IIIN: CEO and CFO Discuss Q3 Results and Expect Industry Conditions to Continue

Thu. July 16, 2009; Posted: 01:37 PM

Insteel Industries, Inc. (IIIN) reported its financial results today for the third quarter ended June 27, 2009. Net sales for the third quarter decreased 45.4% to $57.0 million from $104.3 million in the same year-ago period. The Company reported a net loss of $1.7 million ($0.10 per share) for the third quarter compared with net earnings of $16.9 million ($0.97 per diluted share) for the same period last year. The net loss for the current year quarter includes a pre-tax charge of $2.9 million ($0.10 per share after-tax) for inventory write-downs to reduce the carrying value of inventory to the lower of cost or market.

Michael Gazmarian, CFO of Insteel Industries, commented in a conference call today, "In addition to the inventory write-downs, our financial results were negatively impacted by reductions in shipments and average selling prices, the consumption of higher cost inventory that was purchased prior to the downward spiral in steel prices and higher unit conversion costs as a result of reduced schedules at our manufacturing facilities."

He continued, "On a sequential basis, shipments for the quarter were up 34.1% from Q2, which is significantly higher than the typical seasonal upturn. We attribute the additional pick-up in volume this year to the completion of the customer inventory de-stocking, rather than a pronounced recovery in our market. Our average selling prices for the quarter were down 15.7% on a sequential basis due to the continued weakness of market conditions. They are down now 34.7% on a cumulative basis from peak levels of Q4 of 2008."

Mr. Gazmarian noted, "On a positive note, the drop-off in selling prices has been exceeded by the reduction in the prices of our raw materials, rolled steel wire rod. Although this widening in spreads has not been reflected in our current year results due to the inventory write-downs and consumption of higher cost inventory, we expect it to become more apparent during Q4."

He added, "Under the American Recovery and Reinvestment Act, infrastructure-related spending should begin to increase. With highway and bridge construction driving around 35% of our revenues, this funding should help to mitigate the anticipated weakness in other categories of non-residential construction, particularly commercial construction. Spending under this act has been negligible up to this point, but we expect spending levels and the resulting impact from the stimulus to ratchet up during 2010 and 2011."

H.O. Woltz, III, CEO of Insteel Industries, commented, "Business conditions strengthened somewhat in Q3 from the severly depressed levels of the previous two quarters. It appears that we are settling into a new market environment that may be characterized by a greater degree of stability versus our experience over the last several quarters, which is likely to reflect depressed unit volume for the forseeable future. Assuming that current conditions continue, our Q4 results should more closely reflect the new spread and volume environment. We expect to operate at a profit under these conditions, although our return on capital is likely to remain at reduced levels relative to recent years."

The U.S. International Trade Commission ("ITC") reached a preliminary determination last week that imports of PC strand from China threatened to injure the domestic PC strand industry. The ITC's unanimous ruling was in response to antidumping and countervailing duty petitions filed by a coalition of domestic PC strand producers, including Insteel, on May 27, 2009. These petitions allege that imports of PC strand from China were being "dumped" or sold in the U.S. at a price that was lower than its fair value and that subsidies were being provided to Chinese PC strand producers by the Chinese government. The petitioners are alleging dumping margins ranging from 140% to 315%, with an average margin of 223%. The entire investigative process is anticipated to take one year, with the final determinations of injury, dumping and subsidies expected to occur in mid-2010. While PC strand imports as reflected in recent government statistics have declined, the market continues to be adversely affected by unsold quantities of strand that entered the U.S. during the last half of 2008.

Mr. Woltz concluded, "The first three quarters of this fiscal year have been a nightmare for us and our industry. We have emerged in a stronger competitive position, and we look forward to moving into a more stable environment. We occupy strong positions in all of our markets, and our solid financial position should provide us with considerable flexibility over the next few quarters that position us to capitalize on any attractive growth opportunities."

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