Insteel Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended July 1, 2017, and first nine months of fiscal 2017. Comparisons are with the quarter and nine-month period ended July 2, 2016, unless noted. Insteel manufactures prestressed concrete strand and welded wire reinforcement for concrete construction.
Financial performance
| Metric | Q3 FY2017 | Q3 FY2016 | 9M FY2017 | 9M FY2016 |
|---|---|---|---|---|
| Net sales | $96.9 million | $115.6 million | $292.0 million | $315.4 million |
| Gross profit | $16.7 million | $27.5 million | $48.0 million | $62.6 million |
| Gross margin | 17.2% | 23.8% | 16.4% | 19.8% |
| Net earnings | $6.9 million | $13.5 million | $18.7 million | $27.4 million |
| Diluted EPS | $0.36 | $0.71 | $0.98 | $1.44 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $21.6 million | $45.7 million |
- Q3 sales fell 16.2% year over year as shipments declined 20.8%; average selling prices rose 5.9%. Nine-month sales declined 7.4%, with shipments down 7.8% and average prices relatively unchanged.
- Gross profit decreased 39.5% in Q3 and 23.3% for the first nine months. Lower shipments, narrower selling-price/raw-material spreads, and higher unit costs from lower production were the principal factors.
- SG&A declined 9.2% in Q3 and 6.2% over nine months, mainly from lower compensation and incentive costs. Effective tax rates were 33.9% for Q3 and 33.8% for nine months.
Liquidity, debt, and capital allocation
- At July 1, 2017, cash and cash equivalents were $37.8 million, total current assets $169.0 million, current liabilities $55.7 million, and working capital $113.3 million. Cash was $58.9 million at October 1, 2016.
- No debt was outstanding. The $100 million revolving credit facility had $90.1 million of borrowing availability and $1.8 million of letters of credit outstanding; it matures May 13, 2020. The company reported covenant compliance and no defaults.
- Nine-month operating cash flow was $21.6 million, investing cash use $17.1 million, and financing cash use $25.5 million. Capital expenditures were $16.9 million, versus $9.1 million in the prior-year period.
- Cash dividends paid were $25.4 million, including a $23.7 million special dividend ($1.25 per share). The filing reports $0.03 per share of dividends declared in Q3 and $1.34 per share for the nine-month period.
- Management expected fiscal 2017 capital expenditures of up to $25 million, principally for Houston PC strand expansion, ESM capacity, production technology, and information systems.
Outlook, risks, and unusual items
- Management said construction-market leading indicators pointed to improved conditions for the rest of 2017, supporting higher shipments and operating levels and lower unit manufacturing costs. It cited positive customer sentiment and potential benefit from increased state and local infrastructure funding in some markets. No numerical earnings or sales guidance was provided.
- Management expects benefits from ASW acquisition synergies and the ramp-up of new raw-material and production lines at the Houston plant, as well as gradual contributions from recent facility investments.
- Q3 shipments were affected by excessive rainfall, reduced new-project activity, and competitive pricing. Higher wire-rod costs outpaced selling-price increases amid weaker demand, squeezing margins. A 10% wire-rod price increase, without a corresponding selling-price change, was estimated to reduce nine-month pretax earnings by $16.0 million.
- Other key exposures include construction-market cyclicality and seasonality, customer order and inventory changes, raw-material availability and cost, freight, pricing competition, trade-policy changes, capacity utilization, and plant outages. The company does not hedge wire-rod commodity exposure.
- Restructuring charges were $60,000 in Q3 and $133,000 for nine months, related to PC strand equipment relocation; management 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 off-balance-sheet arrangements were reported.
- Management stated that cash, operating cash generation, and the credit facility were expected to cover anticipated needs, including the next 12 months, absent significant unanticipated cash demands. A downturn could require curtailing spending, restricting repurchases, or reducing or suspending dividends.
Important facts for investors to verify
- Whether shipment volumes and construction demand recover as management anticipated, and whether weather or project delays persist.
- Whether selling prices can keep pace with wire-rod and freight costs, and whether gross margins stabilize.
- Execution and expected returns from Houston expansion, ESM investments, and ASW-related operating synergies.
- Inventory growth and cash conversion: inventories rose to $83.7 million from $71.2 million at fiscal year-end, contributing to lower operating cash flow.
- Dividend sustainability and liquidity under weaker market conditions; the company paid a substantial special dividend during the period.
- Availability under the borrowing base and compliance with credit-facility restrictions if liquidity declines.