Insteel Industries, Inc. — Q1 FY2012 Form 10-Q
Reporting period: Three months ended December 31, 2011; comparative period ended January 1, 2011. Insteel manufactures concrete-reinforcing products, including welded wire reinforcement and prestressed concrete strand. The interim statements are unaudited.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Net sales | $84.8 million | $52.3 million |
| Gross profit (loss) | $4.7 million; 5.5% margin | $(0.1) million; (0.3)% margin |
| Net loss | $(0.2) million; $(0.01) per share | $(7.6) million; $(0.44) per share |
| Operating cash flow | $(0.7) million | $(5.1) million |
| Investing cash flow | $(1.4) million | $(38.1) million |
| Financing cash flow | $2.1 million | $0.04 million |
Sales rose 62.1% year over year: shipments increased 40.4%, primarily reflecting a full-quarter contribution from the Ivy facilities, and average selling prices rose 15.5%. Gross-margin improvement reflected Ivy’s contribution, wider selling-price/raw-material spreads and lower unit conversion costs. However, depressed demand and reduced operating schedules continued to weigh on volumes and margins. SG&A was $4.6 million, or 5.4% of sales, versus $4.2 million, or 8.0%.
At December 31, 2011, total assets were $207.8 million, shareholders’ equity $148.1 million, working capital $79.6 million, and cash $10,000. Debt was $16.4 million, all under the revolving facility; the Ivy subordinated note was prepaid during the quarter. The company reported $57.5 million of additional revolver availability and $1.1 million of letters of credit. It was in compliance with credit-agreement covenants. Current assets were $114.1 million and current liabilities $34.5 million.
Capital expenditures were $1.0 million; management expected fiscal 2012 capital expenditures to be less than $10 million. The company declared dividends of $0.03 per share and paid $0.5 million in cash dividends during the quarter.
Material changes and unusual items
- Net loss improved substantially from the year-ago quarter, mainly due to higher gross profit and lower restructuring and Ivy acquisition costs.
- The prior-year comparison included $2.8 million of Ivy acquisition costs and $4.4 million of restructuring charges, including $2.9 million of impairment charges. Current-quarter restructuring charges were $0.6 million, primarily equipment relocation and facility closure costs.
- In December 2011, Insteel paid $12.4 million to retire the remaining Ivy note balance and recorded a $0.425 million gain on early extinguishment. The repayment was funded in part by increased revolver borrowings.
- Accounts payable and accrued expenses declined $11.7 million during the quarter; this was a major working-capital cash use, partly offset by lower receivables and inventory.
Outlook, risks and contingencies
Management said market visibility remained limited. Construction markets appeared to have stabilized, but no pronounced recovery was evident; activity was expected to remain depressed during the year. Steel wire rod prices had risen since December 2011, and the company’s ability to recover further cost increases through selling prices—and the resulting margin effect—was uncertain. Management highlighted cost control, matching production to demand, productivity improvements, realization of remaining Ivy synergies, and possible future acquisitions. No quantified revenue or earnings guidance was provided.
Key risks include construction-market weakness and seasonality, steel wire rod cost and availability, competitive pricing and limited ability to pass through cost increases, customer demand and inventory changes, and realization of Ivy synergies. A 10% increase in wire rod cost, with no corresponding selling-price change, was estimated to reduce quarterly pretax earnings by $6.0 million. A 25-basis-point interest-rate change was estimated to affect annual pretax earnings by $41,000.
The company reported no material change in risk factors and no material off-balance-sheet arrangements. It said ordinary-course litigation was not expected to materially affect financial position, results or cash flows. A prior dispute involving DSI and an Ohio bridge project had been settled and dismissed. 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 sales volumes and margins improve despite weak construction demand and seasonal effects.
- Whether rising wire rod costs can be passed through to customers without further margin pressure.
- Progress in realizing the remaining Ivy integration savings and benefits from the reconfigured facilities.
- Revolver availability, borrowing-base capacity, covenant compliance and liquidity if operating cash flow remains negative.
- Cash requirements for capital expenditures, dividends, pension contributions and any future restructuring or acquisitions.