Insteel Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 29, 2014; comparative periods ended March 30, 2013. The company manufactures concrete reinforcing products, including prestressed concrete strand and welded wire reinforcement.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $91.4 million, up 10.3% | $178.7 million, up 5.9% |
| Gross profit / margin | $11.6 million / 12.7%; prior 13.3% | $20.7 million / 11.6%; prior 11.6% |
| Net earnings | $3.5 million, down 5.2% | $6.3 million, up 2.5% |
| Diluted EPS | $0.19; prior $0.20 | $0.34; unchanged |
- Quarterly shipments rose 12.8%, while average selling prices fell 2.1%; for the six months, shipments rose 9.5% and prices fell 3.3%. Management attributed higher shipments to improving demand and lower prices to competitive pressure.
- Quarterly gross profit increased, but gross margin declined as lower prices, freight and conversion costs offset shipment growth. For the first half, improved shipments and spreads were partly offset by higher conversion costs.
- Cash from operations for the six months was $8.0 million, versus $26.1 million a year earlier. Higher inventory used $12.6 million of cash, partly offset by a $7.9 million increase in payables and accrued expenses.
- Cash and cash equivalents were $19.2 million at quarter-end, versus $15.4 million at fiscal year-end. Working capital was $92.2 million. Inventory was $71.4 million, up from $58.8 million.
- No debt was outstanding. The $100 million revolving facility had $81.3 million of borrowing capacity available and $1.5 million of letters of credit outstanding; the company reported covenant compliance. Total current assets were $136.9 million and current liabilities $44.6 million.
- Six-month capital expenditures were $3.0 million; fiscal 2014 capital expenditures were expected to be less than $12.0 million. Cash dividends were $1.1 million, or $0.06 per share, for the six months.
Changes, outlook and risks
- Compared with the prior-year quarter, sales growth did not translate into earnings growth: increased SG&A and other expense contributed to lower net earnings. First-half earnings increased modestly, while diluted EPS was unchanged.
- Cash from operations fell substantially year over year, chiefly because working capital consumed cash in 2014, whereas it provided cash in the prior-year period.
- Management said construction markets appeared to be gradually improving, with a potentially strengthening nonresidential recovery supporting future shipment volumes and facility utilization. It gave no numerical earnings or sales guidance.
- Management expects additional Ivy Steel and Wire synergies and benefits from welded-wire operations reconfiguration, and plans to continue cost control, production scheduling and productivity initiatives. Demand is seasonal and cyclical; sales and profitability are usually higher in the third and fourth fiscal quarters.
- A January 2014 fire at the Gallatin, Tennessee PC-strand facility temporarily curtailed operations. Production was shifted partly to the company’s Florida facility; repairs were expected to finish in fiscal Q4 2014. The company received $1.3 million of insurance proceeds during the quarter, including proceeds recorded against additional plant expenses and damaged equipment.
- Steel wire rod price and availability, competitive pricing, construction demand, capacity utilization, and the fire’s duration, repair costs and insurance recovery are key risks. A 10% increase in wire rod prices would have reduced first-half pretax earnings by $11.4 million absent a corresponding selling-price increase.
- The company believed cash, operating cash flow and facility availability would meet expected needs absent significant unexpected demands. It could curtail spending, restrict repurchases or suspend dividends if conditions deteriorate. Ordinary-course legal matters were not expected to have a material adverse effect; no material risk-factor changes were reported.
Important facts for investors to verify
- Progress on Gallatin repairs, production recovery, and the amount and timing of insurance reimbursements.
- Whether volume growth continues and selling prices and margins stabilize amid competitive pressure and raw-material cost changes.
- Whether inventory growth converts into sales and operating cash flow improves.
- Whether the construction recovery, Ivy synergies and facility investments deliver the expected operating benefits.
- Available revolver capacity and covenant headroom, particularly if cash needs increase; future dividends remain subject to board discretion.