10-Q: Friedman Industries Reports Strong Q2 Growth, Boosted by Acquisition

Friedman Industries reported significant increases in net sales and earnings for the second quarter and first half of fiscal 2026, driven by higher sales volume and the strategic acquisition of Century Metals & Supplies.

Summary

• Net sales for the six months ended September 30, 2025, increased by $65.9 million to $287.2 million, up from $221.3 million in the prior year.
• Net earnings for the six-month period rose significantly to $7.3 million ($1.03 per basic share) from $1.9 million ($0.27 per basic share) in the previous year.
• For the three months ended September 30, 2025, net sales increased by $45.6 million to $152.4 million, compared to $106.8 million in the same period last year.
• Net earnings for the quarter were $2.2 million ($0.32 per basic share), a substantial improvement from a net loss of $(0.7) million ($(0.10) per basic share) in the prior year's quarter.
• Adjusted gross profit for the six months increased to $55.4 million (19.3% of sales) from $36.7 million (16.6% of sales) year-over-year.
• The company acquired Century Metals & Supplies Inc. on August 29, 2025, for approximately $52.7 million, expanding its presence in the southeastern U.S. and Latin American markets and diversifying product offerings.
• Sales volume from inventory for the six-month period increased by 56,500 tons to 296,500 tons, and toll processing volume increased by 1,500 tons to 43,500 tons.
• The flat-roll segment's earnings from operations grew to $14.5 million for the six months, up from $5.3 million in the prior year.
• The tubular segment swung to earnings from operations of $2.2 million for the six months, compared to a loss of $(1.8) million in the prior year.
• The Asset-Based Lending (ABL) Facility was renewed on August 29, 2025, for $125 million, maturing on August 29, 2030, with a balance of $83.5 million at September 30, 2025.

Sentiment

Score: 8

Explanation: The company demonstrated strong financial performance with significant increases in sales and earnings, a successful strategic acquisition, and improved operational metrics. The positive outlook for Q3 fiscal 2026, despite anticipated holiday slowdowns, further contributes to a strong sentiment. While hedging gains were lower and SG&A increased, these are offset by overall robust growth and strategic expansion.

Positives

• Significant increase in net sales for both the three-month ($152.4M vs $106.8M) and six-month ($287.2M vs $221.3M) periods ended September 30, 2025.
• Strong turnaround in net earnings, moving from a loss of $(0.7) million in Q2 2024 to a profit of $2.2 million in Q2 2025, and a substantial increase for the six-month period ($7.3M vs $1.9M).
• Improved adjusted gross profit margins, reaching 19.3% for the six months ended September 30, 2025, compared to 16.6% in the prior year.
• Increased sales volume across both inventory sales and toll processing, indicating stronger demand and successful commercial efforts.
• Strategic acquisition of Century Metals & Supplies Inc. expanded market presence in the southeastern U.S. and Latin America and diversified product offerings to include cold-rolled, coated, stainless steels, aluminum, copper, and brass.
• The tubular segment returned to profitability with earnings from operations of $2.2 million for the six months, compared to a loss in the prior year.
• Renewal of the $125 million ABL Facility provides stable financing until August 2030, with full access to the borrowing base.

Negatives

• Hedging related gains decreased significantly to $1.1 million for the six months ended September 30, 2025, compared to $5.6 million in the prior year, indicating less favorable market conditions for hedging.
• Selling, general and administrative costs increased by $3.3 million for the six months, partly due to non-recurring acquisition-related expenses and higher incentive compensation.
• Hot-rolled coil (HRC) prices declined approximately 10% during the second half of the six-month period, leading to tapering margins after a strong start.
• Tubular segment sales decreased slightly from $20.5 million to $19.8 million for the six months, primarily due to a decline in tons sold (19,000 tons to 16,500 tons), despite an increase in average selling price per ton.

Risks

• 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.
• The company's success in executing its internal operating plans.
• Changes in and availability of raw materials.
• Unplanned shutdowns of production facilities due to equipment failures or other issues.
• Increased competition from alternative materials.
• Risks concerning innovation, new technologies, products, and increasing customer requirements.
• Loss of any of the limited number of suppliers for the flat-roll segment could have a material adverse effect.
• Loss of any of the limited number of suppliers for the tubular segment could have a material adverse effect.
• Fair value estimates for assets acquired and liabilities assumed in the Century Metals & Supplies business combination are provisional and subject to change, which could be significant.

Future Outlook

The company anticipates that third-quarter fiscal 2026 sales volume will remain consistent with second-quarter levels, as the additional volume from the Century Metals & Supplies acquisition is expected to offset the anticipated holiday-related slowdown. Margins are expected to improve modestly quarter over quarter, driven by anticipated increases in metals pricing during the third quarter.

Management Comments

• Our operating results are significantly impacted by the market prices of the metals we purchase.
• The increase in sales volume for the 2025 period was primarily related to a combination of stronger demand among some customers and successful commercial efforts to increase capacity utilization.
• 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 decisions are intended to protect the value of the Company's inventory and produce more consistent financial results over price cycles.

Industry Context

The company's performance is heavily influenced by hot-rolled coil (HRC) steel prices. While HRC prices were at the top of a cycle entering the 2025 period and remained stable before a 10% decline, the prior year experienced a significant 40% drop in HRC prices. This volatility directly impacts physical margins, with the company using hedging to mitigate risk. The acquisition of Century Metals & Supplies expands the company's product range beyond carbon steel to include cold-rolled, coated, stainless steels, aluminum, copper, and brass, positioning it for broader market engagement and potentially reducing reliance on HRC price cycles.

Comparison to Industry Standards

• NA

Corporate Governance

Stakeholder Impact

• Shareholders: Positive impact due to increased net earnings, higher EPS, and strategic growth through acquisition. The new LTIP could further align management incentives with shareholder value.
• Employees: Potential positive impact from increased incentive compensation due to higher earnings and the new Long-Term Incentive Plan. The acquisition may also create new opportunities.
• Customers: Expanded product offerings and geographic reach through the Century acquisition could provide more diverse options and improved service.
• Suppliers: Continued reliance on a limited number of suppliers for both flat-roll and tubular segments poses a risk if any supplier relationships are disrupted.
• Creditors: The renewal of the ABL facility provides stable financing, and improved financial performance strengthens the company's creditworthiness.

Next Steps

• Finalize fair value estimates for the Century Metals & Supplies acquisition within one year from the Acquisition Date (August 29, 2025).
• Continue to monitor, evaluate, and manage balance sheet components based on market conditions and operations.
• Evaluate the impact of new accounting pronouncements ASU 2023-09 (effective after December 15, 2024) and ASU 2024-03 (effective after December 15, 2026) on consolidated financial statements.

Key Dates

Recommendation

Friedman Industries delivered exceptionally strong financial results, significantly outperforming the prior year with substantial increases in net sales and a return to strong profitability. The strategic acquisition of Century Metals & Supplies not only expanded market reach and diversified product offerings but also contributed to the positive performance. Despite some tapering of margins due to HRC price declines later in the period, the overall trend is positive, and the company's outlook for consistent sales volume and modestly improving margins in the next quarter is encouraging. The renewed ABL facility provides solid liquidity. These factors suggest a strong operational and strategic trajectory, making the stock an attractive 'buy' for investors.

Keywords

steel processing, flat-roll, tubular products, metals distribution, Century Metals & Supplies, acquisition, HRC prices, commodity hedging, SEC 10-Q, financial results, manufacturing, supply chain