Insteel Industries Inc. (IIIN) is the nation's largest manufacturer of steel wire reinforcing products for concrete construction applications. The company's diverse product portfolio includes prestressed concrete strand (PC strand) and welded wire reinforcement, including engineered structural mesh (ESM), concrete pipe reinforcement, and standard welded wire reinforcement. Insteel's products are primarily sold to manufacturers of concrete products that are used in nonresidential construction projects across the United States.

Financials

In the fiscal year ended September 30, 2023, Insteel reported annual net income of $32.4 million on revenue of $649.2 million. The company generated $142.2 million in annual operating cash flow and $111.5 million in annual free cash flow. These strong financial results demonstrate Insteel's ability to navigate the cyclical nature of the construction industry and maintain a healthy balance sheet.

During the third quarter of fiscal 2024, Insteel faced a continuation of sluggish market conditions, although momentum increased steadily throughout the quarter. Net sales for the third quarter decreased 12.0% to $145.8 million, reflecting a 16.3% decrease in average selling prices partially offset by a 5.1% increase in shipments. The decrease in average selling prices was driven by competitive pricing pressures, the impact of low-priced PC strand imports, and the decline in raw material costs.

Gross profit for the third quarter of 2024 decreased 24.4% to $15.4 million, or 10.6% of net sales, from $20.4 million, or 12.3% of net sales, in the prior year quarter. The decrease in gross profit was primarily due to lower spreads between average selling prices and raw material costs, which offset the benefit of higher shipments. Selling, general, and administrative (SG&A) expense for the quarter remained relatively flat at $7.9 million, or 5.4% of net sales.

Net earnings for the third quarter of 2024 decreased to $6.6 million ($0.34 per share) from $10.6 million ($0.54 per share) in the prior year quarter, primarily due to the decrease in gross profit partially offset by an increase in interest income.

For the first nine months of fiscal 2024, Insteel reported net sales of $394.9 million, a 19.7% decrease from the same period in the prior year. The decrease in net sales was driven by a 20.4% decrease in average selling prices partially offset by a 1.0% increase in shipments. Gross profit for the first nine months of 2024 decreased 27.3% to $37.4 million, or 9.5% of net sales, from $51.4 million, or 10.5% of net sales, in the same year-ago period. The decrease in gross profit was primarily due to lower spreads between average selling prices and raw material costs, along with higher manufacturing costs, partially offset by an increase in shipments.

SG&A expense for the first nine months of 2024 decreased 1.9% to $22.1 million, or 5.6% of net sales, from $22.6 million, or 4.6% of net sales, in the same year-ago period. The decrease was primarily due to lower compensation expense, partially offset by higher depreciation, bad debt, and legal expenses. Net earnings for the first nine months of 2024 decreased to $14.6 million ($0.75 per share) from $26.8 million ($1.37 per share) in the same year-ago period, primarily due to the decrease in gross profit and other income, partially offset by lower SG&A expense and higher interest income.

Liquidity

From a liquidity perspective, Insteel ended the third quarter of 2024 with $97.7 million of cash on hand and was debt-free, with no borrowings outstanding on its $100 million revolving credit facility. This strong financial position provides the company with ample flexibility to pursue growth opportunities and make strategic investments.

Outlook

Looking ahead, Insteel's management team remains cautiously optimistic about the company's future prospects. While the operating environment during fiscal 2024 has been challenging, with headwinds such as declining steel prices, customer inventory liquidations, and the normal seasonal downturn in construction activity, the company is experiencing rising demand driven by market fundamentals and the capital investments made in recent years.

Insteel's management expects the slow and steady demand improvements experienced in the third quarter to continue into the fourth quarter. Backlogs in the company's welded wire reinforcement business have lengthened, and Insteel is ramping up operating hours at several facilities to respond to more robust customer demand. The outlook for infrastructure construction also appears positive, with federal spending from the Infrastructure Investment and Jobs Act expected to boost demand as the company progresses through the fourth quarter and into fiscal 2025.

Risks and Challenges

However, Insteel continues to face challenges from low-priced imported PC strand, which is putting pressure on selling prices. The company is carefully monitoring this situation and will pursue any trade actions that are justified. Additionally, the company is working with the administration to demonstrate that the differential treatment of hot-rolled wire rod and PC strand with respect to the Section 232 tariff is undermining the intent of the tariff and damaging the very constituency the tariff was intended to benefit.

Conclusion

Despite these challenges, Insteel remains well-positioned to navigate the current market environment. The company's substantial investments in state-of-the-art technology and capacity expansions are expected to favorably impact its cash cost of production and support future growth. Insteel's strong balance sheet and debt-free position provide the financial flexibility to pursue attractive growth opportunities, both organically and through acquisitions.

As Insteel continues to execute its strategic initiatives and adapt to the evolving market conditions, the company is poised to capitalize on the long-term growth prospects in the concrete reinforcing products industry. Investors should closely monitor Insteel's progress as the company navigates the current challenges and positions itself for future success.