This report contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, particularly under the caption “Outlook” below. When used in this report, the words “believes,” “anticipates,” “expects,” “estimates,” “appears,” “plans,” “intends,” “may,” “should,” “could” and similar expressions are intended to identify forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, they are subject to a number of risks and uncertainties, and we can provide no assurances that such plans, intentions or expectations will be implemented or achieved. Many of these risks and uncertainties are discussed in detail, and where appropriate, updated in our filings with the United States (“U.S.”) Securities and Exchange Commission (“SEC”), in particular in our Annual Report on Form 10-K for the fiscal year ended September 29, 2018 (our “2018 Annual Report”). You should carefully review these risks and uncertainties.
All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. All forward-looking statements speak only to the respective dates on which such statements are made and we do not undertake any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events, except as may be required by law.
It is not possible to anticipate and list all risks and uncertainties that may affect our future operations or financial performance; however, they include, but are not limited to, the following:
Insteel Industries, Inc. (“we,” “us,” “our,” “the Company” or “Insteel”) is the nation’s largest manufacturer of steel wire reinforcing products for concrete construction applications. We manufacture and market prestressed concrete strand (“PC strand”) and welded wire reinforcement, including ESM, concrete pipe reinforcement and standard welded wire reinforcement. Our products are sold primarily to manufacturers of concrete products that are used in nonresidential construction. We market our products through sales representatives who are our employees. We sell our products nationwide across the U.S. and, to a much lesser extent, into Canada, Mexico, and Central and South America, delivering them primarily by truck, using common or contract carriers. Our business strategy is focused on: (1) achieving leadership positions in our markets; (2) operating as the lowest cost producer in our industry; and (3) pursuing growth opportunities within our core businesses that further our penetration of the markets we currently serve or expand our footprint.
Results of Operations
Statements of Operations – Selected Data
(Dollars in thousands)
|
|
Three Months Ended
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|
|
|
December 29,
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|
|
|
|
|
|
December 30,
|
|
|
|
2018
|
|
|
Change
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|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
104,110
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|
|
|
6.5
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%
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|
$
|
97,741
|
|
Gross profit
|
|
|
10,976
|
|
|
|
(5.9
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%)
|
|
|
11,661
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|
Percentage of net sales
|
|
|
10.5
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%
|
|
|
|
|
|
|
11.9
|
%
|
Selling, general and administrative expense
|
|
$
|
6,534
|
|
|
|
13.4
|
%
|
|
$
|
5,763
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|
Percentage of net sales
|
|
|
6.3
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%
|
|
|
|
|
|
|
5.9
|
%
|
Other expense (income), net
|
|
$
|
(829
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)
|
|
N/M
|
|
|
$
|
19
|
|
Interest expense
|
|
|
30
|
|
|
|
7.1
|
%
|
|
|
28
|
|
Interest income
|
|
|
(155
|
)
|
|
|
103.9
|
%
|
|
|
(76
|
)
|
Effective income tax rate
|
|
|
23.5
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%
|
|
|
|
|
|
|
(36.8
|
%)
|
Net earnings
|
|
$
|
4,126
|
|
|
|
(49.1
|
%)
|
|
$
|
8,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
"N/M" = not meaningful
|
|
|
|
|
|
|
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First
Quarter of Fiscal 201
9
Compared to
First
Quarter of Fiscal 201
8
Net Sales
Net sales for the first quarter of 2019 increased 6.5% to $104.1 million from $97.7 million in the prior year quarter, reflecting a 28.7% increase in average selling prices partially offset by a 17.2% decrease in shipments. The increase in average selling prices was driven by price increases that were implemented over the course of the prior year to recover the escalation in raw material costs. Shipments for the current year quarter were unfavorably impacted by adverse weather in many regions of the country and construction project delays together with an increase in low-priced import competition.
Gross Profit
Gross profit for the first quarter of 2019 decreased 5.9% to $11.0 million, or 10.5% of net sales, from $11.7 million, or 11.9% of net sales, in the prior year quarter due to higher manufacturing costs ($2.4 million) and lower shipments ($2.1 million) partially offset by higher spreads between average selling prices and raw material costs ($4.2 million). The increase in spreads was driven by higher average selling prices ($22.8 million) partially offset by higher raw material costs ($18.4 million) and freight expense ($207,000).
Selling, General and Administrative Expense
Selling, general and administrative expense (“SG&A expense”) for the first quarter of 2019 increased 13.4% to $6.5 million, or 6.3% of net sales, from $5.8 million, or 5.9% of net sales in the prior year quarter primarily due to the relative year-over-year changes in the cash surrender value of life insurance policies ($788,000) partially offset by lower compensation expense ($334,000). The cash surrender value of life insurance policies decreased $532,000 in the current year quarter compared with an increase of $256,000 in the prior year quarter due to the corresponding changes in the value of the underlying investments. The decrease in compensation expense was largely driven by lower incentive plan expense based on our weaker results in the current year quarter.
Other Income
Other income of $829,000 for the first quarter of 2019 was primarily related to a net gain from the disposition of property, plant and equipment ($709,000).
Income Taxes
Our effective tax rate for the first quarter of 2019 increased to 23.5% from (36.8%) for the prior year quarter. The prior year rate reflects a $3.7 million gain on the remeasurement of deferred tax assets and liabilities related to the lower corporate tax rate enacted under the Tax Cuts and Jobs Act in December 2017. Excluding the deferred tax gain, our effective tax rate was 24.9% in the prior year quarter reflecting the reduction in the federal statutory rate to 21% from 35% for three quarters of fiscal 2018.
Net Earnings
Net earnings for the first quarter of 2019 decreased to $4.1 million ($0.21 per diluted share) from $8.1 million ($0.42 per diluted share) in the prior year quarter primarily due to the decrease in gross profit and increase in SG&A expense together with the prior year income tax benefit related to enactment of the Tax Cuts and Jobs Act.
Liquidity and Capital Resources
Selected Financial Data
(Dollars in thousands)
|
|
Three Months Ended
|
|
|
|
December 29,
|
|
|
December 30,
|
|
|
|
2018
|
|
|
2017
|
|
Net cash provided by (used for) operating activities
|
|
$
|
(22,768
|
)
|
|
$
|
14,764
|
|
Net cash used for investing activities
|
|
|
(5,663
|
)
|
|
|
(9,533
|
)
|
Net cash used for financing activities
|
|
|
(7
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net working capital
|
|
|
125,265
|
|
|
|
97,109
|
|
Total debt
|
|
|
-
|
|
|
|
-
|
|
Percentage of total capital
|
|
|
-
|
|
|
|
-
|
|
Shareholders' equity
|
|
$
|
245,382
|
|
|
$
|
212,110
|
|
Percentage of total capital
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Total capital (total debt + shareholders' equity)
|
|
$
|
245,382
|
|
|
$
|
212,110
|
|
Operating Activities
Operating activities used $22.8 million of cash during the first quarter of 2019 primarily from net earnings adjusted for non-cash items together with a net decrease in the working capital components of accounts receivable, inventories, and accounts payable and accrued expenses. Net working capital used $31.2 million of cash due to a $25.1 million decrease in accounts payable and accrued expenses and a $21.1 million increase in inventories partially offset by a $15.0 million decrease in accounts receivable. The decrease in accounts payable and accrued expenses was largely due to lower raw material purchases during the latter portion of the quarter, and, to a lesser extent, the payment of accrued incentive compensation for the prior year. The increase in inventories was primarily driven by the reduction in shipments and higher unit costs during the quarter. The decrease in accounts receivable was principally due to the usual seasonal downturn in sales near the end of the quarter compounded by the adverse weather.
Operating activities provided $14.8 million of cash during the first quarter of 2018 primarily from net earnings adjusted for non-cash items together with a decrease in net working capital. Net working capital provided $4.6 million of cash due to a $10.9 million decrease in inventories and a $0.5 million decrease in accounts receivable partially offset by a $6.8 million decrease in accounts payable and accrued expenses. The decrease in inventories was primarily due to lower raw material purchases during the quarter. The decrease in accounts receivable was largely related to the usual seasonal downturn in sales near the end of the quarter. The decrease in accounts payable and accrued expenses was principally due to lower raw material purchases during the quarter together with the payment of accrued incentive compensation for the prior year.
We may elect to adjust our operating activities as there are changes in our construction end-markets, which could materially impact our cash requirements. While a downturn in the level of construction activity adversely affects sales to our customers, it generally reduces our working capital requirements.
Investing Activities
Investing activities used $5.7 million of cash during the first quarter of 2019 compared to $9.5 million in the prior year quarter primarily due to the acquisition of a business in the prior year and a decrease in the cash surrender value of life insurance policies in the current quarter. Capital expenditures increased slightly to $6.2 million from $6.1 million in the prior year quarter and are expected to total up to $22.0 million for fiscal 2019 primarily focused on cost and productivity initiatives in addition to recurring maintenance.
Our investing activities are largely discretionary, providing us with the ability to significantly curtail outlays should business conditions warrant that such actions be taken.
Financing Activities
Financing activities did not provide or use any significant amounts of cash during the current or prior year quarters. During the first quarter of 2019, we declared a regular quarterly cash dividend of $576,000, or $0.03 per share, which was paid in the second quarter of 2019. During the first quarter of 2018, we declared a special cash dividend totaling $19.0 million, or $1.00 per share, and a regular quarterly cash dividend of $571,000, or $0.03 per share, which were paid in the second quarter of 2018.
Cash Management
Our cash is principally concentrated at one financial institution, which at times exceeds federally insured limits. We invest excess cash primarily in money market funds, which are highly liquid securities that bear minimal risk.
Credit Facility
We have a $100.0 million revolving credit facility (the “Credit Facility”) maturing May 13, 2020 that is used to supplement our operating cash flow and fund our working capital, capital expenditure, general corporate and growth requirements. Advances under the Credit Facility are limited to the lesser of the revolving loan commitment amount (currently $100.0 million) or a borrowing base amount that is calculated based upon a percentage of eligible receivables and inventories. As of December 29, 2018, no borrowings were outstanding on the Credit Facility, $98.2 million of borrowing capacity was available and outstanding letters of credit totaled $1.8 million (see Note 9 to the consolidated financial statements).
We believe that, in the absence of significant unanticipated cash demands, cash and cash equivalents, net cash generated by operating activities and the borrowing availability provided under the Credit Facility will be sufficient to satisfy our expected requirements for working capital, capital expenditures, dividends and share repurchases, if any. We expect to have access to the amounts available under the Credit Facility as required. However, should we experience future reductions in our operating cash flows due to weakening conditions in our construction end-markets and reduced demand from our customers, we may need to curtail capital and operating expenditures, delay or restrict share repurchases, cease dividend payments and/or realign our working capital requirements.
Should we determine, at any time, that we required additional short-term liquidity, we would evaluate the alternative sources of financing that would be potentially available to provide such funding. There can be no assurance that any such financing, if pursued, would be obtained, or if obtained, would be adequate or on terms acceptable to us. However, we believe that our strong balance sheet, flexible capital structure and borrowing capacity available to us under our Credit Facility position us to meet our anticipated liquidity requirements for the foreseeable future, including the next 12 months.
Seasonality and Cyclicality
Demand in our markets is both seasonal and cyclical, driven by the level of construction activity, but can also be impacted by fluctuations in the inventory positions of our customers. From a seasonal standpoint, shipments typically reach their highest level of the year when weather conditions are the most conducive to construction activity. As a result, assuming normal seasonal weather patterns, shipments and profitability are usually higher in the third and fourth quarters of the fiscal year and lower in the first and second quarters. From a cyclical standpoint, construction activity and demand for our products is generally correlated with general economic conditions, although there can be significant differences between the relative strength of nonresidential and residential construction for extended periods.
Impact of Inflation
We are subject to inflationary risks arising from fluctuations in the market prices for our primary raw material, hot-rolled carbon steel wire rod, and, to a much lesser extent, freight, energy and other consumables that are used in our manufacturing processes. We have generally been able to adjust our selling prices to pass through increases in these costs or offset them through various cost reduction and productivity improvement initiatives. However, our ability to raise our selling prices depends on market conditions and competitive dynamics, and there may be periods during which we are unable to fully recover increases in our costs. Inflation did not have a material impact on our sales or earnings during the first quarter of 2019.
Off-Balance Sheet Arrangements
We do not have any material transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons, as described by Item 303(a)(4) of Regulation S-K of the SEC, that have or are reasonably likely to have a material current or future impact on our financial condition, results of operations, liquidity, capital expenditures, capital resources or significant components of revenues or expenses.
Contractual Obligations
There have been no material changes in our contractual obligations and commitments as disclosed in our 2018 Annual Report other than those which occur in the ordinary course of business.
Critical Accounting Policies
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our unaudited financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information. The preparation of our financial statements requires the application of these accounting principles in addition to certain estimates and judgments based on current available information, actuarial estimates, historical results and other assumptions believed to be reasonable. Actual results could differ from these estimates. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” included in our 2018 Annual Report for further information regarding our critical accounting policies and estimates. As of December 29, 2018, there were no changes in the nature of our critical accounting policies or the application of those policies from those reported in our 2018 Annual Report other than Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers”.
Recent Accounting Pronouncements
Refer to Note 2 of the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report for recently adopted and issued accounting pronouncements including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements.
Outlook
Looking ahead to the remainder of 2019, we expect our financial results will be favorably impacted by the continued growth in our construction end-markets and the weather-related deferral of business from the first quarter. The leading indicators and industry forecasts for nonresidential construction remain positive. The infrastructure-related portion of our business should benefit from increased federal funding through the FAST Act and supplementary measures together with higher state and local spending in many of our markets supported by various initiatives such as fuel tax increases, bond issuances and other ballot measures.
We expect business conditions will remain challenging, however, in view of the escalation in our raw material costs resulting from the Section 232 tariffs on imported steel and the duties that have been imposed against certain countries in response to the recent trade cases initiated by domestic wire rod producers. We will continue to focus on the operational fundamentals of our business: closely managing and controlling our expenses; aligning our production schedules with demand in a proactive manner as there are changes in market conditions to minimize our cash operating costs; and pursuing further improvements in the productivity and effectiveness of all of our manufacturing, selling and administrative activities. We also expect gradually increasing contributions from the substantial investments we have made in our facilities in the form of reduced operating costs and additional capacity to support future growth (see “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors”). In addition, we will continue to pursue further acquisitions in our existing businesses that expand our penetration of markets we currently serve or expand our footprint.