Insteel Industries, Inc. — Fiscal 2021 Form 10-K
Reporting period: Fiscal year ended October 2, 2021 (52 weeks); comparison is fiscal 2020, ended October 3, 2020 (53 weeks). The company manufactures prestressed concrete strand and welded wire reinforcement for construction markets.
Financial performance
| Metric | FY2021 | FY2020 | Change / context |
|---|---|---|---|
| Net sales | $590.6 million | $472.6 million | Up 25.0%; selling prices rose 25.7%, while reported shipments declined 0.6%. Adjusting for the extra week in FY2020, shipments increased 1.6%. |
| Gross profit / margin | $121.5 million / 20.6% | $55.8 million / 11.8% | Margin expanded 8.8 percentage points, mainly from wider selling-price-to-raw-material spreads. |
| Net earnings | $66.6 million | $19.0 million | Up 250.4%; diluted EPS was $3.41 versus $0.98. |
| Operating cash flow | $69.9 million | $56.2 million | Up $13.7 million; FY2021 working capital used $12.3 million. |
| Cash and cash equivalents | $89.9 million | $68.7 million | Increased $21.2 million. |
| Debt and revolving credit availability | $0 debt; $98.6 million available | $0 debt | $100 million revolving facility matures May 2024; $1.4 million of letters of credit outstanding. |
| Net working capital | $178.1 million | $143.4 million | Increased $34.7 million. |
Net margin was approximately 11.3%, compared with approximately 4.0% in FY2020. Cash used for investing was $17.8 million, including $17.5 million of capital expenditures; cash used for financing was $30.9 million, chiefly reflecting $31.3 million of dividends. That amount included a $29.0 million special dividend ($1.50 per share) and $2.3 million of regular dividends. Total dividends declared were $1.62 per share.
Material changes and unusual items
- Sales growth reflected higher prices implemented principally to recover rising wire-rod costs, alongside strong demand. Gross profit increased $65.8 million, primarily from a $73.2 million increase in spreads, partly offset by higher manufacturing and freight costs and slightly lower reported shipments.
- FY2021 included $2.9 million of net restructuring charges related to closing the acquired Summerville, South Carolina facility and consolidating PC-strand operations. This included a $1.4 million asset impairment. Management did not expect significant additional restructuring charges in FY2022.
- FY2020 included $1.3 million of other income, principally a gain on asset disposition, and a $223,000 tax benefit related to the CARES Act; FY2021 had $114,000 of other expense and a 22.6% effective tax rate versus 21.4%.
- Wire rod costs and selling prices rose sharply. Management said FY2021 price increases were sufficient to recover raw-material cost escalation, while noting margins could normalize once raw-material markets stabilize.
Outlook, risks and contingencies
Management expected robust construction demand in FY2022, supported by an economic recovery, favorable private nonresidential indicators and resilient public construction. Potential federal infrastructure investment could benefit demand, but its size and timing were uncertain. The company forecast capital expenditures of up to $25 million for FY2022, including ESM growth, productivity initiatives and maintenance.
Key near-term constraints were steel wire-rod shortages and escalating prices, tight labor markets, possible operating inefficiencies, and customer-service delays. Management expected to pass rising costs through the supply chain but anticipated more normalized margins after raw-material markets stabilize. COVID-19 remained a source of uncertainty; management reported limited operating impact to date.
- Wire-rod price exposure is material: a 10% increase, assuming no corresponding selling-price change, would have reduced annual pretax earnings by an estimated $32.7 million based on FY2021 shipments and costs. The company does not hedge wire rod with derivatives.
- Raw-material purchase commitments were $125.3 million, extending up to approximately 100 days; contractual equipment commitments were $3.6 million.
- Ordinary-course litigation and claims were not expected to have a material adverse effect. The company reported no material known tax exposures requiring reserves and no material off-balance-sheet arrangements.
- Demand is seasonal and cyclical, with minimal backlog and short customer lead times. Other disclosed risks include import competition and trade-policy changes, infrastructure funding, plant interruptions, cost inflation, climate-related impacts, cybersecurity and COVID-19.
Important facts for investors to verify
- Whether pricing continues to keep pace with wire-rod, freight and labor cost changes, and how quickly margins normalize.
- Whether wire-rod supply and labor availability constrain production, shipments or customer service; track shipment trends on a comparable-week basis.
- Whether expected FY2022 demand and planned capital spending, particularly ESM investment, translate into sustained growth and returns.
- The sustainability of dividend payments following the large special dividend and the company’s capital-allocation plans.
- Progress on sale of the idle Summerville facility and any resulting proceeds or further charges.
- The filing reports unqualified audit opinions on the financial statements and internal controls, and no critical audit matters.