<PAGE> 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 March 31, 1995
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)
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 [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 8,376,713 shares of
Common Stock (No Par Value) as of May 9, 1995.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSTEEL INDUSTRIES, INC.
Condensed Consolidated Balance Sheets
March 31, 1995 and September 30, 1994
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 31, 1995 September 30,
(unaudited) 1994
--------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 883 $ 1,234
Receivables (Net) 32,438 33,399
Inventories (Note 2) 36,549 28,750
Prepaid Expenses and Other 477 1,119
------------- -------------
TOTAL CURRENT ASSETS 70,347 64,502
PROPERTY, PLANT AND EQUIPMENT 106,826 104,497
Less accumulated depreciation (41,137) (37,957)
------------- -------------
65,689 66,540
OTHER ASSETS 7,249 7,837
------------- -------------
TOTAL ASSETS $ 143,285 $ 138,879
============= =============
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses $ 38,966 $ 31,972
Short-Term Borrowings 2,283 4,940
Current Portion of Long-Term Debt 2,865 2,407
------------- -------------
TOTAL CURRENT LIABILITIES 44,114 39,319
DEFERRED INCOME TAXES 2,901 6,302
LONG-TERM DEBT less current portion 25,801 26,797
STOCKHOLDERS' EQUITY:
Common Stock 16,753 16,667
Additional Paid-in Capital 37,945 37,730
Retained Earnings 15,771 12,064
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 70,469 66,461
------------- -------------
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $ 143,285 $ 138,879
============= =============
</TABLE>
<PAGE> 3
INSTEEL INDUSTRIES, INC.
Consolidated Statements of Earnings
(000's Omitted Except for Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31, March 31, March 31,
1995 1994 1995 1994
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
NET SALES $ 66,003 $ 56,128 $ 124,622 $ 106,484
Cost of Sales 59,060 51,460 113,005 98,974
----------- ----------- ------------ -----------
GROSS PROFIT 6,943 4,668 11,617 7,510
Selling, General and Administrative Expense 3,547 3,261 6,734 5,943
Minority Interest in Loss of Subsidiary 164 (155) - (326)
Equity in Loss of Affiliate 91 44 96 145
----------- ----------- ------------ -----------
OPERATING INCOME 3,141 1,518 4,787 1,748
Interest Expense 558 542 1,104 879
Other Expense (Income) (29) (93) (11) (249)
----------- ----------- ------------ -----------
EARNINGS BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 2,612 1,069 3,694 1,118
Income Tax Expense (Benefit) (Note 3) (1,414) 363 (1,016) 395
----------- ----------- ------------ -----------
EARNINGS BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 4,026 706 4,710 723
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (Note 3) - - - 1,325
----------- ----------- ------------ -----------
NET EARNINGS $ 4,026 $ 706 $ 4,710 $ 2,048
=========== ========== ============ ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 8,361 8,310 8,347 8,290
=========== ========== ============ ===========
EARNINGS PER COMMON SHARE:
Before Cumulative Effect of Change in
Accounting Principle $ .48 $ .09 $ .56 $ .09
Cumulative Effect of Change in Accounting
Principle - - - .16
----------- ----------- ------------ -----------
NET EARNINGS PER SHARE $ .48 $ .09 $ .56 $ .25
=========== ========== ============ ===========
DIVIDENDS PAID PER SHARE $ .06 $ .06 $ .12 $ .12
=========== ========== ============ ===========
</TABLE>
<PAGE> 4
INSTEEL INDUSTRIES, INC.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended March 31,
1995 1994
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 4,710 $ 2,048
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Cumulative effect of change in accounting principle - (1,325)
Depreciation and amortization 4,064 3,691
Net gain on sale of property, plant and equipment - (3)
Provision for doubtful accounts 110 204
Minority interest in loss of subsidiary - (326)
Equity in loss of affiliate 96 144
Increase (decrease) in deferred income taxes (3,401) 73
Increase (decrease) in accounts receivable 859 (2,445)
Increase in inventories (7,799) (14,883)
Decrease in prepaid expenses 642 1,018
(Increase) decrease in other assets (18) (2,295)
Increase in accounts payable 6,351 2,717
Increase in accrued salaries, wages and related items 372 298
Decrease in accrued expenses (437) (1,251)
Increase (decrease) in accrued income taxes 708 (491)
------------- -------------
Total adjustments 1,547 (14,874)
------------- -------------
Net cash provided by (used in) operating activities 6,257 (12,826)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,803) (6,857)
Proceeds from sale of property, plant and equipment - 7
Proceeds on notes receivable 112 -
Increase in other assets (20) -
------------- -------------
Net cash used in investing activities (2,711) (6,850)
------------- -------------
</TABLE>
<PAGE> 5
<TABLE>
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings (2,657) 12,120
Proceeds from long-term debt 1,941 1,275
Principal payments on long-term debt (2,479) (2,684)
Proceeds from employee stock options 301 371
Dividends paid (1,003) (996)
Capital contribution to subsidiary by minority interest - 326
------------- -------------
Net cash provided by (used in) financing activities (3,897) 10,412
------------- -------------
NET DECREASE IN CASH (351) (9,264)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,234 9,289
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 883 $ 25
============= =============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 1,101 $ 632
Income taxes $ 874 $ 779
</TABLE>
Notes to Unaudited Condensed Consolidated Financial Statements
1. General
The condensed consolidated financial statements included herein have
been prepared by the Company, without audit, 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. These unaudited financial statements should be read in conjunction
with the financial statements and related notes contained in the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 1994 as
filed with the Securities and Exchange Commission.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all adjustments (consisting only of
normal recurring adjustments except as may be specifically disclosed) necessary
for a fair presentation of the information therein. Results of operations for
the interim periods should not be regarded as necessarily indicative of the
results to be expected for a full year.
<PAGE> 6
2. Inventories
Inventories at March 31, 1995 and September 30, 1994 have been stated
at the lower of cost (first-in, first-out method) or market (dollars in
thousands):
<TABLE>
<CAPTION>
March 31, September 30,
1995 1994
-------------- --------------
<S> <C> <C>
Raw Materials $ 13,629 $ 14,067
Work in Process 1,731 1,274
Finished Products 18,727 10,900
Supplies 2,462 2,509
------------- ------------
$ 36,549 $ 28,750
============= ============
</TABLE>
3. Income Taxes
The provision (benefit) for income taxes differs from the amount of
income tax determined by applying the applicable federal statutory income tax
rate to pretax earnings as a result of the following differences (dollars in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------------------- -----------------------------
1995 1994 1995 1994
------------ --------------- -------------- -------------
<S> <C> <C> <C> <C>
Computed tax expense $ 888 $ 363 $ 1,256 $ 380
Reduction in valuation allowance (2,368) - (2,368) -
Other 66 - 96 15
----------- ------------ ----------- -----------
Total Income Tax Expense (Benefit) $ (1,414) $ 363 $ (1,016) $ 395
=========== ============ =========== ===========
</TABLE>
During the second quarter of fiscal 1995, the Company purchased the
remaining 30% of its joint venture subsidiary, Insteel Construction Systems,
Inc. ("ICS"). Following the completion of the stock purchase, ICS was merged
into Insteel's wholly-owned subsidiary, Insteel Wire Products Company ("IWP"),
where it will operate as a separate division. Management expects that through
the future combined operations of IWP and ICS, the Company will be able to
utilize the net operating loss carryforwards ("NOL carryforwards") generated by
ICS prior to the merger. Accordingly, during the second quarter of fiscal
1995, the Company reversed substantially all of the previously established
valuation allowance related to ICS's separate return NOL carryforwards which
had reduced its deferred tax asset to zero. This one-time income tax
adjustment of $2.4 million, or $.28 per share, had the effect of increasing
deferred tax assets with a corresponding reduction in the current year income
tax provision.
<PAGE> 7
The Company adopted SFAS No. 109, "Accounting for Income Taxes,"
effective October 1, 1993. This Statement supersedes SFAS No. 96, "Accounting
for Income Taxes," which was adopted by the Company in fiscal year 1988. The
cumulative effect of adopting SFAS No. 109 on the Company's financial
statements was to increase income by $1,325,000 ($.16 per share) for the six
months ended March 31, 1994.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Insteel's net sales for the quarter and first six months of fiscal
1995 increased 18% and 17% over the comparable periods last year due to
stronger market demand and milder weather conditions. Tonnage shipments of wire
and wire products were up 14% and 12% over the year-ago quarter and first half,
while average selling prices increased over 3% as a result of improved product
mix and higher pricing levels. The increase in sales volume was driven by the
performance of the prestressed concrete strand ("PC strand") plant, which was
started up in February 1994, and had minimal shipments in last year's quarter.
Gross profit margins as a percentage of net sales improved from 8.3%
to 10.5% for the quarter and 7.1% to 9.3% for the first six months in
comparison to the year-ago periods. Margins were favorably impacted by higher
spreads between selling prices and raw material costs and the improved
performance of the PC strand plant, which incurred start-up losses during the
prior year period.
Selling, general and administrative expense ("SG & A expense")
increased 9% for the quarter and 13% for the first six months compared to the
year-ago periods. The majority of the increase was due to higher profit-sharing
expense generated by improved operating performance. As a result of the larger
percentage increase in sales volume, SG &A expense as a percentage of net sales
dropped to 5.4% from 5.8% for the quarter and 5.4% from 5.6% for the first six
months in comparison to prior year levels.
Minority interest in loss of subsidiary previously represented the 30%
share of Insteel Construction Systems ("ICS") losses funded by Insteel's joint
venture partner, EVG. During the second quarter, Insteel purchased the
remaining 30% of ICS from EVG and merged it into Insteel Wire Products ("IWP").
Instead of funding its share of the first quarter loss, the $164,000
contribution owed by EVG was negotiated as a reduction in the purchase price
for their 30% interest. As a result, the first quarter amount was reversed in
the second quarter, bringing the year-to-date total to zero. Going forward,
Insteel's financial results will reflect 100% of the operating performance of
ICS now that it is a wholly-owned subsidiary.
Equity in loss of affiliate increased for the quarter compared to last
year as a result of the economic downturn in Mexico and the resulting impact on
Insteel's joint venture, Insteel Panel/MEX ("IPM"). Year-to-date results were
still above prior year levels due to higher sales volumes prior to the December
devaluation of the peso.
<PAGE> 8
Interest expense increased 3% for the second quarter and 26% for the
first six months compared to the year-ago periods. First quarter 1994 expenses
were reduced as a result of the capitalization of interest related to the
construction of the PC strand plant.
Income tax expense for the second quarter was reduced by $2.4 million
to reflect the future utilization of the tax benefits arising from Insteel's
acquisition of the remaining 30% interest in ICS. The Company established a
deferred tax asset and reduced its income tax provision to reflect the expected
usage of existing ICS net operating loss carryforwards ("NOLs") in the future.
Going forward, the Company expects to continue reporting income tax expense at
close to statutory levels, but will reduce its deferred tax asset balance as
the ICS NOLs are utilized to offset consolidated taxable income.
First quarter fiscal 1994 results reflect Insteel's adoption of SFAS
No. 109, "Accounting for Income Taxes." The Company recognized a $1.3 million
benefit resulting from the recognition of previously unrecorded deferred tax
assets related to NOLs.
The market outlook for IWP over the remainder of the year appears to
be mixed. Although management anticipates continued strong demand for
construction-related product lines, there has been an accumulation of customer
inventories in certain markets which could effect third quarter shipments.
However, due to the seasonal nature of the Company's markets, sales volumes in
the second half have historically been substantially higher than in the first
six months. Recent raw material price increases on hot rolled wire rod could
negatively impact profit margins should there be a softening in business
conditions that would prevent the Company from raising its selling prices.
Management believes that the improved operational performance of the
Wilmington, Delaware plant and the industrial wire plant in Gallatin, Tennessee
would significantly impact Insteel's overall financial results. Although the
Delaware plant has demonstrated substantial progress during the first half of
the year, it has not yet improved to the level of its stated objectives. The
Tennessee industrial wire plant continues to be a concern due to management
issues which are being addressed. Management expects that both facilities will
demonstrate significant progress before the end of the year.
ICS continued to operate substantially below breakeven volumes in the
second quarter and incurred losses above prior year levels. The Company is
continuing its marketing focus for the Insteel 3-D(R) building panel on the
development of sales to the precast market and to projects in Florida, Central
America and the Caribbean. Given the all-or-nothing nature of the construction
projects being pursued, forecasting exactly when volume will increase to
profitable levels is extremely difficult. Should ICS' financial performance
fail to significantly improve over the remainder of the year, management will
pursue alternative operational strategies in order to attain profitability.
Although IPM has been adversely impacted by the decline in the Mexican
economy, it is management's opinion that the long-term prospects remain
promising and that the Company's investment value will not be significantly
impacted. The operating results of IPM are not expected to have a material
impact on Insteel's 1995 consolidated financial operating results.
<PAGE> 9
LIQUIDITY AND FINANCIAL CONDITION
Operating activities generated $6.3 million of cash for the first half
of fiscal 1995 compared to the prior year period, when $12.8 million was
consumed. The primary drivers behind the turnaround in operating cash flow were
improvements in the major components of working capital and improved financial
results. Although net sales increased 17% for the first half, receivables
increased only 2% and inventories decreased 5% compared to year-ago levels. As
a result, days sales outstanding decreased from 54 to 47 days and inventory
turns improved from 5.1 to 6.2 compared to the prior year. Net earnings before
depreciation and amortization, excluding the tax-related adjustments in both
years, were $6.4 million for the first half of fiscal 1995, compared to $4.4
million for the prior year period - a 45% increase.
Investing activities consumed $2.7 million of cash during the first
half of fiscal 1995 compared to $6.9 million during the year-ago period due to
lower capital expenditures. Management expects that capital expenditures will
continue to run below prior year levels but could increase later in the year
should expansion projects be undertaken. The Company is close to finalizing
plans to expand its PC strand capacity and enter the collated nail business.
Total expenditures for these projects would total around $9 million and could
commence in the third quarter.
The Company used $3.9 million of cash for financing activities during
the first half of fiscal 1995, while $10.4 million was provided in the prior
year period. The major application of cash was to reduce short-term borrowings
by $2.7 million in the current year, compared to an increase of $12.1 million
during the year-ago period.
Short-term borrowings are utilized by the Company to fund its working
capital requirements. At March 31, 1995, there was $2.3 million outstanding on
unsecured lines of credit providing total availability of $20.0 million. The
Company uses these lines to meet seasonal working capital needs, and management
believes that they are sufficient for that purpose.
The Company's financial condition remains strong. As of March 31,
1995, ratios of debt to equity and debt to total capital were 37% and 27%,
compared to 43% and 30% a year ago. Management believes that continuing
improvements in operating performance together with the strength of the
Company's balance sheet will allow it to access additional long- term sources
of financing as needed and that funds provided by operations and external
sources of financing are sufficient to support future requirements.
<PAGE> 10
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1995 Annual Meeting of Shareholders on February
7, 1995.
Election of Directors
Four directors were elected with votes cast as follows:
<TABLE>
<CAPTION>
For Withheld
----------- ----------
<S> <C> <C>
Howard O. Woltz, Jr. 7,537,406 50,730
Thomas J. Cumby 7,537,814 50,322
C. Richard Vaughn 7,537,867 50,269
Louis E. Hannen 7,537,872 50,264
</TABLE>
Other directors whose term of office continued after the meeting are:
John E. Woltz, W. Allen Rogers, II, Joseph D. Noell, III, H. O. Woltz III,
Frances H. Johnson and Charles B. Newsome.
Adoption of the 1994 Employee Stock Option Plan
The 1994 Employee Stock Option Plan of Insteel Industries, Inc. was
approved with votes cast as follows:
<TABLE>
<CAPTION>
Broker
For Against Abstain Nonvotes
--------- ---------- ----------- -----------
<S> <C> <C> <C>
7,361,199 170,470 56,467 1,258,229
</TABLE>
Adoption of the 1994 Director Stock Option Plan
The 1994 Director Stock Option Plan of Insteel Industries, Inc. was
approved with votes cast as follows:
<TABLE>
<CAPTION>
Broker
For Against Abstain Nonvotes
--------- ---------- ----------- -----------
<S> <C> <C> <C>
7,108,737 421,831 57,568 1,258,230
</TABLE>
<PAGE> 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
27 - Financial Data Schedule (for SEC use only)
b. Reports on Form 8-K: None filed during the quarter
with respect to which this report is filed.
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
By /s/ H. O. Woltz III
----------------------------------
H. O. Woltz III
President and Chief Executive Officer
Date: May 11, 1995 By /s/ Michael C. Gazmarian
---------------- ----------------------------------
Michael C. Gazmarian
Chief Financial Officer and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF INSTEEL INDUSTRIES, INC. FOR THE SIX MONTH PERIOD ENDED
MARCH 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> MAR-31-1995
<CASH> 883
<SECURITIES> 0
<RECEIVABLES> 32,438
<ALLOWANCES> 0
<INVENTORY> 36,549
<CURRENT-ASSETS> 70,347
<PP&E> 106,826
<DEPRECIATION> 41,137
<TOTAL-ASSETS> 143,285
<CURRENT-LIABILITIES> 44,114
<BONDS> 0
<COMMON> 16,753
0
0
<OTHER-SE> 53,716
<TOTAL-LIABILITY-AND-EQUITY> 143,285
<SALES> 124,622
<TOTAL-REVENUES> 124,622
<CGS> 113,005
<TOTAL-COSTS> 113,005
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,104
<INCOME-PRETAX> 3,694
<INCOME-TAX> (1,016)
<INCOME-CONTINUING> 4,710
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,710
<EPS-PRIMARY> .56
<EPS-DILUTED> .56
</TABLE>
