INSTEEL INDUSTRIES, INC. Cautionary Note Regarding Forward-Looking Statements
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 numerous 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 theU.S. Securities and Exchange Commission ("SEC"), in particular in our Annual Report on Form 10-K for the fiscal year endedSeptember 28, 2019 (our "2019 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. 18 -------------------------------------------------------------------------------- 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: ? the impact of COVID-19 on the economy, demand for our products and our operations, including the measures taken by governmental authorities to address it, which may precipitate or exacerbate other risks and/or uncertainties; ? general economic and competitive conditions in the markets in which we operate;
? changes in the spending levels for nonresidential and residential construction
and the impact on demand for our products;
? changes in the amount and duration of transportation funding provided by
federal, state and local governments and the impact on spending for
infrastructure construction and demand for our products;
? the cyclical nature of the steel and building material industries;
? credit market conditions and the relative availability of financing for us,
our customers and the construction industry as a whole;
? fluctuations in the cost and availability of our primary raw material,
hot-rolled carbon steel wire rod, from domestic and foreign suppliers;
? competitive pricing pressures and our ability to raise selling prices in order
to recover increases in raw material or operating costs;
? changes in
imported steel, affecting imports or exports of steel wire rod or our
products;
? unanticipated changes in customer demand, order patterns and inventory levels;
? the impact of fluctuations in demand and capacity utilization levels on our
unit manufacturing costs;
? our ability to further develop the market for engineered structural mesh
("ESM") and expand our shipments of ESM;
? legal, environmental, economic or regulatory developments that significantly
impact our operating costs;
? unanticipated plant outages, equipment failures or labor difficulties; and
? the "Risk Factors" discussed in our 2019 Annual Report and in other filings
made by us with the SEC .
Overview
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.
On March 16, 2020 , we, through our wholly-owned subsidiary, Insteel Wire
Products ("IWP"), purchased substantially all of the assets of Strand-Tech
Manufacturing, Inc. ("STM") for a purchase price of $22.5 million , subject to
certain post-closing adjustments (the "STM Acquisition"). STM was a leading
manufacturer of PC strand for concrete construction applications. We acquired,
among other assets, STM's accounts receivable, inventories, production equipment
and facility located in Summerville, South Carolina and assumed certain of its
accounts payable and accrued liabilities.
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Results of Operations
Statements of Operations - Selected Data
(Dollars in thousands)
Three Months Ended Six Months Ended
March 28, March 30, March 28, March 30,
2020 Change 2019 2020 Change 2019
Net sales $ 114,859 2.6 % $ 111,948 $ 212,428 (1.7 %) $ 216,058
Gross profit 15,283 117.7 % 7,021 21,520 19.6 % 17,997
Percentage of net
sales 13.3 % 6.3 % 10.1 % 8.3 %
Selling, general and
administrative
expense $ 9,602 46.5 % $ 6,556 $ 15,346 17.2 % $ 13,090
Percentage of net
sales 8.4 % 5.9 % 7.2 % 6.1 %
Acquisition costs $ 187 N/M $ - $ 187 N/M $ -
Restructuring charges 149 N/M - 149 N/M -
Other income, net (18 ) (98.1 %) (971 ) (43 ) (97.6 %) (1,800 )
Interest expense 26 (42.2 %) 45 52 (30.7 %) 75
Interest income (204 ) N/M (12 ) (430 ) 157.5 % (167 )
Effective income tax
rate 21.2 % 25.2 % 21.4 % 23.9 %
Net earnings $ 4,364 316.0 % $ 1,049 $ 4,919 (4.9 %) $ 5,175
"N/M" = not meaningful
Second Quarter of Fiscal 2020 Compared to Second Quarter of Fiscal 2019
Net Sales Net sales for the second quarter of 2020 increased 2.6% to$114.9 million from$111.9 million in the prior year quarter, reflecting a 19.7% increase in shipments partially offset by a 14.3% decrease in average selling prices. The increase in shipments was primarily due to improved market conditions and strengthening demand for our products relative to the prior year, which was unfavorably impacted by adverse weather conditions. The decrease in average selling prices was driven by competitive pricing pressures resulting from an increase in low-priced import competition spurred by the Section 232 tariffs on imported steel. Gross Profit Gross profit for the second quarter of 2020 increased 117.7% to$15.3 million , or 13.3% of net sales, from$7.0 million , or 6.3% of net sales, in the prior year quarter primarily due to higher spreads between average selling prices and raw material costs ($7.2 million ), the increase in shipments ($1.4 million ) and lower manufacturing costs ($143,000 ). The increase in spreads was driven by lower raw material costs ($26.3 million ) and freight expense ($224,000 ) partially offset by lower average selling prices ($19.3 million ).
Selling, General and Administrative Expense
Selling, general and administrative expense ("SG&A expense") for the second
quarter of 2020 increased 46.5% to $9.6 million , or 8.4% of net sales, from $6.6
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 ($1.8 million ) together with higher incentive and stock-based
compensation ($309,000 ) and legal expense ($175,000 ). The cash surrender value
of life insurance policies decreased $1.2 million in the current year quarter
compared with an increase of $594,000 in the prior year quarter due to the
corresponding changes in the value of the underlying investments. The increase
in legal expense was primarily related to costs associated with trade matters.
Acquisition Costs
Acquisition costs of
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--------------------------------------------------------------------------------Restructuring Charges Restructuring charges of$149,000 were incurred in the second quarter of 2020 related to the closure of theSummerville, South Carolina facility, which had been acquired through the STM Acquisition. Restructuring charges included$129,000 for employee separation costs and$20,000 for facility closure costs. Other Income
Other income was
Income Taxes Our effective tax rate for the second quarter of 2020 decreased to 21.2% from 25.2% for the prior year quarter primarily due to a$188,000 discrete tax benefit that was recorded in connection with the net operating loss carryback provisions of the Coronavirus Aid, Relief and Economic Security Act, which was enacted inMarch 2020 . Net Earnings Net earnings for the second quarter of 2020 increased to$4.4 million ($0.23 per share) from$1.0 million ($0.05 per share) in the prior year quarter primarily due to the increase in gross profit partially offset by the increase in SG&A expense.
First Half of Fiscal 2020 Compared to First Half of Fiscal 2019
Net Sales Net sales for the first half of 2020 decreased 1.7% to$212.4 million from$216.1 million in the same year-ago period, reflecting a 15.2% decrease in average selling prices partially offset by a 15.9% increase in shipments. The decrease in average selling prices was driven by competitive pricing pressures resulting from an increase in low-priced import competition spurred by the Section 232 tariffs on imported steel. The increase in shipments was primarily due to improved market conditions and strengthening demand for our products relative to the prior year, which was unfavorably impacted by adverse weather conditions. Gross Profit Gross profit for the first half of 2020 increased 19.6% to$21.5 million , or 10.1% of net sales, from$18.0 million , or 8.3% of net sales, in the same year-ago period. The year-over-year increase was primarily due to the increase in shipments ($3.0 million ) and higher spreads between average selling prices and raw material costs ($922,000 ) partially offset by higher manufacturing costs ($517,000 ). The increase in spreads was driven by lower raw material costs ($39.4 million ) and freight expense ($449,000 ) partially offset by lower average selling prices ($38.9 million ).
Selling, General and Administrative Expense
SG&A expense for the first half of 2020 increased 17.2% to$15.3 million , or 7.2% of net sales, from$13.1 million , or 6.1% of net sales, in the same year-ago period primarily due to relative year-over-year changes in the cash surrender value of life insurance policies ($1.0 million ) together with higher incentive and stock-based compensation ($437,000 ) and legal expense ($169,000 ). The cash surrender value of life insurance policies decreased$907,000 in the current year period compared with an increase of$62,000 in the prior year period due to the corresponding changes in the value of the underlying investments. The increase in legal expense was primarily related to costs associated with trade matters. Acquisition Costs
Acquisition costs of
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--------------------------------------------------------------------------------Restructuring Charges
Restructuring charges of
Other Income
Other income was
Income Taxes Our effective tax rate for the first half of 2020 decreased to 21.4% from 23.9% for the same year ago period primarily due to a$188,000 discrete tax benefit that was recorded in connection with the net operating loss carryback provisions of the Coronavirus Aid, Relief and Economic Security Act, which was enacted inMarch 2020 . Net Earnings Net earnings for the first half of 2020 decreased to$4.9 million ($0.25 per diluted share) from$5.2 million ($0.27 per share) in the same year-ago period primarily due to the increase in SG&A expense and reduction in other income partially offset by the increase in gross profit.
Liquidity and Capital Resources
Selected Financial Data
(Dollars in thousands)
Six Months Ended
March 28 , March 30,
2020 2019
Net cash provided by (used for) operating activities
(23,194 ) (7,296 )
Net cash provided by (used for) financing activities (1,232 ) 4,036
Net working capital 128,147 133,441
Total debt - 5,365
Percentage of total capital - 2.1 %
Shareholders' equity $ 250,831 $ 246,530
Percentage of total capital 100.0 %
97.9 %
Total capital (total debt + shareholders' equity)
Operating Activities Operating activities provided$26.6 million of cash during the first half of 2020 primarily from net earnings adjusted for non-cash items together with a net decrease in working capital. Working capital provided$10.8 million of cash due to a$15.3 million increase in accounts payable and accrued expenses and a$2.3 million decrease in inventories partially offset by a$6.9 million increase in accounts receivable. The increase in accounts payable and accrued expenses was largely related to higher raw material purchases driven by the higher sales during the period. The decrease in inventories was due to the higher shipments and lower unit costs. The increase in accounts receivable was largely driven by the increase in sales during the second quarter of 2020. Operating activities used$40.2 million of cash during the first half of 2019 primarily from a net increase in working capital partially offset by net earnings adjusted for non-cash items. Working capital used$52.5 million of cash due to a$30.3 million decrease in accounts payable and accrued expenses and a$23.1 million increase in inventories partially offset by a$0.9 million decrease in accounts receivable. The decrease in accounts payable and accrued expenses was largely due to lower raw material purchases during the period, and, to a lesser extent, the payment of accrued incentive compensation, property taxes and customer rebates for the prior year. The increase in inventories was primarily driven by the reduction in shipments and higher unit costs. The decrease in accounts receivable was principally due to the usual seasonal downturn in sales compounded by the adverse weather. 22 -------------------------------------------------------------------------------- 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$23.2 million of cash during the first half of 2020 compared to$7.3 million during the prior year period primarily due to the STM Acquisition ($21.5 million ). Capital expenditures decreased to$2.4 million from$8.1 million in the prior year period and are expected to total up to$17.0 million for fiscal 2020 primarily focused on cost and productivity improvement initiatives in addition to recurring maintenance requirements.
Our investing activities are largely discretionary, providing us with the ability to significantly curtail outlays when warranted based on business conditions.
Financing Activities Financing activities used$1.2 million of cash during the first half of 2020 while providing$4.0 million during the prior year period. Net borrowings on our revolving credit facility were$5.4 million during the prior year period. Cash dividends used$1.2 million of cash in both the current and prior year periods. 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") that is used to supplement our operating cash flow and fund our working capital, capital expenditure, general corporate and growth requirements. InMay 2019 , we entered into a new credit agreement, which amended and restated in its entirety the previous agreement pertaining to the revolving credit facility that had been in effect sinceJune 2010 . The new credit agreement, among other changes, extended the maturity date of the Credit Facility fromMay 13, 2020 toMay 15, 2024 and provided for an incremental feature whereby its size may be increased by up to$50.0 million , subject to our lender's approval. 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 ofMarch 28, 2020 , no borrowings were outstanding on the Credit Facility,$89.6 million of borrowing capacity was available and outstanding letters of credit totaled$1.6 million (see Note 10 to the consolidated financial statements). We believe that, in the absence of significant unanticipated funding requirements, 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, cease dividend payments, delay or restrict share repurchases 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. 23 --------------------------------------------------------------------------------
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. During the first half of fiscal 2020, selling prices for our products declined in response to low-priced import competition spurred by the Section 232 tariff on imported steel, which negatively impacted our financial results. The timing and magnitude of any future increases in our raw material costs and the selling prices for our products is uncertain at this time.
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 theSEC , 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 2019 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 theU.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 2019 Annual Report for further information regarding our critical accounting policies and estimates. As ofMarch 28, 2020 , there were no changes in our critical accounting policies or the application of those policies from those reported in our 2019 Annual Report.
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 2020, our visibility is limited due to the
cloud of uncertainty surrounding the ultimate impact of COVID-19 and the
mitigation measures that are pursued by governmental authorities. We also expect
business conditions to remain challenging in our markets that are susceptible to
import competition in view of the surge of low-priced imports that followed the
imposition of the Section 232 tariff on imports of hot-rolled steel wire rod.
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In response to these challenges, we will continue to focus on those factors that we can control: 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 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. 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.
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