Business context and reporting period
Insteel Industries, Inc. manufactures steel wire reinforcing products for concrete construction, primarily welded wire reinforcement and prestressed concrete strand. This unaudited Form 10-Q covers fiscal Q1 2019, the three months ended December 29, 2018; comparisons are with the three months ended December 30, 2017 unless otherwise noted.
Financial performance and liquidity
| Metric | Q1 2019 | Prior period | Change / context |
|---|---|---|---|
| Net sales | $104.1 million | $97.7 million | Up 6.5% |
| Gross profit | $11.0 million | $11.7 million | Down 5.9%; gross margin 10.5%, versus 11.9% |
| SG&A expense | $6.5 million | $5.8 million | Up 13.4%; 6.3% of sales, versus 5.9% |
| Other income | $829,000 | $19,000 expense | Primarily a $709,000 gain on disposal of property, plant and equipment |
| Earnings before taxes | $5.4 million | $5.9 million | Down |
| Net earnings | $4.1 million | $8.1 million | Down 49.1%; diluted EPS $0.21 versus $0.42 |
| Operating cash flow | $(22.8) million | $14.8 million | Cash use mainly reflected working-capital outflows |
| Capital expenditures | $6.2 million | $6.1 million | Fiscal 2019 spending expected to be up to $22 million |
At December 29, 2018, cash and cash equivalents were $15.5 million, down from $43.9 million at September 29, 2018. Inventories rose to $115.3 million from $94.2 million, while accounts receivable fell to $36.5 million from $51.5 million. Current liabilities were $47.9 million. The company reported no outstanding debt, with $98.2 million of borrowing capacity available under its $100 million revolving facility and $1.8 million of letters of credit outstanding. Shareholders’ equity was $245.4 million.
The company declared a regular quarterly dividend of $0.03 per share, compared with $1.03 per share in the prior-year quarter, which included a $1.00 special dividend. No shares were repurchased in either period.
Material changes and management commentary
- Sales growth reflected a 28.7% increase in average selling prices, partly offset by a 17.2% decline in shipments. Management attributed lower shipments to adverse weather, construction project delays and increased low-priced imports.
- Gross profit fell as higher manufacturing costs ($2.4 million) and lower shipments ($2.1 million) more than offset improved selling-price/raw-material spreads ($4.2 million). Higher selling prices were partly offset by increased raw-material costs and freight.
- Net earnings also reflected higher SG&A and the absence of the prior-year $3.7 million tax benefit from remeasurement of deferred taxes after the Tax Cuts and Jobs Act. The effective tax rate was 23.5%, versus a reported (36.8%) in the prior period; excluding that prior-year benefit, the prior-period rate was 24.9%.
- Operating cash use included a $21.1 million inventory increase and a $25.1 million decrease in accounts payable and accrued expenses, partly offset by a $15.0 million reduction in receivables. Management cited lower raw-material purchases, payment of prior-year incentive compensation, higher inventory unit costs and seasonally weaker sales.
Outlook, risks and contingencies
Management expects results for the remainder of fiscal 2019 to benefit from construction-market growth and business deferred from Q1 because of weather. It cited positive nonresidential construction indicators and expected infrastructure support from federal, state and local spending. No numerical earnings or sales guidance was provided.
Management also expects challenging conditions from higher raw-material costs associated with Section 232 tariffs and trade duties. It plans to control expenses, align production with demand, improve productivity and pursue acquisitions. The company expects capital spending of up to $22 million for fiscal 2019, primarily for cost, productivity and maintenance projects.
Key risks include construction-market cyclicality and seasonality, steel wire rod price and availability, inability to pass cost increases through to customers, trade-policy changes, import competition, customer demand and inventory shifts, and plant outages. Management estimated that a 10% increase in wire rod prices, without a corresponding selling-price change, would have reduced Q1 pretax earnings by $6.7 million. The Dayton, Texas facility’s 2018 electrical fire and hurricane-related claims were addressed through insurance; the fire claim was still being finalized, and management believed coverage was sufficient. Ordinary-course legal matters were not expected to have a material adverse effect. The company reported compliance with credit-facility covenants and no material change in risk factors.
Important facts for investors to verify
- Whether deferred weather-related demand returns and shipments recover, given Q1’s 17.2% shipment decline and import competition.
- Whether selling prices and product spreads can offset raw-material, freight and manufacturing-cost pressures.
- How inventory levels and working-capital movements affect operating cash flow and liquidity in subsequent quarters.
- Progress and final proceeds from the Dayton fire insurance claim, including the recorded $263,000 anticipated receivable.
- Execution of the fiscal 2019 capital-spending plan and expected productivity benefits, alongside the company’s qualitative outlook.