<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 JULY 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
August 11, 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>
JULY 1, OCTOBER 2,
2000 1999
-------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 742 $ 827
Accounts receivable, net 42,314 31,054
Inventories 51,512 36,360
Prepaid expenses and other 6,600 3,012
-------- --------
Total current assets 101,168 71,253
Property, plant and equipment, net 109,607 85,529
Other assets 37,251 11,114
-------- --------
Total assets $248,026 $167,896
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 39,393 $ 25,035
Accrued expenses 16,736 9,965
Current portion of long-term debt 9,620 620
-------- --------
Total current liabilities 65,749 35,620
Long-term debt 93,950 46,197
Deferred income taxes 8,270 7,734
Other liabilities 1,030 1,016
Shareholders' equity:
Common stock 16,920 16,914
Additional paid-in capital 38,327 38,314
Retained earnings 23,780 22,101
-------- --------
Total shareholders' equity 79,027 77,329
-------- --------
Total liabilities and shareholders' equity $248,026 $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 NINE MONTHS ENDED
------------------------- -------------------------
JULY 1, JULY 3, JULY 1, JULY 3,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 90,922 $ 72,676 $228,315 $201,105
Cost of sales 80,129 61,947 202,111 174,606
-------- -------- -------- --------
Gross profit 10,793 10,729 26,204 26,499
Selling, general and administrative expense 5,429 4,764 14,351 12,883
-------- -------- -------- --------
Operating income 5,364 5,965 11,853 13,616
Interest expense 3,096 602 6,333 1,850
Other expense (income) (97) (35) 312 103
-------- -------- -------- --------
Earnings before income taxes 2,365 5,398 5,208 11,663
Provision for income taxes 911 2,010 2,006 4,234
-------- -------- -------- --------
Net earnings $ 1,454 $ 3,388 $ 3,202 $ 7,429
======== ======== ======== ========
Weighted average shares outstanding (basic) 8,460 8,453 8,459 8,446
======== ======== ======== ========
Net earnings per share (basic and diluted) $ 0.17 $ 0.40 $ 0.38 $ 0.88
======== ======== ======== ========
Dividends paid per share $ 0.06 $ 0.06 $ 0.18 $ 0.18
======== ======== ======== ========
</TABLE>
<PAGE> 4
INSTEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------
JULY 1, JULY 3,
2000 1999
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 3,202 $ 7,429
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 8,495 6,766
Loss (gain) on sale of assets 71 (113)
Net changes in assets and liabilities:
Accounts receivable, net 4,285 (224)
Inventories 5,334 263
Accounts payable and accrued expenses (1,247) 1,055
Other changes 1,056 2,196
------- -------
Total adjustments 17,994 9,943
------- -------
Net cash provided by operating activities 21,196 17,372
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses (net of cash acquired) (66,594) (8,397)
Payment of acquisition-related costs (1,376) --
Capital expenditures (7,293) (5,126)
Equity investments -- (3,250)
Purchases of short-term investments -- (1,875)
Proceeds from (issuance of) notes receivable 50 (1,355)
Proceeds from sale of property, plant and equipment 2,879 239
------- -------
Net cash used for investing activities (72,334) (19,764)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 80,000 81,142
Payments on long-term debt (6,350) (77,246)
Borrowings on revolving credit facility 92,058 --
Payments on revolving credit facility (108,955) --
Payment of debt issuance costs (4,196) --
Proceeds from exercise of stock options 19 111
Cash dividends paid (1,523) (1,520)
------- -------
Net cash provided by financing activities 51,053 2,487
------- -------
Net increase (decrease) in cash (85) 95
Cash and cash equivalents at beginning of period 827 422
------- -------
$ 742 $ 517
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 5,669 $ 1,898
Income taxes 1,649 2,355
</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>
JULY 1, OCTOBER 2,
(Amounts in thousands) 2000 1999
--------- ----------
<S> <C> <C>
Raw materials $ 19,981 $ 20,414
Supplies 3,997 2,601
Work in process 2,353 1,578
Finished goods 25,181 11,767
--------- ---------
Total inventories $ 51,512 $ 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 NINE MONTHS ENDED
-------------------------- -------------------------
JULY 1, JULY 3, JULY 1, JULY 3,
(Amounts in thousands, except per share data) 2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net earnings $ 1,454 $ 3,388 $ 3,202 $ 7,429
======== ======== ======== ========
Weighted average shares outstanding:
Weighted average shares outstanding (basic) 8,460 8,453 8,459 8,446
Dilutive effect of stock options 24 99 64 24
-------- -------- -------- --------
Weighted average shares outstanding (diluted) 8,484 8,552 8,523 8,470
======== ======== ======== ========
Net earnings per share (basic and diluted) $ 0.17 $ 0.40 $ 0.38 $ 0.88
======== ======== ======== ========
</TABLE>
Options to purchase 584,000 shares and 58,000 shares for the three
months ended July 1, 2000 and July 3, 1999, respectively, were antidilutive and
were not included in the diluted EPS computation.
(4) ACQUISITION OF FLORIDA WIRE AND CABLE, INC.
On January 31, 2000, the Company acquired Florida Wire and Cable, Inc.
("FWC"), 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.
("GSTOC"), a subsidiary of GS Industries, Inc. ("GSI") subject to a purchase
price adjustment based upon FWC's closing balance sheet. In addition, the
Company entered into a five-year agreement with GSI under which GSI will supply
FWC with a portion of its raw material requirements. During the third quarter,
the Company received a $1.9 million payment from GSTOC for a reduction in the
purchase price based upon FWC's final closing balance sheet.
<PAGE> 6
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 has been recorded as
goodwill and was adjusted to approximately $23.9 million based upon the change
in the preliminary purchase price adjustment which had previously been recorded
as a receivable in the 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 NINE MONTHS ENDED
---------------------------------- -------------------------------------
JULY 1, JULY 3, JULY 1, JULY 3,
2000 CHANGE 1999 2000 CHANGE 1999
---------- -------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales .................................... $ 90,922 25% $ 72,676 $ 228,315 14% $201,105
Gross profit ................................. 10,793 1% 10,729 26,204 (1%) 26,499
Percentage of net sales .................. 11.9% 14.8% 11.5% 13.2%
Selling, general and administrative expense... $ 5,429 14% $ 4,764 $ 14,351 11% $ 12,883
Percentage of net sales .................. 6.0% 6.6% 6.3% 6.4%
Operating income ............................. $ 5,364 (10%) $ 5,965 $ 11,853 (13%) $ 13,616
Percentage of net sales .................. 5.9% 8.2% 5.2% 6.8%
Interest expense ............................. $ 3,096 414% $ 602 $ 6,333 242% $ 1,850
Percentage of net sales .................. 3.4% 0.8% 2.8% 0.9%
Effective income tax rate ......... ........... 38.5% 37.2% 38.5% 36.3%
Net earnings ................................. $ 1,454 (57%) $ 3,388 $ 3,202 (57%) $ 7,429
Percentage of net sales .................. 1.6% 4.7% 1.4% 3.7%
</TABLE>
Net sales for the third quarter increased 25% to $90.9 million from
$72.7 million in the year-ago period as a result of the revenues contributed by
Florida Wire and Cable, Inc. ("FWC"), which was acquired in January 2000. For
the nine-month period, sales rose 14% from the prior year. On a comparable
basis, excluding the sales of FWC, sales decreased 8% for the quarter and 6% for
the nine-month period primarily as a result of lower sales of industrial wire.
Industrial wire sales fell 38% for the quarter due to significant
changes in the Company's operating strategy that were executed during the first
quarter together with transition-related inefficiencies at the Andrews, South
Carolina facility. The Company completed a realignment of its industrial wire
manufacturing capacity, ceasing production at the Gallatin, Tennessee plant and
shifting the majority of its volume to the South Carolina facility. The expected
increase in the operating level of the South Carolina plant has proceeded slower
than anticipated, constraining the sales of industrial wire as well as nails.
Sales of concrete reinforcing products rose 3% 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. Sales of bulk nails decreased 4% from a year ago due to price
deterioration largely driven by import competition together with volume
constraints resulting from the shortfall in wire production and unplanned
equipment downtime. Collated nail sales rose 19% as a result of higher
shipments. Sales of tire bead wire increased 14% from the year-ago quarter, but
fell short of expected levels due to equipment-related constraints that resulted
in production inefficiencies as well as lower than planned orders and operating
volumes.
Gross profit for the third quarter decreased to 11.9% of sales compared
with 14.8% in the prior year. For the nine-month period, gross profit decreased
to 11.5% of sales from 13.2% 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
<PAGE> 7
manufacturing costs as well as reduced sales. Margins were also compressed in
certain product lines by higher raw material costs and lower selling prices.
These factors were partially offset by the contribution of the FWC acquisition.
Selling, general and administrative expense ("SG&A expense") rose 14%
for the second quarter, but decreased as a percentage of sales to 6.0% from 6.6%
in the prior year. For the nine-month period, SG&A expense increased 11%,
declining to 6.3% of sales from 6.4% a year ago. The increase was primarily due
to the incremental expenses associated with FWC that were partially offset by
lower incentive plan expenses.
Interest expense increased significantly for the three and nine-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>
NINE MONTHS ENDED
----------------------------
JULY 1, JULY 3,
2000 1999
--------- ---------
<S> <C> <C>
Net cash provided by operating activities $ 21,196 $ 17,372
Net cash used for investing activities (72,334) (19,764)
Net cash provided by financing activities 51,053 2,487
Total long-term debt 103,570 40,259
Percentage of total capital 57% 35%
Shareholders' equity $ 79,027 $ 75,280
Percentage of total capital 43% 65%
Total capital (total long-term debt + shareholders' equity) $ 182,597 $ 115,539
</TABLE>
Operating activities generated $21.2 million of cash for the nine-month
period compared with $17.4 million a year ago. The increase was primarily due to
the current year reductions in receivables and inventories (excluding the
FWC-related additions) compared with the minimal year-ago changes. These sources
of cash served to offset the decrease in net earnings.
Investing activities consumed $72.3 million of cash for the nine-month
period compared with $19.8 million a year ago primarily due to the acquisition
of FWC. During the third quarter, the Company executed a sale-leaseback
transaction that generated $2.8 million of cash, which was used to pay down the
balance outstanding on its credit facility.
Financing activities provided $51.1 million of cash for the nine-month
period compared with $2.5 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. The applicable interest rate margins and unused commitment fee
are 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.
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 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.
At July 1, 2000, the Company was not in compliance with a financial
covenant of the credit facility, which constitutes an event of default. The
Company and its lenders have agreed to a waiver, effective for the period from
July 1, 2000 through September 29, 2000. During the waiver period, the Company
is subject to certain terms and conditions, including that it will not (1)
permit the balances outstanding on its revolving credit facility (which were
$26.0 million at July
<PAGE> 8
1, 2000) to exceed $45.0 million, or (2) make dividend payments or repurchase
shares in excess of $750,000. The Company is currently engaged in discussions
with its lenders regarding an amendment to the credit agreement that would
provide for the appropriate adjustments to the financial covenants in order to
permit compliance following the expiration of the waiver period.
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 converted $50.0 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, in February 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% 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% a year and the level
of the surcharge will decline by 2.5% 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. During the
second and third quarters, the Company continued to maintain higher inventory
levels in light of the upward trend in wire rod prices. 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. Although the demand for PC strand is expected to
remain strong, the Company anticipates that pricing will continue to be
depressed in the fourth quarter as a result of intense competitive pressures
from domestic and foreign producers.
During the third quarter, sales of the Company's most recent product
addition, tire bead wire, decreased from the previous quarter primarily due to
mechanical and electrical malfunctions in its wire plating process equipment.
The Company expects to complete an extensive equipment upgrade and expansion
program in the fourth quarter that should resolve these issues. Shipments are
expected to decrease in the fourth quarter and begin to rebound in fiscal 2001
as the operating volumes of the facility are gradually increased. 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 significantly improve its financial
performance.
The Company anticipates significant improvement in the performance of
its South Carolina and Kentucky facilities as both operations are expected to
attain higher production levels in the fourth quarter.
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; 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
<PAGE> 9
levels provided for in the TEA-21 highway spending legislation; the financial
impact of the acquisition of FWC, the Hickman, Kentucky manufacturing facility
and the 25% interest in SRP; 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; the Company's ability to successfully integrate FWC; and the Company's
ability to avoid events of default under its credit facility during the waiver
period described above and its ability to enter into an amendment to the credit
facility that would adjust the Company's financial covenants to permit
compliance following the expiration of the waiver period.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
27 - Financial Data Schedule
b. Reports of Form 8-K
The Company filed a report on Form 8-K, dated April 17, 2000. The Item
reported was "Item 7. Financial Statements and Exhibits."
<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: August 11, 2000 By: /s/ H.O. Woltz III
-------------------------------------------
H.O. Woltz III
President and Chief Executive Officer
Date: August 11, 2000 By: /s/ Michael C. Gazmarian
-------------------------------------------
Michael C. Gazmarian
Chief Financial Officer and Treasurer
