Business context and reporting period
Insteel Industries, Inc. manufactures steel wire reinforcing products for concrete construction, including prestressed concrete strand (PC strand) and welded wire reinforcement. This unaudited Form 10-Q covers the quarter and nine months ended June 27, 2015; comparable periods ended June 28, 2014. Figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance and position
| Metric | Three months ended June 27, 2015 | Year-over-year | Nine months ended June 27, 2015 | Year-over-year |
|---|---|---|---|---|
| Net sales | $117.0 | +3.3% | $329.4 | +12.9% |
| Gross profit / margin | $15.7 / 13.4% | $14.3 / 12.6% | $36.4 / 11.1% | $34.9 / 12.0% |
| Net earnings | $5.4 | -$0.4; -7.0% | $12.1 | +$0.02; +0.2% |
| Diluted EPS | $0.29 | $0.31 | $0.64 | $0.65 |
| Operating cash flow | Not provided for quarter | $16.3 | Down from $22.1 |
Quarterly shipments rose 5.1%, while average selling prices fell 1.7%. For the nine-month period, shipments rose 11.6% and average selling prices rose 1.1%. Management attributed shipment growth primarily to the ASW acquisition, partly offset by adverse weather. Quarter gross margin improved as selling-price-to-input-cost spreads and shipments increased; nine-month gross margin declined amid higher unit conversion costs.
At June 27, cash and cash equivalents were $11.4, total assets $248.8, current assets $134.4, current liabilities $43.1, and shareholders’ equity $190.9. Net working capital was $91.3. The company had no debt outstanding, with $85.7 of borrowing availability under its $100.0 revolving facility and $1.6 of letters of credit. The facility maturity was extended to May 13, 2020; the company reported compliance with its covenants.
Nine-month investing cash outflow was $6.2, including $6.8 of capital expenditures and $1.5 for an acquired intangible asset, partly offset by fire-insurance proceeds and $0.5 of post-closing acquisition adjustments. Financing cash outflow was $1.8, mainly dividends. Cash increased $8.4 from fiscal year-end to $11.4.
Material changes and unusual items
- Third-quarter net earnings fell despite higher sales and gross profit, principally because of restructuring charges, a $0.7 customer-dispute settlement charge, and higher SG&A. The prior-year quarter included other income primarily from a fire-insurance gain.
- For the first nine months, earnings were essentially flat: gross profit increased, but SG&A and restructuring costs rose. Other income included a $1.7 net gain from insurance proceeds related to the 2014 Gallatin facility fire; the insurer settlement was finalized in the third quarter.
- Restructuring charges totaled $0.7 for nine months, including a $0.2 noncash equipment impairment. The company closed the acquired Newnan, Georgia PC strand facility in March 2015 and expects approximately $0.2 of additional relocation and closure charges through fiscal 2016.
- Balance-sheet cash rose from $3.1 at September 27, 2014, while inventory fell from $81.9 to $70.8 and accounts payable fell from $52.8 to $33.3. The decrease in payables and accrued expenses was the principal working-capital cash use.
Guidance, outlook, and risks
Management expected further improvement in the remainder of fiscal 2015, citing favorable construction-market conditions, lower-cost inventory, anticipated recovery in private nonresidential construction after adverse weather, and additional ASW operating synergies. Infrastructure demand remained less certain pending federal transportation funding authorization. Fiscal 2015 capital expenditures were expected not to exceed $11.0. No specific revenue or earnings guidance was provided.
Key risks include construction-market cyclicality and seasonality; weather and capacity utilization; steel wire rod availability and price volatility; competitive limits on passing cost increases through to selling prices; transportation funding uncertainty; and execution of acquisition synergies. Management estimated that, absent corresponding selling-price changes, a 10% increase in wire rod prices would have reduced nine-month pretax earnings by $20.7. It also noted that falling input costs can hurt results if selling prices fall further or higher-cost inventory is consumed.
The company said ordinary-course lawsuits and claims were not expected to have a material adverse effect. It reported no material off-balance-sheet arrangements and no material changes in contractual obligations outside the ordinary course. Disclosure controls were deemed effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether improving construction demand and shipment volumes materialize, particularly in private nonresidential markets, and whether infrastructure funding is enacted.
- Whether selling prices and product spreads can offset steel wire rod, freight, insurance, and other conversion-cost movements.
- Progress and remaining costs from the Newnan closure and realization of expected ASW synergies.
- Cash conversion and working-capital trends, including the effect of lower payables and inventory changes on operating cash flow.
- Availability under the borrowing-base facility, covenant headroom, and continued ability to fund capital spending and dividends.
- Effects of the customer settlement and Gallatin fire-insurance recovery in assessing recurring earnings.