Insteel Industries, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2014, ended June 28, 2014; comparisons are to periods ended June 29, 2013. Amounts are in U.S. dollars. Insteel manufactures steel wire reinforcement products for concrete construction, including prestressed concrete strand and welded wire reinforcement.
Financial performance
| Metric | Third quarter 2014 | Third quarter 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $113.2 million | $96.9 million | $291.9 million | $265.7 million |
| Gross profit | $14.3 million | $10.9 million | $34.9 million | $30.6 million |
| Gross margin | 12.6% | 11.3% | 12.0% | 11.5% |
| Net earnings | $5.8 million | $3.3 million | $12.1 million | $9.4 million |
| Diluted EPS | $0.31 | $0.18 | $0.65 | $0.51 |
| Operating cash flow | Not separately presented for the quarter | Not separately presented for the quarter | $22.1 million | $32.1 million |
- Third-quarter sales increased 16.8%; shipments rose 16.0% and average selling prices rose 0.7% year over year. Nine-month sales grew 9.9%, as shipments increased 11.9% while average selling prices fell 1.9% amid competitive pricing.
- Third-quarter gross profit growth reflected higher shipments, wider selling-price/raw-material spreads and lower unit conversion costs. Nine-month gross profit also benefited from higher shipments and wider spreads. Management said depressed volumes and reduced operating schedules continued to weigh on both periods.
- SG&A was $6.2 million for the quarter and $16.9 million year to date, up 15.7% and 9.4%, respectively. Higher incentive compensation was the principal factor; SG&A remained 5.5% and 5.8% of sales, respectively.
- Effective tax rates declined to 34.4% for the quarter and 34.8% year to date, versus 35.5% and 35.7% in the comparable periods.
Financial position, liquidity and cash flows
- At June 28, 2014, cash and cash equivalents were $31.4 million, up from $15.4 million at September 28, 2013. Working capital was $98.6 million, compared with $83.8 million at fiscal year-end (calculated from reported current assets less current liabilities).
- Total debt was zero. The $100 million revolving facility had no borrowings, $91.2 million of available capacity and $1.5 million of outstanding letters of credit. The facility matures in June 2016; the company reported compliance with its covenants.
- For the first nine months, operating activities provided $22.1 million, investing activities used $4.6 million and financing activities used $1.6 million. Operating cash flow declined from $32.1 million a year earlier, while inventory rose $20.4 million and accounts receivable rose $5.5 million; a $28.1 million increase in payables and accrued expenses partly offset those uses.
- Capital expenditures were $5.8 million year to date, including $1.9 million related to the Gallatin fire. Fiscal 2014 capital expenditures were expected not to exceed $5.0 million excluding fire-related outlays. Regular dividends paid year to date were $0.09 per share; the prior-year period included a $0.25-per-share special dividend.
Changes, outlook and risks
- Management expected continued improvement in construction markets through the remainder of 2014, particularly private nonresidential construction, with potential benefits from higher shipments and facility utilization. Infrastructure demand remained less certain pending federal transportation funding authorization. The filing provides no specific earnings or revenue guidance.
- A January 2014 fire at the Gallatin, Tennessee PC-strand facility temporarily curtailed operations. Production was shifted partly to the Florida facility; repairs were expected to finish in fiscal fourth quarter 2014. The company received $4.0 million in insurance proceeds during the first nine months. Insurance-related gains on damaged property contributed to other income, and proceeds for additional plant expenses were recorded as reductions to operating expenses; these items supported reported results and should be considered when assessing underlying performance.
- Key exposures include cyclical and seasonal construction demand, steel wire-rod costs and availability, competitive pricing, customer inventory patterns, and the pace of infrastructure spending. Management estimated that a 10% increase in wire-rod prices, without corresponding selling-price changes, would have reduced nine-month pretax earnings by $18.7 million.
- Management said the company generally could pass through raw-material cost increases over time, but acknowledged that market conditions may prevent full recovery. It also cited possible adverse effects from the Gallatin fire, including further interruptions, repair costs, reduced output or lower insurance reimbursements.
- Ordinary-course legal matters were not expected to have a material adverse effect. The company reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and no significant subsequent events affecting the statements.
Important facts for investors to verify
- Whether shipment growth and construction-market improvement continued, and whether average selling prices kept pace with raw-material and freight costs.
- Completion of Gallatin repairs, restored production, and final insurance recoveries versus costs and recorded benefits.
- Inventory levels, working-capital cash demands and operating cash flow, particularly given the year-over-year cash-flow decline.
- Whether the company maintained zero revolver borrowings, covenant compliance and its stated capital-spending and dividend plans.