Insteel(IIIN) - 2022 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements Unaudited consolidated financial statements for Q2 and H1 2022, covering operations, balance sheets, cash flows, equity, and notes Consolidated Statements of Operations and Comprehensive Income Q2 and H1 2022 showed significant revenue and profitability growth, with Q2 net sales up 53.4% and net earnings up 161.5% Consolidated Statements of Operations Highlights (In thousands, except per share amounts) | Metric | Three Months Ended April 2, 2022 | Three Months Ended April 3, 2021 | YoY Change | Six Months Ended April 2, 2022 | Six Months Ended April 3, 2021 | YoY Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $213,209 | $138,999 | +53.4% | $391,668 | $258,604 | +51.5% | | Gross profit | $57,069 | $30,228 | +88.8% | $99,433 | $50,079 | +98.6% | | Net earnings | $39,017 | $14,920 | +161.5% | $62,146 | $23,063 | +169.5% | | Diluted EPS | $1.99 | $0.76 | +161.8% | $3.17 | $1.18 | +168.6% | Consolidated Balance Sheets Strong financial position as of April 2, 2022, with total assets of $420.6 million, driven by inventories and receivables Consolidated Balance Sheet Highlights (In thousands) | Account | April 2, 2022 (Unaudited) | October 2, 2021 | | :--- | :--- | :--- | | Total current assets | $282,804 | $246,906 | | Cash and cash equivalents | $69,725 | $89,884 | | Inventories | $127,049 | $79,049 | | Total assets | $420,558 | $390,710 | | Total current liabilities | $73,816 | $68,849 | | Total shareholders' equity | $325,147 | $302,038 | Consolidated Statements of Cash Flows H1 2022 operating cash flow decreased to $20.1 million due to inventory, while financing cash flow rose from a special dividend Consolidated Statements of Cash Flows Highlights (Six Months Ended, In thousands) | Cash Flow Activity | April 2, 2022 | April 3, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $20,066 | $29,239 | | Net cash used for investing activities | $(86) | $(8,923) | | Net cash used for financing activities | $(40,139) | $(30,064) | | Net decrease in cash and cash equivalents | $(20,159) | $(9,748) | | Cash and cash equivalents at end of period | $69,725 | $58,940 | Notes to Consolidated Financial Statements Detailed financial statement notes cover revenue, restructuring, credit facility, and tax rates - Restructuring activities related to the consolidation of PC strand operations following the STM acquisition resulted in a net recovery of $365,000 in Q2 2022, primarily from a gain on the sale of the Summerville facility. The company does not expect further restructuring charges from this consolidation[26][76] Net Sales by Product Line (Six Months Ended, In thousands) | Product Line | April 2, 2022 | April 3, 2021 | YoY Change | | :--- | :--- | :--- | :--- | | Welded wire reinforcement | $247,044 | $155,949 | +58.4% | | Prestressed concrete strand | $144,624 | $102,655 | +40.9% | | Total | $391,668 | $258,604 | +51.5% | - The company has a $100.0 million revolving credit facility maturing in May 2024. As of April 2, 2022, there were no borrowings outstanding, with $98.6 million of borrowing capacity available[52][95] - The effective income tax rate was 22.6% for the first six months of fiscal 2022, slightly down from 22.8% in the same period of fiscal 2021[45] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses financial performance, highlighting price-driven sales growth, strong liquidity, and positive outlook Results of Operations Strong Q2 and H1 2022 performance driven by higher price-raw material spreads, with Q2 net sales up 53.4% and gross profit up 88.8% - Q2 2022 net sales increased 53.4% year-over-year, reflecting a 65.4% increase in average selling prices partially offset by a 7.2% decrease in shipments[73] - Gross profit for Q2 2022 increased 88.8% to $57.1 million, or 26.8% of net sales, up from 21.7% in the prior year quarter, due to higher spreads between selling prices and raw material costs[74] - First half 2022 net sales increased 51.5% year-over-year, driven by a 67.5% increase in average selling prices, which was partially offset by a 9.5% decrease in shipments due to tight raw material supply[79] Liquidity and Capital Resources Robust liquidity with no debt and $69.7 million cash, despite decreased operating cash flow due to inventory and special dividend - The company remains debt-free with $98.6 million of available borrowing capacity under its $100.0 million revolving credit facility as of April 2, 2022[87][95] - Cash from operations decreased to $20.1 million in H1 2022 from $29.2 million in H1 2021, largely due to a $48.0 million increase in inventories[88] - During H1 2022, the company paid a special dividend of $38.8 million ($2.00 per share) and regular quarterly dividends totaling $1.2 million ($0.06 per share)[93] Outlook Strong financial results expected for the fiscal year due to robust demand, addressing raw material supply and high steel prices - The company expects strong financial results for the balance of the fiscal year due to robust demand and seasonal upturns in construction[104] - Inadequate domestic supply of hot-rolled steel wire rod is a primary concern, leading the company to supplement its needs with foreign sources to support demand[105] - Future strategy includes managing expenses, improving productivity, and opportunistically pursuing acquisitions to expand market penetration or footprint[106] Item 3. Quantitative and Qualitative Disclosures About Market Risk Primary market risk is commodity price fluctuations for steel wire rod, with minimal interest rate or foreign exchange risk - The company is subject to significant fluctuations in the cost and availability of its primary raw material, hot-rolled carbon steel wire rod[108] - A hypothetical 10% increase in the price of wire rod would have resulted in a $22.3 million decrease in pre-tax earnings for the first half of 2022, assuming selling prices remained constant[108] Item 4. Controls and Procedures Disclosure controls and procedures were effective as of April 2, 2022, with no material changes in internal control - Management concluded that the company's disclosure controls and procedures were effective as of April 2, 2022[111] - No changes occurred in the company's internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, its internal controls[112] PART II – OTHER INFORMATION Item 1. Legal Proceedings Ongoing legal matters are not expected to materially affect financial condition or results of operations - The company does not anticipate that the ultimate costs to resolve ongoing lawsuits, claims, and investigations will have a material adverse effect on its financial position, results of operations, or cash flows[115] Item 1A. Risk Factors No material changes to risk factors from the 2021 Annual Report on Form 10-K - No material changes to the risk factors set forth in the 2021 Annual Report occurred during the quarter ended April 2, 2022[116] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No share repurchases in Q2/H1 2022; $24.8 million remains for future repurchases - There were no share repurchases during the three- and six-month periods ended April 2, 2022 and April 3, 2021[117] - As of April 2, 2022, $24.8 million remained available for future share repurchases under the company's authorization[117] Item 6. Exhibits Lists exhibits including management compensation, officer certifications, and iXBRL financial data - The report includes exhibits such as forms of Restricted Stock Unit and Stock Option Agreements, CEO and CFO certifications (pursuant to Sections 302 and 906 of Sarbanes-Oxley), and iXBRL financial data[119]