Insteel Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended June 30, 2018; nine months ended June 30, 2018. The company manufactures steel wire reinforcing products for concrete construction, principally prestressed concrete strand and welded wire reinforcement.
Financial performance
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Net sales | $126.7 million | $96.9 million | $331.8 million | $292.0 million |
| Gross profit | $24.2 million | $16.7 million | $51.3 million | $48.0 million |
| Gross margin | 19.1% | 17.2% | 15.4% | 16.4% |
| Net earnings | $12.9 million | $6.9 million | $26.9 million | $18.7 million |
| Diluted EPS | $0.67 | $0.36 | $1.40 | $0.98 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $49.8 million | $22.0 million |
- Q3 sales rose 30.7%, reflecting shipments up 16.5% and average selling prices up 12.1%. Gross profit increased 45.0%; higher selling prices more than offset increases in raw material and freight costs.
- Nine-month sales rose 13.7%, with shipments and average selling prices each up 6.6%. Gross profit increased 6.8%, but gross margin declined as raw material and freight cost increases outpaced price gains over the full period.
- SG&A was $7.5 million in Q3 and $20.8 million for nine months. The nine-month increase primarily reflected compensation and employee benefit costs, including staffing to support engineered structural mesh growth.
- The nine-month effective tax rate was 12.0%, versus 33.8% a year earlier. A $3.7 million deferred-tax benefit from remeasuring deferred tax liabilities after the Tax Cuts and Jobs Act materially boosted current-year earnings. Excluding that benefit, the company reported a 24.0% effective rate for the period.
Financial position and liquidity
- At June 30, 2018, cash and cash equivalents were $45.2 million, total current assets $160.9 million, current liabilities $44.4 million, and shareholders’ equity $230.7 million. Cash was $32.1 million at September 30, 2017.
- The company had no debt outstanding. Its $100 million revolving credit facility had $82.5 million of available borrowing capacity and $1.8 million of letters of credit outstanding; it was in compliance with facility covenants.
- Nine-month investing cash outflow was $15.9 million, including $12.5 million of capital expenditures and a $3.3 million business acquisition. Financing cash outflow was $20.8 million, including $20.8 million of dividends paid.
- Fiscal 2018 capital expenditures were expected to total up to $21 million, primarily for engineered structural mesh capacity, purchase of the leased Houston facility, production technology, and information systems.
Outlook, risks, and notable items
- Management expected continued construction-market growth for the remainder of 2018, citing positive customer sentiment, infrastructure funding, and favorable nonresidential construction indicators. It also anticipated gradually increasing benefits from facility investments and intended to pursue further acquisitions in its existing businesses.
- Management cautioned that imported-steel tariffs and trade-case duties were increasing raw material costs. It planned to pursue price increases where appropriate and emphasized cost control, production alignment, and productivity improvements. The timing and scale of future raw material and selling-price changes remained uncertain.
- A 10% increase in wire rod prices, with no corresponding selling-price change, was estimated to reduce nine-month-based pretax earnings by $19.4 million. The company does not use derivatives to hedge wire rod prices.
- Demand is seasonal and cyclical; results are exposed to construction activity, customer inventory patterns, competitive pricing, raw-material availability and costs, and capacity utilization. Management said weaker end markets could require curtailing spending, delaying repurchases, or reducing or suspending dividends.
- The company was finalizing its insurance claim for 2017 Hurricane Harvey damage at its Dayton, Texas facility. It received $439,000 of insurance proceeds during the nine-month period and recorded a further $52,000 receivable in Q3. Management expected no material adverse effect from ordinary-course legal matters.
- The company completed a business acquisition during the nine-month period; the purchase-price allocation’s reported financial-statement effects were not material. No restructuring charges were recorded in the current-year periods.
Important facts for investors to verify
- Whether price increases continue to offset steel wire rod, freight, and tariff-related cost inflation, particularly given the nine-month gross-margin decline.
- How much of nine-month earnings growth reflects recurring operating performance versus the $3.7 million tax remeasurement benefit.
- Actual fiscal 2018 capital spending, progress on engineered structural mesh capacity and other facility investments, and the acquisition’s subsequent contribution.
- Cash generation and working-capital trends, including the inventory reduction and higher receivables, alongside future dividend and repurchase decisions.
- Final resolution of the Hurricane Harvey insurance claim and any material developments in legal or other contingencies.