Insteel Industries, Inc. — Q2 FY2020 Form 10-Q
Reporting period: Second quarter and six months ended March 28, 2020. Unaudited results; dollar amounts below are in millions unless stated otherwise. Insteel manufactures steel wire reinforcing products for concrete construction, principally welded wire reinforcement and prestressed concrete strand.
Financial performance
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Net sales | $114.9 | $111.9 | $212.4 | $216.1 |
| Gross profit | $15.3 | $7.0 | $21.5 | $18.0 |
| Gross margin | 13.3% | 6.3% | 10.1% | 8.3% |
| Net earnings | $4.4 | $1.0 | $4.9 | $5.2 |
| Diluted EPS | $0.23 | $0.05 | $0.25 | $0.27 |
- Quarterly drivers: Sales rose 2.6%, as shipments increased 19.7%, partly offset by a 14.3% decline in average selling prices. Gross profit more than doubled, primarily reflecting lower raw-material costs, higher shipments and lower manufacturing costs. SG&A rose 46.5% to $9.6 million, including the impact of lower life-insurance policy values, higher compensation and legal costs.
- Six-month comparison: Sales declined 1.7%, with a 15.9% increase in shipments offset by a 15.2% fall in average selling prices. Gross profit improved 19.6%, but net earnings fell 4.9%, as higher SG&A and reduced other income more than offset the gross-profit gain.
- Cash flow: Operating activities generated $26.6 million in the first half, versus $40.2 million used in the prior-year period. Working capital provided $10.8 million, mainly from higher payables and accrued expenses, partly offset by higher receivables. Investing activities used $23.2 million, including $21.5 million for the acquisition; financing activities used $1.2 million, principally dividends. Cash increased to $40.4 million from $38.2 million at fiscal year-end.
- Liquidity and debt: Working capital was $128.1 million. No revolving-credit borrowings were outstanding; $89.6 million of borrowing capacity was available under the $100 million facility, with $1.6 million of letters of credit. The facility matures May 15, 2024; the company reported covenant compliance. Capital expenditures are expected to total up to $17 million for fiscal 2020.
Material changes and unusual items
- On March 16, Insteel acquired substantially all assets of Strand-Tech Manufacturing (STM) for $22.5 million, subject to post-closing adjustments, including a $1.0 million holdback payable after one year. The preliminary purchase-price allocation recorded $1.3 million of goodwill. STM contributed approximately $1.1 million of facility sales in the quarter; the company said its earnings contribution could not practicably be isolated following integration.
- Insteel plans to close STM’s Summerville, South Carolina facility and redeploy equipment to its other PC strand plants. The closure was expected by the end of fiscal Q3. The company recorded $149,000 of restructuring charges and expected approximately $1.7 million of additional restructuring charges through fiscal 2020. Acquisition-related costs were $187,000.
- Prior-year comparisons include unusual insurance proceeds and a gain on property disposition in other income. Current-quarter income taxes included a $188,000 discrete benefit related to CARES Act net operating loss carryback provisions.
- At March 28, total assets were $319.0 million and shareholders’ equity was $250.8 million. Current assets were $176.3 million and current liabilities were $48.1 million.
Outlook, risks and contingencies
- Management said visibility for the remainder of 2020 was limited by COVID-19 uncertainty and mitigation measures, and expected challenging market conditions due to low-priced imports following Section 232 steel tariffs. Insteel reported that its facilities had continued operating as critical infrastructure, but warned the pandemic could disrupt operations, suppliers, customers and transportation and materially affect results; the impact could not be estimated.
- Management’s stated priorities were expense control, adjusting production to demand, productivity improvements and realizing benefits from facility investments. It also expected to pursue further acquisitions; no earnings or revenue guidance was provided.
- Steel wire rod cost and availability, construction demand, import competition, selling-price recovery and capacity utilization are significant risks. The filing estimates that a 10% wire-rod price increase, without a corresponding selling-price change, would reduce first-half-based pretax earnings by $13.0 million.
- Ordinary-course legal matters were not expected to have a material adverse effect. The filing reported no material change to previously disclosed risk factors other than adding COVID-19-related risks.
Important facts for investors to verify
- How COVID-19 affected subsequent demand, plant operations, supply chains and cash generation after the March 28 reporting date.
- Whether price competition and lower selling prices continue to pressure margins, and how effectively raw-material cost changes are passed through.
- STM integration progress, final purchase-price allocation, realized synergies, facility closure timing and total restructuring costs.
- Delivery of the up-to-$17 million capital expenditure plan and the effects on liquidity, working capital and borrowing availability.
- Whether operating cash flow, dividend capacity and credit-facility covenant compliance remain consistent with management’s liquidity expectations.