Insteel Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 30, 2019. Insteel manufactures steel wire reinforcement products for concrete construction, principally welded wire reinforcement and prestressed concrete strand. It reports one operating segment.
Financial performance
| Metric | Three months ended Mar. 30, 2019 | Year-over-year | Six months ended Mar. 30, 2019 | Year-over-year |
|---|---|---|---|---|
| Net sales | $111.9 million | Up 4.2% | $216.1 million | Up 5.3% |
| Gross profit / margin | $7.0 million / 6.3% | Down from $15.4 million / 14.4% | $18.0 million / 8.3% | Down from $27.1 million / 13.2% |
| Net earnings | $1.0 million | Down 82.2% | $5.2 million | Down 63.0% |
| Diluted EPS | $0.05 | From $0.31 | $0.27 | From $0.73 |
| Operating cash flow | Not presented separately for the quarter | $(40.2) million | Compared with $24.5 million provided |
Second-quarter average selling prices increased 21.0%, but shipments fell 13.9%. For the first half, average selling prices rose 24.6% while shipments declined 15.5%. Sales growth reflected price increases intended to recover raw-material inflation; adverse weather and increased low-priced import competition weighed on shipments.
Gross profit was pressured by lower selling-price/raw-material spreads, higher manufacturing costs and reduced shipments. In the second quarter, the filing attributes approximately $3.7 million of the gross-profit decline to lower spreads, $2.4 million to higher manufacturing costs and $2.1 million to lower shipments. First-half manufacturing costs and lower shipments reduced gross profit by approximately $4.8 million and $4.3 million, respectively.
Product sales, second quarter: welded wire reinforcement $68.9 million; prestressed concrete strand $43.0 million. First-half sales were $135.2 million and $80.8 million, respectively.
Liquidity, debt and capital
- At March 30, 2019, cash and cash equivalents were $0.5 million, versus $43.9 million at September 29, 2018. Net working capital was $133.4 million.
- Current assets were $174.6 million and current liabilities $41.1 million. Inventory rose to $117.2 million from $94.2 million, including finished goods of $52.4 million versus $28.4 million.
- Operating activities used $40.2 million in the first half, mainly reflecting a $23.1 million inventory increase and a $30.4 million decrease in accounts payable and accrued expenses. Investing activities used $7.3 million, including $8.1 million of capital expenditures.
- Financing activities provided $4.0 million. The company had $5.4 million outstanding under its $100 million revolving facility, with $92.8 million of availability and $1.8 million in letters of credit. The facility matures May 13, 2020; the company reported covenant compliance and no defaults.
- Total debt was $5.4 million, or 2.1% of total capital; shareholders’ equity was $246.5 million. Quarterly dividends declared were $0.03 per share. Prior-year first-half dividends included a $1.00-per-share special dividend.
Material changes, unusual items and outlook
- Other income included insurance-related gains from the Dayton, Texas facility fire and the final settlement of the 2017 Hurricane Harvey claim. For the six months, the company reported $1.8 million of proceeds related to the fire and $150,000 related to Harvey; amounts were recorded across other income, cost of sales and SG&A. These items contributed to reported results and are not a measure of recurring operating performance.
- The prior-year first-half income tax result benefited from a $3.7 million deferred-tax gain following the Tax Cuts and Jobs Act. The effective tax rate was 23.9% in the current first half versus negative 1.9% a year earlier; excluding that prior-year tax benefit, the prior-year rate was 24.8%.
- Management expects continued construction-market growth and weather-delayed business to benefit the remainder of fiscal 2019. It cited positive nonresidential construction indicators and infrastructure spending, but gave no quantified earnings or sales guidance.
- Management expects challenging conditions from raw-material cost escalation related to Section 232 tariffs and trade duties. It plans to manage costs and production schedules, improve productivity, and pursue acquisitions. Capital expenditures for fiscal 2019 are expected to total up to $22 million.
- Key risks include construction demand and seasonality, steel wire rod cost and availability, competitive pricing and import pressure, tariffs and trade actions, plant outages, and the company’s ability to pass cost increases through to customers. Management said first-half raw-material cost escalation exceeded selling-price increases. A 10% wire-rod price increase, absent a corresponding selling-price change, would have reduced first-half pretax earnings by an estimated $14.5 million.
- The company is finalizing the fire-related insurance claim and believes coverage is sufficient. Ordinary-course lawsuits and claims are not expected by management to have a material adverse effect. The filing reported no material risk-factor changes, no material off-balance-sheet arrangements, and effective disclosure controls.
Important facts for investors to verify
- Whether shipments recover as weather-related delays unwind, and whether low-priced import competition persists.
- Whether product pricing can keep pace with wire-rod, freight and manufacturing costs, and how inventory costs affect future margins.
- How quickly inventory converts to sales and cash, given the sharp first-half operating cash outflow and low quarter-end cash balance.
- Progress and final proceeds from the Dayton fire insurance claim, including the treatment of any remaining recoveries.
- Available borrowing capacity, covenant compliance and refinancing plans ahead of the credit facility’s May 2020 maturity.
- Execution of the up-to-$22 million fiscal 2019 capital program and the expected timing of productivity benefits.