Friedman Industries Inc: Form 10-K for the period ended Mar 31, 2024

General

Friedman Industries, Incorporated (the “Company”), a Texas corporation incorporated in 1965, is a manufacturer and processor of steel products and operates in two reportable segments: flat-roll products and tubular products. The flat-roll segment was previously referred to as the coil segment. The Company is now using flat-roll to describe the segment due to it being a more common term used in the Company's industry. Significant financial information relating to the Company’s business segments for the last two years is contained in Note 13of the Consolidated Financial Statements included in the Company’s Annual Report to Shareholders for the fiscal year ended March 31, 2024, which financial statements are incorporated herein by reference in Item 8 hereof.

Flat-Roll Products

The flat-roll product segment consists of the operation of five hot-rolled coil processing facilities located in Hickman, Arkansas; Decatur, Alabama; East Chicago, Indiana; Granite City, Illinois and Sinton, Texas. The facilities in Granite City and East Chicago were acquired on April 30, 2022 from Plateplus, Inc ("Plateplus"). More information about the Plateplus transaction can be found in Note 2 of the Consolidated Financial Statements included in the Company’s Annual Report to Shareholders for the fiscal year ended March 31, 2024. The facility in Sinton is a newly constructed facility that commenced operations during October 2022. 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 equipment at all locations improve the flatness and surface quality of the coils and cut the coils into sheet and plate of prescribed lengths. On a combined basis, the facilities are capable of cutting sheet and plate with thicknesses ranging from 16 gauge to 1” thick in widths ranging from 36” wide to 96” 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 coils on a fee basis.

The coil processing facilities are substantially similar with respect to products produced. The Company makes shipments of products based on which facility offers the desired product or, if the product is available at multiple facilities, based on other factors, such as customer location, freight conditions and the ability of the facility to fulfill the order on a timely basis. Flat-roll products are sold on a wholesale, rapid-delivery basis in competition with other processors of hot-rolled steel coils. Shipments are made via unaffiliated truckers or by rail.

The 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 Products

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. TTP has a pipe finishing facility capable of applying threads and couplings to oil country tubular goods and performing other services that are customary in the pipe finishing process. The pipe finishing facility is currently idled. All of the tubular segment's revenue is generated from sales of Company owned inventory.

TTP 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.

Marketing

The following table sets forth the approximate percentage of total sales contributed by each group of products and services during each of the Company’s last two fiscal years:

Flat-Roll Products. The Company sells flat-roll products and processing or storage services to approximately 480 customers located primarily in the midwestern, southwestern and southeastern regions of the United States. The Company’s principal customers for these products and services are steel distributors and customers manufacturing steel products such as steel buildings, railroad cars, barges, tanks and containers, trailers, component parts and other fabricated steel products. In fiscal years 2024 and 2023, sales of flat-roll products to O'Neal Steel accounted for approximately 16% and 15% of the Company's total sales, respectively. No other individual flat-roll products customer accounted for 10% or more of the Company's total sales for either of the two fiscal years.

The Company sells all of its flat-roll products through its own sales force. At March 31, 2024, the sales force was comprised of the Vice President of Sales – Flat Roll Division and 25 sales personnel.

Tubular Products. The Company sells its tubular products nationally to approximately 92 customers. The Company’s principal customers for these products are steel and pipe distributors. In fiscal years 2024 and 2023, no individual tubular customer accounted for 10% or more of the Company’s total sales.

The Company sells all of its tubular products through its own sales force. At March 31, 2024, the sales force was comprised of the Vice President and General Manager – Tubular Division and two sales personnel.

Competition

The Company is engaged in a non-seasonal, highly-competitive business. The Company competes with other processors of hot-rolled steel coils, tubular manufacturers, steel distributors and brokers.

The Company believes that, generally, its ability to compete is dependent upon its ability to offer products at prices competitive with or below those of other steel suppliers, as well as its ability to provide products meeting customer specifications on a rapid-delivery basis.

Human Capital

Employee Base

At March 31, 2024, the Company had 268 full-time employees, with all of them based in the United States.

Talent Management and Diversity

The Company's success and growth depend in large part on our ability to attract, develop, and retain a diverse population of talented employees at all levels of our organization. Our goal is to foster an inclusive and respectful work environment where employees are comfortable to express ideas and openly communicate throughout the organization with the goal of continuously improving our company. Our compensation programs are designed to ensure that we attract and retain the right talent and are focused on rewarding employees based on their individual performance as well as company performance that is made possible by their efforts. Our employee benefits programs are structured to provide competitive benefits that are effective in attracting and retaining talent and that address the needs of a diverse employee base.

Safety and Wellness

The health and safety of our workforce is fundamental to the success of our company. We have established policies and work procedures aimed at ensuring the safety of our employees. We seek to have our employees actively engaged in the safety process through initial trainings and ongoing regular meetings. We believe safety is a shared responsibility of everyone within our organization. The Company recognizes the importance of our employees' wellness and provides industry leading benefit programs and employee policies that help ensure employees' physical, mental and work-life balance needs are met.

Executive Officers of the Company

The following table sets forth as of March 31, 2024, for each executive officer of the Company, the name, age, officer positions and arrangements with other persons regarding his selection as an officer, if any, and the period during which such officer has served in such capacity:

3

Cybersecurity Governance

The Board of Directors (the “Board”) of the Company is responsible for the oversight of the Company’s cybersecurity program and recognizes the risks that cybersecurity threats may impose on the Company, its business partners, employees and investors. The Company's IT Director is responsible for overall IT governance, risk and compliance including the Company’s cybersecurity program. The Audit Committee of the Board collaborates with the full Board and the IT Director to facilitate alignment of overall IT related controls and processes. We have a formalized IT Security Incident Report process which provides a method to document and communicate details of security incidents to appropriate stakeholders. The Board and the Audit Committee receive periodic briefings on cybersecurity and help set priorities and strategic direction. As part of continuous improvement, our cybersecurity program is being aligned with the NIST Cybersecurity Framework 2.0 to help ensure comprehensive controls and oversight.

Cybersecurity Controls

We have implemented a modern, comprehensive set of controls that restrict access to systems using a combination of firewalls, virtual private networks, multi-factor authentication and enforced use of corporate controlled compliant devices. We make extensive use of best-in-class automated intrusion prevention, intrusion detection and response systems which constantly monitor activity, build usage patterns and respond or alert when unusual activity is detected. We have experienced staff who perform root cause analysis, respond to any immediate threat, and implement improved controls for future prevention. Our cybersecurity tools are fully integrated and collect data from various sources to build relationships and detect more complex multi-channel attack strategies. Application controls are role-based and designed to protect data confidentiality and provide overall data integrity. A risk-based approach is taken regarding third-party systems utilized in our business.

We have controls specifically focused on E-mail phishing including impersonation attempts. Although our automated controls prevent most phishing attempts, some can be delivered to employees. To mitigate this risk, we provide training to employees using various methods including E-mail phishing campaigns which send phishing-style E-mails, monitors user responses and automatically assigns further training as appropriate. Employees have been trained to send any suspicious activity to a central IT Service Desk for evaluation and appropriate timely action.

All critical systems have rigorous data backups and are designed for disaster recovery, ensuring business continuity in the event of a catastrophic incident. As part of continuous improvement, disaster recovery testing is being conducted and documented.

We are not aware of any unmitigated risk or any prior incident that may have materially affected the Company’s data integrity, confidentiality, operations, business strategy or financial reporting. Given our reliance on modern systems, we are aware a significant incident could impact the Company’s overall goals so we strive to provide modern counter measures to manage this risk.

The principal real properties of the Company are described in the following table:

(1) All of the Company’s owned real properties, plants and offices are held in fee and are not subject to any mortgage or deed of trust.

(2) The office lease is with a non-affiliated party, expires on April 30, 2027, and requires a monthly rental payment of approximately $5,000.

(3) The associated lease is a 99 year lease with Steel Dynamics Inc. that calls for an annual rental payment of $1 and has an expiration date of February 19, 2120.

(4) The associated lease is with America's Central Port District. The lease expires on August 31, 2028 and requires a monthly rental payment of approximately $13,000.

(5) The office lease is with a non-affiliated party, expires on February 28, 2029, requires a monthly rental payment of approximately $11,400 and a monthly payment of proportionate operating costs of approximately $4,800.

The Company is not, and during fiscal year 2024 was not, a party to, nor is its property the subject of, any material pending legal proceedings.

Information with respect to Item 7 is hereby incorporated herein by reference from the section of the Company’s Annual Report to Shareholders for the fiscal year ended March 31, 2024, entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Information with respect to Item 9A is hereby incorporated herein by reference from the sections of the Company’s Annual Report to Shareholders for the fiscal year ended March 31, 2024, entitled “Management's Report on Internal Control Over Financial Reporting”.