Insteel Industries, Inc. — Q3 FY2020 Form 10-Q
Reporting period: Unaudited quarter and first nine months ended June 27, 2020; comparisons are to the periods ended June 29, 2019. Insteel manufactures welded wire reinforcement and prestressed concrete strand for concrete construction markets.
Financial performance and liquidity
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Net sales | $122.0m | $126.3m | $334.4m | $342.3m |
| Gross profit / margin | $14.8m / 12.1% | $8.2m / 6.5% | $36.3m / 10.9% | $26.2m / 7.7% |
| Net earnings | $6.7m | $2.2m | $11.6m | $7.4m |
| Diluted earnings per share | $0.34 | $0.11 | $0.60 | $0.38 |
- Quarterly sales fell 3.4%, while shipments rose 9.5% and average selling prices fell 11.7%. For the nine-month period, sales declined 2.3%, with shipments up 13.5% and average selling prices down 14.0%.
- Gross profit improved mainly because lower raw-material costs more than offset lower selling prices. SG&A increased 21.4% in the quarter to $6.7m and 18.5% year to date to $22.0m, driven chiefly by compensation and legal costs.
- Nine-month operating cash flow was $44.6m, versus cash used of $25.9m in the prior-year period. The current period benefited substantially from a $26.3m increase in accounts payable and accrued expenses; investing activities used $19.6m, including $18.4m for the STM acquisition.
- At June 27, cash and cash equivalents were $61.4m; current assets were $196.8m and current liabilities $59.7m. Net working capital was $137.1m. No debt was outstanding; $94.4m of borrowing capacity remained under the $100m revolving facility, with $1.5m in letters of credit. The facility matures May 15, 2024.
- Cash dividends declared were $0.03 per share in Q3 and $0.09 per share year to date.
Material changes, outlook and risks
- STM acquisition and restructuring: Insteel acquired substantially all assets of Strand-Tech Manufacturing on March 16, 2020 for an adjusted $19.4m. The acquisition expanded PC strand operations, but Insteel decided to close STM’s Summerville, South Carolina facility and redeploy its equipment to three other facilities. Q3 restructuring charges were $0.8m; the company expects about $1.4m of additional charges. The purchase-price allocation remains preliminary. STM facility sales were approximately $1.8m in the quarter and $2.9m year to date; separate earnings could not be quantified because of integration.
- Unusual items: Q3 other income of $1.2m primarily reflected a gain on disposition of assets held for sale. A $0.224m discrete tax benefit related to CARES Act net operating loss carryback provisions contributed to the lower nine-month effective tax rate of 21.7%, versus 22.4% a year earlier.
- COVID-19 and outlook: Facilities remained open as part of a critical-infrastructure industry, and the company reported no material operating impact to date. Management said visibility was limited and could not measure the pandemic’s future effects, including possible infrastructure funding constraints and weakness in private nonresidential construction. It expects challenging conditions in markets exposed to import competition, and gave no earnings or sales forecast.
- Management plans to control expenses, align production with demand, improve productivity and pursue acquisitions opportunistically. FY2020 capital expenditures were expected to be up to $12m.
- Key risks: Low-priced imports and competitive pricing, construction-market cyclicality, COVID-19 uncertainty, steel wire-rod cost and availability, and the ability to pass cost increases through to customers. Management estimated that a 10% increase in wire-rod prices, without a corresponding selling-price change, would reduce nine-month-based pretax earnings by $20.2m.
- Ordinary-course legal matters were not expected to have a material adverse effect. The company reported compliance with credit-facility covenants and effective disclosure controls.
Important facts for investors to verify
- Whether shipment growth and improved gross margins persist as selling prices, import competition and raw-material costs change.
- The pace and cost of the Summerville closure, the expected additional $1.4m restructuring charges, and completion of STM’s preliminary purchase-price allocation.
- COVID-19 effects on construction demand, infrastructure funding and customer orders, which management said could not yet be reliably assessed.
- Cash generation quality: operating cash flow benefited from higher payables and accrued expenses, so monitor working-capital movements alongside reported cash flow.
- Capital spending against the stated FY2020 ceiling of $12m, and continued access to the revolving facility subject to its borrowing base, covenants and other terms.