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 DECEMBER 31, 1996 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 January 28, 1997 was 8,436,597.
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INSTEEL INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (In thousands) <TABLE> <CAPTION> (Unaudited) December 31, September 30, 1996 1996 ------------ ------------- <S> <C> <C> Assets Current assets: Cash and cash equivalents $ 425 $ 1,423 Accounts receivable, net 23,554 33,872 Inventories 37,842 31,845 Prepaid expenses and other 1,178 1,693 -------- -------- Total current assets 62,999 68,833 Property, plant and equipment, net 74,270 71,072 Other assets 5,582 5,758 -------- -------- Total assets $142,851 $145,663 ======== ======== Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 24,879 $ 23,841 Accrued expenses 5,688 8,156 Current portion of long-term debt 3,080 3,188 -------- -------- Total current liabilities 33,647 35,185 Long-term debt 29,244 29,655 Deferred income taxes 6,295 6,410 Other liabilities 753 736 Shareholders' equity: Common stock 16,871 16,871 Additional paid-in capital 38,192 38,192 Retained earnings 17,849 18,614 -------- -------- Total shareholders' equity 72,912 73,677 -------- -------- Total liabilities and shareholders' equity $142,851 $145,663 ======== ======== </TABLE>
3 INSTEEL INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF EARNINGS (In thousands except for per share data) (Unaudited) <TABLE> <CAPTION> Three Months Ended December 31, ------------------------------- 1996 1995 ------------ -------------- <S> <C> <C> Net sales $58,802 $57,505 Cost of sales 55,440 54,719 ------- ------ Gross profit 3,362 2,786 Selling, general and administrative expense 3,320 3,039 ------- ------ Operating income (loss) 42 (253) Interest expense 444 608 Other expense (income) 3 (8) ------- ------ Loss before income taxes (405) (853) Benefit for income taxes (147) (302) ------- ------ Net loss $ (258) $ (551) ======= ====== Weighted average shares outstanding 8,435 8,393 ======= ====== Net loss per share $ (.03) $ (.07) ======= ====== Dividends paid per share $ .06 $ .06 ======= ====== </TABLE>
4 INSTEEL INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) <TABLE> <CAPTION> Three Months Ended December 31, -------------------------------- 1996 1995 ---------------- -------------- <S> <C> <C> Cash Flows From Operating Activities: Net loss $ (258) $ (551) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 2,252 2,066 Accounts receivable, net 10,285 6,350 Inventories (5,997) 4,981 Accounts payable and accrued expenses (1,430) (7,092) Other changes 419 337 ------- ------- Total adjustments 5,529 6,642 ------- ------- Net cash provided by operating activities 5,271 6,091 ------- ------- Cash Flows From Investing Activities: Capital expenditures (5,319) (2,568) Proceeds on notes receivable 58 21 ------- ------- Net cash used for investing activities (5,261) (2,547) ------- ------- Cash Flows From Financing Activities: Net decrease in short-term debt - (1,059) Proceeds from long-term debt 26,196 20 Principal payments on long-term debt (26,698) (1,830) Dividends paid (506) (503) ------- ------- Net cash used for financing activities (1,008) (3,372) ------- ------- Net increase (decrease) in cash (998) 172 Cash and cash equivalents at beginning of period 1,423 263 ------- ------- Cash and cash equivalents at end of period $ 425 $ 435 ======= ======= Supplemental Disclosures of Cash Flow Information: Cash paid during the quarter for: Interest $ 821 $ 1,026 Income taxes $ 388 $ 88 </TABLE>
5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (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> December 31, September 30, 1996 1995 ------------ ------------- <S> <C> <C> Raw materials $18,478 $15,911 Supplies 2,197 2,099 Work in process 1,424 1,426 Finished goods 15,743 12,409 ------- ------- Total inventories $37,842 $31,845 ======= ======= </TABLE>
6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Statements of Earnings - Selected Data ($ In Thousands) <TABLE> <CAPTION> Three Months Ended December 31, ---------------------------------- 1996 Change 1995 ----------- ------ ----------- <S> <C> <C> <C> Net sales $58,802 2% $57,505 Gross profit $ 3,362 21% $ 2,786 Percentage of net sales 5.7% 4.8% Selling, general and administrative expense $ 3,320 9% $ 3,039 Percentage of net sales 5.6% 5.3% Operating income (loss) $ 42 N/M $ (253) Percentage of net sales 0.1% (0.4%) Interest expense $ 444 (27%) $ 608 Percentage of net sales 0.8% 1.1% Loss before income taxes $ (405) (53%) $ (853) Percentage of net sales (0.7%) (1.5%) Effective income tax rate 36.3% 35.4% </TABLE> Net sales increased to $58.8 million for the first quarter, a 2% increase over a year ago. Total wire product shipments rose 3% for the quarter primarily due to increases in industrial wire and nails. Sales from the Company's new businesses, PC strand and collated fasteners, also contributed to the year-to-year increase. In October 1996, the expansion of the PC strand operation was completed with the start-up of a second production line. Operating levels at the collated fastener facility continued to increase with the addition of new equipment. Average selling prices of wire products declined 1% compared with the same period last year. Sales of the Insteel 3-D(R) building panel decreased 32% compared with a year ago. Gross profit increased 21% for the quarter compared with the prior year, rising as a percentage of sales to 5.7% from 4.8%. Operating expenses were negatively impacted by the transfer of equipment and industrial wire capacity from the Virginia facility to other Insteel locations. Maintenance and process improvements completed during plant shutdowns related to the usual seasonal downturn in shipments also drove operating costs higher. Selling, general and administrative expense increased 9% for the quarter, rising to 5.6% of sales compared with 5.3% in the year-earlier period. The primary factor driving the increase was expenditures related to the upgrade of the Company's management information systems. Interest expense decreased 27% for the first quarter compared with the year-earlier period primarily due to lower average debt levels together with a decrease in the Company's average borrowing rates. The Company's effective income tax rate for the first quarter was 36.3% compared with 35.4% in the prior year period. The increase in the fiscal 1997 rate is primarily due to a higher estimated state income tax rate.
7 Financial Condition <TABLE> <CAPTION> Selected Financial Data ($ In Thousands) Three Months Ended December 31, ------------------------------- 1996 1995 ---------- ---------- <S> <C> <C> Net cash provided by operating activities $ 5,271 $ 6,091 Net cash used for investing activities $ (5,261) $ (2,547) Net cash used for financing activities $ (1,008) $ (3,372) EBITDA(1) $ 2,291 $ 1,821 Working capital $ 29,352 $ 22,675 Total debt $ 32,324 $ 32,023 Percentage of total capital 31% 31% Shareholders'equity $ 72,912 $ 70,157 Percentage of total capital 69% 69% Total capital $105,236 $102,180 </TABLE> (1) Earnings before interest, taxes, depreciation and amortization. Operating activities generated $5.3 million of cash in the first quarter compared with $6.1 million in the same period last year. The primary factor driving the year-to-year decrease was the reduction in excess inventories during the year-ago period compared with the usual seasonal increase that occurred in the current quarter. EBITDA rose to $2.3 million compared with $1.8 million a year ago. Investing activities consumed $5.3 million in the quarter compared with $2.5 million in the prior year period as a result of higher capital expenditures primarily related to the tire bead wire project. Construction is underway on the reconfiguration and expansion of the Company's Virginia plant into a world-class tire bead wire manufacturing facility. Total expenditures for the project are currently expected to approximate $16.0 million with the largest portion occuring during the next two quarters. Financing activities used $1.0 million in the quarter compared with $3.4 million in the year-ago period. In January 1996, the annual lines of credit that provided total availability of $20.0 million were replaced by a $35.0 million unsecured revolving credit facility that will expire in November 2000. As a result, the short-term debt balance outstanding was refinanced under the revolver and is now reflected as a long-term liability. Insteel's financial position continues to be strong. The Company's total debt to capital ratio at December 31, 1996 remained at 31%, the same level as a year ago. At December 31, 1996, approximately $21.6 million was available under the $35.0 million revolving credit 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. Recently announced expansions in domestic wire rod capacity should increase supplier competition and favorably impact quality and availability. As order lead times begin to decrease, the Company should be able to significantly reduce raw material inventory levels in comparison to recent years when maintaining adequate supply was a primary concern. Insteel's business strategy continues to be focused on further expansion into higher value-added products that offer 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. The Company has also announced plans to enter the tire reinforcement business, with production of tire bead wire scheduled to begin during the third quarter of fiscal 1997. Operating volumes at Insteel Construction Systems have remained substantially below break-even level. The Company expects to make a decision regarding the continuation of this division during the second quarter of fiscal 1997. Part II - Other Information Item 6. Exhibits and Reports on Form 8-k a. Exhibits: 27.1 Financial Data Schedule (for SEC use only) b. Reports on Form 8-K: No reports on Form 8-K were filed by the Registrant during the quarter ended December 31, 1996.
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: January 28, 1997 By /s/ H.O. Woltz III ------------------------------ H. O. Woltz III President and Chief Executive Officer Date: January 28, 1997 By /s/ Michael C. Gazmarian ------------------------------ Michael C. Gazmarian Chief Financial Officer and Treasurer