Another sharp increase in costs related to Chinese tariffs contributed to Insteel Industries Inc. having an 82.9% decline in third-quarter net income to $2.19 million.
Diluted earnings for the third quarter were 11 cents, compared with 67 cents a year ago.
Investors responded to the second consecutive sharp quarterly profit drop by sending Insteel’s share price down as much as 15.3% during trading before the stock closed at $18.73, down $2.26 or 10.8%.
Insteel reported April 18 an 82.1% decline in second-quarter net income to $1.05 million. The investor response to that quarterly profit decline sent the share price down 16% to $17.60.
The share price had recovered to as high as $21.61 on Wednesday before Thursday’s report.
The company benefited from having a $500,000 income-tax expense, compared with a $3.94 million expense a year ago.
The Mount Airy company reported Thursday that the profit decrease was caused primarily by being “unfavorably impacted by increasing low-priced import competition resulting from the Section 232 tariff on imported steel, together with adverse weather conditions” affecting the construction industry compared with a year ago.
The Trump administration placed in March 2018 a 25% stainless-steel tariffs imposed on Chinese and other imports that have resulted in lower raw-material costs for Insteel’s offshore-based competition.
Sales were flat at $126.2 million, while cost of sales increased 15.1% to $118.1 million.
Insteel makes steel-wire reinforcing products largely for infrastructure projects. Steel material represents 70% of the company’s total product costs.
Because Insteel is a large purchaser of steel for its product mix, it relies on sourcing lower-cost raw material from foreign countries for the 25% of its business not tied to a federal contract. Since the 1980s, most federal contracts require “Buy American” steel sourcing.
Insteel says the additional cost of raw materials could make some customer orders cost-prohibitive to serve.
H.O. Woltz III, Insteel’s president and chief executive, said Thursday that “we expect continued pricing pressure in our PC strand and standard welded wire reinforcement markets, driven by the surge in imports resulting from the Section 232 tariff program.”
“The tariffs have enabled offshore competitors to further their penetration of the U.S. market by leveraging their access to lower- cost raw materials and significantly underpricing domestic producers.
Woltz said that if the tariff remains in effect, “it’s imperative that it would be extended to include downstream products derived from wire rod in order to eliminate the harsh penalty the current structure is imposing on producers of steel intensive downstream products.”
Woltz cited as an example that “Turkey has shifted production downstream to low value commodity standard welded wire reinforcement, exported into the U.S. markets as a means of circumventing the tariff.”
“Such blatant examples of gaming the system should provide strong justification to the administration for expanding coverage to downstream steel intensive products”
Woltz has stressed that Insteel “has no plans to reduce employment levels due to the potential for tariffs on imports of steel products.”
However, he said “we’ll continue to reassess our manufacturing strategy in response to the unfavorable market changes resulting from the tariff.
“Our current plans are to continue to compete with low-priced imports, operate our plants and attain additional manufacturing efficiencies while we work toward a satisfactory resolution of the matter with the administration.”
Insteel has reduced its fiscal 2019 capital investment projections from $22 million to $15 million. It has spent $9.4 million through the first three quarters of the fiscal year.
“The reduction in forecasted outlays from the previous estimate ... is related to the deferral of certain projects into fiscal 2020,” the company said.