Business context and reporting period
Insteel Industries, Inc. manufactures and markets steel wire reinforcing products for concrete construction, including prestressed concrete strand and welded wire reinforcement. This unaudited Form 10-Q covers the first quarter of fiscal 2014, the three months ended December 28, 2013, and compares results with the three months ended December 29, 2012. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where shown.
Financial performance and condition
- Sales and profitability: Net sales rose 1.5% to $87.2 million. Net earnings increased 14.4% to $2.75 million; diluted EPS was $0.15 versus $0.13. Basic EPS was $0.15 versus $0.14.
- Shipments and pricing: Shipments increased 6.4%, while average selling prices declined 4.6%, reflecting competitive pricing pressure.
- Margins: Gross profit grew 5.4% to $9.06 million; gross margin improved to 10.4% from 10.0%. SG&A declined 2.8% to $4.71 million, or 5.4% of sales versus 5.6%.
- Taxes and interest: The effective tax rate rose to 36.6% from 34.7%, primarily due to permanent book-tax differences. Interest expense decreased to $56,000 from $72,000.
- Cash flow: Operating cash flow was $6.32 million, down from $23.47 million. Inventory growth used $11.23 million of cash, partly offset by a $7.36 million reduction in receivables and a $4.39 million increase in payables and accrued expenses. Capital expenditures were $1.98 million; investing activities used $2.06 million. Financing activities used $0.72 million, including $0.55 million of dividends paid.
- Liquidity and balance sheet: Cash and cash equivalents were $18.99 million at quarter-end, up from $15.44 million at September 28, 2013. Net working capital was $86.01 million. Total debt was zero; the $100 million revolving facility had $74.7 million of availability and $1.5 million of outstanding letters of credit. Shareholders’ equity was $163.49 million.
- Dividends: The declared dividend was $0.03 per share versus $0.28 a year earlier; the prior-year amount included a $0.25-per-share special dividend.
Changes, outlook, and risks
- Management attributed improved gross profit to wider spreads between selling prices and raw material costs and higher shipments. Both periods were affected by weak construction demand and elevated unit conversion costs from compressed operating schedules.
- Management described construction end-markets as gradually improving, with signs of a strengthening recovery in nonresidential construction. It expected higher volumes and facility operating levels to support results, and anticipated further benefits from Ivy Steel and Wire synergies and facility investments. No specific earnings or sales guidance was provided.
- Fiscal 2014 capital expenditures were expected to be less than $12 million. Management said cash, operating cash generation, and available credit were expected to meet foreseeable needs absent significant unanticipated demands; a further deterioration in construction markets could reduce cash flows and prompt spending reductions or changes to dividends and repurchases.
- Demand is seasonal and cyclical, typically stronger in the third and fourth fiscal quarters. Key risks include construction-market weakness, competitive pricing, steel wire rod cost and availability, and the ability to recover raw material cost increases. A 10% increase in wire rod prices, without a corresponding selling-price change, was estimated to reduce quarterly pretax earnings by $5.6 million.
- There were no borrowings under the credit facility and the company reported compliance with its covenants. A fixed-charge coverage covenant applies when facility liquidity falls below $13.5 million. Ordinary-course legal matters were not expected to have a material adverse effect. No material changes to previously disclosed risk factors or contractual obligations were reported.
- Cash surrender value of life insurance increased $289,000 in the quarter, compared with a $30,000 decrease in the prior-year quarter; management cited changes in underlying investment values. This contributed to the year-over-year SG&A comparison.
Important facts for investors to verify
- Whether improving construction demand translates into sustained shipment growth and better plant utilization.
- Whether selling prices and product mix can protect margins against competitive pressure and changes in wire rod costs.
- Whether inventory growth supports expected demand or creates additional working-capital and cash-flow needs.
- Facility borrowing availability, covenant headroom, and the effect of any future borrowing or market deterioration on liquidity.
- Execution of expected cost savings and synergies, and spending against the less-than-$12-million fiscal 2014 capital expenditure expectation.
- Future dividend decisions, which remain discretionary and subject to board approval each quarter.