<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 June 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-9929
INSTEEL INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-0674867
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1373 BOGGS DRIVE, MOUNT AIRY, NORTH CAROLINA 27030
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(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 July 25, 1995.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSTEEL INDUSTRIES, INC.
Condensed Consolidated Balance Sheets
June 30, 1995 and September 30, 1994
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, September 30,
1995 1994
(unaudited)
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<S> <C> <C>
CURRENT ASSETS:
Cash $ 759 $ 1,234
Receivables (Net) 32,060 33,399
Inventories (Note 2) 44,989 28,750
Prepaid Expenses and Other 517 1,119
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TOTAL CURRENT ASSETS 78,325 64,502
PROPERTY, PLANT AND EQUIPMENT 107,909 104,497
Less accumulated depreciation (42,897) (37,957)
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65,012 66,540
OTHER ASSETS 7,047 7,837
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TOTAL ASSETS $ 150,384 $ 138,879
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CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses $ 34,695 $ 31,972
Short-Term Borrowings 12,371 4,940
Current Portion of Long-Term Debt 2,805 2,407
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TOTAL CURRENT LIABILITIES 49,871 39,319
DEFERRED INCOME TAXES 3,985 6,302
LONG-TERM DEBT less current portion 24,966 26,797
STOCKHOLDERS' EQUITY:
Common Stock 16,753 16,667
Additional Paid-in Capital 37,945 37,730
Retained Earnings 16,864 12,064
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TOTAL STOCKHOLDERS' EQUITY 71,562 66,461
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TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $ 150,384 $ 138,879
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</TABLE>
<PAGE> 3
INSTEEL INDUSTRIES, INC.
Consolidated Statements of Earnings
(000's Omitted Except for Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30, June 30, June 30,
1995 1994 1995 1994
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<S> <C> <C> <C> <C>
NET SALES $ 69,360 $ 71,360 $ 193,982 $ 177,845
Cost of Sales 62,662 64,749 175,667 163,723
----------- ----------- ----------- -----------
GROSS PROFIT 6,698 6,611 18,315 14,122
Selling, General and Administrative Expense 3,542 3,442 10,276 9,386
Minority Interest in Loss of Subsidiary - (78) - (404)
Equity in Loss of Affiliate (12) 14 84 159
----------- ----------- ----------- -----------
OPERATING INCOME 3,168 3,233 7,955 4,981
Interest Expense 614 671 1,718 1,550
Other Expense (Income) 37 (72) 26 (321)
EARNINGS BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 2,517 2,634 6,211 3,752
Income Tax Expense (Benefit) (Note 3) 921 1,054 (95) 1,450
----------- ----------- ----------- -----------
EARNINGS BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 1,596 1,580 6,306 2,302
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (Note 3) - - - 1,325
----------- ----------- ----------- -----------
NET EARNINGS $ 1,596 $ 1,580 $ 6,306 $ 3,627
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 8,377 8,330 8,357 8,303
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE:
Before Cumulative Effect of Change in Accounting
Principle $ .19 $ .19 $ .75 $ .28
Cumulative Effect of Change in Accounting Principle - - - .16
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NET EARNINGS PER SHARE $ .19 $ .19 $ .75 $ .44
=========== =========== =========== ===========
DIVIDENDS PAID PER SHARE $ .06 $ .06 $ .18 $ .18
=========== =========== =========== ===========
</TABLE>
<PAGE> 4
INSTEEL INDUSTRIES, INC.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
1995 1994
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CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net earnings $ 6,306 $ 3,627
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 6,033 5,480
Net gain on sale of property, plant and equipment (5) (3)
Provision for doubtful accounts 219 301
Minority interest in loss of subsidiary - (404)
Equity in loss of affiliate 84 158
Increase (decrease) in deferred income taxes (2,316) 387
Increase (decrease) in accounts receivable 1,066 (5,463)
Increase in inventories (16,239) (10,759)
Decrease in prepaid expenses 602 1,235
Increase in other assets (2) (2,266)
Increase in accounts payable 3,078 838
Increase in accrued salaries, wages and related items 31 319
Decrease in accrued expenses (243) (255)
Decrease in accrued income taxes (143) (152)
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Total adjustments (7,835) (11,909)
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Net cash used in operating activities (1,529) (8,282)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,896) (8,576)
Proceeds from sale of property, plant and equipment 11 952
Proceeds on notes receivable 193 -
Increase in other assets (48) -
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Net cash used in investing activities (3,740) (7,624)
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</TABLE>
<PAGE> 5
<TABLE>
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term borrowings 7,431 10,052
Proceeds from long-term debt 1,978 1,275
Principal payments on long-term debt (3,411) (3,356)
Proceeds from employee stock options 301 430
Dividends paid (1,505) (1,496)
Capital contribution to subsidiary by minority interest - 404
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Net cash provided by financing activities 4,794 7,309
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NET DECREASE IN CASH (475) (8,597)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,234 9,289
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 759 $ 692
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Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 2,114 $ 1,694
Income taxes $ 1,552 $ 1,100
</TABLE>
Notes to Unaudited Consolidated Financial Statements
1. General
The 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 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 June 30, 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>
June 30, September 30,
1995 1994
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<S> <C> <C>
Raw Materials $ 22,376 $ 14,067
Work in Process 1,153 1,274
Finished Products 19,057 10,900
Supplies 2,403 2,509
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$ 44,989 $ 28,750
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</TABLE>
3. Income Taxes
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.
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 were down 3% for the quarter and up 9% for the
first nine months of fiscal 1995 in comparison to prior year results. Shipments
ran below expected levels throughout the quarter as customers worked down
excess inventories which had accumulated due to softening market conditions.
Tonnage shipments of wire and wire products decreased 6% for the quarter and
increased 5% for the first nine months in comparison to prior year volumes.
<PAGE> 7
Average selling prices were up 4% for the quarter and year-to-date periods as a
result of a more favorable product mix and higher pricing levels relative to
comparable prior year periods.
Gross profit margins improved from 9.3% to 9.7% for the quarter and
7.9% to 9.4% for the first nine months in comparison to prior year periods. The
PC strand plant, which incurred start-up losses during the first half of last
year, was responsible for a large portion of the year-to-year improvement.
Although spreads between selling prices and raw material costs widened over the
comparable periods last year, current quarter levels were down from the second
quarter.
Selling, general and administrative expense ("SG & A expense")
increased 3% for the quarter and 9% for the first nine months compared to prior
year levels. The majority of the year-to-date increase was a result of higher
profit-sharing expense generated by improved operating performance. SG & A
expense increased from 4.8% of sales to 5.1% for the quarter and remained flat
at 5.3% for the first nine months in comparison to last year's results.
Prior year results reflected the funding of 30% of ICS' losses by
Insteel's joint venture partner, EVG. As a result of the purchase of EVG's 30%
interest in the second quarter of this year and the ensuing merger of ICS into
IWP, minority interest was applicable only to prior year results.
Interest expense was down 8% for the quarter and up 11% for the first
nine months compared to prior year periods. The quarterly decrease was due to
lower average short-term borrowings while the year-to-date increase resulted
from the capitalization of interest related to the construction of the PC
strand plant in the first quarter of last year.
Income tax expense for the first nine months included a $2.4 million
reduction recorded in the second quarter resulting from the future utilization
of 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 tax loss
carryforwards in the future.
Prior year results reflect the first quarter 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.
OUTLOOK
The recent weakening in demand at IWP has resulted in excess
inventories relative to anticipated shipment levels through the remainder of
the year. Management is taking measures to align inventory levels with customer
requirements, including the reduction of production schedules at certain
facilities. Margins could be eroded if the current market softness continued
and resulted in significant price discounting.
ICS has continued to incur losses as sales volumes remain
substantially below breakeven levels. Management is evaluating alternative
operating strategies which would be pursued should there fail to be substantial
improvement in operating results over the remainder of the year.
<PAGE> 8
ICS' Mexican joint venture, Insteel Panel/MEX ("IPM") demonstrated
improvement during the quarter and should operate at close to breakeven levels
through the end of the year. The operation has begun to recover from the impact
of the economic downturn resulting from the peso devaluation and has benefited
from export sales into the western U.S.
LIQUIDITY AND FINANCIAL CONDITION
Operating activities consumed $1.5 million of cash for the first nine
months of fiscal 1995 compared to $8.3 million during the prior year period.
Increases in cash provided by receivables and improved operating performance
were partially offset by higher inventory levels. In comparison to the 9%
increase in nine-month sales, as of June 30, 1995, receivables were down 7%
while inventories were up 31% relative to year-ago levels. As a result, days
sales outstanding dropped from 51 to 45 and inventory turns decreased from 6.4
to 5.2 compared to the prior year period. Net earnings before depreciation and
amortization, excluding the tax-related adjustments in both years, were $10.0
million for the first nine months of fiscal 1995 compared to $7.8 million for
the same period last year - a 28% increase.
Investing activities consumed $3.7 million of cash during the first
nine months of fiscal 1995 compared to $7.6 million during the year-ago period
as a result of lower capital expenditures. Management expects that capital
spending will increase during the next six months as expansion projects are
undertaken. In May, construction started on a new collated nail facility
located in Andrews, South Carolina, adjacent to the Company's existing plant.
Commissioning of the facility is projected to occur during the first quarter of
fiscal 1996. The Company has previously announced plans to expand the capacity
of its PC strand plant with purchase commitments expected to be made next
quarter. Total expenditures for these projects is expected to be around $9.0
million.
Financing activities provided $4.8 million of cash during the first
nine months of fiscal 1995 compared to $7.3 million during the same period last
year. Although the increase in short-term borrowings was $2.6 million lower
than last year's comparable period, the June 30, 1995 balance was up $2.3
million relative to a year ago.
The Company utilizes short-term borrowings on unsecured lines of
credit to fund its seasonal working capital needs. At June 30, 1995, there was
$12.4 million outstanding on lines providing total availability of $20.0
million. Management believes that these lines are sufficient to fund its
working capital requirements.
The financial condition of the Company continues to be strong.
Debt-to-equity and debt-to-total capital ratios were 35% and 26% at June 30,
1995, compared to 42% and 29% a year ago. Management believes that the strength
of the Company's balance sheet together with improved operating performance
enable it to access additional long-term sources of financing as required and
that funds provided by operations and external sources of financing are
sufficient to support future requirements.
<PAGE> 9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits - Financial Data Schedule (for SEC use only)
b. Reports on Form 8-K: During the period covered by this report,
the Company filed one report on Form 8-K, dated June 28, 1995,
reporting under Item 4(a) change in the Company's certifying
accountant.
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.
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Registrant
By H.O. Woltz III
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H. O. Woltz III
President and Chief Executive Officer
Date: July 25, 1995 By 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 NINE MONTH PERIOD ENDED
JUNE 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> JUN-30-1995
<CASH> 759
<SECURITIES> 0
<RECEIVABLES> 32,060
<ALLOWANCES> 0
<INVENTORY> 44,989
<CURRENT-ASSETS> 78,325
<PP&E> 107,909
<DEPRECIATION> 42,897
<TOTAL-ASSETS> 150,384
<CURRENT-LIABILITIES> 49,871
<BONDS> 0
<COMMON> 16,753
0
0
<OTHER-SE> 54,809
<TOTAL-LIABILITY-AND-EQUITY> 150,384
<SALES> 193,982
<TOTAL-REVENUES> 193,982
<CGS> 175,667
<TOTAL-COSTS> 175,667
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,718
<INCOME-PRETAX> 6,211
<INCOME-TAX> (95)
<INCOME-CONTINUING> 6,306
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 00
<NET-INCOME> 6,306
<EPS-PRIMARY> .75
<EPS-DILUTED> .75
</TABLE>
