Insteel Industries, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended September 28, 2019 (52 weeks). Insteel manufactures steel-wire reinforcement products for concrete construction, principally prestressed concrete strand and welded wire reinforcement. About 85% of FY2019 sales were tied to nonresidential construction.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $455.7 million | $453.2 million |
| Shipments / average selling prices | Down 7.1% / up 8.1% | — |
| Gross profit / margin | $30.1 million / 6.6% | $70.8 million / 15.6% |
| Net earnings | $5.6 million | $36.3 million |
| Diluted EPS | $0.29 | $1.88 |
| Operating cash flow | $6.6 million | $54.0 million |
| Capital expenditures | $10.5 million | $18.4 million |
| Cash and cash equivalents at year-end | $38.2 million | $43.9 million |
| Debt at year-end | None | None |
| Working capital | $132.2 million | $123.5 million |
Sales were nearly flat as higher prices were offset by lower shipments. Gross profit fell 57.5%, principally because wire-rod costs rose faster than selling prices, alongside higher manufacturing costs and lower shipments. SG&A declined 13.4% to $24.5 million, mainly on lower incentive compensation. The effective tax rate was 24.9%, versus 14.9% in FY2018; the prior-year rate included a $3.3 million benefit from the Tax Cuts and Jobs Act remeasurement.
Operating cash flow declined sharply, including a $12.0 million use of working capital, chiefly from lower accounts payable and accrued expenses. Year-end liquidity included $38.2 million cash and $82.9 million available borrowing capacity under the $100 million revolving credit facility, maturing May 2024. The company reported $2.3 million of dividends paid in FY2019; FY2018 included a $19.0 million special dividend.
FY2019 product sales were $290.4 million for welded wire reinforcement, up from $273.7 million, and $165.3 million for prestressed concrete strand, down from $179.6 million. Fourth-quarter net sales were $113.4 million and the company recorded a $1.8 million net loss, compared with $121.4 million sales and $9.4 million net earnings in the prior-year quarter.
Changes, outlook, risks, and unusual items
- Management attributed weaker shipments to unusually wet weather through the first three quarters and increased low-priced imports following the Section 232 tariff on imported steel. The tariff applies to imported wire rod but excludes finished products, which management said gave offshore competitors a cost advantage.
- FY2019 other income included gains from property insurance and asset dispositions. The company received $2.2 million related to the Dayton, Texas facility insurance claim; portions were recorded across other income, cost of sales, and SG&A. These items are not necessarily recurring.
- For FY2020, management expected support from construction-market growth, weather-related deferred business, and infrastructure spending, while nonresidential growth was expected to moderate but remain positive. It also anticipated continued challenging conditions from low-priced imports. No quantified earnings or sales guidance was provided.
- Management plans to control costs, match production to demand, improve productivity, realize benefits from facility investments, and continue considering acquisitions. It also expected FY2020 SERP pension cost of $966,000 and contributions of $283,000.
- Key risks include construction-cycle and seasonal demand, variable customer orders and minimal backlog, wire-rod price and supply volatility, inability to pass through costs, trade policy and import competition, plant interruptions, and rising freight, energy, and employee-benefit costs. A 10% increase in wire-rod prices, assuming no corresponding selling-price change, was estimated to reduce annual pretax earnings by $31.1 million.
- The company reported no goodwill impairment, no material off-balance-sheet arrangements, and no expected material adverse effect from ordinary-course legal matters. Its financial statements and internal controls received unqualified auditor opinions.
Important facts for investors to verify
- Whether selling prices and product spreads recover sufficiently to offset wire-rod costs and competitive price pressure.
- Whether the shipment decline reverses as weather-related deferred work and infrastructure demand materialize.
- How Section 232 policy and low-priced imports affect market share, pricing, and margins.
- Whether operating cash generation improves after the unusually large working-capital outflow, and whether the stated credit availability remains accessible.
- The repeatability and accounting treatment of insurance recoveries and other gains included in FY2019 results.