Insteel Industries, Inc. — Fiscal 2022 Second-Quarter Form 10-Q
Business context and period: Insteel manufactures steel wire reinforcing products for concrete construction, principally welded wire reinforcement and prestressed concrete strand. This unaudited filing covers the quarter and six months ended April 2, 2022; comparisons are with the periods ended April 3, 2021. Amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended Apr. 2, 2022 | Year-over-year change | Six months ended Apr. 2, 2022 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $213.2 million | +53.4% | $391.7 million | +51.5% |
| Gross profit | $57.1 million | +88.8% | $99.4 million | +98.6% |
| Gross margin | 26.8% | 21.7% prior year | 25.4% | 19.4% prior year |
| Net earnings | $39.0 million | +161.5% | $62.1 million | +169.5% |
| Diluted EPS | $1.99 | $0.76 prior year | $3.17 | $1.18 prior year |
| Operating cash flow | Not separately presented for the quarter | — | $20.1 million | $29.2 million prior year |
- Second-quarter sales growth reflected a 65.4% increase in average selling prices, partly offset by shipments down 7.2%. For the first half, selling prices rose 67.5% while shipments fell 9.5%. Management attributed lower shipments to tight raw-material supply.
- Second-quarter sales comprised $133.7 million of welded wire reinforcement and $79.6 million of prestressed concrete strand. Higher selling-price-to-raw-material-cost spreads drove gross-profit growth, partly offset by higher manufacturing costs and lower shipments.
- Second-quarter SG&A was $7.2 million, down 30.3% year over year; first-half SG&A was $19.5 million, up 3.2%. The quarter’s decline primarily reflected lower compensation, legal and employee-benefit costs.
Balance sheet, cash flow and liquidity
- At April 2, 2022, cash and equivalents were $69.7 million, down from $89.9 million at October 2, 2021. Working capital was $209.0 million; shareholders’ equity was $325.1 million.
- There was no outstanding debt. The $100 million revolving facility had $98.6 million of borrowing capacity available, with $1.4 million of letters of credit outstanding; maturity is May 2024. The company reported compliance with its covenants and no defaults.
- First-half operating cash flow of $20.1 million included a $48.0 million increase in inventories and a $12.8 million increase in receivables, partly offset by a $6.8 million increase in accounts payable and accrued expenses.
- First-half investing cash use was $0.1 million, including $8.6 million of capital expenditures, offset substantially by proceeds from asset sales and life-insurance claims. Financing cash use was $40.1 million, including $40.0 million of dividends paid.
- The first half included a $2.00-per-share special dividend and regular dividends totaling $0.06 per share. Up to $25 million remained authorized for share repurchases; none occurred during the reported periods.
Outlook, risks and unusual items
- Management described demand and business conditions as positive and expected strong results for the remainder of fiscal 2022, citing strength in nonresidential construction markets and the usual seasonal demand increase in the third and fourth quarters. No quantitative earnings or sales guidance was provided.
- Domestic hot-rolled steel wire rod availability remained a concern. Insteel increasingly supplemented domestic supply with foreign sources. Management said it had recovered raw-material cost increases through pricing during the first half, but future cost and selling-price movements are uncertain.
- As a sensitivity, a 10% increase in wire-rod prices would have reduced first-half pretax earnings by $22.3 million if selling prices did not change correspondingly. The company does not hedge wire-rod prices with derivatives.
- Key risks include construction-market cyclicality and seasonality, raw-material availability and pricing, freight and other costs, competitive pricing, customer demand and inventory patterns, and the ability to pass through cost increases. Management also cited COVID-19, trade-policy, labor and operating-disruption risks.
- Second-quarter restructuring recoveries were $0.4 million, including a $0.6 million gain on sale of the Summerville facility, partly offset by closure costs. Management does not expect further restructuring charges or recoveries from the PC-strand consolidation.
- Ordinary-course legal matters were not expected to have a material adverse effect. The filing reported no material change in risk factors and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether tight wire-rod supply eases and Insteel can secure adequate imported and domestic material without disrupting production.
- Whether selling prices continue to offset raw-material, freight and manufacturing-cost changes, and whether demand remains resilient at record-high steel prices.
- How the substantial inventory and receivables increases convert to cash, particularly as seasonal shipments and working-capital needs change.
- Whether the outlook for strong second-half results is realized, given construction-market cyclicality and seasonal assumptions; the filing provides no numerical forecast.
- The sustainability and future level of special dividends; first-half dividend cash outflow included a special distribution.