Insteel Industries, Inc. — Q1 FY2021 Form 10-Q
Business and period. Insteel manufactures steel-wire reinforcement products for concrete construction, principally welded wire reinforcement and prestressed concrete strand (PC strand). This unaudited quarter ended January 2, 2021; comparisons below use the filing’s stated three-month comparator, ended December 28, 2019. The quarter’s results include the acquired Strand-Tech Manufacturing (STM) business.
Financial performance
| Metric | Quarter ended Jan. 2, 2021 | Comparator |
|---|---|---|
| Net sales | $119.6 million | $97.6 million |
| Gross profit / margin | $19.9 million / 16.6% | $6.2 million / 6.4% |
| Net earnings / diluted EPS | $8.1 million / $0.42 | $0.6 million / $0.03 |
| Operating cash flow | $14.0 million | $29.6 million |
| Capital expenditures | $2.9 million | $0.6 million |
Sales increased 22.6%, reflecting 21.6% higher shipments and 1.0% higher average selling prices. Sales were $74.0 million for welded wire reinforcement and $45.6 million for PC strand. Gross profit improved primarily from wider spreads between selling prices and raw-material costs, lower manufacturing costs, and higher shipments. SG&A rose 48.9% to $8.6 million, mainly on higher compensation and legal costs. The effective tax rate was 23.2%.
Operating cash flow was lower year over year, with working capital using $0.5 million, including a $9.8 million decrease in accounts payable and accrued expenses. Investing activities used $3.0 million; financing activities used $29.4 million, principally for dividends. Cash declined to $50.2 million from $68.7 million at the fiscal year-end, including payment of a $29.0 million special dividend ($1.50 per share) and a regular $0.03-per-share dividend.
At January 2, 2021, current assets were $168.9 million and current liabilities $46.8 million; reported net working capital was $122.1 million. The company had no debt outstanding, with $81.8 million of revolver borrowing capacity available under its $100 million facility, which matures May 2024; letters of credit totaled $1.5 million. Shareholders’ equity was $243.7 million. Total assets were $310.0 million.
Material changes and unusual items
- Gross margin rose to 16.6% from 6.4%. Management attributed the improvement chiefly to lower raw-material costs, higher selling prices, and lower freight expense.
- The STM acquisition contributed additional business. Insteel is consolidating PC strand operations by closing the acquired Summerville, South Carolina facility and relocating equipment to three other facilities. Q1 restructuring charges were $657,000; approximately $800,000 of additional charges were expected.
- Capital spending increased, and the company expects fiscal 2021 capital expenditures of up to $20 million, including STM asset deployment, engineered structural mesh growth, productivity initiatives, and maintenance.
- The company adopted the expected-credit-loss standard in the quarter; adoption had no impact on its financial statements.
Outlook, commentary, and risks
Management was cautiously optimistic about continued strong construction demand, higher shipments and operating levels, and lower unit manufacturing costs. It expected continued growth in engineered structural mesh and said a favorable PC strand trade-case ruling could benefit certain markets. Potential infrastructure spending was identified as a possible positive, not a quantified forecast. No specific earnings or sales guidance was provided.
Management said COVID-19 had limited operational impact to date, but its duration and effects remained uncertain. Risks include construction-market cyclicality and seasonality, raw-material availability and price volatility, competition and pricing pressure, trade-policy changes, customer demand shifts, and plant or equipment disruptions. A 10% increase in wire-rod prices, without offsetting selling-price changes, would have reduced quarterly pretax earnings by an estimated $6.7 million. The company reported ordinary-course legal matters and did not expect them to have a material adverse effect. It was in compliance with credit-facility covenants.
Important facts for investors to verify
- Confirm the appropriate prior-year comparison: financial statements label the comparator December 28, 2019, while MD&A describes it as the prior-year quarter.
- Track whether demand, shipment growth, selling prices, and raw-material spreads remain favorable, particularly as wire-rod costs change.
- Monitor the remaining expected restructuring charges and the costs and benefits of the PC-strand consolidation.
- Assess execution of the up-to-$20-million fiscal 2021 capital-spending plan and its effect on cash generation.
- Review the sustainability of cash flows and dividends after the special dividend, along with borrowing availability and construction-market exposure.