Insteel Industries, Inc. — Form 10-Q Summary
Business and period: The company manufactures steel wire reinforcing products for concrete construction, including prestressed concrete strand and welded wire reinforcement. This report covers the three months ended December 30, 2017, the first quarter of fiscal 2018; comparisons are with the quarter ended December 31, 2016. Financial statements are unaudited.
Financial performance
| Metric | Q1 FY2018 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $97.7 million | $93.9 million | +4.1% |
| Gross profit | $11.7 million; 11.9% of sales | $13.0 million; 13.9% of sales | -10.4% |
| Net earnings | $8.1 million | $4.5 million | +81.9% |
| Diluted earnings per share | $0.42 | $0.23 | Increased |
| Operating cash flow | $14.8 million | $3.9 million | Increased |
| Capital expenditures | $6.1 million | $5.4 million | Increased |
Sales grew as shipments increased 1.3% and average selling prices increased 2.8%. Gross profit declined because higher raw-material costs and freight compressed spreads, partly offset by higher prices, production volume and shipments. SG&A declined 8.0% to $5.8 million, or 5.9% of sales, mainly reflecting lower incentive compensation and increased life-insurance cash value.
Net earnings benefited materially from a $3.7 million income-tax benefit recorded after enactment of the Tax Cuts and Jobs Act, which reduced the federal corporate tax rate. Excluding that deferred-tax remeasurement, the company reported a 24.9% effective tax rate, compared with 33.7% a year earlier. The reported effective rate was negative 36.8%.
Liquidity, debt and capital allocation
At December 30, 2017, cash and cash equivalents were $37.3 million, current assets were $153.1 million and current liabilities were $56.0 million. Working capital was $97.1 million. The company had no outstanding debt under its $100 million revolving credit facility; $80.1 million of borrowing capacity was available, with $1.8 million in letters of credit outstanding. The facility matures May 13, 2020, and the company reported compliance with its covenants.
Operating cash flow was $14.8 million. Investing activities used $9.5 million, including $6.1 million of capital expenditures and $3.3 million for a business acquisition. Cash increased $5.2 million during the quarter to $37.3 million. The company declared dividends totaling $19.6 million, or $1.03 per share, including a $1.00 special dividend and a $0.03 regular dividend; payment occurred in the second fiscal quarter. Up to $21 million of fiscal 2018 capital expenditures was expected, principally for engineered structural mesh capacity, the Houston facility and operational technology.
Outlook, risks and notable items
- Management expected improved construction-market conditions to support higher shipments and operating levels, lower unit manufacturing costs, and demand from infrastructure, nonresidential construction and housing. It expected recent spread compression to diminish as demand improved.
- Management also anticipated benefits from acquisition-related operating synergies and Houston plant investments, while continuing to pursue acquisitions. These are forward-looking expectations, not guarantees.
- Steel wire rod is the principal raw-material risk. In the quarter, raw-material cost escalation exceeded selling-price increases amid competitive pressure. A 10% wire-rod price increase, with no corresponding selling-price change, was estimated to reduce pretax earnings by $5.9 million.
- Results are exposed to construction-market cyclicality and seasonality, customer inventory changes, raw-material availability and pricing, freight costs, competitive pricing, and trade-policy changes. Management noted that shipments and profitability typically are higher in the third and fourth fiscal quarters.
- Operations at four Texas and Florida facilities were affected by Hurricanes Harvey and Irma in August and September 2017; insurance claims for business interruption and property damage were still being finalized.
- Ordinary-course legal matters were not expected to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors and no material subsequent events.
Most important facts for investors to verify
- Whether shipment growth and management’s expected construction-market improvement materialize.
- Whether selling prices recover higher wire-rod and freight costs and gross margins stabilize.
- The recurring earnings and cash-flow profile excluding the one-time $3.7 million tax benefit.
- Progress and returns from the acquired business, Houston investments and planned capital spending.
- Final insurance recoveries related to the hurricanes, and continuing liquidity, dividend and credit-facility covenant capacity.