Insteel Industries Inc. — Q2 FY2023 Form 10-Q
Reporting period: Three and six months ended April 1, 2023, compared with the periods ended April 2, 2022. The interim financial statements are unaudited. Insteel manufactures steel wire reinforcement products for concrete construction, principally welded wire reinforcement and prestressed concrete strand.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Net sales | $159.1 million | $213.2 million | $326.0 million | $391.7 million |
| Gross profit | $13.3 million | $57.1 million | $31.0 million | $99.4 million |
| Gross margin | 8.3% | 26.8% | 9.5% | 25.4% |
| Net earnings | $5.1 million | $39.0 million | $16.2 million | $62.1 million |
| Diluted earnings per share | $0.26 | $1.99 | $0.83 | $3.17 |
| Operating cash flow | Not separately provided for the quarter | $79.6 million | $20.1 million |
Q2 sales fell 25.4%; management attributed this to a 14.5% decline in average selling prices and a 12.8% decline in shipments. First-half sales fell 16.8%, reflecting 11.4% lower shipments and 6.0% lower average prices. Q2 gross profit was pressured by lower selling-price/raw-material spreads, reduced shipments and higher manufacturing costs. First-half spreads were affected by higher raw material costs, lower selling prices and increased freight expense.
At April 1, 2023, cash and cash equivalents were $80.2 million, up from $48.3 million at October 1, 2022. Current assets were $287.9 million and current liabilities $45.1 million; reported net working capital was $242.8 million. Inventory declined to $136.5 million from $197.7 million, while accounts receivable declined to $65.9 million from $81.6 million.
There was no debt outstanding. The $100 million revolving facility had $98.6 million of available borrowing capacity, net of $1.4 million in letters of credit, and matures March 15, 2028. The company reported compliance with facility covenants. Six-month investing cash use was $5.5 million, including $15.4 million of capital expenditures and $9.9 million of proceeds from property sales. Financing cash use was $42.3 million, including $40.1 million of dividends and $1.9 million of share repurchases.
Material changes and unusual items
- Q2 net earnings declined 86.9% year over year; first-half net earnings declined 73.9%, primarily because of sharply lower gross profit.
- First-half operating cash flow rose to $79.6 million from $20.1 million, supported by a $57.5 million working-capital release, particularly lower inventory and receivables. Lower accounts payable and accrued expenses partly offset the benefit.
- First-half other income included a $3.3 million net gain from the sale of property, plant and equipment.
- First-half cash dividends included a special dividend of $38.9 million, or $2.00 per share, as well as regular dividends. The company repurchased 66,113 shares for $1.9 million during the half; $21.6 million remained under its authorization.
- In March 2023, the credit agreement was amended to extend the facility maturity and replace LIBOR with SOFR.
Outlook, risks and contingencies
Management expected momentum to recover in the second half as weather headwinds eased and customer destocking largely concluded. It cited positive customer sentiment, continued strength in private nonresidential construction, a gradual residential recovery and potential demand support from federal infrastructure spending. Management expected these conditions to support higher shipments, wider spreads, higher operating levels and lower unit costs. These are forward-looking expectations, not guaranteed results.
The company expects fiscal 2023 capital expenditures of up to approximately $30 million, for engineered structural mesh growth, productivity and cost initiatives, and maintenance. Management said cash, operating cash flow and available credit were expected to cover anticipated needs for at least the next 12 months, but weaker construction demand could require curtailing spending, dividends or repurchases.
Key risks include construction-market cyclicality and seasonality; customer inventory changes; competitive pricing and the ability to pass through raw-material costs; wire-rod price and availability; weather, capacity utilization and operating disruptions; and trade, regulatory and economic developments. Management estimated that a 10% increase in wire-rod prices, without a corresponding selling-price change, would have reduced first-half pretax earnings by $22.1 million. Ordinary-course lawsuits, claims and proceedings were not expected to have a material adverse effect. No material changes to the previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether second-half shipment and margin improvement materialized, and the pace of customer destocking and construction demand.
- Whether selling prices and raw-material costs stabilized enough to restore spreads, particularly as higher-cost inventory is consumed.
- How much of the $79.6 million operating cash flow reflected sustainable earnings versus working-capital reductions.
- Execution, timing and returns on the planned capital expenditures of up to approximately $30 million.
- Future dividend and repurchase decisions, facility availability and covenant compliance if operating conditions weaken.
- The effects of weather, infrastructure spending and broader construction-market conditions on demand and capacity utilization.