Insteel Industries, Inc. — Q1 Fiscal 2015 Form 10-Q
Reporting period: Three months ended December 27, 2014; comparisons are with the three months ended December 28, 2013 unless noted. Insteel manufactures welded wire reinforcement and prestressed concrete strand for construction markets.
Financial performance
| Metric | Q1 FY2015 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $110.6 million | $87.2 million | +26.8% |
| Gross profit | $12.0 million | $9.1 million | +33.0% |
| Gross margin | 10.9% | 10.4% | +0.5 percentage points |
| Net earnings | $4.2 million | $2.7 million | +51.1% |
| Diluted EPS | $0.22 | $0.15 | Up $0.07 |
| Operating cash flow | $(9.5) million | $6.3 million | Declined $15.8 million |
Shipments increased 20.9% and average selling prices rose 4.9%. Sales and shipment growth benefited from the August 2014 acquisition of American Spring Wire’s PC strand business, as well as improved market conditions and demand. Gross profit benefited mainly from higher selling-price/raw-material spreads and shipments, partly offset by higher unit conversion costs. SG&A was $5.7 million, or 5.1% of sales, versus $4.7 million, or 5.4%. The effective tax rate fell to 34.5% from 36.6%.
Cash, debt and liquidity
- Operating activities used $9.5 million of cash, primarily reflecting a $22.7 million decrease in accounts payable and accrued expenses and a $5.6 million inventory increase, partly offset by a $10.4 million reduction in receivables.
- Capital expenditures were $3.5 million; fiscal 2015 capex was expected to be $11–$13 million. Investing activities used $3.0 million.
- Financing activities provided $9.4 million, including $10.0 million of net revolving-credit borrowings. Cash and cash equivalents on the balance sheet were reported at $11,000, versus $3.05 million at September 27, 2014.
- Debt was $10.0 million at quarter-end, compared with none at September 27, 2014. The $100 million revolving facility had $81.4 million of additional borrowing capacity and $1.5 million of letters of credit outstanding; it matures June 2, 2016. The company reported compliance with covenants and no defaults.
- Current assets were $132.9 million and current liabilities $40.0 million; net working capital was $93.0 million. Shareholders’ equity was $182.9 million. Quarterly dividends declared were $0.03 per share.
Changes, outlook and risks
- The ASW acquisition had an adjusted purchase price of $33.5 million and added PC strand assets and operations. Restructuring liabilities related to employee separation costs were $1.2 million at quarter-end.
- Management expected further improvement in construction markets and anticipated benefits from ASW for the full fiscal year, operating synergies, and manufacturing investments. Private nonresidential construction appeared to be strengthening; infrastructure demand remained uncertain pending federal transportation funding. No quantitative earnings or revenue guidance was provided.
- Demand is seasonal and cyclical, with sales and profitability typically lower in the first and second fiscal quarters. Key risks include construction-market weakness, steel wire rod cost and availability, pricing pressure, utilization and conversion costs, and changes in transportation funding. A 10% increase in wire rod cost, without a corresponding selling-price change, was estimated to reduce quarterly pretax earnings by $7.0 million; a 25-basis-point interest-rate change was estimated to affect annual pretax earnings by $25,000.
- A January 2014 fire at the Gallatin PC strand facility had been fully repaired, and the facility was fully operational by December 27, 2014. The company recorded a $257,000 insurance receivable for costs incurred during the quarter and was pursuing final settlement. Ordinary-course legal matters were not expected to have a material adverse effect.
- Management stated that disclosure controls were effective and reported no material change in internal control over financial reporting. The filing reported no material risk-factor changes from the fiscal 2014 Form 10-K.
Important facts for investors to verify
- Reconcile the reported $11,000 balance-sheet cash figure with the note’s $1.49 million fair-value balance for cash equivalents.
- Assess how much of sales and shipment growth reflects the ASW acquisition versus underlying demand, and whether improved spreads and margins can persist.
- Monitor operating cash conversion, particularly working-capital movements, inventory levels, and accounts payable.
- Confirm the final insurance recovery for the Gallatin fire and track remaining restructuring costs.
- Evaluate liquidity and covenant headroom against the facility’s borrowing base and maturity, and monitor wire rod pricing, construction demand, and infrastructure funding.