FRIEDMAN INDUSTRIES INC (FRD)

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 gross 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 processing 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.

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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 approximately 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 approximately $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):

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FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

The Company’s current ratio was 2.9 at June 30, 2026 and 3.4 at March 31, 2026. Working capital was approximately $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 expects 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

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