Insteel Industries, Inc. — Form 10-Q Summary
Business and period: Insteel manufactures steel wire reinforcing products for concrete construction, including prestressed concrete strand and welded wire reinforcement. This report covers the fiscal second quarter and six months ended April 2, 2016; comparatives are the periods ended March 28, 2015. Amounts below are in millions unless noted.
Financial performance
| Metric | Three months ended Apr. 2, 2016 | Year-over-year change | Six months ended Apr. 2, 2016 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $107.4 | Up 5.5% | $199.8 | Down 5.9% |
| Gross profit / margin | $18.6 / 17.3% | $8.7 / 8.6% prior year | $35.0 / 17.5% | $20.7 / 9.8% prior year |
| Net earnings | $7.2 | Up 181.1% | $13.9 | Up 107.1% |
| Diluted earnings per share | $0.38 | $0.14 prior year | $0.73 | $0.36 prior year |
| Operating cash flow | Not separately reported | — | $23.7 | $(1.8) prior year |
- Quarterly shipments rose 20.1%, while average selling prices fell 12.1%; for the half, shipments increased 5.1% and prices declined 10.5%. Management attributed price pressure to competition and shipment growth to improved markets and milder winter weather.
- Gross-profit improvement reflected wider spreads between selling prices and raw-material costs, lower unit conversion costs and higher shipments. Lower raw-material costs contributed to wider spreads, partly offset by lower selling prices.
- SG&A was $7.6 million for the quarter and $14.0 million for the half, up 27.8% and 20.2%, respectively, primarily because of higher incentive compensation. The effective tax rate was 34.0% for the quarter and 34.3% for the half.
- At April 2, cash and cash equivalents were $36.4 million; working capital was $104.4 million. Total debt was zero, versus $10.0 million at the prior-year comparison cited in MD&A. The $100 million revolving facility had $77.0 million available and $1.6 million of letters of credit outstanding; the company reported covenant compliance.
- Six-month investing cash use was $4.3 million, including $4.3 million in capital expenditures. Financing used $16.3 million, including $19.7 million in dividends, of which $18.6 million was a special dividend ($1.00 per share). Cash increased $3.1 million from the fiscal-year start.
Material changes and unusual items
- Quarterly results benefited from higher gross profit; the prior-year quarter included $1.6 million of other income, mainly an insurance-related gain for the 2014 Gallatin facility fire. The corresponding prior-year half included $1.6 million of other income. The claim had been finally settled in fiscal 2015.
- Restructuring charges were $0.1 million for the quarter and $0.025 million for the half, relating to PC-strand facility consolidation; the prior-year periods each included $0.333 million. The Newnan, Georgia facility had closed in March 2015. The company did not expect significant restructuring charges in the rest of fiscal 2016.
- Inventory declined to $56.6 million from $66.0 million at October 3, 2015, largely reflecting lower average raw-material costs and higher-than-forecast shipments. Accounts payable and accrued expenses also declined.
- The company announced intent to terminate its frozen Delaware hourly pension plan effective May 1, 2016, with settlement expected by September 30, 2016. It expected an additional $0.106 million of plan contributions during the rest of fiscal 2016; settlement costs are not quantified in the provided filing text.
Outlook, risks and contingencies
Management expected further improvement during the remainder of fiscal 2016, citing favorable construction-market conditions, seasonal demand improvement, lower unit conversion costs, expected PC-strand synergies and potential benefits from facility investments. It viewed private nonresidential construction positively and said new federal transportation funding provided greater certainty for future infrastructure spending. No numerical earnings or revenue guidance was provided.
Principal risks include construction-market cyclicality and seasonality, competitive pricing, steel wire rod cost and availability, the ability to pass through cost increases, trade-policy changes, customer demand and inventory shifts, and plant outages or operating-cost increases. The filing estimates that, absent a corresponding change in selling prices, a 10% increase in wire rod prices would have reduced first-half pretax earnings by $10.9 million. Ordinary-course lawsuits and claims, including commercial, environmental and employment matters, were not expected to have a material adverse effect. Management reported no material changes to previously disclosed risk factors and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether shipment growth and construction demand continue to offset lower selling prices and competitive pressure.
- Whether gross-margin gains persist as wire rod prices, freight costs and customer pricing evolve.
- Progress and spending on the planned approximately $20 million of fiscal-2016 capital expenditures, including $9 million for Houston PC-strand expansion.
- Cash needs and accounting effects of the Delaware pension-plan termination and settlement.
- Dividend sustainability after the special dividend, and liquidity availability under the facility’s borrowing-base and covenant terms.
- Execution of expected ASW-related operating synergies and the remaining PC-strand restructuring actions.