Insteel Industries, Inc. — FY2018 Form 10-K
Reporting period: 52 weeks ended September 29, 2018. The filing is an annual report, not a standalone fourth-quarter filing. Insteel manufactures prestressed concrete strand and welded wire reinforcement for concrete construction, primarily in the United States.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $453.2 million | $388.9 million |
| Gross profit / margin | $70.8 million / 15.6% | $59.8 million / 15.4% |
| Net earnings | $36.3 million | $22.5 million |
| Diluted EPS | $1.88 | $1.17 |
| Operating cash flow | $54.0 million | $20.8 million |
| Capital expenditures | $18.4 million | $20.6 million |
| Cash and cash equivalents at year-end | $43.9 million | $32.1 million |
| Total debt | None | None |
Net sales increased 16.5%, reflecting 4.6% higher shipments and 11.5% higher average selling prices. Gross profit rose 18.4%, mainly from improved selling-price/raw-material spreads, higher shipments, and lower manufacturing costs. SG&A rose 11.0% to $28.3 million, while declining as a share of sales to 6.2% from 6.6%.
FY2018 net earnings included a $3.3 million tax benefit from remeasuring deferred taxes after the Tax Cuts and Jobs Act. The reported effective tax rate was 14.9%; excluding that benefit, management reported a 22.7% rate. The federal corporate rate was reduced to 21% for FY2019 and beyond.
At year-end, working capital was $123.5 million. The $100 million revolving credit facility had no borrowings, with $98.2 million available after letters of credit. Shareholders’ equity was $241.7 million. Cash dividends paid totaled $21.3 million, including a $1.00-per-share special dividend; declared dividends were $1.12 per share for the year.
Fourth-quarter snapshot
For the quarter ended September 29, 2018, net sales were $121.4 million, gross profit was $19.5 million, net earnings were $9.4 million, and diluted EPS was $0.49. The comparable FY2017 quarter reported sales of $96.9 million, gross profit of $11.8 million, net earnings of $3.8 million, and diluted EPS of $0.20.
Material changes, outlook, and risks
- Results recovered from FY2017, when sales and gross profit were pressured by lower shipments, hurricanes, reduced project activity, and competitive pricing.
- Management expected FY2019 results to benefit from continued construction-market growth, infrastructure funding and spending, and a continuing housing recovery. It also anticipated increasing contributions from facility investments and planned to continue cost controls and consider acquisitions.
- Management warned that Section 232 steel tariffs raised wire-rod costs while not applying to imported downstream products such as PC strand and welded wire reinforcement. It expected low-priced imports could erode market share and compress margins.
- Wire rod is the principal raw material, and the company does not hedge its price exposure with commodity derivatives. Management estimated a 10% wire-rod price increase, with no corresponding selling-price change, would reduce annual pretax earnings by $26.6 million.
- Other key risks include construction cyclicality, government infrastructure funding, seasonal demand, short order lead times and minimal backlog, raw-material availability and price pass-through, import competition, and plant interruptions. A transformer outage and electrical fire temporarily disrupted the Dayton, Texas facility in FY2018; the company recorded insurance proceeds and an expected insurance receivable.
- Ordinary-course legal matters were not expected to materially affect financial position, results, or cash flows. The independent auditor issued unqualified opinions on the financial statements and internal controls; management also reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Whether FY2019 demand and infrastructure spending supported the growth outlook, and whether tariff-related import competition affected pricing, volumes, or margins.
- Whether selling prices continued to keep pace with wire-rod, freight, and other cost increases.
- How much FY2018 earnings depended on the one-time $3.3 million deferred-tax remeasurement benefit.
- Whether capital investment and ESM capacity expansion generated expected productivity and growth returns.
- Progress and final insurance recoveries for the Dayton fire and Hurricane Harvey claims, and the status of the $100 million credit facility, which was scheduled to mature in May 2020.