Insteel Industries Inc. ( IIIN)

F4Q2010 Earnings Conference Call

October 21, 2010 10:00 am EST

Executives

H. O. Woltz III - President and CEO

Mike Gazmarian - VP, CFO and Treasurer

Analysts

Tim Hayes - Davenport & Company

Robert Kelly - Sidoti

Operator

Good day, ladies and gentlemen and welcome to the Insteel Industries fourth quarter 2010 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, Insteel 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 fourth 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 now turn it over to Mike to review our fourth quarter financial results then follow up to comment more on market conditions and our business outlook.

Mike Gazmarian

Thank you H. As we reported earlier this morning, Insteel incurred a loss from continuing operation of $1.7 million or $0.09 a share for the quarter compared with earnings from continuing operation of $2.8 million or $0.16 a share for the same period last year.

The loss for the quarter includes pre-tax charges totalling one $1.9 million or $0.06 a share after tax for inventory write-downs and the settlement of litigation. $0.4 million or $0.01 a share after tax was related to inventory write-down to reduce the carrying value of inventory associated with our standard welded wire reinforcement product line to the lower cost to market as a result of competitive pricing pressures. The other $1.5 million or $0.05 a share after tax for the settlement of the litigation matter that has been discussed in our SEC filings on an ongoing basis dating back to fiscal year 2008.

We are pleased to have as a matter of results which will serve to eliminate the associated legal fees that we have been incurring and restore the commercial relationship with this customer going forward. Excluding these charges, the loss from continuing operations for the quarter would have been $0.03 a share. In addition to these charges are results for the quarter are unfavourably impacted by lower shipment and compressed spread between selling prices in raw material cost which were driven by the continuation of weak market conditions.

Net sales for the fourth quarter were down 8% from the prior year due a 13.8% decrease in shipment which is partially offset by a 6.7% increase in average selling prices.

On a sequential basis, net sales were down 9.2% from the third quarter on a 7.5% decrease in shipments and 2% decrease in average selling prices.

Gross profit for the fourth quarter fell to $2.3 million from $7.7 million in the third quarter and $9 million in the prior year with gross margins dropping to 4.2% in net sales from 12.4% in the third quarter and 14.8% in the prior year. Gross profit for the current year quarter includes the $0.4 million charge for inventory write-down that I alluded to you earlier.

The year-over-year reduction in gross profit for the quarter, which is primarily driven by the narrowing and spread between average selling prices and raw material costs and to a lesser extent the decrease in shipment. Our total unit production for the fourth quarter was down 22% from last year and 6% on a sequential basis from Q3which reduced overall capacity utilization to 49% from 52% in the third quarter and 56% a year ago.

SG&A expense for the fourth quarter decreased $0.3 million from the prior year, primarily due to the reductions in legal and consulting expenses a large portion of which were related to the fees that we were incurring a year ago associated with the PC strand and trade cases.

Interest expense for the fourth quarter decreased to $42,000 from $157,000 a year ago due to reduced standardization of capitalized financing costs resulting from the June 2010 amendment over our credit facility.

Our effective income tax rate on continuing operations for the fourth quarter decreased to 41.9% from 43% a year ago primarily due to changes in permanent book versus tax differences.

Going forward our effective tax rate will be subject to change depending upon the level of future earnings which could secure the impact of permanent differences or as there are adjustments to any of the estimates that enter into our tax provision calculation.

Moving to the cash flow statement and balance sheet, continuing operating activities used $1.6 million of cash for the fourth quarter or providing $15.5 million in the prior year quarter, primarily due to the year-over-year changes in net working capital together with the loss that was incurred during the current year quarter.

Net working capital used $1.6 million of cash during the current year quarter while providing $8.3 million in the prior year quarter largely due to the $8.4 million increase in payables from Q3 to Q4 last year.

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