Insteel Industries, Inc. — Q3 FY2021 Form 10-Q
Reporting period: Three and nine months ended July 3, 2021; comparisons are to periods ended June 27, 2020. Amounts below are in millions of dollars unless noted. Insteel manufactures welded wire reinforcement and prestressed concrete strand for construction markets.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $160.7, up 31.8% | $419.3, up 25.4% |
| Gross profit | $31.6; 19.6% margin, versus $14.8; 12.1% | $81.6; 19.5% margin, versus $36.3; 10.9% |
| Net earnings | $18.4 versus $6.7 | $41.5 versus $11.6 |
| Diluted EPS | $0.94 versus $0.34 | $2.13 versus $0.60 |
| Operating cash flow | Not presented for the quarter | $65.5 versus $44.6 |
- Quarterly sales reflected average selling prices up 32.9%, partly offset by shipments down 1%. For the nine months, prices rose 16.5% and shipments rose 7.7%.
- Both product lines grew: quarterly welded wire reinforcement sales were $96.4 million and PC strand sales were $64.3 million. For nine months, they were $252.4 million and $167.0 million, respectively.
- At July 3, cash and cash equivalents were $89.8 million; current assets were $227.8 million and current liabilities $75.6 million. Working capital was $152.2 million. The company reported no debt.
- The $100 million revolving facility had $92.0 million available, with $1.4 million of letters of credit outstanding; the facility matures May 15, 2024. The company reported covenant compliance.
- For the nine months, investing used $13.9 million, including $13.7 million of capital expenditures; financing used $30.4 million, including $30.7 million of dividends paid. Cash increased $21.1 million.
Changes, unusual items and management outlook
- Profitability improved substantially as selling-price increases more than offset higher steel wire rod costs. Management attributed the quarterly gross-profit increase primarily to wider selling-price/raw-material spreads. Tight raw-material supply constrained quarterly shipments and may cause operating inefficiencies and customer delays.
- The company recorded $2.8 million of restructuring charges in the nine months, including a $1.4 million impairment related to the Summerville, South Carolina facility acquired with Strand-Tech Manufacturing. The facility is held for sale at a stated net consideration/fair value of $6.3 million. Management expects about $0.3 million of additional facility-closure charges.
- Management expects robust construction demand through the balance of FY2021, supported by economic recovery and public construction resilience. It cited favorable trade-case rulings as supportive; possible infrastructure legislation may benefit markets, but its size and timing are uncertain. No quantified revenue or earnings guidance was provided.
- Management expects to pass rising costs through the supply chain and anticipates margins returning to more normalized levels when raw-material markets stabilize. It also highlighted expense control, production flexibility, productivity initiatives, and expected contributions from facility investments.
- Key risks include COVID-19 and economic uncertainty, construction cyclicality, steel wire rod availability and price volatility, competitive limits on passing through costs, trade policy, and customer demand/inventory changes. A hypothetical 10% wire rod price increase without a corresponding selling-price change would reduce pretax earnings by $23.2 million, based on the period’s shipments and average rod cost.
- Cash dividends declared were $1.59 per share for the nine months, including a $1.50-per-share special dividend and $0.09 in regular dividends. Routine legal matters were not expected to have a material adverse effect. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether raw-material supply constraints ease and whether selling prices continue to recover steel, freight, and other cost increases.
- Actual sale proceeds and timing for the Summerville facility, and whether the expected additional restructuring charges remain near $0.3 million.
- Progress on the up-to-$20 million FY2021 capital expenditure plan and the expected returns from facility, capacity, and ESM investments.
- Construction-market demand, trade-case effects, and any changes in the outlook for infrastructure spending.
- Liquidity and dividend capacity if construction demand weakens; management noted that a downturn could prompt spending reductions or dividend suspension.