IIIN results somewhat disappointing
EPS of $0.59 for the December quarter. Results have been declining sequentially from EPS of $1.98 in the June quarter, and $1.27 in September. But management made some positive remarks looking forward. Nonetheless, I had expected better earnings from IIIN after TONS reported outstanding results for their November quarter.
MOUNT AIRY, N.C., Jan. 24 /PRNewswire-FirstCall/ -- Insteel Industries, Inc. (Nasdaq: IIIN - News) today announced record earnings and sales for the first quarter ended January 1, 2005. Net earnings for the first quarter increased to $5.6 million, or $0.59 per diluted share, compared with $0.7 million, or $0.08 per diluted share for the same period last year. Sales for the first quarter increased 33% to $74.7 million from $56.1 million in the prior year quarter. Average selling prices for the first quarter rose 74% while shipments decreased 24% from the prior year levels.
"We are pleased by the favorable margin environment that continued through the first quarter, particularly in view of our soft order book and reduced production levels," said H.O. Woltz III, Insteel's president and chief executive officer. "Shipments declined sharply as we had anticipated due to the usual seasonal downturn in construction activity compounded by inventory reduction measures that were pursued within our customer base. In response, we scheduled downtime at all of our facilities around the holidays which unfavorably impacted unit conversion costs. Spreads between average selling prices and the cost of our primary raw material, hot-rolled steel wire rod, were relatively stable with the exception of our standard mesh product line, where we encountered pricing pressure. The continued pricing discipline has served to sustain the margin improvement for Insteel as well as for the industry as a whole in spite of the reduced volumes."
Operating activities used $3.9 million of cash for the first quarter while providing $10.6 million for the same period last year due to a significant increase in inventories in the current year. The inventory increase was driven by the reduced production schedules and weak shipments in the current quarter together with the receipt of imported raw materials that were ordered during the third and fourth fiscal quarters. The Company's long-term debt rose by $3.0 million from the beginning of the fiscal year, primarily as a result of the increased inventory investment.
Woltz commented, "Our reliance on offshore raw material sources made it impossible to adjust purchases to the lower level of shipments that we experienced during the quarter. While we must address our current inventory imbalance, we are encouraged by the expansion of domestic capacity during the quarter that has given us the flexibility to reduce our utilization of offshore sources going forward. We expect the combination of reduced purchases and the anticipated recovery in order entry rates to restore a reasonable balance between inventories and shipment levels within the next 60 to 90 days."
Based on its excess cash flow for fiscal 2004 as defined in the Company's credit agreement, in December 2004, the Company prepaid $11.4 million of term debt on its senior secured credit facility. The prepayment enabled the Company to pay off the $4.4 million balance outstanding on Term Loan B and pay down Term Loan A by $7.0 million, which will reduce the Company's average borrowing rate going forward. As of January 1, 2005, approximately $55.9 million was outstanding on the senior secured credit facility with $48.3 million drawn and $10.2 million of additional borrowing capacity available on the revolver, and $7.6 million outstanding on Term Loan A. Average borrowing rates under the credit facility were 5.58% on the revolver and 6.45% on Term Loan A as of January 1, 2005. As previously reported, following the end of the quarter, the Company and its lender agreed to an amendment to the credit facility which increased the amount of the revolver from $60.0 million to $75.0 million and expanded the maximum inventory borrowing base from $35.0 million to $45.0 million, providing additional liquidity.
Outlook
Commenting on the outlook for fiscal 2005, Woltz said, "In spite of the weak shipments that we experienced during the quarter, our customers remain bullish about the business prospects for 2005. The anticipated recovery in the nonresidential construction sector together with resolution of the federal highway funding successor to TEA-21 should favorably impact the demand for concrete reinforcing products. Pricing for raw materials appears to have stabilized at historically high levels and we detect a firm commitment on the part of our vendors to extend the positive trends in their financial performance that they have enjoyed for the past few quarters. The stability in our raw material markets together with the prospects for improved order levels cause us to be optimistic about Insteel's financial outlook through the balance of fiscal 2005. This is not to say, however, that we are forecasting an improvement over the record results of 2004.
We are proceeding with the previously announced expansions of our engineered structural mesh ("ESM") and PC strand businesses. We currently expect the ESM production line to be fully operational during the third fiscal quarter of 2005. The reconfiguration and expansion of our PC strand operation in Gallatin, Tennessee will begin during the current quarter and is currently projected to be completed during the fourth fiscal quarter of 2006. The first phase of the project will include the installation and start up of a new production line which will be followed by the consolidation of our Gallatin manufacturing activities into one facility. We believe that the timing for these projects is opportune in view of the expected growth in demand for these products in addition to the cost reductions that we expect to realize."
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