Insteel Industries, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2022, ended July 2, 2022. The company manufactures steel wire reinforcing products for concrete construction, principally welded wire reinforcement and prestressed concrete strand. Amounts below are in U.S. dollars; financial statement figures are rounded to millions unless stated otherwise.
Financial performance
| Metric | Three months ended July 2, 2022 | Year-over-year change | Nine months ended July 2, 2022 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $227.2 million | +41.3% | $618.8 million | +47.6% |
| Gross profit | $58.1 million | +84.1% | $157.5 million | +93.0% |
| Gross margin | 25.6% | 19.6% prior year | 25.5% | 19.5% prior year |
| Net earnings | $38.6 million | +109.6% | $100.7 million | +142.9% |
| Diluted EPS | $1.96 | $0.94 prior year | $5.13 | $2.13 prior year |
| Operating cash flow | Not provided for the quarter | — | $15.1 million | $65.5 million prior year |
Sales growth reflected higher average selling prices—up 53.9% in the quarter and 62.2% for the nine-month period—partly offset by shipment declines of 8.2% and 9.1%, respectively. Management attributed the stronger gross profit primarily to improved spreads between selling prices and raw material costs.
Liquidity, debt and cash flow
- Cash and cash equivalents were $63.0 million at July 2, 2022, down from $89.9 million at October 2, 2021. Net working capital was $248.6 million.
- Operating activities generated $15.1 million in the first nine months, compared with $65.5 million a year earlier. Inventory growth used $113.4 million of cash and higher receivables used $13.3 million, partly offset by a $27.2 million increase in accounts payable and accrued expenses.
- Investing activities used $2.7 million; capital expenditures were $12.3 million. Financing activities used $39.2 million, including $40.6 million of dividends paid.
- No borrowings were outstanding under the $100 million revolving credit facility; available borrowing capacity was $98.6 million, with $1.4 million of letters of credit. The facility matures May 15, 2024. The company reported compliance with its covenants and no defaults.
- Total debt was zero, and shareholders’ equity was $364.9 million. The current ratio was approximately 3.6x, based on reported current assets and current liabilities.
Material changes and unusual items
- Gross margin rose by 6.0 percentage points in the quarter and 6.0 points for the nine-month period, as selling-price increases more than offset higher wire rod and freight costs.
- Shipments declined amid customer inventory management, tight raw-material supply during the nine-month period, and labor shortages that constrained production.
- Inventories increased to $192.4 million from $79.0 million at fiscal year-end, reflecting higher raw-material purchases and unit costs.
- The nine-month results included a $0.3 million net restructuring recovery, primarily from a $0.6 million gain on sale of the Summerville facility, partially offset by closure costs. The prior-year period included $2.8 million of net restructuring charges.
- The company declared a $2.00-per-share special dividend and $0.09 per share of regular dividends during the first nine months. No share repurchases occurred.
Outlook, commentary and risks
- Management expected another period of strong financial performance in fiscal fourth quarter 2022, citing positive customer sentiment and expansionary nonresidential construction indicators. It reported softness in standard welded wire reinforcement but no similar trend in other product lines.
- Management said domestic wire rod supply constraints had eased through foreign sourcing, while tight labor markets continued to limit facility schedules. Higher pay and revised work schedules were intended to support production through the balance of calendar 2022.
- Fiscal 2022 capital expenditures were expected to total up to $20 million, supporting engineered structural mesh growth, productivity improvements, and maintenance.
- Key exposures include construction-market cyclicality and seasonality; customer inventory changes; steel wire rod price and availability; freight and other input costs; labor constraints; and the company’s ability to pass cost increases through selling prices. A 10% increase in wire rod prices, without a corresponding selling-price change, was estimated to reduce nine-month-based pretax earnings by $35.5 million.
- Management said cash, operating cash flow, and credit availability should meet anticipated liquidity needs for the foreseeable future, including the next 12 months, absent significant unexpected funding needs. In a downturn, it may reduce spending or suspend dividends.
- Ordinary-course lawsuits, claims, investigations, and proceedings were not expected to have a material adverse effect. The filing reported no material changes to the company’s previously disclosed risk factors.
Important facts for investors to verify
- Whether price increases continue to offset raw-material, freight, and manufacturing-cost inflation, particularly if market conditions weaken.
- Whether labor availability improves and production recovers from customer inventory controls and shipment constraints.
- How elevated inventory levels convert to sales and cash, and whether working-capital demands continue to weigh on operating cash flow.
- Whether the expected strong fourth-quarter performance and up-to-$20-million fiscal 2022 capital-spending plan are achieved.
- The sustainability of exceptional earnings and dividends, including the effect of special distributions on cash balances.