What happened

Shares of steel wire producer Insteel Industries (IIIN -7.00%) crashed 13.6% through 11:40 a.m. Thursday morning after missing earnings estimates badly in its fiscal Q1 2023 report this morning.

Heading into earnings, analysts had forecast Insteel would earn $0.85 per share on sales of $177.4 million, but the company missed on both the top and bottom lines. Sales for the quarter fell short at just $166.9 million. Likewise, earnings missed expectations at just $0.57 per share.  

So what

And that was the good news.

Insteel's Q1 sales declined worse than expected, but still only 6.5% year over year. The volume of steel shipped was down 10% year over year, as customers "destocked" (i.e., used up accumulated inventory) in the quarter. Luckily, price hikes on what steel was shipped limited the size of the revenue decline.  

Meanwhile, on the profits front, higher input costs cut gross profit margins by more than half to just 10.7%. Net profits likewise fell by more than half to the aforementioned $0.57. And 23% of that profit -- $0.13 per share of it -- came from a one-time gain on the sale of property, plants, and equipment. Absent that one-time profit, Insteel's earnings would have been only $0.44 per share -- barely one-third of what the company earned in the year-ago quarter.

Now what

And the news doesn't get much better from there. Apprising investors of what to expect as the year progresses, CEO H.O. Woltz warned that his customers are continuing to draw down inventories rather than place more orders, even as winter slows down construction activity -- weighing further on sales in Q2, as is usual for the season.

If there's any good news here, it's that Woltz notes that his company uses "first in, first out" (FIFO) accounting, so that relatively high input costs on the steel that Insteel bought earlier, but is selling now, are currently weighing on profit margins. As prices "normalize," though, this margin compression should lessen over time.

Management did not say precisely how it expects all of the above to affect sales or earnings in Q2. It does sound like the company is in for a rough couple of quarters before things start to look up again.

On the bright side, at a share price less than 5 times trailing earnings, it does at least look like this bad news is already baked into Insteel's stock price.