1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________ COMMISSION FILE NUMBER 1-9929 INSTEEL INDUSTRIES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) NORTH CAROLINA 56-0674867 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1373 BOGGS DRIVE, MOUNT AIRY, NORTH CAROLINA 27030 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 910-786-2141 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares outstanding of the registrant's common stock as of August 11, 1997 was 8,436,597.
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INSTEEL INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited) <TABLE> <CAPTION> June 30, September 30, 1997 1996 -------- -------- <S> <C> <C> Assets Current assets: Cash and cash equivalents $ 63 $ 1,423 Accounts receivable, net 30,827 32,981 Inventories 44,460 31,705 Prepaid expenses and other 1,151 1,653 Net assets of discontinued operations 0 5,846 -------- -------- Total current assets 76,501 73,608 Property, plant and equipment, net 83,872 67,558 Other assets 6,642 4,956 -------- -------- Total assets $167,015 $146,122 ======== ======== Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 31,277 $ 23,770 Accrued expenses 6,364 9,161 Current portion of long-term debt 2,620 3,188 -------- -------- Total current liabilities 40,261 36,119 Long-term debt 48,262 29,655 Deferred income taxes 6,403 5,935 Other liabilities 949 736 Shareholders' equity: Common stock 16,871 16,871 Additional paid-in capital 38,192 38,192 Retained earnings 16,077 18,614 -------- -------- Total shareholders' equity 71,140 73,677 -------- -------- Total liabilities and shareholders' equity $167,015 $146,122 ======== ======== </TABLE>
3 INSTEEL INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF EARNINGS (In thousands except for per share data) (Unaudited) <TABLE> <CAPTION> Three Months Ended Nine Months Ended June 30, June 30, ---------------------- -------------------------- 1997 1996 1997 1996 ------- -------- --------- --------- <S> <C> <C> <C> <C> Net sales $68,127 $ 72,619 $ 191,803 $ 192,665 Cost of sales 62,265 64,977 177,888 177,303 ------- -------- --------- --------- Gross profit 5,862 7,642 13,915 15,362 Selling, general and administrative expense 3,223 3,434 9,346 9,138 ------- -------- --------- --------- Operating income 2,639 4,208 4,569 6,224 Interest expense 636 413 1,472 1,467 Other expense 158 7 166 191 ------- -------- --------- --------- Earnings from continuing operations before income taxes 1,845 3,788 2,931 4,566 Provision for income taxes 669 1,341 1,063 1,616 ------- -------- --------- --------- Earnings from continuing operations 1,176 2,447 1,868 2,950 Discontinued operations: Loss from operations of Insteel Construction Systems net of income tax benefits of $ - , $170, $395 and $388 0 (309) (693) (707) Loss on disposal of Insteel Construction Systems, including provision of $400 for operating losses during phase-out period (net of income tax benefit of $1,245) 0 0 (2,184) 0 ------- -------- --------- --------- Loss from discontinued operations 0 (309) (2,877) (707) ------- -------- --------- --------- Net earnings (loss) $ 1,176 $ 2,138 ($ 1,009) $ 2,243 ======= ======== ========= ========= Weighted average shares outstanding 8,437 8,422 8,436 8,410 ======= ======== ========= ========= Per share: Earnings from continuing operations $ 0.14 $ 0.29 $ 0.22 $ 0.35 Loss from discontinued operations 0.00 (0.04) (0.34) (0.08) ------- -------- --------- --------- Net earnings (loss) $ 0.14 $ 0.25 ($ 0.12) $ 0.27 ======= ======== ========= ========= Dividends paid $ 0.06 $ 0.06 $ 0.18 $ 0.18 ======= ======== ========= ========= </TABLE>
4 INSTEEL INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) <TABLE> <CAPTION> Nine Months Ended June 30, -------------------------- 1997 1996 -------- -------- <S> <C> <C> Operating Activities: Net earnings from continuing operations $ 1,868 $ 2,950 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 6,253 5,927 Accounts receivable, net 1,408 (3,420) Inventories (12,880) 4,252 Accounts payable and accrued expenses 5,521 4,442 Other changes 617 804 -------- -------- Total adjustments 919 12,005 -------- -------- Net cash provided by operating activities 2,787 14,955 -------- -------- Discontinued Operating Activities: Net cash provided by discontinued operating activities 847 475 Investing Activities: Capital expenditures (22,354) (8,543) Proceeds (payments) on notes receivable 636 (191) -------- -------- Net cash used for investing activities (21,718) (8,734) -------- -------- Financing Activities: Net decrease in short-term debt 0 (8,260) Proceeds from long-term debt 89,676 50,847 Principal payments on long-term debt (71,425) (47,835) Proceeds from stock options 0 195 Dividends paid (1,527) (1,514) -------- -------- Net cash provided by (used for) financing activities 16,724 (6,567) -------- -------- Net increase (decrease) in cash (1,360) 129 Cash and cash equivalents at beginning of period 1,423 263 -------- -------- Cash and cash equivalents at end of period $ 63 $ 392 ======== ======== Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest $ 1,609 $ 2,201 Income taxes 613 146 </TABLE>
5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share data) (1) BASIS OF PRESENTATION The consolidated unaudited financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 1996. The unaudited consolidated financial statements included herein reflect all adjustments (consisting only of normal recurring accruals) that the Company considers necessary for a fair presentation of the financial position, results of operations and cash flows for all periods presented. The results for the interim periods are not necessarily indicative of the results for the entire fiscal year. (2) INVENTORIES <TABLE> <CAPTION> June 30, September 30, 1997 1996 ------- ------- <S> <C> <C> Raw materials $23,549 $15,797 Supplies 2,105 2,099 Work in process 1,539 1,426 Finished goods 17,267 12,383 ------- ------- Total inventories $44,460 $31,705 ======= ======= </TABLE> (3) DISCONTINUED OPERATIONS On May 30, 1997, the Company sold its Insteel Construction Systems division (ICS), which manufactured and marketed the Insteel 3-D(R) building panel. ICS has been classified as a discontinued operation in the accompanying financial statements in accordance with Accounting Principles Board Opinion No. 30. During the quarter ended March 31, 1997, the Company recorded a provision of $2,184 for the estimated loss on disposal of ICS (net of a $1,245 tax benefit) which included a $400 provision for anticipated operating losses prior to disposal. Although the Company believes that the provision is sufficient, it will defer making a final adjustment pending realization of the expected proceeds from the sale.
6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS STATEMENTS OF EARNINGS - SELECTED DATA ($ in thousands) <TABLE> <CAPTION> Three Months Ended June 30, Nine Months Ended June 30, --------------------------- -------------------------- 1997 Change 1996 1997 Change 1996 ---- ------ ---- ---- ------ ---- <S> <C> <C> <C> <C> <C> <C> Net sales $68,127 -6% $72,619 $191,803 0 $192,665 Gross profit 5,862 -23% 7,642 13,915 -9% 15,362 Percentage of net sales 8.6% 10.5% 7.3% 8.0% Selling, general and administrative expense $3,223 -6% $3,434 $9,346 2% $9,138 Percentage of net sales 4.7% 4.7% 4.9% 4.7% Operating income $2,639 -37% $4,208 $4,569 -27% $6,224 Percentage of net sales 3.9% 5.8% 2.4% 3.2% Interest expense $636 54% $413 $1,472 0 $1,467 Percentage of net sales 0.9% 0.6% 0.7% 0.9% Effective income tax rate 36.3% 35.4% 36.3% 35.4% Earnings from continuing operations $1,176 -52% $2,447 $1,868 -37% $2,950 Percentage of net sales 1.7% 3.4% 1.0% 1.5% </TABLE> Insteel's net sales for the third quarter declined to $68.1 million, a 6% decrease from the year-ago period. For the nine months, net sales were flat, decreasing less than 1% to $191.8 million. Total wire product shipments declined 8% for the third quarter and 1% for the nine months compared with the year-ago periods. Average selling prices increased 2% for the third quarter and 1% for the nine months relative to the prior year. The sales decreases for the third quarter and nine months were primarily due to weak market conditions in certain segments of the wire products business unit. Sales of bulk nails, industrial wire and agricultural fencing declined compared with the year-ago periods. Sales of the concrete reinforcing products business unit rose from prior year levels primarily due to continued increases in the operating levels of the PC strand facility. Gross profit for the third quarter decreased 23% from the prior year, declining as a percentage of sales to 8.6% from 10.5%. For the nine months, gross profit declined 9% from the year-ago period, decreasing as a percentage of sales to 7.3% from 8.0%. Expenses were negatively impacted by pre-operating costs related to the tire bead wire expansion together with start-up inefficiencies associated with the transfer of equipment and industrial wire capacity from the Virginia facility to other Insteel locations. Gross margins benefited from a widening in the spread between selling values and raw material costs relative to prior year levels. Selling, general and administrative expense (SG&A expense) decreased 6% for the third quarter, remaining at 4.7% of sales for the current and prior year periods. For the nine months, SG&A expense rose 2%, increasing to 4.9% of sales from 4.7% a year ago. The increase in SG&A expense was driven by expenditures related to the upgrade of the Company's management information systems. Interest expense increased 54% for the third quarter from the year-ago period due to increased borrowings on the Company's revolving credit facility to finance capital expenditures for the tire bead expansion together with higher inventory levels. For the nine months, interest expense was flat relative to the prior year as the impact of higher debt levels was offset by capitalized interest related to the tire bead wire expansion and a decrease in the Company's average borrowing rates. The Company's effective income tax rate for the third quarter and nine months increased to 36.3% compared with 35.4% in the prior year periods as a result of a higher estimated state income tax rate. Earnings from continuing operations decreased 52% in the third quarter from the prior year, declining as a percentage of sales to 1.7% from 3.4%. For the nine months, earnings from continuing operations fell 37% to 1.0% of sales compared with 1.5% a year ago.
7 Nine-month results reflect a loss of $2.9 million on the disposal of the Company's Insteel Construction Systems division (ICS) and the reclassification of the segment as discontinued operations. ICS manufactured and marketed the Insteel 3-D(R) building panel. FINANCIAL CONDITION SELECTED FINANCIAL DATA ($ in thousands) <TABLE> <CAPTION> Nine Months Ended June 30, -------------------------- 1997 1996 --------- -------- <S> <C> <C> Net cash provided by operating activities $ 2,787 $ 14,955 Net cash used for investing activities (21,718) (8,734) Net cash provided by (used for) financing activities 16,724 (6,567) Long-term debt 48,262 26,318 Percentage of total capital 40% 27% Shareholders' equity $ 71,140 $ 72,135 Percentage of total capital 60% 73% Total capital (long-term debt + shareholders' equity) $ 119,402 $ 98,453 </TABLE> Operating activities generated $2.8 million of cash during the nine months compared with $15.0 million in the same period last year. The primary factor driving the decline was a planned increase in raw material inventories in the current year in anticipation of further escalation in wire rod prices during the fourth quarter. In the prior year period, inventories had fallen from the excess levels that had accumulated at the beginning of the year due to weak market conditions and depressed shipment volumes. Cash generated by accounts receivable increased during the current year as a result of a reduction in the average days sales outstanding. Investing activities consumed $21.7 million during the nine months compared with $8.7 million in the same period last year as a result of higher capital expenditures related to the tire bead wire expansion. The Company expects that its capital expenditures will decrease significantly in fiscal 1998 as a result of the completion of the tire bead wire expansion. Financing activities provided $16.7 million during the nine months primarily to fund the outlays for the tire bead wire expansion and higher inventory levels. In the prior year period, financing activities used $6.6 million of cash. Insteel's financial position remains strong. The Company's long-term debt to capital ratio increased to 40% at June 30, 1997 compared with 27% a year ago primarily as a result of the capital expenditures related to the tire bead wire expansion together with higher inventory levels. In January 1996, the Company entered into a $35.0 million unsecured revolving credit facility that will expire in November 2000, replacing the annual lines of credit that provided total availability of $20.0 million. In April 1997, the revolving credit facility was amended, increasing the Company's availability from $35.0 million to $50.0 million. At June 30, 1997, approximately $15.4 million was available under the facility. The Company currently expects to fund its capital expenditure requirements and liquidity needs from a combination of internally generated funds, the revolving credit facility and additional long-term sources of financing. FACTORS THAT MAY AFFECT FUTURE RESULTS Insteel operates in a rapidly changing environment that involves a number of risks and uncertainties, some of which are beyond the Company's control. The Company has short delivery cycles and as a result does not have a large order backlog, which makes the forecasting of revenue inherently uncertain. As delivery lead times have decreased, the Company has generated a higher percentage of sales from new order bookings in the same fiscal period. Business conditions and growth in the general economy have an impact on the Company's operating results. Seasonality also affects the Company's operating results, particularly in the first quarter of the fiscal year, which has historically represented the lowest quarterly sales volume. Shipments typically increase in the second quarter and reach a high point in the third or fourth quarter, reflecting the buying patterns of the Company's customers.
8 Wire rod market conditions also have a significant impact on the Company's operating results. Hot rolled steel rod is the Company's primary raw material and constitutes the largest component of manufacturing costs. Realized selling values for the Company's products cannot always be adjusted in the short-term to recover cost increases in steel rod, but generally tend to reflect changes in these prices over the long-run. During the current year, domestic wire rod market conditions have tightened and prices have escalated due to production outages at some of the major manufacturers together with the filing of anti-dumping charges against certain countries exporting into the U.S.. Recently announced expansions in domestic wire rod capacity should increase supplier competition and favorably impact quality and availability once the additional capacity becomes fully operational. Insteel's business strategy continues to be focused on further expansion into higher value products that offer the potential for superior returns relative to the Company's traditional businesses. In January 1994, the Company entered the PC strand business with the start-up of a new manufacturing facility. The operation was expanded in October 1996 with the addition of a second production line. In March 1996, the Company entered the collated fastener business with the start-up of a new manufacturing facility. In April 1997, the Company entered the tire reinforcement business with the start-up of a reconfigured and expanded facility to manufacture and market tire bead wire. Start-up costs related to the tire bead wire project have reduced current year earnings by an estimated $1.3 million, or $0.16 a share, and will continue to negatively impact earnings until sales begin to ramp up to significant levels in the first quarter of fiscal 1998. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits: 4 - INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES 4.42 First Amendment dated April 11, 1997 to Amended and Restated Credit Agreement between First Union National Bank of North Carolina and Insteel Industries, Inc. dated January 26, 1996. 4.43 Second Amendment dated April 30, 1997 to Amended and Restated Credit Agreement between First Union National Bank of North Carolina and Insteel Industries, Inc. dated January 26, 1996. 27 - Financial Data Schedule b. Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during the quarter ended June 30, 1997.
9 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INSTEEL INDUSTRIES, INC. Registrant Date: August 12, 1997 By /s/ H.O. Woltz III ---------------------------- H.O. Woltz III President and Chief Executive Officer Date: August 12, 1997 By /s/ Michael C. Gazmarian ---------------------------- Michael C. Gazmarian Chief Financial Officer and Treasurer