than in the 2026 quarter. The Company utilizes HRC futures, options and swaps to partially manage exposure to commodity price risk. The Company recognized hedging related losses of approximately $2.8 million in the 2026 quarter compared to hedging related gains of approximately $0.3 million in the 2025 quarter. 15 Table of Contents Flat-roll Segment Flat-roll product segment sales for the 2026 quarter totaled approximately $221.8 million compared to approximately $124.1 million for the 2025 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 $1.2 million for both the 2026 quarter and the 2025 quarter. Sales generated from flat-roll segment inventory totaled approximately $220.6 million for the 2026 quarter compared to approximately $122.9 million for the 2025 quarter. The average per ton selling price related to these shipments increased from approximately $926 per ton in the 2025 quarter to approximately $1,262 per ton in the 2026 quarter. Sales volume for the 2026 quarter consisted of approxi mately 175,000 tons from inventory and another 17,500 tons of toll processing customer owned material compared to the 2025 quarter volume consisting of approximately 132,500 tons from inventory and 19,000 tons of toll processing. The increase in sales volume for the 2026 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 $24.7 million and $8.8 million for the 2026 quarter and 2025 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 2026 quarter totaled approximately $18.2 million compared to approximately $10.7 million for the 2025 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 9,000 tons in the 2025 quarter to approximately 13,500 tons in the 2026 quarter. The average per ton selling price increased from approximately $1,206 per ton for the 2025 quarter to approximately $1,341 per ton for the 2026 quarter. The tubular segment recorded earnings from operations of approximately $2.1 million and $1.3 million for the 2026 quarter and 2025 quarter, respectively. 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 2026 quarter, selling, general and administrative costs increased approximately $5.4 million compared to the 2025 quarter. This increase was primarily driven by profit-based and volume-based incentive compensation being approximately $3.1 million higher for the 2026 quarter combined with approximately $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. Income Taxes Income taxes increased from a provision for the 2025 quarter of approximately $1.6 million to a provision for the 2026 quarter of approximat ely $4.2 million. This increase was primarily related to increased earnings before taxes for the 2026 quarter. The income tax provision as a percentage of earnings before tax was approximately 24.7% and 24.3% for the 2026 quarter and 2025 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 JUNE 30, 2026 2025 Gross profit (GAAP measure) $ 31,871 $ 12,498 Processing and warehousing expense 13,427 9,328 Delivery expense 9,385 6,400 Depreciation and amortization 1,069 847 Adjusted gross profit (non-GAAP measure presented) $ 55,752 $ 29,073 16 Table of Contents FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES The Company’s current ratio was 2.9 a t June 30, 2026 and 3.4 at March 31, 2026 . Working capital was approx imately $190.8 million at June 30, 2026 and $180.9 million at March 31, 2026 . During the three months ended June 30, 2026, 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. 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. The Company has a $140 million asset-based lending facility ("ABL Facility") 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 June 30, 2026, the Company had a balance of approximately $91.5 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 a loss of approximately $2.8 million during the three months ended June 30, 2026 and a gain of $0.3 million during the three months ended June 30, 2025 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 judgments in the valuation process. Actual results could differ from any estimates. 17 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.