IIIN

Insteel Industries, Inc. (IIIN)

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Industry: Capital Goods
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Insteel Industries Inc. (IIIN)

F3Q10 (Qtr End 31/06/10) Earnings Call

July 22, 2010 10:00 am ET

Executives

H. O. Woltz III - President and CEO

Mike Gazmarian - VP, CFO and Treasurer

Analysts

Chris Haberlin - Davenport & Company

Robert Kelly - Sidoti

John Kohler - Oppenheimer & Close

Presentation

Operator

Good day ladies and gentlemen and thank you for standing by. Welcome to the Insteel Industries third quarter conference call. At this time all participants are in a listen-only mode. Later we will conduct the question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference may be recorded.

I would now like to introduce your host for today Mr. H. O. Woltz III, President and CEO. Sir, please go ahead.

H. O. Woltz III

Thank you, Karen. Good morning. Thank you for your interest in Insteel and welcome to our third quarter 2010 conference call which will be conducted by Mike Gazmarian our Vice President, CFO and Treasurer and me.

Before we begin, let me remind you that some of the comments made in our presentation are considered to be forward-looking statements. Forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those projected. These risk factors are described in our periodic filings with the SEC.

I will turn it over to Mike to review our third quarter financial results and the most recent indicators for the macro drivers of our business and then follow up to comment more on the PC strand trade cases, market conditions and our business outlook.

Mike Gazmarian

Thank you H. As we reported earlier this morning, despite the continuation in severely depressed market conditions, Insteel [upholds] to the second consecutive quarter of earnings. Net earnings for the third quarter ended July 3rd, were $1.6 million or $0.09 a share compared with the net loss of $1.7 million or $0.10 a share for the same period last year.

The prior loss for the quarter included a pre-tax charge of $2.9 million or $0.10 a share after tax for inventory write-downs to reduce the carrying value of inventory to the lower cost to market. Excluding these write-downs, last year’s results would have essentially been at a breakeven level.

Insteel’s results for the third quarter were favorably impacted by higher shipments and spreads between selling prices and raw material costs and lower unit conversion costs. Net sales for the quarter increased 8.8% from the prior year driven by 8.5% increase in shipments and a 0.3% increase in average selling prices.

On a sequential basis, net sales were up 18.3% from the second quarter of fiscal 2010. Q3 shipments rose 8% sequentially from Q2, reflective of the usual seasonal pick-up that we experienced between the quarters. However, even with the higher volume for the quarter, our Q3 shipments were still 40% under the peak level for the previous five years.

Average selling prices for the third quarter rose 9.7% sequentially from Q2, due to the price increases that we implemented during the quarter to recover escalating raw material costs. Gross profit for the third quarter increased to $7.7 million from $6.2 million in the second quarter and $1.2 million in the prior year, while gross margins rose to 12.4% in net sales from 11.9% in the second quarter and 2.1% in net sales in the prior year.

Gross profit in the prior year quarter included the $2.9 million for inventory write-downs that I that alluded to earlier. Excluding these write-downs, last year’s gross profit would have been $4.1 million or 7.2% in net sales.

The year-over-year improvement in gross profit was driven by the absence of inventory write-downs in the current year quarter, the increase in shipments, wider spreads between average selling prices and raw material costs and lower unit conversion costs.

Total unit production for the third quarter was up 22% from last year and 6% on a sequential basis from Q2, which increased our overall capacity utilization at 52% from 49% in the second quarter and 42% a year ago, and reduced our unit conversion costs relative to both periods.

SG&A expense for the quarter increased $0.3 million or 7.5% from the prior year, primarily due to the relative changes in the cash surrender value of life insurance policies which was partially offset by a reduction in bad debt expense. Cash surrender values depreciated during the current year quarter due to the drop-off in the financial markets while increasing in the prior year.

Our effective income tax rate for the third quarter rose to 50.8% from 41.5% a year ago, primarily due to about 150,000 of tax reserve adjustments that were recorded during the current year period together with changes in permanent book versus tax differences. If we were to exclude the reserve adjustments and the 501,000 benefit that was recorded in the second quarter relating to the increase in our prior year federal tax refund, our effective tax rate would have been in the 44% to 45% range for both Q3 and the nine month period. These percentages are still higher than our effective rate for the past few years which was in the neighborhood of 36% due to the amplified impact of permanent book versus tax differences resulting from the lower pre-tax earnings in the current year.

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