Insteel Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2016; comparisons are to the three months ended January 2, 2016 unless noted. Unaudited consolidated results. Insteel manufactures steel wire reinforcing products for concrete construction, including prestressed concrete strand and welded wire reinforcement.
Financial results
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $93.9 million | $92.4 million | +1.6% |
| Gross profit | $13.0 million | $16.4 million | -20.8% |
| Gross margin | 13.9% | 17.8% | -3.9 percentage points |
| Net earnings | $4.5 million | $6.7 million | -33.5% |
| Diluted EPS | $0.23 | $0.36 | Lower |
| Operating cash flow | $3.8 million | $12.4 million | Lower |
| Capital expenditures | $5.4 million | $0.9 million | Higher |
- Shipments increased 8.5%, primarily reflecting improved market conditions and demand, while average selling prices declined 6.4% amid competitive pricing. The resulting sales increase was more than offset at the gross-profit level by narrower spreads between selling prices and raw-material costs.
- Management attributed the gross-profit decline principally to lower selling prices ($6.4 million impact) and higher freight expense ($0.3 million), partly offset by lower raw-material costs ($2.2 million) and higher shipment volume ($1.5 million).
- SG&A was $6.3 million, approximately flat year over year, and equaled 6.7% of sales versus 6.9%. The effective tax rate was 33.7%, compared with 34.6%.
Cash, debt and liquidity
- At December 31, 2016, cash and cash equivalents were $57.0 million; working capital was $104.3 million. Total assets were $282.6 million and shareholders’ equity was $205.0 million.
- No borrowings were outstanding under the $100 million revolving credit facility; $73.6 million of borrowing capacity was available, with $1.8 million of letters of credit outstanding. The facility matures May 13, 2020. Insteel reported compliance with its covenants and no events of default.
- Operating cash flow was reduced by working-capital movements, including a $17.4 million decrease in accounts payable and accrued expenses, partly offset by lower inventory and receivables. Cash used in investing activities was $5.6 million, principally for capital spending.
- Cash dividends declared totaled $24.3 million and were payable at quarter-end. This included a $1.25-per-share special dividend and the regular $0.03-per-share quarterly dividend; payment occurred in the second fiscal quarter. The reported quarterly dividend declared per share was $1.28.
Outlook, risks and notable items
- Management expected favorable construction-market conditions for the remainder of fiscal 2017, supporting higher shipments and operating levels and lower unit conversion costs. It cited positive customer sentiment, continued nonresidential construction growth, and anticipated infrastructure demand benefits from federal FAST Act funding.
- Management expected additional operating synergies following completion of the Houston PC-strand facility expansion, anticipated in fiscal Q2 2017, and gradual benefits from facility investments. Fiscal 2017 capital expenditures were expected to reach up to $25 million, primarily for the Houston expansion, engineered structural mesh capabilities, production technology and information systems.
- Demand is seasonal and cyclical; shipments and profitability are typically lower in the first and second fiscal quarters. Key exposures include construction activity, competitive pricing, steel wire rod cost and availability, customer demand and capacity utilization. A 10% increase in wire rod prices, assuming no corresponding selling-price change, would have reduced first-quarter pretax earnings by an estimated $5.2 million.
- Insteel said cash, operating cash generation and facility availability should meet anticipated requirements, including the next 12 months, absent significant unanticipated cash demands. A downturn could prompt cuts or delays to capital spending, share repurchases or dividends.
- Restructuring charges were $48,000, related to PC-strand equipment relocation; the company did not expect significant further restructuring charges in fiscal 2017. Ordinary-course legal matters were not expected to have a material adverse effect. No material changes to previously reported risk factors were noted.
Important facts for investors to verify
- Whether shipment growth and management’s construction-market outlook translate into sustained sales growth.
- Whether selling prices and raw-material costs improve the spreads that drove the quarter’s lower gross margin and earnings.
- Execution, timing and returns from the Houston expansion and other planned capital expenditures, against the stated capex ceiling of $25 million.
- Liquidity after the special dividend payment, including borrowing-base availability and continued covenant compliance.
- Exposure to wire rod price changes, construction-market cyclicality, competitive pricing and other risks described in the filing.