Insteel Industries, Inc. — Q1 FY2022 Form 10-Q
Business and period: Insteel manufactures steel wire reinforcing products for concrete construction, primarily welded wire reinforcement and prestressed concrete strand. This unaudited quarter ended January 1, 2022; comparisons are with the three months ended January 2, 2021 unless noted. The company operates as one reportable segment.
Financial performance
| Metric | Q1 FY2022 | Prior-year quarter |
|---|---|---|
| Net sales | $178.5 million | $119.6 million |
| Gross profit / margin | $42.4 million / 23.7% | $19.9 million / 16.6% |
| Net earnings | $23.1 million | $8.1 million |
| Diluted EPS | $1.18 | $0.42 |
| Operating cash flow | $13.6 million | $14.0 million |
| Capital expenditures | $0.8 million | $2.9 million |
| Cash and cash equivalents | $63.0 million at Jan. 1, 2022 | $89.9 million at Oct. 2, 2021 |
| Total debt | None | None |
At quarter-end, current assets were $226.8 million and current liabilities were $62.6 million; reported net working capital was $164.2 million. The $100 million revolving credit facility had no borrowings, $98.6 million available and $1.4 million in outstanding letters of credit. Insteel reported compliance with its covenants.
Material changes and drivers
- Sales increased 49.2%, reflecting a 69.4% increase in average selling prices, partly offset by an 11.9% decline in shipments. Higher prices reflected cost-recovery increases and strong demand; shipments were constrained by tight raw-material supplies.
- Gross profit more than doubled as selling-price increases outpaced higher raw-material costs. Management attributed the increase in gross profit primarily to a $27.2 million improvement in spreads, partly offset by higher manufacturing costs and lower shipments.
- SG&A rose 43.6% to $12.3 million, mainly because of higher compensation and incentive-plan expense; SG&A declined to 6.9% of sales from 7.2%.
- Operating cash flow was slightly lower year over year. Working capital used $21.4 million of cash, principally from lower accounts payable and accrued expenses, higher receivables and higher inventories.
- Financing used $39.4 million, including a $38.8 million special dividend ($2.00 per share) and a $0.6 million regular dividend ($0.03 per share). The quarter’s total dividends declared were $2.03 per share.
Outlook, risks and unusual items
- Management was optimistic about continued strong demand and expected the Infrastructure Investment and Jobs Act to add demand beginning in the second half of 2022. No quantified earnings or revenue guidance was provided.
- Domestic hot-rolled wire-rod supply remained inadequate, affecting production efficiency and customer service. Insteel made substantial commitments to imported rod; future offshore purchases depend partly on domestic supplier performance. Labor, transportation, utilities, spare-parts and other costs were also rising, and the company planned to seek recovery through selling prices.
- Management expected fiscal 2022 capital expenditures of up to $25 million, including investments in engineered structural mesh, productivity improvements and maintenance. It said cash, operating cash flow and available credit should meet expected needs for the foreseeable future, including the next 12 months, absent significant unanticipated funding requirements.
- Management cited exposure to construction-market cyclicality and seasonality, raw-material availability and price volatility, competitive pricing, and the ability to pass through cost increases. A 10% wire-rod price increase, with no offsetting selling-price change, would have reduced quarterly pretax earnings by an estimated $10.4 million.
- The company completed the sale of its former Summerville, South Carolina facility after quarter-end for $6.8 million net cash proceeds; it expected to record an approximately $0.47 million gain in the following quarter and anticipated about $0.25 million of additional closure charges.
- Ordinary-course legal matters were not expected to have a material adverse effect. The filing reported no material changes to the previously disclosed risk factors and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether domestic and imported wire-rod supply, shipment levels and production efficiency improve as management anticipated.
- Whether selling-price increases continue to offset raw-material and other operating-cost inflation without weakening demand.
- Progress on the planned fiscal 2022 capital program and the expected benefits from engineered structural mesh and productivity investments.
- The effect of dividends and working-capital needs on cash balances, and continued access to the revolving facility under its borrowing-base and covenant terms.
- Recognition of the Summerville facility sale gain and remaining restructuring costs in the subsequent quarter.