Insteel Industries, Inc. — Fiscal 2020 First-Quarter 10-Q
Reporting period: Three months ended December 28, 2019; comparable period ended December 29, 2018. Insteel manufactures steel wire reinforcing products for concrete construction, principally welded wire reinforcement and prestressed concrete strand. Financial statements are unaudited.
Financial performance
- Sales: $97.6 million, down 6.3% year over year. Shipments rose 11.7%, but average selling prices fell 16.1%.
- Gross profit and margin: $6.2 million and 6.4%, versus $11.0 million and 10.5%. Management attributed the decline mainly to lower selling-price/raw-material spreads and higher manufacturing costs; increased shipments partly offset the impact.
- Operating expenses and other items: SG&A was $5.7 million (5.9% of sales), down from $6.5 million (6.3%). Prior-year other income of $829,000 primarily reflected a $709,000 gain on asset dispositions; current-period other income was $25,000.
- Net earnings: $555,000, or $0.03 per diluted share, versus $4.1 million, or $0.21 per share. Effective tax rate was 22.7%, compared with 23.5%.
- Cash flow: Operating activities generated $29.6 million, versus $22.8 million used in the prior-year quarter. The current quarter benefited from a $24.6 million working-capital inflow, including lower receivables and inventory and higher payables/accruals. Investing used $642,000, including $600,000 of capital expenditures; financing cash flow was approximately zero.
- Liquidity and debt: Cash and cash equivalents were $67.1 million at quarter-end; working capital was $134.0 million. No revolver borrowings were outstanding; $71.7 million of borrowing capacity was available, with $1.6 million of letters of credit. The $100 million facility matures May 15, 2024. The company reported covenant compliance.
- Capital and shareholder returns: Shareholders’ equity was $246.2 million. The company declared a quarterly dividend of $0.03 per share. No shares were repurchased during the quarter; $24.8 million remained under the repurchase authorization.
Material changes and management commentary
- Lower selling prices reflected competitive pressure from low-priced imports following Section 232 tariffs on imported steel; the company also consumed higher-cost inventory purchased in prior periods. Management cited a $19.4 million adverse effect from lower selling prices, partly offset by $13.2 million lower raw-material costs and $217,000 lower freight expense.
- Shipments improved compared with the prior-year period, which management said was adversely affected by unusually wet weather. Management described stronger demand and improved market conditions as contributing factors.
- For the remainder of fiscal 2020, management expected continued construction-market growth and business deferred by prior-year weather to support results. It cited potential support from state and local infrastructure spending and federal funding, while describing conditions as challenging because of low-priced imports. The filing provides no numerical earnings or sales guidance.
- Management planned to control costs, align production with demand, improve productivity, and pursue acquisitions. Fiscal 2020 capital expenditures were expected to total up to $17 million, mainly for productivity/cost initiatives and maintenance.
- Demand is seasonal and cyclical; shipments and profitability are usually lower in the first and second fiscal quarters and higher in the third and fourth, assuming normal weather. Weak construction demand could reduce cash flows, though it may also lower working-capital needs.
Risks, contingencies, and other notable items
- Key exposures include construction-market demand, steel wire rod price and availability, import competition and trade policy, the ability to pass costs through to customers, customer ordering and inventory patterns, and operational disruptions. A 10% wire-rod price increase, with no corresponding selling-price change, was estimated to reduce pretax earnings by $6.3 million.
- The company said cash, operating cash flow, and revolver availability should meet anticipated needs for the foreseeable future, including the next 12 months, absent significant unexpected funding requirements. Weaker markets could require spending reductions or changes to dividends, repurchases, or working capital.
- Ordinary-course commercial, environmental, employment, and other legal matters were not expected to materially adversely affect financial position, results, or cash flows. No material change in reported risk factors was disclosed.
- Adoption of the lease accounting standard increased assets and liabilities by $1.9 million at adoption; it did not materially affect earnings or cash flows. Quarter-end operating lease liabilities were $2.0 million.
Important facts for investors to verify
- Whether selling prices and product spreads stabilize or continue to be pressured by imports and competition.
- Whether shipment growth and construction/infrastructure demand persist, and how weather and seasonality affect subsequent quarters.
- Whether lower-cost inventory, cost controls, and productivity investments improve gross margins; compare actual fiscal 2020 capital spending with the up-to-$17-million expectation.
- Whether operating cash generation and working-capital movements are repeatable, and whether revolver availability or covenant compliance changes.
- Whether the stated assumptions behind management’s qualitative outlook remain valid; the filing cautions that forward-looking statements are subject to risks and results may differ.