Insteel Industries, Inc. — Q2 FY2021 Form 10-Q
Reporting period: Three and six months ended April 3, 2021; comparison periods ended March 28, 2020. Unaudited results. Insteel manufactures steel wire reinforcing products for concrete construction, principally welded wire reinforcement and prestressed concrete strand (PC strand).
Key financial results
Amounts in millions, except per-share data and percentages.
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Net sales | $139.0 | $114.9 | $258.6 | $212.4 |
| Gross profit | $30.2 | $15.3 | $50.1 | $21.5 |
| Gross margin | 21.7% | 13.3% | 19.4% | 10.1% |
| Net earnings | $14.9 | $4.4 | $23.1 | $4.9 |
| Diluted EPS | $0.76 | $0.23 | $1.18 | $0.25 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $29.2 | $26.6 |
- Q2 sales rose 21.0%, reflecting 15.0% higher average selling prices and 5.2% higher shipments. First-half sales rose 21.7%, from 12.7% higher shipments and 8.0% higher prices.
- Gross profit increased sharply as selling-price gains exceeded raw-material cost increases; first-half gross profit also benefited from lower manufacturing costs. Q2 gross profit included higher spreads and shipment growth, partly offset by higher manufacturing costs and freight.
- Q2 SG&A was $10.3 million (7.4% of sales), versus $9.6 million (8.4%). First-half SG&A was $18.9 million (7.3%), versus $15.3 million (7.2%). Higher compensation and trade-related legal expense were partly offset by changes in life-insurance cash value and lower earnout and employee-benefit expense.
- First-half capital expenditures were $8.8 million. Investing cash use was $8.9 million, compared with $23.2 million in the prior year, which included the STM acquisition.
Liquidity, debt and capital
- At April 3, 2021, cash and cash equivalents were $58.9 million, down from $68.7 million at October 3, 2020. Working capital was $133.0 million; total current assets were $192.2 million and current liabilities $59.2 million.
- No revolving-credit borrowings were outstanding. Of the $100 million facility, $93.6 million was available, with $1.5 million in letters of credit. The facility matures May 15, 2024; the company reported compliance with its covenants and no defaults.
- Shareholders’ equity was $258.7 million. Financing activities used $30.1 million in the first half, mainly reflecting a $29.0 million special dividend ($1.50 per share) and $1.2 million of regular dividends. Total dividends declared were $1.56 per share for the six months.
Material changes and unusual items
- Net earnings increased 241.9% in Q2 and 368.9% for the first half year over year, primarily due to improved gross profit. The filing attributes stronger sales to improved market conditions, higher demand, and contribution from the STM acquisition.
- Restructuring charges were $545,000 in Q2 and $1.2 million in the first half, associated with closing STM’s Summerville, South Carolina facility and consolidating PC strand operations. The company expects approximately $300,000 in additional equipment-relocation and facility-closure charges.
- Raw-material costs and selling prices both rose. Management said first-half price increases were sufficient to recover raw-material cost escalation; the Q2 spread also benefited from selling-price increases exceeding higher raw-material and freight costs.
- The first-half effective tax rate was 22.8%, compared with 21.4%, partly because the prior-year period included a $188,000 tax benefit related to CARES Act net operating loss carrybacks.
Outlook, commentary and risks
Management expected solid demand through the balance of FY2021, citing improving private nonresidential construction indicators, resilient public construction markets, COVID-19 vaccine rollout, and favorable trade-case rulings for PC strand and standard welded wire reinforcement. It viewed potential federal infrastructure investment as a possible market benefit but could not project timing. The filing provides no quantified revenue or earnings guidance.
Management cautioned that visibility remained limited and that tight steel-wire-rod supply and rising prices could cause operating and delivery inefficiencies. It expected to pass rising costs through the supply chain and anticipated margins returning to more normalized levels once raw-material markets stabilize. Other stated risks include construction-market cyclicality and seasonality, COVID-19 impacts, competition and pricing pressure, raw-material availability and costs, trade policy, and plant or equipment disruptions. A 10% wire-rod price increase, absent an offsetting selling-price change, would have reduced first-half pretax earnings by an estimated $14.0 million.
Ordinary-course legal matters, including commercial, environmental and employment matters, were not expected to have a material adverse effect. The company stated that COVID-19 had limited impact on operations to date, but the duration and economic effects remained uncertain. No material change in reported risk factors or internal controls was disclosed.
Investor facts to verify
- Whether pricing continues to recover wire-rod, freight and other cost inflation, and whether margins normalize as management anticipates.
- Whether demand, shipments and construction indicators support the company’s qualitative FY2021 outlook, including the uncertain timing of infrastructure spending.
- Progress, remaining costs and expected benefits from the Summerville closure and PC strand consolidation.
- Use of the planned capital-expenditure budget of up to $20 million for FY2021 and the expected returns from capacity, ESM and productivity investments.
- Cash and capital allocation after the special dividend, including liquidity needs, regular dividends and any share repurchases.