<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 APRIL 1, 2000
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: 336-786-2141
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 12, 2000 was 8,460,187.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSTEEL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
APRIL 1, OCTOBER 2,
2000 1999
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,326 $ 827
Accounts receivable, net 53,348 31,054
Inventories 52,152 36,360
Prepaid expenses and other 6,128 3,012
--------- ---------
Total current assets 112,954 71,253
Property, plant and equipment, net 112,398 85,529
Other assets 32,808 11,114
--------- ---------
Total assets $ 258,160 $ 167,896
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 30,475 $ 25,035
Accrued expenses 15,728 9,965
Current portion of long-term debt 8,840 620
--------- ---------
Total current liabilities 55,043 35,620
Long-term debt 115,930 46,197
Deferred income taxes 8,082 7,734
Other liabilities 1,023 1,016
Shareholders' equity:
Common stock 16,920 16,914
Additional paid-in capital 38,327 38,314
Retained earnings 22,835 22,101
--------- ---------
Total shareholders' equity 78,082 77,329
--------- ---------
Total liabilities and shareholders' equity $ 258,160 $ 167,896
========= =========
</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
---------------------- ----------------------
APRIL 1, APRIL 3, APRIL 1, APRIL 3,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 78,822 $ 66,162 $137,393 $128,429
Cost of sales 69,528 56,958 121,982 112,659
-------- -------- -------- --------
Gross profit 9,294 9,204 15,411 15,770
Selling, general and administrative expense 4,827 4,565 8,922 8,119
-------- -------- -------- --------
Operating income 4,467 4,639 6,489 7,651
Interest expense 2,487 655 3,237 1,248
Other expense 519 82 409 138
-------- -------- -------- --------
Earnings before income taxes 1,461 3,902 2,843 6,265
Provision for income taxes 563 1,385 1,095 2,224
-------- -------- -------- --------
Net earnings $ 898 $ 2,517 $ 1,748 $ 4,041
======== ======== ======== ========
Weighted average shares outstanding (basic) 8,460 8,443 8,459 8,443
======== ======== ======== ========
Net earnings per share (basic) $ 0.11 $ 0.30 $ 0.21 $ 0.48
======== ======== ======== ========
Dividends paid per share $ 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
---------------------------
APRIL 1, APRIL 3,
2000 1999
--------- ---------
<S> <C> <C>
Cash Flows From Operating Activities:
Net earnings $ 1,748 $ 4,041
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 5,234 4,497
Loss (gain) on sale of assets 195 (17)
Net changes in assets and liabilities (excluding effect of
acquisition):
Accounts receivable, net 639 1,379
Inventories 4,694 2,019
Accounts payable and accrued expenses (11,173) (6,668)
Other changes 427 1,638
--------- ---------
Total adjustments 16 2,848
--------- ---------
Net cash provided by operating activities 1,764 6,889
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Florida Wire and Cable, Inc., net of cash acquired (68,494) --
Payment of acquisition related costs (1,144) --
Capital expenditures (4,762) (3,664)
Equity investments -- (3,250)
Purchases of short-term investments -- (1,875)
Proceeds from (issuance of) notes receivable 212 (1,421)
Proceeds from sale of property, plant and equipment 95 159
--------- ---------
Net cash used for investing activities (74,093) (10,051)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 80,000 --
Repayments of long-term debt (2,450) (450)
Borrowings under revolving credit facility 88,958 51,437
Repayments on revolving credit facility (88,555) (46,434)
Payment of debt issuance costs (4,130) --
Proceeds from exercise of stock options 19 22
Cash dividends paid (1,014) (1,013)
--------- ---------
Net cash provided by financing activities 72,828 3,562
--------- ---------
Net increase in cash 499 400
Cash and cash equivalents at beginning of period 827 422
--------- ---------
Cash and cash equivalents at end of period $ 1,326 $ 822
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 2,738 $ 685
Income taxes 1,201 1,060
</TABLE>
<PAGE> 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for 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 October 2, 1999.
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>
APRIL 1, OCTOBER 2,
(Amounts in thousands) 2000 1999
--------- ---------
<S> <C> <C>
Raw materials $ 20,971 $ 20,414
Supplies 4,213 2,601
Work in process 1,993 1,578
Finished goods 24,975 11,767
--------- ---------
Total inventories $ 52,152 $ 36,360
========= =========
</TABLE>
(3) EARNINGS PER SHARE
The reconciliation of basic and diluted earnings per share ("EPS") is
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
APRIL 1, APRIL 3, APRIL 1, APRIL 3,
(Amounts in thousands, except per share data) 2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Earnings $ 898 $ 2,517 $ 1,748 $ 4,041
======= ======= ======= =======
Weighted average shares outstanding:
Weighted average shares outstanding (basic) 8,460 8,443 8,458 8,443
Dilutive effect of stock options 79 15 95 2
------- ------- ------- -------
Weighted average shares outstanding (diluted) 8,539 8,458 8,553 8,445
======= ======= ======= =======
Net earnings per share (basic) $ 0.11 $ 0.30 $ 0.21 $ 0.48
======= ======= ======= =======
Net earnings per share (diluted) $ 0.11 $ 0.30 $ 0.20 $ 0.48
======= ======= ======= =======
</TABLE>
Options to purchase 241,000 shares and 443,000 shares for the three
months ended April 1, 2000 and April 3, 1999, respectively, were antidilutive
and were not included in the diluted EPS computation.
<PAGE> 6
(4) ACQUISITION OF FLORIDA WIRE AND CABLE, INC.
On January 31, 2000, the Company completed its acquisition of Florida
Wire and Cable, Inc. ("FWC"). FWC is the nation's leading producer of
prestressed concrete strand ("PC strand") and one of the largest manufacturers
of galvanized strand. Under the terms of the purchase agreement, the Company
acquired all of the outstanding stock of FWC for $68.5 million from GS
Technologies Operating Co., Inc., a subsidiary of GS Industries, Inc. ("GSI").
The purchase price is subject to an adjustment that is to be determined based on
FWC's closing balance sheet which the Company expects will be finalized during
the third quarter. In addition, the Company has entered into a five-year
agreement with GSI under which GSI will supply FWC with a portion of its raw
material requirements.
The acquisition has been accounted for under the purchase method of
accounting and, accordingly, the results of FWC have been included in the
consolidated financial statements since the acquisition date. The excess of cost
over the estimated fair value of net assets acquired was approximately $18.3
million and has been recorded as goodwill. The goodwill amount may be adjusted
for any change in the preliminary purchase price adjustment currently recorded
as a receivable in the accompanying consolidated balance sheet. Goodwill is
being amortized on a straight-line basis over 20 years.
The acquisition was financed with funding provided under a $140.0
million senior secured credit facility that the Company has entered into with
Bank of America, N.A., as agent and lender, Branch Banking and Trust Company,
First Union National Bank, and National Bank of Canada, a Canadian Chartered
Bank, consisting of a $60.0 million revolving credit loan and a $80.0 million
term loan. Borrowings under the new credit facility were also used to pay off
the balances outstanding on the Company's previous $60.0 million unsecured
revolving credit facility. The additional funding available under the new credit
facility will be used for working capital, capital expenditures and other
general corporate purposes.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
STATEMENTS OF EARNINGS - SELECTED DATA
($ in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------------ --------------------------------------
APRIL 1, APRIL 3, APRIL 1, APRIL 3,
2000 CHANGE 1999 2000 CHANGE 1999
----------- -------- ------------ ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 78,822 19% $66,162 $ 137,393 7% $ 128,429
Gross profit 9,294 1% 9,204 15,411 (2)% 15,770
Percentage of net sales 11.8% 13.9% 11.2% 12.3%
Selling, general and administrative expense $ 4,827 6% $ 4,565 $ 8,922 10% $ 8,119
Percentage of net sales 6.1% 6.9% 6.5% 6.3%
Operating income $ 4,467 (4)% $ 4,639 $ 6,489 (15)% $ 7,651
Percentage of net sales 5.7% 7.0% 4.7% 6.0%
Interest expense $ 2,487 280% $ 655 $ 3,237 159% $ 1,248
Percentage of net sales 3.2% 1.0% 2.4% 1.0%
Effective income tax rate 38.5% 35.5% 38.5% 35.5%
Net earnings $ 898 (64)% $ 2,517 $ 1,748 (57)% $ 4,041
Percentage of net sales 1.1% 3.8% 1.3% 3.1%
</TABLE>
Net sales for the second quarter increased 19% to $78.8 million from
$66.2 million in the year-ago period. For the six-month period, sales rose 7%
from the prior year. The increase was due to the additional revenues contributed
by Florida Wire and Cable, Inc. ("FWC"), which was acquired in January 2000. On
a comparable basis excluding the sales of FWC, sales decreased 5% for the
quarter and 6% for the six-month period primarily as a result of lower sales of
industrial wire. Industrial wire sales dropped 39% for the quarter due to the
closure of the Company's Tennessee industrial wire plant during the first
quarter together with transition-related inefficiencies associated with changes
in the Company's operating strategy. During the first quarter, the Company
completed a realignment of its manufacturing capacity, ceasing the production of
industrial wire at its Gallatin, Tennessee plant and shifting the majority of
the volume to its Andrews, South Carolina facility. In addition, an increasing
proportion of wire was consumed internally by downstream processes to
manufacture other higher value products. Sales of bulk nails decreased 8% from a
year ago due to price deterioration largely driven by import competition.
Collated nail sales rose 30% as a result of higher shipment volumes. Sales of
tire bead wire increased to another new high for the quarter. Sales of concrete
reinforcing products rose 13% for the quarter (excluding the sales of FWC) due
to higher shipments of welded wire fabric. The increase was primarily generated
by the Hickman, Kentucky facility, which was acquired in April 1999, together
with favorable market conditions.
<PAGE> 7
Gross profit for the second quarter decreased to 11.8% of sales
compared with 13.9% in the prior year. For the six-month period, gross profit
decreased to 11.2% of sales from 12.3% a year ago. Gross profit was negatively
impacted by the operating inefficiencies associated with the reconfiguration of
the industrial wire business, which resulted in unfavorable manufacturing costs
as well as reduced sales. These factors were partially offset by the
contributions of the FWC acquisition, the improved performance of the concrete
reinforcing business, and the higher operating volumes of the Company's recent
expansions.
Selling, general and administrative expense ("SG&A expense") rose 6%
for the second quarter, but decreased as a percentage of sales to 6.1% from 6.9%
in the prior year. For the six-month period, SG&A expense increased 10%, rising
to 6.5% of sales from 6.3% a year ago. The increase was due to the incremental
expenses associated with FWC that were partially offset by lower incentive plan
expenses.
Interest expense increased for the three and six-month periods compared
with a year ago due to the higher debt levels principally related to the
acquisition of FWC together with an increase in the Company's borrowing rates
under its new credit facility.
FINANCIAL CONDITION
SELECTED FINANCIAL DATA
($ in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------
APRIL 1, APRIL 3,
2000 1999
--------- ---------
<S> <C> <C>
Net cash provided by operating activities $ 1,764 $ 6,889
Net cash used for investing activities (74,093) (10,051)
Net cash provided by financing activities 72,828 3,562
Total long-term debt 124,770 40,916
Percentage of total capital 62% 36%
Shareholders' equity $ 78,082 $ 72,309
Percentage of total capital 38% 64%
Total capital (total long-term debt + shareholders' equity) $ 202,852 $ 113,225
</TABLE>
Operating activities generated $1.8 million of cash for the six-month
period compared with $6.9 million a year ago. The year-to-year change was
primarily due to the reduction in accounts payable and accrued expenses
resulting from lower raw material purchases as well as the decrease in net
earnings. These uses of cash were offset by a planned reduction in raw material
inventories.
Investing activities consumed $74.1 million of cash for the six-month
period compared with $10.1 million a year ago primarily due to the acquisition
of FWC.
Financing activities provided $72.8 million of cash for the six-month
period compared with $3.6 million a year ago. In January 2000, the Company
entered into a $140.0 million senior secured credit facility with a group of
banks, consisting of a $60.0 million revolving credit loan and a $80.0 million
term loan. Borrowings under the new credit facility were used to fund the
acquisition of FWC and pay off the balances outstanding on the Company's
previous $60.0 million unsecured revolving credit facility.
Under the terms of the credit agreement, the Company may elect
different interest rate options based upon LIBOR or a base rate that is
established at the higher of the prime rate or 0.5% plus the federal funds rate.
In addition, a commitment fee is payable on the unused portion of the revolving
credit facility. Beginning in the Company's fiscal quarter ending September 30,
2000, the applicable interest rate margins and unused commitment fee will be
adjusted quarterly based on the Company's ratio of debt to earnings before
interest, taxes, depreciation and amortization ("EBITDA"). Advances under the
revolving credit facility are limited to the lesser of $60.0 million or a
borrowing base amount that is calculated based upon a percentage of eligible
receivables and inventories. At April 1, 2000, approximately $16.7 million was
available under the revolving credit facility.
The credit facility contains restrictive covenants which, among other
restrictions, places limitations on certain financial ratios, capital
expenditures and additional liens or indebtedness as well as requiring that
consolidated net worth be maintained at or above specified levels. The credit
facility is collateralized by all of the Company's assets. The Company
<PAGE> 8
currently expects to fund its cash requirements for working capital, capital
expenditures and other corporate purposes from internally generated funds
together with borrowings available under the credit facility.
In April 2000, the Company entered into interest rate swap agreements
to reduce the financial impact of future interest rate fluctuations on its
earnings and cash flows. These agreements effectively convert $50 million of the
Company's floating rate debt to a fixed rate of 9.825% based upon the current
applicable interest rate margin.
OUTLOOK
The Company's operating results are impacted by seasonal factors,
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.
Market conditions for the Company's primary raw material, hot-rolled
carbon steel wire rod, remained stable through the first quarter. In January
1999, domestic steel wire rod producers initiated a Section 201 filing with the
U.S. International Trade Commission ("ITC") alleging that rising import levels
had resulted in serious injury to the domestic industry. In response to the
ITC's report, on February 11, 2000, President Clinton announced import relief
for the domestic industry in the form of a "tariff-rate-quota" ("TRQ"), which
will remain in place for three years. In the first year, steel wire rod from
countries subject to the TRQ will face additional duties of 10 percent once
imports exceed 1.58 million net tons. In the second and third years, the
quantity of imports exempt from the higher duty will increase by 2.0 percent a
year and the level of the surcharge will decline by 2.5 percentage points a
year. The future impact of these actions on the Company's financial results is
difficult to predict, depending upon the Company's ability to recover any raw
material price increases in its markets. The Company's preliminary analysis
indicates that imported wire rod will continue to be available in quantities
that are sufficient to support the requirements of the domestic market. The
Company increased its raw material inventories through the end of the first
quarter to partially protect itself against the potential unfavorable impact of
a negative outcome. The Company expects to substantially reduce its inventories
through the remainder of the year.
The Company expects that the recently enacted federal highway spending
legislation ("TEA-21") will have a favorable impact on the demand for its
concrete reinforcing products. As customer requirements rise, the Company
expects to gradually increase the operating volumes of its recently expanded PC
strand manufacturing facility to its full design capacity. During the second
quarter, sales of the Company's most recent product addition, tire bead wire,
rose to a new high as the Company continued to gain customer acceptance and
further its market penetration. As the Company is currently incurring
substantially all of the anticipated operating costs required to support its new
business, the incremental impact of projected increases in sales is expected to
have a significant favorable impact on its financial performance.
The Company's business strategy continues to be focused on (1)
expansion opportunities in existing businesses as well as in related products
that leverage off of the Company's core competencies in the manufacture and
marketing of wire products and (2) continued improvement in the financial
performance of the Company's traditional businesses.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that reflect
management's current assumptions and estimates of future performance and
economic conditions. Such statements are made in reliance upon the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are subject to various risks and uncertainties that
could cause actual results to differ materially from those projected, stated or
implied by the statements. Such risks and uncertainties include, but are not
limited to, general economic conditions in the markets in which the Company
operates; unanticipated changes in customer demand, order patterns and inventory
levels; fluctuations in the cost and availability of the Company's primary raw
material, hot rolled steel wire rod; the Company's ability to raise selling
prices in order to recover increases in wire rod prices; the impact of the
resolution of the Section 201 trade filing on the cost and availability of wire
rod; legal, environmental or regulatory developments that significantly impact
the Company's operating costs; increased demand for the Company's concrete
reinforcing products resulting from increased federal funding levels provided
for in the TEA-21 highway spending legislation; the financial impact of the
acquisition of FWC, the 25% interest in SRP and the Hickman, Kentucky
manufacturing facility; the success of the Company's new product initiatives,
including the PC strand, collated nail and tire bead wire expansions; the
inability of the Company to expedite the qualification process with prospective
customers for tire bead wire; the failure of the Company to receive regular and
substantial orders for its new products; the financial impact of the realignment
of the Company's industrial wire manufacturing capacity; and the Company's
ability to successfully integrate FWC.
<PAGE> 9
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
27 - Financial Data Schedule (for SEC use only)
b. Reports of Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter
ended April 1, 2000.
<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 12, 2000 By: /s/ H.O. Woltz III
-------------------------------------------
H.O. Woltz III
President and Chief Executive Officer
Date: May 12, 2000 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 FORM 10-Q OF
INSTEEL INDUSTRIES, INC. FOR THE SIX MONTHS ENDED APRIL 1, 2000, 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-30-2000
<PERIOD-START> OCT-03-1999
<PERIOD-END> APR-01-2000
<CASH> 1,326
<SECURITIES> 0
<RECEIVABLES> 54,409
<ALLOWANCES> 1,061
<INVENTORY> 52,152
<CURRENT-ASSETS> 112,954
<PP&E> 178,533
<DEPRECIATION> 66,135
<TOTAL-ASSETS> 258,160
<CURRENT-LIABILITIES> 55,043
<BONDS> 0
0
0
<COMMON> 16,920
<OTHER-SE> 61,162
<TOTAL-LIABILITY-AND-EQUITY> 258,160
<SALES> 137,393
<TOTAL-REVENUES> 137,393
<CGS> 121,982
<TOTAL-COSTS> 121,982
<OTHER-EXPENSES> 409
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,237
<INCOME-PRETAX> 2,843
<INCOME-TAX> 1,095
<INCOME-CONTINUING> 1,748
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,748
<EPS-BASIC> .21
<EPS-DILUTED> .21
</TABLE>
