Business context and reporting period
Insteel Industries, Inc. manufactures concrete-reinforcing products, principally welded wire reinforcement and prestressed concrete strand. This Form 10-Q covers the third quarter and first nine months of fiscal 2011, ended July 2, 2011; comparisons are with periods ended July 3, 2010. The November 2010 acquisition of Ivy Steel and Wire expanded operations and affects year-over-year comparability.
Financial performance and position
| Metric | Three months ended July 2, 2011 | Nine months ended July 2, 2011 |
|---|---|---|
| Net sales | $98.6 million, up 59.1% | $237.8 million, up 53.0% |
| Gross profit / margin | $12.5 million / 12.7% | $24.0 million / 10.1% |
| Net earnings (loss) | $3.65 million; $0.21 per diluted share | $(1.36) million; $(0.08) per diluted share |
| Operating cash flow | Not presented separately for the quarter | $(0.10) million, versus $12.69 million provided in the prior-year period |
- Quarterly shipments rose 41.9% and average selling prices rose 12.1%; nine-month shipments rose 35.0% and average selling prices rose 13.4%. Management attributed shipment growth primarily to Ivy and price increases to efforts to recover higher raw-material costs.
- Nine-month results included $8.57 million of restructuring charges and $3.52 million of Ivy acquisition costs, partly offset by a $0.50 million bargain-purchase gain. The prior-year period included a $1.93 million inventory write-down.
- At July 2, cash was $2.01 million, current assets $121.85 million, current liabilities $50.89 million, and working capital $70.96 million. Cash was $45.94 million at October 2, 2010. Accounts receivable and inventory increased to $43.69 million and $70.45 million, respectively.
- Debt was $13.50 million under the Ivy subordinated note; no revolving-credit borrowings were outstanding. The $75 million revolver had $73.9 million of availability, after $1.1 million of letters of credit. Total shareholders’ equity was $146.85 million.
- Capital expenditures were $6.29 million for the nine months; management expected fiscal 2011 capital expenditures to be below $10 million.
Material changes versus the prior comparable period
Third-quarter earnings increased from $1.61 million to $3.65 million as higher sales and improved gross margin more than offset higher SG&A and restructuring costs. For the nine months, the company moved from $2.10 million of net earnings to a $1.36 million net loss, principally reflecting Ivy-related restructuring and acquisition expenses. Nine-month sales growth includes acquired Ivy operations and should not be read as wholly organic growth. Nine-month cash from operations fell sharply, reflecting the prior year’s $13.3 million tax refund, the current-year loss and working-capital investment.
Outlook, commentary, risks and contingencies
- Management expected nonresidential construction, its primary demand market, to remain depressed through the rest of fiscal 2011; residential construction was expected to remain weak but improve gradually. The filing gives no specific earnings or revenue guidance.
- Management expected about $1.0 million of additional restructuring charges through the first quarter of fiscal 2012, with substantially all related cash payments expected by then. It expected Ivy contributions to improve as integration and anticipated synergies progressed.
- Hot-rolled steel wire rod prices had risen since December 2010. The company warned it might not recover further cost increases through selling prices; a 10% wire-rod price increase, without a corresponding selling-price change, was estimated to reduce nine-month pretax earnings by $6.4 million.
- Management said cash, operating cash flow and revolver access should meet anticipated needs absent significant unanticipated demands, but weaker construction demand or acquisition-related cash needs could pressure liquidity. Potential responses include reducing spending, restricting repurchases or suspending dividends.
- The Ivy integration, realization of synergies, construction-market weakness, steel costs and competitive pricing are key disclosed risks. The company reported compliance with credit-agreement and note covenants. A previously disclosed DSI/ODOT dispute was settled and dismissed; other ordinary-course claims were not expected to have a material adverse effect.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter. The company reported no material changes to the risk factors in its prior Form 10-K.
Important facts for investors to verify
- How much of reported sales and shipment growth reflects Ivy, and whether planned integration savings materialize.
- Whether selling prices keep pace with wire-rod costs, given the disclosed $6.4 million pretax sensitivity to a 10% raw-material increase.
- Whether operating cash flow improves as receivables and inventory normalize, and how low cash balances affect liquidity despite revolver availability.
- The final restructuring cash costs and timing, and the scheduled repayments on the $13.5 million Ivy note.
- Whether demand, margins and capacity utilization recover sufficiently to offset continuing construction-market weakness.