Insteel(IIIN) - 2022 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements In Q1 fiscal 2022, Insteel Industries reported significant year-over-year growth in net sales and profitability, with net earnings up 184.0% to $23.1 million, while total assets slightly decreased due to lower cash balances Consolidated Statements of Operations and Comprehensive Income The company experienced substantial growth in Q1 fiscal 2022, with net sales increasing by 49.2% and net earnings surging by 184.0% Consolidated Statements of Operations (Unaudited) | Metric | Three Months Ended Jan 1, 2022 (in thousands) | Three Months Ended Jan 2, 2021 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Net sales | $178,459 | $119,605 | +49.2% | | Gross profit | $42,364 | $19,851 | +113.4% | | Earnings before income taxes | $30,033 | $10,608 | +183.1% | | Net earnings | $23,129 | $8,143 | +184.0% | | Diluted EPS | $1.18 | $0.42 | +181.0% | Consolidated Balance Sheets As of January 1, 2022, total assets decreased to $368.8 million, primarily due to a $26.9 million reduction in cash and cash equivalents Consolidated Balance Sheet Highlights (Unaudited) | Metric (in thousands) | January 1, 2022 | October 2, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $63,020 | $89,884 | | Total current assets | $226,804 | $246,906 | | Total assets | $368,779 | $390,710 | | Total current liabilities | $62,574 | $68,849 | | Total shareholders' equity | $286,020 | $302,038 | Consolidated Statements of Cash Flows Net cash provided by operating activities was $13.6 million, while financing activities used significantly more cash due to a larger special dividend payment Consolidated Cash Flows (Unaudited) | Metric (in thousands) | Three Months Ended Jan 1, 2022 | Three Months Ended Jan 2, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $13,631 | $13,950 | | Net cash used for investing activities | ($1,076) | ($3,020) | | Net cash used for financing activities | ($39,419) | ($29,436) | | Net decrease in cash and cash equivalents | ($26,864) | ($18,506) | Consolidated Statements of Shareholders' Equity Shareholders' equity decreased to $286.0 million, primarily due to $39.4 million in cash dividends, partially offset by $23.1 million in net earnings Changes in Shareholders' Equity (Q1 2022, in thousands) | Description | Amount | | :--- | :--- | | Balance at October 2, 2021 | $302,038 | | Net earnings | $23,129 | | Cash dividends declared | ($39,410) | | Other (stock plans, etc.) | $263 | | Balance at January 1, 2022 | $286,020 | Notes to Consolidated Financial Statements The notes detail accounting policies, revenue breakdown by product line, and the company's $100 million undrawn credit facility - In connection with the 2020 STM Acquisition, the company closed the Summerville facility, which was subsequently sold for net cash proceeds of $6.8 million, expected to result in a gain of approximately $470,000 in the next quarter[28] Net Sales by Product Line (in thousands) | Product Line | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Welded wire reinforcement | $113,393 | $74,026 | | Prestressed concrete strand | $65,066 | $45,579 | | Total | $178,459 | $119,605 | - The company has a $100.0 million revolving credit facility maturing in May 2024, with $98.6 million of borrowing capacity available and no outstanding borrowings as of January 1, 2022[53] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 49.2% increase in Q1 net sales to higher selling prices, offsetting volume declines due to raw material constraints, while maintaining a strong liquidity position Results of Operations Net sales for Q1 2022 increased 49.2% to $178.5 million, driven by price increases that offset an 11.9% decrease in shipments due to raw material supply issues - The increase in net sales was driven by price increases implemented to recover escalating raw material costs amid strong product demand, while decreased shipments were due to sustained tight supply conditions for raw materials[75] - Gross profit increased by $22.5 million, primarily due to higher spreads between average selling prices and raw material costs ($27.2 million), partially offset by higher manufacturing costs ($2.5 million) and the impact of lower shipments ($2.1 million)[76] - SG&A expense increased by $3.7 million, largely driven by higher compensation expense ($3.8 million) resulting from improved financial performance[77] Liquidity and Capital Resources The company maintained a strong, debt-free balance sheet with $286.0 million in shareholders' equity, with capital expenditures for fiscal 2022 expected to be up to $25.0 million Liquidity and Capitalization | Metric (in thousands) | January 1, 2022 | January 2, 2021 | | :--- | :--- | :--- | | Net working capital | $164,230 | $122,110 | | Total debt | $0 | $0 | | Shareholders' equity | $286,020 | $243,734 | - Capital expenditures are expected to total up to $25.0 million for fiscal 2022, focused on growing the engineered structural mesh business and cost/productivity initiatives[87] - In Q1 2022, the company paid a special dividend of $38.8 million ($2.00 per share) and a regular dividend of $582,000 ($0.03 per share)[89] Outlook Management is optimistic for the remainder of fiscal 2022, anticipating strong market demand and infrastructure spending benefits, despite challenges from raw material shortages and cost inflation - The company is optimistic for the remainder of 2022, expecting continued strong market demand and incremental demand from the Infrastructure Investment and Jobs Act beginning in the latter half of 2022[100] - Significant challenges include inadequate domestic supplies of hot-rolled steel wire rod, leading to commitments for imported material, and sharply escalating costs for labor, transportation, utilities, and other purchases[101] - The company will continue to focus on controlling expenses, aligning production with demand, and pursuing productivity improvements and opportunistic acquisitions[102] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is exposure to commodity price fluctuations for hot-rolled carbon steel wire rod, with a hypothetical 10% increase in cost reducing Q1 2022 pre-tax earnings by $10.4 million - The company is subject to significant fluctuations in the cost and availability of its primary raw material, hot-rolled carbon steel wire rod, and does not use derivative instruments to hedge this exposure[104] - Based on Q1 2022 results, a 10% increase in the price of wire rod would have resulted in a $10.4 million decrease in pre-tax earnings, assuming selling prices remained unchanged[104] Controls and Procedures The company's disclosure controls and procedures were deemed effective as of January 1, 2022, with no material changes in internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of January 1, 2022[107] - No change in internal control over financial reporting occurred during the quarter that has materially affected, or is reasonably likely to materially affect, internal controls[108] PART II – OTHER INFORMATION Legal Proceedings The company is involved in various ordinary course lawsuits and claims, but management does not anticipate a material adverse effect on its financial position or results - The company is involved in ordinary course lawsuits and claims but does not expect the ultimate cost to resolve these matters will have a material adverse effect on its financial position, results of operations or cash flows[110] Risk Factors There were no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended October 2, 2021 - There have been no material changes from the risk factors set forth in the company's 2021 Annual Report[112] Unregistered Sales of Equity Securities and Use of Proceeds As of January 1, 2022, $24.8 million remained available for future share repurchases under the company's authorization, with no repurchases made during the quarter - As of January 1, 2022, $24.8 million remained available for future share repurchases under the company's authorization, with no repurchases made during the quarter[113] Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and financial data in iXBRL format - Exhibits filed include CEO and CFO certifications pursuant to Sarbanes-Oxley Act Sections 302 and 906, and financial statements formatted in iXBRL[116]