<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, 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 May 7, 1997 was 8,436,597.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSTEEL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 457 $ 1,423
Accounts receivable, net 29,836 32,981
Inventories 40,243 31,705
Prepaid expenses and other 913 1,653
Net assets of discontinued operations 1,943 5,846
-------- --------
Total current assets 73,392 73,608
Property, plant and equipment, net 77,285 67,558
Other assets 4,775 4,956
-------- --------
Total assets $155,452 $146,122
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 27,455 $ 23,770
Accrued expenses 6,928 9,161
Current portion of long-term debt 3,080 3,188
-------- --------
Total current liabilities 37,463 36,119
Long-term debt 40,856 29,655
Deferred income taxes 5,893 5,935
Other liabilities 769 736
Shareholders' equity:
Common stock 16,871 16,871
Additional paid-in capital 38,192 38,192
Retained earnings 15,408 18,614
-------- --------
Total shareholders' equity 70,471 73,677
-------- --------
Total liabilities and shareholders' equity $155,452 $146,122
======== ========
</TABLE>
<PAGE> 3
INSTEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ------------------------
1997 1996 1997 1996
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 65,250 $ 63,040 $ 123,676 $ 120,046
Cost of sales 60,607 58,066 115,623 112,326
-------- -------- --------- ---------
Gross profit 4,643 4,974 8,053 7,720
Selling, general and administrative expense 3,167 2,985 6,123 5,704
-------- -------- --------- ---------
Operating income 1,476 1,989 1,930 2,016
Interest expense 432 526 836 1,054
Other expense 10 177 8 184
-------- -------- --------- ---------
Earnings from continuing operations
before income taxes 1,034 1,286 1,086 778
Provision for income taxes 376 454 394 275
-------- -------- --------- ---------
Earnings from continuing operations 658 832 692 503
Discontinued operations:
Loss from operations of Insteel Construction
Systems net of income tax benefits of $229,
$95, $395 and $218 (401) (176) (693) (398)
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) (2,184) -- (2,184) --
-------- -------- --------- ---------
Loss from discontinued operations (2,585) (176) (2,877) (398)
-------- -------- --------- ---------
Net earnings (loss) $ (1,927) $ 656 $( 2,185) $ 105
======== ======== ========= =========
Weighted average shares outstanding 8,436 8,415 8,436 8,404
======== ======== ========= =========
Per share:
Earnings from continuing operations $ 0.08 $ 0.10 $ 0.08 $ 0.06
Loss from discontinued operations (0.31) (0.02) (0.34) (0.05)
======== ======== ========= =========
Net earnings (loss) $ (0.23) $ 0.08 $ (0.26) $ 0.01
======== ======== ========= =========
Dividends paid $ 0.06 $ 0.06 $ 0.12 $ 0.12
======== ======== ========= =========
</TABLE>
<PAGE> 4
INSTEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31,
----------------------
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings from continuing operations $ 692 $ 503
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 4,339 3,947
Accounts receivable, net 3,097 342
Inventories (8,538) 4,834
Accounts payable and accrued expenses 1,452 (2,155)
Other changes 669 986
-------- --------
Total adjustments 1,019 7,954
-------- --------
Net cash provided by operating activities 1,711 8,457
-------- --------
DISCONTINUED OPERATING ACTIVITIES:
Net cash provided by discontinued operating activities 1,026 438
INVESTING ACTIVITIES:
Capital expenditures (13,886) (5,275)
Proceeds (payments) on notes receivable 78 (253)
-------- --------
Net cash used for investing activities (13,808) (5,528)
-------- --------
FINANCING ACTIVITIES:
Net decrease in short-term debt -- (8,260)
Proceeds from long-term debt 56,225 26,374
Principal payments on long-term debt (45,099) (20,475)
Proceeds from stock options 0 148
Dividends paid (1,021) (1,009)
-------- --------
Net cash provided by (used for) financing activities 10,105 (3,222)
-------- --------
Net increase (decrease) in cash (966) 145
Cash and cash equivalents at beginning of period 1,423 263
-------- --------
Cash and cash equivalents at end of period $ 457 $ 408
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,131 $ 1,302
Income taxes 419 131
</TABLE>
<PAGE> 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.
These 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>
MARCH 31, SEPTEMBER 30,
1997 1996
------- -------
<S> <C> <C>
Raw materials $19,411 $15,797
Supplies 2,151 2,099
Work in process 1,635 1,426
Finished goods 17,046 12,383
------- -------
Total inventories $40,243 $31,705
======= =======
</TABLE>
(3) DISCONTINUED OPERATIONS
On March 27, 1997, the Company adopted a plan to sell its Insteel
Construction Systems division (ICS). ICS manufactures and markets the Insteel
3-D(R) building panel. The Company anticipates that the business will be
disposed of before the end of its current fiscal year ending September 30,
1997. ICS has been classified as a discontinued operation in the accompanying
financial statements in accordance with Accounting Principles Board Opinion No.
30.
The operating results of the discontinued ICS division are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------------------
1997 1996 1997 1996
----- ----- ------- -------
<S> <C> <C> <C> <C>
Net sales $ 205 $ 724 $ 580 $ 1,223
Cost of sales 320 654 743 1,113
----- ----- ------- -------
Gross profit (loss) (115) 70 (163) 110
Selling, general and administrative expense 356 330 720 650
----- ----- ------- -------
Operating loss (471) (260) (883) (540)
Interest expense 41 85 82 165
Other expense (income) 118 (74) 123 (89)
----- ----- ------- -------
Loss from operations of Insteel Construction
Systems before income taxes (630) (271) (1,088) (616)
Benefit for income taxes (229) (95) (395) (218)
----- ----- ------- -------
Loss from operations of Insteel Construction
Systems $(401) $(176) $ (693) $ (398)
===== ===== ======= =======
</TABLE>
<PAGE> 6
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.
The net assets of the discontinued ICS division were valued at the
lower of cost or net realizable value. The components of the net assets are as
follows:
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1996
------- -------
<S> <C> <C>
Accounts receivable, net $ 100 $ 891
Inventories 0 140
Prepaid expenses and other 32 40
Property, plant and equipment, net 1,960 3,514
Other assets 0 802
------- -------
Total assets 2,092 5,387
------- -------
Accounts payable 49 71
Accrued expenses (759) (1,005)
Deferred income taxes 859 475
------- -------
Total liabilities 149 (459)
------- -------
Net assets of discontinued operations $ 1,943 $ 5,846
======= =======
</TABLE>
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
STATEMENTS OF EARNINGS - SELECTED DATA
($ in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
------------------------------------- --------------------------------------
1997 CHANGE 1996 1997 CHANGE 1996
---------- ------ --------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 65,250 4% $ 63,040 $ 123,676 3% $ 120,046
Gross profit 4,643 (7)% 4,974 8,053 4% 7,720
Percentage of net sales 7.1% 7.9% 6.5% 6.4%
Selling, general and administrative expense $ 3,167 6% $ 2,985 $ 6,123 7% $ 5,704
Percentage of net sales 4.8% 4.7% 4.9% 4.8%
Operating income $ 1,476 (26)% $ 1,989 $ 1,930 (4)% $ 2,016
Percentage of net sales 2.3% 3.2% 1.6% 1.7%
Interest expense $ 432 (18)% $ 526 $ 836 (21)% $ 1,054
Percentage of net sales 0.7% 0.8% 0.7% 0.9%
Effective income tax rate 36.3% 35.4% 36.3% 35.4%
Earnings from continuing operations $ 658 (21)% $ 832 $ 692 38% $ 503
Percentage of net sales 1.0% 1.3% 0.6% 0.4%
</TABLE>
Insteel's net sales rose to $65.3 million for the second quarter, a 4%
increase over the year-ago period. For the first six months, net sales
increased 3% over the prior year to $123.7 million. Wire product shipments rose
3% for the second quarter and first six months compared with the year-ago
periods. Average selling prices increased 1% for the second quarter and were
flat for the first six months relative to the prior year. The increase in
second quarter sales was driven by improvements in the Company's new
businesses, PC strand and collated nails, together with higher shipments of
welded wire mesh products. These same factors, together with higher bulk nail
sales, were responsible for the sales increase for the first six months. Sales
of agricultural fencing products continued to be weak due to soft market
conditions and Mexican import competition.
Gross profit for the second quarter decreased 7% compared with the
prior year, declining as a percentage of sales to 7.1% from 7.9%. For the first
six months, gross profit rose 4%, increasing as a percentage of sales to 6.5%
compared with 6.4% in the year-ago period. Expenses were negatively impacted by
preoperating costs related to the Virginia tire bead wire expansion together
with the related transfer of equipment and industrial wire capacity to other
Insteel locations. Gross margins benefited from a widening in the spread
between selling values and raw material costs relative to year-ago levels.
Selling, general and administrative expense (SG&A expense) increased
6% for the second quarter, rising to 4.8% of sales from 4.7% in the prior year
period. For the first six months, SG&A expense rose 7%, increasing to 4.9% of
sales compared with 4.8% 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 declined 18% for the second quarter and 21% for the
first six months compared with the year-ago periods as a result of capitalized
interest related to the tire bead wire expansion together with a decrease in
the Company's average borrowing rates.
The Company's effective income tax rate for the second quarter and
first six 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 21% in the second
quarter, declining as a percentage of sales to 1.0% from 1.3% in the prior
year. For the first six months, earnings from continuing operations rose 38% to
0.6% of sales compared with 0.4% a year ago.
The second quarter and six-month results reflect losses of $2.6
million and $2.9 million, respectively, for the anticipated disposal of the
Company's Insteel Construction Systems division (ICS) and the reclassification
of the segment as discontinued operations. ICS manufactures and markets the
Insteel 3-D(R) building panel.
<PAGE> 8
FINANCIAL CONDITION
SELECTED FINANCIAL DATA
($ in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31,
--------------------------
1997 1996
--------- ---------
<S> <C> <C>
Net cash provided by operating activities $ 1,711 $ 8,457
Net cash used for investing activities (13,808) (5,528)
Net cash provided by (used for) financing activities 10,105 (3,222)
Long-term debt 40,856 29,786
Percentage of total capital 37% 30%
Shareholders' equity $ 70,471 $ 70,455
Percentage of total capital 63% 70%
Total capital (long-term debt + shareholders' equity) $ 111,327 $ 100,241
</TABLE>
Operating activities generated $1.7 million of cash during the first
six months compared with $8.5 million in the same period last year. The primary
factor driving the decrease was a reduction in excess inventories during the
year-ago period compared with the typical seasonal increase that occurred in
the current year. 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 $13.8 million during the first six
months compared with $5.5 million in the same period last year as a result of
higher capital expenditures primarily related to the tire bead wire expansion.
The remainder of the expenditures for the $17.0 million expansion will occur
during the third fiscal quarter.
Financing activities provided $10.1 million during the first six
months primarily to fund the outlays for the tire bead wire expansion. In the
prior year period, financing activities used $3.2 million of cash.
Insteel's financial position remains strong. The Company's long-term
debt to capital ratio increased to 37% at March 31, 1997 compared with 30% a
year ago primarily as a result of the capital expenditures related to the tire
bead wire expansion. 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. As a result, the short-term debt balance outstanding was refinanced
under the revolver and is now reflected as a long-term liability. At March 31,
1997, approximately $9.7 million was available under the facility. In April
1997, the revolving credit facility was amended, increasing the Company's
availability from $35.0 million to $50.0 million. 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.
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. Domestic wire rod market
conditions have tightened recently 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 is operational.
<PAGE> 9
Insteel's business strategy continues to be focused on further
expansion into higher value-added 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.
The Company is preceding with plans to enter the tire reinforcement business.
Limited production of tire bead wire began in April 1997 with the first
significant revenues anticipated in the fourth quarter of fiscal 1997.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1997 Annual Meeting of Shareholders on February
4, 1997. The only item on the agenda was the election of three directors for
terms ending in 2000 as follows:
<TABLE>
<CAPTION>
Votes
------------------------------------
For Withheld
-------------- ----------------
<S> <C> <C>
H.O. Woltz III 7,837,069 42,078
Frances H. Johnson 7,836,699 42,448
Charles B. Newsome 7,837,016 42,131
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
27.1 Financial Data Schedule
b. Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during
the quarter ended March 31, 1997.
<PAGE> 10
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: May 8, 1997 By /s/ H.O. Woltz III
-------------------------
H.O. Woltz III
President and Chief
Executive Officer
Date: May 8, 1997 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, 1997 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-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 457
<SECURITIES> 0
<RECEIVABLES> 29,836
<ALLOWANCES> 0
<INVENTORY> 40,243
<CURRENT-ASSETS> 73,392
<PP&E> 77,285
<DEPRECIATION> 0
<TOTAL-ASSETS> 155,452
<CURRENT-LIABILITIES> 37,463
<BONDS> 0
0
0
<COMMON> 16,871
<OTHER-SE> 53,600
<TOTAL-LIABILITY-AND-EQUITY> 155,452
<SALES> 123,676
<TOTAL-REVENUES> 123,676
<CGS> 115,623
<TOTAL-COSTS> 115,623
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 836
<INCOME-PRETAX> 1,086
<INCOME-TAX> 394
<INCOME-CONTINUING> 692
<DISCONTINUED> (2,877)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,185)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
</TABLE>
