Insteel Industries, Inc. — Form 10-Q Summary
Business and period: Insteel manufactures steel wire reinforcing products for concrete construction, principally welded wire reinforcement and prestressed concrete strand. This unaudited report covers the third quarter and first nine months of fiscal 2019, ended June 29, 2019; comparatives are the periods ended June 30, 2018. Financial amounts below are in U.S. dollars.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $126.3 million | $126.7 million | $342.3 million | $331.8 million |
| Gross profit | $8.2 million | $24.2 million | $26.2 million | $51.3 million |
| Gross margin | 6.5% | 19.1% | 7.7% | 15.4% |
| SG&A expense | $5.5 million | $7.5 million | $18.6 million | $20.8 million |
| Net earnings | $2.2 million | $12.9 million | $7.4 million | $26.9 million |
| Diluted EPS | $0.11 | $0.67 | $0.38 | $1.40 |
- Q3 sales were nearly flat: shipments fell 3.9%, partly offset by a 3.7% increase in average selling prices. For the nine-month period, sales grew 3.2% as selling prices rose 16.4%, offset by an 11.4% shipment decline.
- Gross profit fell sharply in both comparisons. Management attributed the deterioration chiefly to higher raw-material costs that outpaced selling-price increases, along with higher manufacturing costs and reduced shipments.
- For the nine months, operating cash flow was negative $25.9 million, versus positive $49.8 million a year earlier. Working capital used $43.4 million, largely reflecting a $33.6 million decrease in accounts payable and accrued expenses and a $10.5 million inventory increase.
- Capital expenditures were $9.4 million for the nine months, compared with $12.5 million a year earlier. Investing cash outflow was $8.4 million. Financing cash outflow was $2.1 million, including $1.7 million of dividends paid.
- Cash and cash equivalents were $7.4 million at June 29, down from $43.9 million at fiscal year-end. The company reported no outstanding debt; its $100 million revolving facility had $98.4 million available, subject to borrowing-base limits, and $1.6 million of letters of credit outstanding. The facility was extended to May 2024, with an option to increase commitments by up to $50 million subject to lender approval.
- Working capital was $132.0 million. Total assets were $304.8 million and shareholders’ equity was $248.3 million. The company reported compliance with credit-facility covenants.
Material changes and unusual items
- Low-priced import competition, which management said was encouraged by Section 232 steel tariffs, and unusually wet weather weighed on shipments. Domestic wire-rod costs were elevated relative to global markets, pressuring product spreads.
- Q3 gross profit was reduced by lower spreads between selling prices and raw-material costs, higher manufacturing costs, and fewer shipments. For the nine months, raw-material costs increased $60.0 million year over year, partly offset by $47.8 million in higher selling prices.
- SG&A declined as weaker results reduced incentive compensation. Nine-month other income of $1.8 million included insurance proceeds and a gain on asset disposition. Insurance settlements related to the Dayton, Texas facility affected cost of sales, SG&A, and other income.
- The prior-year nine-month tax rate benefited from a $3.7 million deferred-tax remeasurement gain following U.S. tax reform. The 2019 nine-month effective tax rate was 22.4%, compared with 12.0% in 2018; excluding that prior-year gain, the filing says the prior-year rate was 24.0%.
- Fiscal 2018 nine-month dividends included a $1.00-per-share special dividend. Fiscal 2019 dividends declared were $0.03 per share for Q3 and $0.09 per share year to date, versus $1.09 year to date in 2018.
Outlook, risks, and contingencies
Management expected continued construction-market growth and some recovery of business deferred by earlier weather, with infrastructure demand supported by state and local spending and federal funding. It expected nonresidential construction growth to moderate but remain positive. Management also cautioned that market conditions would remain challenging because domestic raw-material costs were high relative to global costs and import competition pressured pricing. It planned to control costs, align production with demand, pursue productivity gains, and seek acquisitions. Capital expenditures for fiscal 2019 were expected to total up to $15 million.
Key risks include construction-market cyclicality and seasonality, raw-material price and availability, competitive pricing and the ability to pass through costs, trade policy, customer demand and inventory changes, weather, and plant or equipment disruptions. A modeled 10% increase in wire-rod prices, without a corresponding selling-price change, would have reduced nine-month pretax earnings by $23.2 million. Management said cash, operating cash flow, and facility availability should meet anticipated needs for the foreseeable future, but noted weaker demand could require spending reductions or suspension of dividends or repurchases.
The company reported ordinary-course lawsuits and claims, including commercial, environmental, and employment matters, but did not expect them to materially affect its financial position, results, or cash flows. It reported no material changes to risk factors, no significant subsequent events, and effective disclosure controls.
Investor facts to verify
- Whether shipments, margins, and selling prices improved after the quarter, particularly given import competition and raw-material cost pressure.
- Whether inventory levels and operating cash flow recover, and how lower shipments or customer inventory changes affect working-capital needs.
- Progress on the Dayton facility insurance settlement and the extent to which reported insurance proceeds and asset-disposal gains affected period results.
- Actual fiscal 2019 capital spending versus the stated ceiling of $15 million, and whether facility investments deliver expected productivity and capacity benefits.
- Availability under the borrowing-base-limited credit facility and continued covenant compliance if operating conditions weaken.