Executive Summary / Key Takeaways

• Friedman Industries ($FRD) achieved record sales volume and robust earnings in the second quarter of fiscal year 2026, driven by enhanced capacity utilization and strong customer demand, underscoring the effectiveness of its operational strategies.
• The recent acquisition of Century Metals & Supplies Inc. significantly expands FRD's flat-roll product capabilities and geographic footprint into the southeastern U.S. and Latin American markets, diversifying its offerings to include cold-rolled, coated, stainless, and non-ferrous metals.
• The company effectively manages commodity price volatility, particularly in hot-rolled steel coil (HRC), through strategic hedging activities, which have been instrumental in stabilizing margins and ensuring consistent financial outcomes.
• FRD's disciplined capital allocation, including investments in advanced processing equipment and a strong liquidity position supported by a renewed asset-based lending facility, provides a solid foundation for continued strategic growth.
• Investors should closely monitor the successful integration of the Century acquisition and the sustained impact of metals pricing trends, alongside FRD's operational efficiencies, as key determinants of future performance.

Friedman Industries' Foundation and Market Position

Friedman Industries, Incorporated, established in 1965 and publicly traded since 1972, has built a enduring presence as a manufacturer and processor of metals. The company has consistently paid quarterly cash dividends since its public debut, reflecting a long-standing commitment to shareholder returns. FRD operates through two distinct segments: flat-roll products and tubular products, serving a diverse customer base that includes manufacturers of steel products, as well as steel and pipe distributors.

The flat-roll product segment encompasses processing facilities strategically located across the U.S., including Hickman, Arkansas; Decatur, Alabama; Miami, Florida; East Chicago, Indiana; Granite City, Illinois; and Sinton, Texas. These facilities are equipped with advanced operational technologies such as temper mills, cut-to-length lines, stretcher leveler cut-to-length lines, corrective leveling cut-to-length lines, and coil slitting lines. These capabilities enable the company to enhance material quality and precisely cut carbon steel, stainless steel, and aluminum flat-roll products into sheet, plate, or slit coil. The flat-roll segment can process sheet and plate with thicknesses ranging from 30 gauge to 1 inch and widths from 11 to 96 inches, while producing slit coil from 32 gauge to 10 gauge in widths from 12 to 60 inches. The tubular product segment, anchored by the Texas Tubular Products (TTP) division in Lone Star, Texas, operates two electric resistance welded pipe mills. These mills are American Petroleum Institute (API) licensed, manufacturing line pipe and oil country pipe, in addition to pipe for structural applications.

The steel processing and manufacturing industry is inherently cyclical, heavily influenced by commodity prices and broader economic conditions. Friedman Industries operates as a regional specialist, primarily serving markets in the Midwestern, Southwestern, and Southeastern U.S. This positioning allows for a focus on customized services and regional agility, which can translate into stronger customer loyalty and potentially superior margins through recurring revenue from long-term relationships. However, this regional focus and smaller scale can also present vulnerabilities when competing against larger, more diversified players like Nucor Corporation (NUE), Steel Dynamics, Inc. (STLD), United States Steel Corporation (X), and Commercial Metals Company (CMC). These larger competitors often benefit from greater operational scale, broader geographic reach, and more extensive resources for innovation and market penetration.

FRD's operational technologies, while not proprietary in a traditional R&D sense, provide a critical competitive edge through their efficiency and precision. The Sinton, Texas facility, for instance, achieved the highest profit margin among all locations in fiscal year 2025 after reaching full production capacity. This demonstrates how modern, fully utilized processing equipment directly contributes to superior profitability and operational effectiveness. The company's ongoing strategic transformation includes enhancing processing capabilities across its facilities, a steady focus on operational efficiencies, and investments in new equipment, such as the approximately $1.9 million allocated for additional processing equipment at its Granite City, Illinois facility. These investments bolster FRD's ability to meet diverse customer needs, improve material quality, and increase throughput, thereby strengthening its competitive moat and revenue streams.

Broader industry trends, such as the increasing demand for steel in infrastructure projects and the growth of sectors like AI and data centers, could indirectly benefit FRD by driving overall steel demand. While larger competitors might be better positioned to capitalize on these trends due to their scale, FRD's strategic focus on customized services and regional distribution allows it to capture opportunities in niche markets where personalized service and faster turnaround times are valued.

Financial Performance: A Story of Growth and Resilience

Friedman Industries has demonstrated a compelling financial narrative of growth and resilience, particularly in its most recent reporting periods. For the six months ended September 30, 2025, the company reported net sales of $287.16 million, a significant increase from $221.31 million in the prior-year period, representing a 29.8% year-over-year growth. Net earnings for the same period climbed to $7.27 million, a substantial improvement from $1.89 million in the prior year, with earnings from operations reaching $9.92 million, up from $1.62 million. This robust performance was largely driven by an increase in sales volume, attributed to stronger customer demand and successful commercial efforts to boost capacity utilization.

The second quarter of fiscal year 2026 (ended September 30, 2025) marked a significant milestone, with net sales of $152.4 million, representing a 43% year-over-year increase. The company achieved its highest sales volume in history during this quarter, up 28% year-over-year and 12% quarter-over-quarter, resulting in net earnings of $2.2 million.

A deeper look into the segments reveals the Flat-Roll division as a primary growth engine. For the six months ended September 30, 2025, Flat-Roll sales totaled $267.41 million, a 33.2% increase from the prior year, with operating earnings surging by 171.5% to $14.49 million. This growth was fueled by an increase in sales volume from inventory to 280,000 tons, up from 221,500 tons, and an improved average selling price of $946 per ton, compared to $895 per ton. The Tubular segment, while experiencing a slight sales decrease of 3.9% to $19.75 million, demonstrated improved profitability, with operating earnings rising 24.3% to $2.20 million. This was achieved despite a decline in tons sold, offset by a higher average selling price of $1196 per ton.

Margin management is critical in the cyclical steel industry, and Friedman Industries actively utilizes hot-rolled coil (HRC) futures, options, and swaps to mitigate commodity price risk. This hedging strategy proved beneficial, generating a $1.1 million gain in the first half of fiscal year 2026, contributing to margin stability amidst fluctuating HRC prices. The company's adjusted gross profit as a percentage of sales improved to 19.3% for the six months ended September 30, 2025, compared to 16.6% in the prior-year period. This highlights the effectiveness of its operational and risk management strategies in enhancing profitability.

Friedman Industries maintains a solid financial position, with a current ratio of 3.20 and working capital of approximately $159.9 million as of September 30, 2025. The company renewed its $125 million asset-based lending (ABL) facility on August 29, 2025, extending its maturity to August 29, 2030. With approximately $84.2 million outstanding under the ABL facility as of the filing date, the company's borrowing base supports full access to the facility, providing ample liquidity. Management believes its current cash position, cash flows from operations, and borrowing capacity are adequate to fund expected cash requirements for the next 12 months. Furthermore, a robust operating cash flow of $15.5 million in the first quarter of fiscal year 2026 enabled a $14.7 million reduction in debt, underscoring disciplined capital allocation.

Strategic Initiatives and Future Outlook

Friedman Industries' recent strategic moves are poised to further enhance its market position and diversify its revenue streams. A pivotal development was the acquisition of certain assets and liabilities of Century Metals & Supplies Inc. on August 29, 2025. This Miami, Florida-based company, now operating as Century Metals and Supplies LLC, a wholly-owned subsidiary, significantly expands FRD's presence in the southeastern U.S. and Latin American markets. The acquisition also broadens FRD's product offerings to include cold-rolled, coated, and stainless steels, as well as non-ferrous materials such as aluminum, copper, and brass, complementing its existing flat-roll capabilities. The total consideration for the acquisition was approximately $52.7 million, comprising cash, a five-year seller's note, and contingent consideration tied to performance metrics.

Beyond acquisitions, FRD continues to invest in its organic growth. The approximately $1.9 million allocated for additional processing equipment at its Granite City, Illinois facility exemplifies the company's commitment to enhancing its operational footprint and technological capabilities. These capital expenditures are integral to FRD's strategic transformation, aiming to boost capacity and efficiency across its operations.

Looking ahead, management anticipates that third-quarter fiscal year 2026 sales volume will remain consistent with second-quarter levels. The additional volume contributed by the Century Metals & Supplies acquisition is expected to offset the anticipated holiday-related slowdown during the quarter. Furthermore, margins are projected to improve modestly quarter over quarter, driven by anticipated increases in metals pricing during the third quarter. Management expresses optimism regarding the long-term demand outlook for the industry and the company's readiness to capitalize on both near- and long-term growth opportunities, supported by a strong balance sheet. The approval of the Friedman Industries, Incorporated 2025 Long-Term Incentive Plan in September 2025 also signals a commitment to aligning employee incentives with long-term shareholder value creation.

Key Risks and Challenges

Despite its strategic growth and operational strengths, Friedman Industries operates within an environment subject to several inherent risks. The most prominent is the significant impact of fluctuating market prices for the metals it purchases, particularly hot-rolled steel coil (HRC). While the company employs hedging strategies to manage this commodity price risk, the mark-to-market accounting treatment for these economic hedges can lead to timing mismatches between recognized gains or losses and the actual improvement or contraction in physical margins.

Another critical risk stems from supplier concentration. Both the flat-roll and tubular segments rely on a limited number of suppliers for their inventory. The loss of any key supplier could have a material adverse effect on the company's business operations and financial performance. The recent Century Metals & Supplies acquisition, while strategically beneficial, introduces integration risks. The estimated fair values of the acquired assets and liabilities are provisional and subject to change, which could be significant, and the company expects to finalize these estimates no later than one year from the acquisition date. This provisional nature introduces a degree of uncertainty regarding the ultimate financial impact of the transaction.

Furthermore, as a participant in the cyclical steel industry, Friedman Industries remains exposed to broader macroeconomic pressures and changes in demand for steel and steel products. Economic downturns or shifts in industrial activity could impact sales volumes and pricing, affecting overall profitability. The competitive landscape, characterized by larger, more diversified players, also poses a continuous challenge, requiring FRD to consistently leverage its operational efficiencies and specialized services to maintain its market position.

Conclusion

Friedman Industries ($FRD) is demonstrating a compelling investment thesis rooted in strategic expansion and a relentless pursuit of operational excellence within the dynamic steel processing and manufacturing sector. The company's recent record sales volumes and improved profitability, particularly within its Flat-Roll segment, underscore the effectiveness of its focused efforts on capacity utilization and customer demand. The transformative acquisition of Century Metals & Supplies Inc. is a clear catalyst for future growth, significantly broadening FRD's product portfolio and extending its geographic reach into new, promising markets.

FRD's operational technologies, exemplified by the high-margin performance of its Sinton, Texas facility and ongoing investments in processing equipment, provide a tangible competitive edge. This technological foundation, coupled with a disciplined approach to managing commodity price volatility through hedging, positions the company for resilience in an inherently cyclical industry. While challenges such as supplier concentration and integration risks from acquisitions persist, Friedman Industries' robust liquidity, strategic capital allocation, and positive outlook for continued sales volume and margin improvement paint a picture of a company actively shaping its growth trajectory. For discerning investors, FRD represents an opportunity to invest in a company that is strategically fortifying its market position and operational capabilities to deliver sustained value in the evolving steel industry.