Business context and reporting period
Insteel Industries, Inc. manufactures steel wire reinforcing products for concrete construction, including prestressed concrete strand and welded wire reinforcement. This unaudited Form 10-Q covers the three months ended January 2, 2016 (fiscal Q1 2016); the income-statement comparison is the three months ended December 27, 2014. The company reports one operating segment.
Key financial results
| Metric | Q1 FY2016 | Comparable period |
|---|---|---|
| Net sales | $92.4 million | $110.6 million |
| Gross profit / margin | $16.4 million / 17.8% | $12.0 million / 10.9% |
| SG&A expense | $6.3 million (6.9% of sales) | $5.7 million (5.1% of sales) |
| Net earnings | $6.7 million | $4.2 million |
| Diluted earnings per share | $0.36 | $0.22 |
| Operating cash flow | $12.4 million | $(9.5) million |
| Cash and cash equivalents at period-end | $45.6 million | — |
Sales fell 16.5%, reflecting shipments down 9.0% and average selling prices down 8.3%. Gross profit increased 36.4%; management attributed the improvement mainly to higher spreads between selling prices and raw-material costs. A 10% increase in wire-rod prices, with no offsetting selling-price change, would have reduced quarterly pretax earnings by an estimated $5.0 million.
Financial position and liquidity
At January 2, 2016, total assets were $265.3 million, shareholders’ equity was $189.4 million, and net working capital was $95.5 million. The company had no revolving-credit borrowings outstanding and reported $75.2 million of available borrowing capacity, subject to the facility’s borrowing base and terms. The facility commitment is $100 million and matures May 13, 2020; letters of credit outstanding were $1.6 million. The company reported compliance with its financial and negative covenants and no events of default.
Operating cash flow benefited from lower accounts receivable, partly offset by higher inventory and lower accounts payable and accrued expenses. Investing activities used $0.9 million, including $0.9 million of capital expenditures. Financing activities provided $0.8 million, including $1.5 million from stock-option exercises and $0.6 million of dividends paid.
Material changes and unusual items
- Despite lower sales, gross margin rose to 17.8% from 10.9%. Management cited $13.1 million of lower raw-material costs and $0.4 million of lower freight costs, partly offset by $8.4 million of lower selling prices; lower shipments reduced gross profit by $1.2 million.
- SG&A rose 12.1%, primarily from higher compensation and incentive-plan expense, partly offset by lower employee-benefit costs.
- Net restructuring recoveries were $75,000, including a gain on equipment sale partly offset by relocation and facility-closure costs. The company reported a $663,000 restructuring liability remaining and did not expect significant additional restructuring charges in fiscal 2016.
- In December 2015, the company declared a special dividend of $1.00 per share, or $18.6 million, payable in Q2 FY2016. Total dividends declared were $1.03 per share; the special-dividend cash payment was not reflected in Q1 cash flows.
- The company early adopted deferred-tax balance-sheet classification guidance prospectively, reclassifying its current deferred tax asset as noncurrent. Prior periods were not adjusted.
Outlook, commentary and risks
Management expected further improvement in fiscal 2016 results, citing positive construction-market conditions, consumption of lower-cost inventory, lower unit conversion costs, expected higher shipments and operating levels, and additional synergies from the ASW acquisition and PC-strand reconfiguration. It expected fiscal 2016 capital expenditures of approximately $20 million, including $9 million for expansion of the Houston PC-strand facility. These are forward-looking expectations, not guarantees.
Key risks include construction-market seasonality and cyclicality, steel wire-rod cost and availability, competitive pricing and the ability to pass through cost increases, customer demand and inventory changes, capacity utilization, and operating disruptions. Management said cash, operating cash generation and credit availability should meet anticipated needs absent significant unanticipated demands; a downturn could require cuts or delays to spending, share repurchases or dividends. Ordinary-course legal matters were not expected to have a material adverse effect. No material risk-factor changes were reported for the quarter.
Important facts for investors to verify
- Whether the anticipated recovery in construction demand and shipments materializes, given the pronounced seasonal sales decline.
- Whether improved raw-material spreads persist as selling prices and wire-rod costs change, and how lower-cost inventory affects margins.
- The timing and returns of the planned $20 million capital program, particularly the Houston expansion.
- The cash and liquidity effects of the $18.6 million special dividend, future dividends, and the company’s access to borrowing capacity under facility requirements.
- Whether restructuring costs, commodity-price exposure, and the remaining contingent legal matters develop differently from management’s expectations.