Insteel Industries, Inc. — Q3 FY2013 Form 10-Q
Reporting period: Fiscal third quarter ended June 29, 2013; nine-month period ended June 29, 2013. Comparative periods ended June 30, 2012. Insteel manufactures steel-wire concrete reinforcement products, including prestressed concrete strand and welded wire reinforcement. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Net sales | $96.9 | $93.6 | $265.7 | $265.4 |
| Gross profit | $10.9 | $6.4 | $30.6 | $16.6 |
| Gross margin | 11.3% | 6.8% | 11.5% | 6.2% |
| SG&A expense | $5.4 | $4.8 | $15.5 | $14.3 |
| Net earnings | $3.3 | $0.9 | $9.4 | $1.0 |
| Diluted EPS | $0.18 | $0.05 | $0.51 | $0.05 |
- Q3 shipments increased 9.3%, while average selling prices fell 5.3%; nine-month shipments rose 4.6% and average selling prices declined 4.3%. Management attributed the price declines to competitive pressure.
- Higher gross profit reflected wider spreads between selling prices and raw-material costs, increased shipments, and lower unit conversion costs. Depressed volumes and reduced operating schedules continued to weigh on results. SG&A rose largely because improved results increased incentive compensation.
- Nine-month operating cash flow was $32.1 million, versus $1.7 million a year earlier. Working-capital movements provided $11.3 million, including lower receivables and higher payables, partly offset by increased inventories.
- Cash and cash equivalents were $12.1 million at June 29, 2013, compared with $10,000 at September 29, 2012. Current assets were $123.0 million and current liabilities $44.9 million; reported working capital was $78.1 million.
- No debt was outstanding at quarter-end. The $100 million revolving facility had $77.1 million of borrowing capacity available and $1.5 million of letters of credit outstanding; the facility matures in June 2016. The company reported compliance with its covenants.
- Nine-month investing cash outflow was $5.6 million, including $4.4 million of capital expenditures and $1.9 million for an intangible asset acquired with certain Tatano Wire and Steel assets. Financing cash outflow was $14.4 million, including $11.5 million of net debt repayments and $6.1 million of dividends, partly offset by $3.4 million from option exercises.
Changes, outlook, and risks
- Year-over-year earnings improved substantially despite nearly flat nine-month sales. Interest expense declined with lower debt; prior-year comparisons included $0.8 million of restructuring charges and a $0.4 million debt-extinguishment gain, neither recorded in the current nine-month period.
- The nine-month dividends included a $0.25-per-share special dividend and regular dividends of $0.09 per share. Management intended to continue regular quarterly dividends, subject to board discretion and business conditions. No shares were repurchased during the reported periods.
- Management said visibility remained limited and expected construction activity to remain depressed pending a more substantive economic recovery. It anticipated additional Ivy-related operational synergies and benefits from the completed welded-wire operations reconfiguration, while continuing cost control, production-schedule adjustments, productivity initiatives, and evaluation of acquisitions. No quantified earnings or sales guidance was provided.
- Key exposures include cyclical construction demand, competitive pricing, steel-wire-rod cost and availability, and the ability to pass raw-material cost increases through to customers. Management estimated that a 10% increase in wire rod prices would have reduced nine-month pretax earnings by $17.3 million, assuming no corresponding selling-price change. It also warned that further market deterioration could reduce operating cash flow and prompt cuts to spending, dividends, or repurchases.
- Ordinary-course commercial, environmental, and employment matters were not expected to materially adversely affect the company. The filing reported no material changes to previously disclosed risk factors and no significant subsequent events.
Important facts for investors to verify
- Whether shipment growth and improved gross margins can persist despite falling average selling prices and depressed construction volumes.
- Steel-wire-rod price movements, customer pricing, and the company’s ability to recover cost increases; the disclosed sensitivity assumes no offsetting price changes.
- Quality and sustainability of operating cash flow, particularly the contribution from working-capital timing and higher accounts payable.
- Available borrowing capacity and covenant headroom if business conditions weaken; the facility’s borrowing base and liquidity requirements can constrain access.
- Realization of expected Ivy synergies and the benefits of the Tatano asset acquisition, as well as the discretionary nature of future dividends and repurchases.