Insteel Industries, Inc. — Q2 FY2015 Form 10-Q
Reporting period: Unaudited quarter and six months ended March 28, 2015. Amounts are in millions of dollars except per-share data. Insteel manufactures welded wire reinforcement and prestressed concrete strand for the concrete construction industry.
Financial performance
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Net sales | $101.8 | $91.4 | $212.4 | $178.7 |
| Gross profit | $8.7 | $11.6 | $20.7 | $20.7 |
| Gross margin | 8.6% | 12.7% | 9.8% | 11.6% |
| Net earnings | $2.5 | $3.5 | $6.7 | $6.3 |
| Diluted EPS | $0.14 | $0.19 | $0.36 | $0.34 |
- Q2 sales increased 11.3%, reflecting shipments up 10.6% and average selling prices up 0.7%. First-half sales increased 18.9%, with shipments up 15.7% and average selling prices up 2.8%. The ASW acquisition was a key contributor to shipment growth; severe winter weather weighed on volumes.
- Q2 gross profit fell 25.0%. Management attributed the decline primarily to higher unit conversion costs, including weather-related underutilization and increased health and workers’ compensation insurance costs, and narrower selling-price/raw-material spreads.
- First-half gross profit was essentially flat despite higher shipments and wider spreads, as increased unit conversion costs offset those benefits. First-half net earnings rose 6.8%, aided by insurance-related other income.
- Q2 SG&A was $6.0 million, broadly flat year over year; first-half SG&A increased 8.8% to $11.6 million, including higher employee benefits and amortization tied to ASW-acquired intangibles.
Cash flow, liquidity and debt
- First-half operating cash flow was a use of $1.8 million, versus $8.0 million provided a year earlier. Working capital used $15.3 million, chiefly due to a $20.7 million decline in accounts payable and accrued expenses, partly offset by lower receivables.
- Investing activities used $4.0 million, including $4.6 million of capital expenditures and $1.5 million for an acquired intangible asset; $1.6 million of fire-insurance proceeds partly offset outlays. FY2015 capital expenditure guidance was $11–$13 million.
- Financing activities provided $9.0 million, principally from $10.0 million of net revolving-credit borrowings. Cash was $6.2 million at March 28, 2015, versus $3.1 million at September 27, 2014.
- Net working capital was $95.7 million. Long-term debt was $10.0 million, compared with none at fiscal year-end. The $100 million revolver had $82.6 million of additional borrowing capacity and $1.5 million of letters of credit outstanding; it matures June 2, 2016. The company reported covenant compliance and no defaults.
- Dividends declared were $0.03 per share for the quarter and $0.06 for the first half. Management said future dividends remain discretionary.
Material changes, outlook and risks
- In March 2015, Insteel completed closure of the Newnan, Georgia PC strand facility acquired with ASW and consolidated production at its other three PC strand facilities. Q2 restructuring charges were $0.3 million; the company expects approximately $0.5 million of additional charges through FY2016. Expected cost savings are not assured.
- Q2 and first-half other income of approximately $1.6 million primarily reflected a net gain related to insurance proceeds for the 2014 Gallatin facility fire. The company expected final settlement of the claim in Q3 FY2015. Gallatin was fully operational by December 27, 2014.
- Management expected significant improvement in results for the rest of FY2015, citing seasonal factors, improving private nonresidential construction, consumption of lower-cost inventory, and ASW synergies. Infrastructure demand remained less certain pending federal transportation funding authorization. This is an outlook, not quantified earnings guidance.
- Key risks include construction-market and seasonal cyclicality, severe weather and utilization, steel wire rod price and availability, competitive limits on passing through costs, and execution of Newnan-related savings. A 10% wire-rod price increase, absent offsetting selling-price changes, was estimated to reduce first-half pretax earnings by $13.5 million. A 25-basis-point interest-rate change was estimated to affect annual pretax earnings by $25,000.
- Ordinary-course commercial, environmental and employment proceedings were disclosed; management did not expect their resolution to materially adversely affect financial position, results or cash flows. Disclosure controls were deemed effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether shipment growth and construction-market recovery persist after the unusually severe winter and how much growth reflects ASW rather than existing operations.
- Whether gross margins recover as lower-cost inventory is consumed and raw-material costs, selling prices and conversion costs change.
- Whether Newnan closure savings materialize, including the remaining restructuring costs and effects of relocating equipment and production.
- Whether operating cash flow improves after the first-half working-capital outflow, and the timing and sufficiency of revolver availability ahead of its June 2016 maturity.
- Final Gallatin insurance settlement and any remaining operational or financial effects of the fire.