Business context and reporting period
Insteel Industries manufactures steel-wire reinforcement products for concrete construction, including prestressed concrete strand and welded wire reinforcement. This unaudited Form 10-Q covers the third quarter and first nine months of fiscal 2016, ended July 2, 2016; comparisons are with the periods ended June 27, 2015.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $115.6M | $117.0M | $315.4M | $329.4M |
| Gross profit | $27.5M | $15.7M | $62.6M | $36.4M |
| Gross margin | 23.8% | 13.4% | 19.8% | 11.1% |
| Net earnings | $13.5M | $5.4M | $27.4M | $12.1M |
| Diluted EPS | $0.71 | $0.29 | $1.44 | $0.64 |
- SG&A was $6.8M in Q3 and $20.8M year to date, up 6.6% and 15.3%, respectively; higher incentive compensation was the main driver.
- Operating cash flow was $45.7M for the nine months, versus $16.3M a year earlier. Capital expenditures were $9.1M; investing cash outflow was $9.0M.
- Cash was $53.8M at July 2, up from $33.3M at October 3, 2015. Current assets were $169.4M and current liabilities $53.1M; reported working capital was $116.3M.
- No debt was outstanding. The $100M revolving facility had $81.5M available and $1.8M in letters of credit; the company reported covenant compliance.
- Shareholders’ equity was $213.1M. Nine-month financing cash outflow was $16.0M, including $20.3M of dividends paid. This included a $1.00-per-share special dividend of $18.6M; Q3 dividends declared were $0.03 per share.
Material changes versus prior period
Q3 sales declined 1.2% as shipments rose 9.8% but average selling prices fell 10.0%. For the first nine months, sales fell 4.2% as shipments increased 6.8% and average selling prices fell 10.3%. The company attributed the shipment gains to improving markets and price declines to competitive pressure.
Gross profit and margins rose substantially, primarily because lower raw-material costs improved spreads between selling prices and input costs, alongside higher shipments and lower unit conversion costs. Nine-month SG&A increased with incentive-plan expense. Prior-year nine-month other income included a $1.7M insurance-related gain, partly offset by a $0.7M customer-dispute settlement; neither item recurred in the current period.
Outlook, risks and unusual items
- Management expected improving construction markets to support shipment volumes and operating levels for the remainder of fiscal 2016. It expected spreads to narrow from Q3 as higher-cost inventory was consumed, while remaining improved, and anticipated further acquisition-related synergies and benefits from facility investments.
- Fiscal 2016 capital expenditures were expected not to exceed $18M, including expansion of the Houston PC-strand facility. The filing gives no specific earnings or revenue guidance.
- Key exposures include construction demand and seasonality, competitive pricing, steel wire-rod cost and availability, and the ability to pass input-cost increases through to customers. Management estimated that a 10% wire-rod price increase, without a corresponding selling-price change, would have reduced nine-month pretax earnings by $16.6M.
- April–May flooding and excessive rainfall in the south-central U.S. adversely affected shipments. Management noted that spreads could be pressured by higher-cost inventory. Cash and cash equivalents were concentrated primarily at one financial institution, sometimes above federally insured limits.
- The company planned to terminate its frozen Delaware hourly pension plan, with settlement expected by September 30, 2016; it estimated additional funding of approximately $1.9M. It did not expect significant restructuring charges in the rest of fiscal 2016.
- Ordinary-course lawsuits and claims were not expected to materially affect financial position, results or cash flows. No material risk-factor changes were reported.
Important facts for investors to verify
- Whether shipment growth continues and competitive pricing limits revenue recovery despite improved volumes.
- How steel wire-rod costs, inventory timing and selling prices affect gross margins in coming quarters.
- Progress on the Houston facility expansion, planned capital spending and expected acquisition-related cost synergies.
- Final funding and settlement costs and timing for the pension-plan termination.
- Cash generation, dividend policy and available revolver capacity if construction demand weakens.