UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K10-K
[X]☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended |
OR
[ ]☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-9929
INSTEEL INDUSTRIES, INC. (Exact name of registrant as specified in its charter) |
North Carolina (State or other jurisdiction of
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| 56-0674867 (I.R.S. Employer Identification No.) |
1373 Boggs Drive, Mount Airy, North Carolina 27030 (Address of principal executive offices) (Zip Code) |
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Securities registered pursuantsubject to Section 12(b) 12(b) of the Exchange Act:
Title of | Trading Symbol(s) | Name of |
Common Stock (No Par Value) | IIIN | The |
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ]☐ No [X]☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [ ]☐ No [X]☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]☒ No [ ]☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X]☒ No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. [X]☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | Accelerated filer |
Non-accelerated filer | Smaller reporting company Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with anyany new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ]☐ No [X]☒
As of April 1, 2017March 28, 2020 (the last business day of the registrant’s most recently completed second quarter), the aggregate market value of the common stock held by non-affiliates of the registrant was $579,089,435$216,551,141 based upon the closing sale price as reported on the NASDAQNasdaq Global Select Market. As of October 26, 2017,28, 2020, there were 19,041,04619,305,612 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant’sregistrant’s proxy statement to be delivered to shareholders in connection with the 20182021 Annual Meeting of Shareholders are incorporated by reference as set forth in Part III hereof.
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PART I | ||||
Item 1. | 4 | |||
Item 1A. | | |||
Item 1B. | | |||
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Item 4. |
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PART II | ||||
Item 5. |
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Item 6. |
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Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Item 7A. | 18 | |||
Item 8. | Financial Statements and Supplementary Data | 19 | ||
Item |
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| Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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Item 9A. |
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Item 9B. | 48 | |||
PART III | ||||
Item 10. | 48 | |||
Item 11. | 48 | |||
Item 12. | 48 | |||
Item 13. | Certain | 48 | ||
Item 14. | 48 | |||
PART IV | ||||
Item 15. | 48 | |||
Item 16. | Form 10-K Summary | 49 | ||
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Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, particularly in the “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this report. When used in this report, the words “believes,” “anticipates,” “expects,” “estimates,” “appears,” “plans,” “intends,” “may,” “should,” “could” “outlook,” “continues,” “remains” and similar expressions are intended to identify forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, they are subject to a number of risks and uncertainties and involve certain assumptions. Actual results may differ materially from those expressed in forward-looking statements, and we can provide no assurances that such plans, intentions or expectations will be implemented or achieved. Many of these risks and uncertainties are discussed in the “Risk Factors” section of this report and are updated from time to time in our filings with the United States (“U.S.”) Securities and Exchange Commission (“SEC”).
All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. All forward-looking statements speak only to the respective dates on which such statements are made, and we do not undertake and specifically decline any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events, except as may be required by law.
It is not possible to anticipate and list all risks and uncertainties that may affect our business, future operations or financial performance; however, they include, but are not limited to, the following:
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● | general economic and competitive conditions in the markets in which we operate; |
● | changes in the spending levels for nonresidential and residential construction and the impact on demand for our products; |
● | changes in the amount and duration of transportation funding provided by federal, state and local governments and the impact on spending for infrastructure construction and demand for our products; |
● | the cyclical nature of the steel and building material industries; |
● | credit market conditions and the relative availability of |
● | fluctuations in the cost and availability of our primary raw material, hot-rolled carbon steel wire rod, from domestic and foreign suppliers; |
● | competitive pricing pressures and our ability to raise selling prices in order to recover increases in raw material or operating costs; |
● | changes in U.S. or foreign trade policy, including the Section 232 tariff on imported steel, affecting imports or exports of steel wire rod or our products; |
● | unanticipated changes in customer demand, order patterns and inventory levels; |
● | the impact of fluctuations in demand and capacity utilization levels on our unit manufacturing costs; |
● | our ability to further develop the market for engineered structural mesh (“ESM”) and expand our shipments of ESM; |
● | legal, environmental, |
● | unanticipated plant outages, equipment failures or labor difficulties; and |
● | the risks and uncertainties discussed herein under the caption “Risk Factors.” |
PART I
General
Insteel Industries, Inc. (“we,” “us,” “our,” “the Company” or “Insteel”) is the nation’snation’s largest manufacturer of steel wire reinforcing products for concrete construction applications. We manufacture and market prestressed concrete strand (“PC strand”) and welded wire reinforcement (“WWR”), including ESM, concrete pipe reinforcement (“CPR”) and standard welded wire reinforcement (“SWWR”). Our products are sold primarily to manufacturers of concrete products that are used in nonresidential construction. For fiscal 2017,2020, we estimate that approximately 85% of our sales were related to nonresidential construction and 15% were related to residential construction.
Insteel is the parent holding company for two wholly-owned subsidiaries, Insteel Wire Products Company (“IWP”), an operating subsidiary, and Intercontinental Metals Corporation, an inactive subsidiary. We were incorporated in 1958 in the State of North Carolina.
Our business strategy is focused on:on: (1) achieving leadership positions in our markets; (2) operating as the lowest cost producer in our industry; and (3) pursuing growth opportunities inwithin our core businesses that further our penetration of the markets we currently serve or expand our footprint. Headquartered in Mount Airy, North Carolina, we operate ten manufacturing facilities that are all located in the U.S. in close proximity to our customers and raw material suppliers. Our growth strategy is focused on organic opportunities as well as strategic acquisitions in existing or related markets that leverage our infrastructure and core competencies in the manufacture and marketing of concrete reinforcing products.
On March 16, 2020, we, through our wholly-owned subsidiary, IWP, purchased substantially all of the assets of Strand-Tech Manufacturing, Inc. (“STM”) for an adjusted purchase price of $19.4 million, which reflects certain post-closing adjustments (the “STM Acquisition”). STM was a leading manufacturer of PC strand for concrete construction applications. We acquired, among other assets, STM’s accounts receivable, inventories, production equipment and facility located in Summerville, South Carolina and assumed certain of its accounts payable and accrued liabilities. Subsequent to the acquisition, we elected to consolidate our PC strand operations with the closure of the Summerville facility.
Products
Our operations are entirely focused on the manufacture and marketing of steel wire reinforcing products for concrete construction applications. Our concrete reinforcing products consist of two product lines: PC strand and WWR. Based on the criteria specified in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280, Segment Reporting, we have one reportable segment. Our net sales and long-lived assets by geographic region are discussed in Note 13 to our consolidated financial statements and incorporated herein by reference.
PC strand is a high strength, seven-wire strand that is used to impart compression forces into precast concrete elements and structures, which may be either pretensioned or posttensioned, providing reinforcement for bridges, parking decks, buildings and other concrete structures. Its high tensile strength allows for the casting of longer spans and thinner sections. Pretensioned or “prestressed” concrete elements or structures are primarily used in nonresidential construction while posttensioned concrete elements or structures are used in both nonresidential and residential construction. For fiscal years 2017, 2016 and 2015, PC strand sales represented 38%, 39% and 43%, respectively, of our net sales.
WWR is produced as either a standard or a specially engineered reinforcing product for use in nonresidential and residential construction. We produce a full range of WWR products, including ESM, CPR and SWWR. ESM is an engineered made-to-order product that is used as the primary reinforcement for concrete elements or structures, frequently serving as a lower cost reinforcing solution than hot-rolled rebar. CPR is an engineered made-to-order product that is used as the primary reinforcement in concrete pipe, box culverts and precast manholes for drainage and sewage systems, water treatment facilities and other related applications. SWWR is a secondary reinforcing product that is produced in standard styles for crack control applications in residential and light nonresidential construction, including driveways, sidewalks and various slab-on-grade applications. For fiscal years 2017, 2016 and 2015, WWR sales represented 62%, 61% and 57%, respectively,
See Note 15 for the disaggregation of our net sales.sales by product line and geography.
Marketing and Distribution
We market our products through sales representatives who are our employees. Our outside sales representatives are trained on the technical applications for our products and sell multiple product lines in their respective territories. We sell our products nationwide across the U.S. and, to a much lesser extent, into Canada, Mexico, and Central and South America, delivering themAmerica. Our products are shipped primarily by truck, using common or contract carriers. The delivery method selected is dependent upondetermined based on backhaul opportunities, comparative costs and customer service requirements.
Customers
We sell our products to a broad range of customers that includes manufacturers of concrete products, and to a lesser extent, distributors, rebar fabricators and contractors. In fiscal 2017,2020, we estimate that approximately 70% of our net sales were to manufacturers of concrete products and 30% were to distributors, rebar fabricators and contractors. In many cases we are unable to identify the specific end use for our products as most of our customers sell products that are used for both nonresidential and residential construction, and the same products can be used for different end uses. We did not have any customers that represented 10% or more of our net sales in fiscal years 2017, 20162020, 2019 and 2015, and are not dependent upon2018. The loss of a single customer or a few customers the loss of which would not have a material adverse effectimpact on our business.
Backlog
BacklogBacklog for our business is minimal due to the relatively short lead times that are required by our customers. We believe that the majority of our firm orders as of the end of fiscal 20172020 will be shipped during the first quarter of fiscal 2018.2021.
Seasonality and Cyclicality
Demand in our markets is both seasonal and cyclical, driven by the level of construction activity, but can also be impacted by fluctuations in the inventory positions of our customers. From aShipments are seasonal, standpoint, shipments typically reachreaching their highest level of the year when weather conditions are the most conducive to construction activity. As a result, assuming normal seasonal weather patterns, shipments and profitability are usually higher in the third and fourth quarters of the fiscal year and lower in the first and second quarters. From a cyclical standpoint, constructionConstruction activity and demand for our products is generally correlated with generalcyclical based on overall economic conditions, although there can be significant differences between the relative strength of nonresidential and residential construction for extended periods.
Raw Materials
The primary raw material used to manufacture our products is hot-rolled carbon steel wire rod, which we purchase from both domestic and foreign suppliers. Wire rodsuppliers and can generally be characterized as a commodity product. We purchase several different grades and sizes of wire rod with varying specifications based on the diameter, chemistry, mechanical properties and metallurgical characteristics that are required for our products. High carbon grades of wire rod are required for the production of PC strand while low carbon grades are used to manufacture WWR.
Wire rod prices tend to fluctuate based on changes in scrap and other metallic prices for steel producers together with domestic and global market conditions. In most economic environments, domestic demand for wire rod exceeds domestic production capacity and imports of wire rod are necessary to satisfy the supply requirements of the U.S. market. TradeU.S. government trade policies and trade actions initiated by domestic wire rod producers can significantly impact the pricing and availability of imported wire rod, which during fiscal years 20172020 and 20162019 represented approximately 27%7% and 30%8%, respectively, of our total wire rod purchases. We believe that our substantial wire rod requirements, desirable mix of sizes and grades, and strong financial condition represent a competitive advantage by making us a relatively more attractive customer to our suppliers.
Our ability to source wire rod from overseas suppliers is limited by domestic content requirements generally referred to as “Buy America” or “Buy American” laws that exist at both the federal and state levels. These laws generally prescribe a domestic “melt and cast” standard for purposes of compliance. Certain segments of theCustomers purchasing PC strand market and WWR for certain applications require the majority of our CPR and ESM products are certifiedCompany to customers to be incertify compliance with the domestic content regulations.Buy America laws.
Selling prices for our products tend to be correlated with changes in wire rod prices. However, the timing and magnitude of the relative price changes varies depending upon market conditions and competitive factors. Ultimately the relative supply - demand balance in our markets and competitive dynamics determine whether our margins expand or contract during periods of rising or falling wire rod prices.
Competition
We are the nation’s largest manufacturer of steel wire reinforcing products for concrete construction applications. Our markets are highly competitive based on price, quality and service. Some of our competitors, such as Nucor Corporation, Keystone Consolidated Industries, Inc.Liberty Steel USA (“Keystone”Liberty”), and Oklahoma Steel and Wire, and Gerdau Long Products North America, are vertically integrated companies that produce both wire rod and concrete reinforcing products and offer multiple product lines over broad geographic areas. Other competitors are smaller independent companies that offer limited competition in certain markets. Our primary competitors for WWR products are Nucor Corporation, Gerdau Ameristeel Corporation, Engineered Wire Products, Inc. (a subsidiary of Keystone)Liberty), Wire Mesh Corporation, Concrete Reinforcements, Inc., National Wire Products, Davis Wire Corporation and Oklahoma Steel & Wire Co., Inc., Concrete Reinforcements Inc. and Wire Mesh Corporation. Our primary competitors for PC strand are Sumiden Wire Products Corporation Keystone and Wire Mesh Corporation. Import competition is also a significant factor in certain segments of the PC strand marketand SWWR markets that are not subject to “Buy America” requirements.
In response to irrationally-pricedillegally traded import competition from offshore PC strand suppliers, we have pursued trade cases when necessary as a means of ensuring that foreign producers were complying with the applicable trade laws and regulations. In 2003, we joined together with a coalition of domestic PC strand producers and filed petitions with the U.S. Department of Commerce (the “DOC”) alleging that imports of PC strand from Brazil, India, Korea, Mexico and Thailand were being “dumped” or sold in the U.S. at a price that was lower than fair value and had injured the domestic PC strand industry. The DOC ruled in our favor and imposed anti-dumping duties ranging from 12% up to 119%, which had the effect of limiting the participation of these countries in the domestic market. In 2010, we joined together with a coalition of domestic PC strand producers and filed petitions with the DOC alleging that imports of PC strand from China were being “dumped” or sold in the U.S. at a price that was lower than fair value and that subsidies were being provided to Chinese PC strand producers by the Chinese government, both of which had injured the domestic PC strand industry. The DOC ruled in our favor and imposed final countervailing duty margins ranging from 9% to 46% and anti-dumping margins ranging from 43% to 194%, which had the effect of limiting the continued participation of Chinese producers in the domestic market. On April 16, 2020, we joined two other domestic PC strand producers and filed anti-dumping petitions against Argentina, Columbia, Egypt, Indonesia, Italy, Malaysia, Netherlands, Saudi Arabia, South Africa, Spain, Taiwan, Tunisia, Turkey, Ukraine and the United Arab Emirates alleging dumping margins ranging from 24% to 194%. These cases are scheduled to conclude during our third fiscal quarter of 2021. Additionally, on June 30, 2020, we and four other domestic producers of SWWR filed an anti-dumping and countervailing duty petitions against Mexico alleging dumping margins from 56% to 161%. These cases are expected to conclude during our fourth fiscal quarter of 2021. We cannot predict the outcome of either the PC strand or SWWR cases at this time.
Quality and service expectations of customers have risen substantially over the years and are key factors that impact their selection of suppliers. Technology has become a critical competitive factor from the standpoint of manufacturing costs, quality and customer service capabilities. In view of our strong market positions, broad product offering and national footprint, technologically advanced manufacturing facilities, low-cost production capabilities, sophisticated information systems and financial strength and flexibility, we believe that we are well-positioned to compete favorably with other producers of our concrete reinforcing products.
Employees
As of September 30, 2017,October 3, 2020, we had 803881 employees, none of which were represented by labor unions. In the event of production disruptions, we believe that our contingency plans would enable us to continue serving our customers, although there can be no assurances that a work slowdown or stoppage would not adversely impact our operating costs and financial results.
Product Warranties
Our products are used in applications that are subject to inherent risks, including performance deficiencies, personal injury, property damage, environmental contamination or loss of production. We warrant our products to meet certain specifications. Although actual or claimed deficiencies from these specifications may give rise to claims, we do not maintain a reserve for warranties as the historical claims have been immaterial. We maintain product liability insurance coverage to minimize our exposure to such risks.
Environmental Matters
We believe that we are in compliance in all material respects with applicable environmental laws and regulations. We have experienced no material difficulties in complying with legislative or regulatory standards and believe that these standards have not materially impacted our financial position or results of operations. Although our future compliance with additional environmental requirements could necessitate capital outlays, we do not believe these expenditures would ultimately have a material adverse effect on our financial position or results of operations. We do not expect to incur material capital expenditures for environmental control facilities during fiscal 2018.2021.
Available Information
OurOur annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports, are available at no cost on our web site at https://insteelgcs.gcs-web.com/financial-information/sec-filings and the SEC’s web site at www.sec.gov as soon as reasonably practicable after we file these reports electronically with or furnish them to, the SEC. The information available on our web site and the SEC’s web sitewebsite is not incorporated into this report or any of our filings with the SEC.
An investment in our common stock involves risks and uncertainties. You should carefully consider the following risk factors, in addition to the other information contained in this annual report on Form 10-K, before deciding whether an investment in our common stock is suitable for you. The risk factors described below are not the only ones we face. There may be other risks and uncertainties that are currently unknown to us or that we currently consider to be immaterial that could adversely affect our business, results of operations, financial condition and cash flows.
Our business, results of operations, financial condition, cash flows and stock price can be adversely affected by pandemics, epidemics or other public health emergencies, such as the recent outbreak of COVID-19.
Our business, results of operations, financial condition, cash flows and stock price can be adversely affected by pandemics, epidemics or other public health emergencies, such as the recent outbreak of COVID-19 which has spread from China to many other countries including the United States. In March 2020, the World Health Organization characterized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The outbreak has resulted in governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments, school closures, and other measures. In addition, governments and central banks in several parts of the world have enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19.
We are considered a critical infrastructure industry, as defined by the U.S. Department of Homeland Security. Although we have continued to operate our facilities to date consistent with federal guidelines and state and local orders, the outbreak of COVID-19 and any preventive or protective actions taken by governmental authorities may have a material adverse effect on our operations, supply chain, customers and transportation networks, including business shutdowns or disruptions. The extent to which COVID-19 may adversely impact our business depends on future developments, which are highly uncertain and unpredictable, depending upon the severity and duration of the outbreak and the effectiveness of actions taken globally to contain or mitigate its effects. Even after the COVID-19 pandemic has subsided, we may experience material adverse impacts to our business due to any resulting economic recession. Additionally, concerns over the economic impact of COVID-19 have caused extreme volatility in financial and other capital markets which has and may continue to adversely impact our stock price and our ability to access capital markets. In view of the rapidly changing business environment, unprecedented market volatility and heightened degree of uncertainty resulting from COVID-19, we are currently unable to fully determine its future impact on our business.
Our business is cyclical and can be negatively impacted by prolonged economic downturns or tightening in the financial markets that reduce the level of construction activity and demand for our products.
Demand for our products is cyclical in nature and sensitive to changes in the economy and in the financial markets. Our products are sold primarily to manufacturers of concrete products that are used for a broad range of nonresidential and residential construction applications. Demand for our products is driven by the level of construction activity, which tends to be correlated with conditions in the generaloverall economy as well as other factors beyond our control. Tightening in the financial markets could adversely impact demand for our products by reducing the availability of financing to our customers and the construction industry as a whole and increasing the risk of payment defaults on our outstanding customer balances.accounts receivable. Future prolonged periods of economic weakness or reduced availability of financing could have a material adverse impact on our business, results of operations, financial condition and cash flows.
Our business can be negatively impacted by reductions in the amount and duration of government funding for infrastructure projects that reduce the level of construction activity and demand for our products.
Certain of our products are used in the construction of highways, bridges and other infrastructure projects that are funded by federal, state and local governments. Reductions in the amount of funding for such projects or the period for which it is provided could have a material adverse impact on our business, results of operations, financial condition and cash flows.
Our operations are subject to seasonal fluctuations that may impact our cash flows.
Our shipments are typically lower in the first and second fiscal quarters due to the unfavorable impact of winter weather on construction activity during these periods and customer plant shutdowns associated with holidays. As a result, our cash flows may fluctuate from quarter to quarter due to these seasonal factors.
Demand for our products is highly variable and difficult to forecast due to our minimal backlog and unanticipated changes that can occur in customer order patterns or inventory levels.
Demand for our products is highly variable. The short lead times for customer orders and minimal backlog that characterize our business make it difficult to forecast the future level of demand for our products.products. In some cases, unanticipated softening in demand can be exacerbated by inventory reductionrebalancing measures pursued by our customers, which may cause significant fluctuations in our sales, profitability and cash flows.
Our financial results can be negatively impacted by the volatility in the cost and availability of our primary raw material, hot-rolled carbon steel wire rod.
The primary raw material used to manufacture our products is hot-rolled carbon steel wire rod, which we purchase from both domestic and foreign suppliers. We do not use derivative commodity instruments to hedge our exposure to changes in the price of wire rod as such instruments are currently unavailable in the financial markets. BeginningPrices for wire rod have become increasingly volatile in fiscal 2004, a tighteningrecent years driven by the higher degree of supplyvariability in the rod market together with fluctuations in the raw material costs offor rod producers, resultedchanges in increased price volatility which has continued through fiscal 2017.trade policy and the tightening of domestic supply. In response, wire rod producers have resorted to increasing the frequency of price adjustments, typically on a monthly basis as well as unilaterally changing the terms of prior commitments.
Although changes in our wire rod costs and selling prices tend to be correlated, we may be unable to fully recover increased rod costs through higher selling prices during weaker market environments, which would reduce our earnings and cash flows. Additionally, when raw material costs decline, our financial results maywould be negatively impacted if the selling prices for our products decrease to an even greater extent and if we are consuming higher cost material from inventory.
Our financial results can also be significantly impacted if raw material supplies are inadequate to satisfy our purchasing requirements. In addition,Also, U.S. government trade policies or trade actions by domestic wire rod producers against offshore suppliersother countries can have a considerablesignificantly impact on the availability and cost of imported wire rod. The imposition of tariffs, quotas or anti-dumping or countervailing duty margins by the DOCU.S. government against exporting countries can have the effect of reducing or eliminating their activitycompetitiveness and participation in the domestic market, which is of increasing significance in view of the reductions in domestic wire rod production capacity that have occurred in recent years.market. If we were unable to obtain adequate and timely delivery of our raw material requirements, we may be unable to manufacture sufficient quantities of our products or operate our manufacturing facilities in an efficient manner, which could result in lost sales and higher operating costs. Because tight market conditions typically affect the entire industry, during past periods of short raw material supply, margins and profitability have been favorably impacted due to curtailed availability of PC strand and WWR that supported higher average selling prices. There is no assurance that future short supply conditions in raw material markets would result in similar outcomes, however.
Foreign competition could adversely impact our financial results.
OurCertain of our PC strand business isand SWWR markets are subject to offshoreforeign import competition on an ongoing basis in that domestic production capacity is insufficient to satisfy domestic demand in most market environments.basis. If we are unable to purchase raw materials and achieve manufacturing costs that are competitive with those of foreign producers, or if the margin and return requirements of foreign producers are substantially lower, our market share and profit margins could be negatively impacted. In response to irrationally-pricedillegally traded import competition from offshore PC strand suppliers, we have pursued trade cases when necessary as a means of ensuring that foreign producers were complying with the applicable trade laws and regulations. These trade cases have resulted in the imposition of duties which have had the effect of limiting the continued participation of certain countries in the domestic market. Trade law enforcement is critical to our ability to maintain our competitive position against foreign PC strand and SWWR producers that engage in unlawful trade practices.
Increasing unfair import competition and the perpetuation of the Section 232 tariff on imported steel, if not addressed, could continue to negatively impact our financial results and cash flows.
The imposition of the Section 232 tariff on imported steel, which became effective in March 2018, has resulted in a surge in low-priced imports into PC strand and SWWR markets. The tariff, which applies to imports of our primary raw material but excludes our finished products, has provided offshore competitors with the incentive to circumvent the tariff by exporting downstream steel products not covered by the tariff. Imports of PC strand and SWWR have been sold at unfairly low prices that prevent us from recovering higher raw material costs resulting from the tariff. These underpricing tactics have enabled imports to expand their market share, thereby displacing U.S. production. We and other domestic producers have filed trade actions in an attempt to remedy injury caused by unfair imports. If the Administration does not remedy the unfair import pricing practices through the trade cases, and continues the tariff program without extending it to include our finished products, the resulting adverse impact on our market share, financial results and cash flow that we experienced during 2019 and 2020 will persist.
Our manufacturing facilities are subject to unexpected equipment failures, operational interruptions and casualty losses.
Our manufacturing facilities are subject to risks that may limit our ability to manufacture and sell our products, including unexpected equipment failures, operational interruptions and catastrophic losses due to other unanticipated events such as fires, explosions, accidents, adverse weather conditions and transportation interruptions. For example, during fiscal 2017, operations at our Texas and Florida plants were temporarily curtailed due to flooding and power outages related to hurricanes Harvey and Irma. Any such equipment failures or events can subject us to material plant shutdowns and periods of reduced production or unexpected downtime. Furthermore, the resolution of certain operational interruptions may require significant capital expenditures. Although our insurance coverage could offset the losses or expenditures relating to some of these events, our results of operations and cash flows couldwould be negatively impacted to the extent that such claims were not covered or only partially covered by our insurance.
We are increasingly dependent on information technology systems that are susceptible to certain risks, including cybersecurity breaches and data leaks, which could adversely impact our business.
Our increasing reliance on technology systems and infrastructure heightens our potential vulnerability to system failure and malfunction, breakdowns due to natural disasters, human error, unauthorized access, power loss and other unforeseen events. Data privacy breaches by employees and others with or without authorized access to our systems poses risks that sensitive data may be permanently lost or leaked to the public or other unauthorized persons. With the growing use and rapid evolution of technology, not limited to cloud-based computing and mobile devices, there are additional risks of unintentional data leaks. There is also the risk of the theft of confidential information, intentional vandalism, industrial espionage and a variety of cyber-attacks that could compromise our internal technology system and infrastructure or result in data leaks in-house or at our third-party providers and business partners. Failures of technology or related systems, or an improper release of confidential information, could adversely impact our business or subject us to unexpected liabilities.
Our financial results could be adversely impacted by the escalation of our operating costs.
Consistent with the experience of other employers, ourour labor, medical and workers’ compensation costs have increased substantially in recent years and are expected to continue to rise. The Patient Protection and Affordable Care Act (“ACA”) will have a significant impact on employers, health care providers, insurers and others associated with the health care industry and increase our employee health care costs. This legislation requires certain large employers like us to offer health care benefits to full-time employees or face potential annual penalties. To avoid these penalties, employers must offer health benefits providing a minimum level of coverage and limit the amount that employees are charged for the coverage. Although certain provisions of the ACA were waived in January 2017, others are anticipated to become effective at various dates over the next several years and many of the regulations and guidance pertaining to the law have not been implemented. Due to the breadth and complexity of the ACA, the lack of implementing regulations and interpretive guidance and the phased-in nature of the requirement, weWe cannot predict the futureultimate content, timing, or effect of this lawany healthcare reform legislation or the impact of potential legislation or related proposals and policies on our results. Any significant increases in the costs attributable to our self-insured health and workers’ compensation plans could adversely impact our business, results of operations, financial condition and cash flows.
In addition, increasing prices for freight, natural gas, electricity, fuel and consumables would adversely affect our manufacturing and distribution costs. For most of our business, we incur the fueltransportation costs and surcharges associated with the delivery of products to our customers. Although we have previously implemented numerous measures to offset the impact of increases in these costs, there can be no assurance that such actions will be effective. If we are unable to pass these additional costs through by raising our selling prices, our financial results could be adversely impacted.
Our financial results could be adversely impacted by the impairment of goodwill.
Our balance sheet includes intangible assets, including goodwill and other separately identifiable assets related to prior acquisitions, and we may acquire additional intangible assets in connection with future acquisitions. We are required to review goodwill for impairment on an annual basis, or more frequently if certain indicators of permanent impairment arise such as, among other things, a decline in our stock price and market capitalization or a reduction in our projected operating results and cash flows. If our review indicates that goodwill has been impaired, the impaired portion would have to be written-off during that period which could have an adverse effect onadversely impact our business and financial results.
Our capital resources may not be adequate to provide for our capital investment and maintenance expenditures if we were to experience a substantial downturn in our financial performance.
Our operations are capital intensive and require substantial recurring expenditures for the routine maintenance of our equipment and facilities. Although we expect to finance our business requirements through internally generated funds or from borrowings under our $100.0$100.0 million revolving credit facility, we cannot provide any assurances these resources will be sufficient to support our business. A material adverse change in our operations or financial condition could limit our ability to borrow funds under our credit facility, which could further adversely impact our liquidity and financial condition. Any significant future acquisitions could require additional financing from external sources that may not be available on favorable terms, which could adversely impact our growth, operations, growth, financial condition and results of operations.
EnvironmentalChanges in environmental compliance and remediation requirements could result in substantially increased substantial increases in our capital investments and operating costs.
Our business is subject to numerous federal, state and local laws and regulations pertaining to the protection of the environment that could require substantial increases in capital investments and operating costs. These laws and regulations, which are constantly evolving, are becoming increasingly stringent, and the ultimate impact of compliance is not always clearly known or determinable because regulations under some of these laws have not yet been promulgated or are undergoing revision.
Our stock price can be volatile, often in connection with matters beyond our control.
Equity markets in the U.S. have been increasingly volatile in recent years. During fiscal 2017,2020, our common stock traded as high as $42.81$26.61 and as low as $22.50.$10.00. There are numerous factors that could cause the price of our common stock to fluctuate significantly, including: variations in our financial results; changes in our business outlook and expectations for the construction industry; changes in market valuations of companies in our industry; and announcements by us, our competitors or industry participants that may be perceived to impact our financial results.
Item 1B. Unresolved Staff Comments.
None.
Our corporate headquarters and IWP’s sales and administrative offices are located in Mount Airy, North Carolina. At September 30, 2017,As of October 3, 2020, we operated ten manufacturing facilities located in Dayton, Texas; Gallatin, Tennessee; Hazleton, Pennsylvania; Hickman, Kentucky; Houston, Texas; Jacksonville, Florida; Kingman, Arizona; Mount Airy, North Carolina; Sanderson, Florida; and St. Joseph, Missouri. Additionally, we are currently pursuing the sale of an idle facility located in Summerville, South Carolina.
We own all of our real estate, however the facility located in Houston was leased until October 2, 2017 when we exercised the $4.9 million purchase option under the lease.estate. We believe that our properties are in good operating condition and that our machinery and equipment have been well maintained. We also believe that our manufacturing facilities are suitable for their intended purposes and have capacities adequate to satisfy the current and projected demand for our products.
We are involved in lawsuits, claims, investigations and proceedings, including commercial, environmental and employment matters, which arise in the ordinary course of business. We do not anticipate that the ultimate cost to resolve these matters will have a material adverse effect on our financial position, results of operations or cash flows.
Item 4. Mine Safety Disclosures.
Not applicable.
Information About Our Executive Officers of the Company
Our executive officers are as follows:
Name | Age | Position | ||
|
| President, Chief Executive Officer and Chairman of the Board | ||
|
| Senior Vice President, Chief Financial Officer and Treasurer | ||
James F. Petelle |
| Vice President | ||
Richard T. Wagner |
| Senior Vice President and |
H. O. Woltz III, 61, was elected64, Chief Executive Officer insince 1991, as President since 1989 and has been employed by us and our subsidiaries in various capacities since 1978. He was named President and Chief Operating Officer in 1989. He served as our Vice President from 1988 to 1989 and as President of Rappahannock Wire Company, formerly a subsidiary of our Company, from 1981 to 1989. Mr. Woltz has been a Director since 1986 and also serves as President of Insteel Wire Products Company. Mr. Woltz served as President of Florida Wire and Cable, Inc., formerly a subsidiary of our Company, until its merger with Insteel Wire Products Company in 2002. Mr. Woltz serves on the Executive Committee of our Board of Directors and was electedhas served as Chairman of the Board insince 2009.
Michael C. Gazmarian, 58, was electedMark A. Carano, 51, has served as Senior Vice President, Chief Financial Officer and Treasurer in February 2007. Hesince October 2020 and as Vice President, Chief Financial Officer and Treasurer from May 2020 to October 2020. Before joining us, Mr. Carano had previouslybeen employed by Big River Steel, a privately-held manufacturer of steel products, having served as Chief Financial Officer and Treasurer since 1994, the yearApril 2019. Prior to Big River Steel, he joined us. Before joining us, Mr. Gazmarian had been employed by Guardian Industries Corp., a privately-held manufacturer of glass, automotive and building products, since 1986, servingserved in various financial capacities.senior management finance roles with Babcock & Wilcox Enterprises from June 2013 to October 2018. Mr. Carano also has 14 years of combined investment banking experience with Bank of America, Merrill Lynch, Deutsche Bank and First Union Securities.
James F. Petelle,, 67, 70, has served as Vice President Administration, Secretary and Chief Legal Officer since October 2020. He joined us in October 2006. He2006 and was elected Vice President and Assistant Secretary onin November 14, 2006 and Vice President, - Administration and Secretary onin January 12, 2007. He was previously employed by Andrew Corporation, a publicly-held manufacturer of telecommunications infrastructure equipment, having served as Secretary from 1990 to May 2006, and Vice President - Law from 2000 to October 2006.
Richard T. Wagner, 58,61, joined us in 1992 and has served as Vice President and General Manager of the Concrete Reinforcing Products Business Unit of our subsidiary, Insteel Wire Products Company, since 1998. In February 2007, Mr. WagnerHe was appointed Vice President of the parent company, Insteel Industries, Inc. in February 2007 and Senior Vice President and Chief Operating Officer in October 2020. From 1977 until 1992, Mr. Wagner served in various positions with Florida Wire and Cable, Inc., a manufacturer of PC strand and galvanized strand products, which was later acquired by us in 2000.
The executive officers listed above were elected by our Board of Directors at its annual meeting held February 7, 2017 for a term that will expire at the next annual meeting or until their successors are elected and qualify. The next meeting at which officers will be elected is expected to be February 13, 2018.
PART II
Item 5. Market for Registrant’sRegistrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of EquitySecurities. Securities.
Our common stock is listed on the NASDAQNasdaq Global Select Market under the symbol “IIIN” and has been trading on NASDAQNasdaq since September 28, 2004. As of October 25, 2017,28, 2020, there were 582519 shareholders of record. The following table summarizes the high and low sales prices as reported on the NASDAQ Global Select Market and the cash dividends per share declared in fiscal 2017 and 2016:
Fiscal 2017 | Fiscal 2016 | |||||||||||||||||||||||
High | Low | Cash Dividends | High | Low | Cash Dividends | |||||||||||||||||||
First Quarter | $ | 42.81 | $ | 22.50 | $ | 1.28 | $ | 25.78 | $ | 16.19 | $ | 1.03 | ||||||||||||
Second Quarter | 39.20 | 32.22 | 0.03 | 32.05 | 18.72 | 0.03 | ||||||||||||||||||
Third Quarter | 36.94 | 28.94 | 0.03 | 32.11 | 25.40 | 0.03 | ||||||||||||||||||
Fourth Quarter | 34.00 | 23.20 | 0.03 | 37.22 | 28.33 | 0.03 | ||||||||||||||||||
We currently pay a quarterly cash dividend of $0.03 per share. In addition to the regular quarterly cash dividend, we paid special cash dividends of $1.25 per share in the first quarter of fiscal 2017 and $1.00 per share in the first quarter of fiscal 2016. While we intend to pay regular quarterly cash dividends for the foreseeable future, the declaration and payment of future dividends, if any, are discretionary and will be subject to determination by our Board of Directors each quarter after taking into account various factors, including general business conditions and our financial condition, operating results, cash requirements and expansion plans. See Note 7 of the consolidated financial statements for additional discussion with respect to restrictions on our ability to make dividend payments under the terms of our revolving credit facility.
Stock Performance Graph
The graph below compares the cumulative total shareholdershareholder return on our common stock with the cumulative total return of the Russell 2000 Index and the S&P Building Products Index for the five years ended September 30, 2017.October 3, 2020. The graph and table assume that $100 was invested on September 29, 2012October 3, 2015 in our common stock and in each of the two indices and the reinvestment of all dividends. Cumulative total shareholder returns for our common stock, the Russell 2000 Index and the S&P Building Products Index are based on our fiscal year.
Fiscal Year Ended | ||||||||||||||||||||||||
September 29, 2012 | September 28, 2013 | September 27, 2014 | October 3, 2015 | October 1, 2016 | September 30, 2017 | |||||||||||||||||||
Insteel Industries, Inc. | $ | 100.00 | $ | 140.31 | $ | 184.99 | $ | 142.88 | $ | 338.18 | $ | 252.71 | ||||||||||||
Russell 2000 | 100.00 | 130.06 | 135.17 | 136.85 | 158.02 | 190.80 | ||||||||||||||||||
S&P Building Products | 100.00 | 143.86 | 165.29 | 200.16 | 259.63 | 272.78 | ||||||||||||||||||
Fiscal Year Ended | ||||||||||||||||||||||||
October 3, 2015 | October 1, 2016 | September 30, 2017 | September 29, 2018 | September 28, 2019 | October 3, 2020 | |||||||||||||||||||
Insteel Industries, Inc. | $ | 100.00 | $ | 236.69 | $ | 176.87 | $ | 252.71 | $ | 146.69 | $ | 134.32 | ||||||||||||
Russell 2000 | 100.00 | 115.47 | 139.42 | 160.66 | 146.38 | 146.95 | ||||||||||||||||||
S&P Building Products | 100.00 | 129.71 | 136.28 | 123.73 | 145.89 | 168.98 | ||||||||||||||||||
Issuer Purchases of Equity Securities
Information regarding our share repurchase authorization isis discussed in Note 1819 to our consolidated financial statements and incorporated herein by reference.
Rights Agreement
Information regarding our Rights Agreement is discussed in Note 16 to our consolidated financial statements and incorporated herein by reference.
Item 6. Selected Financial Data.
Financial Highlights
(In thousands, except per share amounts)
Year Ended | ||||||||||||||||||||
(52 weeks) | (52 weeks) | (53 weeks) | (52 weeks) | (52 weeks) | ||||||||||||||||
September 30, | October 1, | October 3, | September 27, | September 28, | ||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
Net sales | $ | 388,871 | $ | 418,547 | $ | 447,504 | $ | 408,978 | $ | 363,896 | ||||||||||
Net earnings | 22,548 | 37,245 | 21,710 | 16,641 | 11,735 | |||||||||||||||
Net earnings per share (basic) | 1.19 | 1.99 | 1.18 | 0.91 | 0.65 | |||||||||||||||
Net earnings per share (diluted) | 1.17 | 1.95 | 1.15 | 0.89 | 0.64 | |||||||||||||||
Cash dividends declared | 1.37 | 1.12 | 0.12 | 0.12 | 0.37 | |||||||||||||||
Total assets | 283,073 | 292,892 | 260,239 | 256,795 | 212,649 | |||||||||||||||
Total debt | - | - | - | - | - | |||||||||||||||
Shareholders’ equity | 223,376 | 224,566 | 200,215 | 178,883 | 161,056 | |||||||||||||||
Our August 15, 2014 acquisition of substantially all the assets associated with the PC strand business of American Spring Wire Corporation (the “ASW Acquisition”) may materially affect the comparability of the information reflected in the selected financial data presented in this Item 6.
Year Ended | ||||||||||||||||||||
(53 weeks) | (52 weeks) | (52 weeks) | (52 weeks) | (52 weeks) | ||||||||||||||||
October 3, | September 28, | September 29, | September 30, | October 1, | ||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
Net sales | $ | 472,618 | $ | 455,713 | $ | 453,217 | $ | 388,871 | $ | 418,547 | ||||||||||
Net earnings | 19,009 | 5,598 | 36,266 | 22,548 | 37,245 | |||||||||||||||
Net earnings per share (basic) | 0.99 | 0.29 | 1.90 | 1.19 | 1.99 | |||||||||||||||
Net earnings per share (diluted) | 0.98 | 0.29 | 1.88 | 1.17 | 1.95 | |||||||||||||||
Cash dividends declared | 0.12 | 0.12 | 1.12 | 1.37 | 1.12 | |||||||||||||||
Total assets | 337,902 | 293,009 | 329,534 | 283,073 | 292,892 | |||||||||||||||
Total debt | - | - | - | - | - | |||||||||||||||
Shareholders’ equity | 264,803 | 246,017 | 241,665 | 223,376 | 224,566 | |||||||||||||||
Item 7. Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.
The matters discussed in this section include forward-looking statements that are subject to numerous risks. You should carefully read the “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” in this Form 10-K.
Overview
OurOur operations are entirely focused on the manufacture and marketing of concrete reinforcing products for the concrete construction industry. Our business strategy is focused on: (1) achieving leadership positions in our markets; (2) operating as the lowest cost producer in our industry; and (3) pursuing growth opportunities within our core businesses that further our penetration of the markets we currently serve or expand our footprint.
On March 16, 2020, we, through our wholly-owned subsidiary, IWP, purchased substantially all of the assets of STM for an adjusted purchase price of $19.4 million, which reflects certain post-closing adjustments. STM was a leading manufacturer of PC strand for concrete construction applications. We acquired, among other assets, STM’s accounts receivable, inventories, production equipment and facility located in Summerville, South Carolina and assumed certain of its accounts payable and accrued liabilities. Subsequent to the acquisition, we elected to consolidate our PC strand operations with the closure of the Summerville facility.
Impact of COVID-19
In March 2020, the World Health Organization characterized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The rapid spread of the outbreak has caused significant disruptions in the U.S. and global economies, and economists expect the impact will continue during fiscal 2021. We are a company operating in a critical infrastructure industry, as defined by the U.S. Department of Homeland Security and our facilities have been allowed to remain open. Accordingly, COVID-19 has had limited impact on our operations to date. We have implemented new procedures to support the health and safety of our employees and we are following all U.S. Centers for Disease Control and Prevention and state and local health department guidelines. The costs associated with these safety procedures were not material. In view of the rapidly changing business environment, unprecedented market volatility and heightened degree of uncertainty resulting from COVID-19, we are currently unable to fully determine its future impact on our business. We are continuing to monitor the progression of the pandemic, measures taken by governmental authorities to address it, and the potential effect on our financial position, results of operations, and cash flows.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). Our discussion and analysis of our financial condition and results of operations are based on these consolidated financial statements. The preparation of our consolidated financial statements requires the application of these accounting principles in addition to certain estimates and judgments based on current available information, actuarial estimates, historical results and other assumptions believed to be reasonable. These estimates, assumptions and judgments are affected by our application of accounting policies, which are discussed in Note 2, "Summary of SignificantAccountingPolicies", and elsewhere in the accompanying consolidated financial statements. Estimates are used for, but not limited to, determining the net carrying value of trade accounts receivable, inventories, recording self-insurance liabilities and other accrued liabilities. Estimates are also used in establishing opening balances in relation to purchase accounting. Actual results could differ from these estimates.
TheWe believe the following critical accounting policies are both important to the depiction of our financial condition and results of operations and requirepolicy is impacted significantly by judgments, assumptions and estimates.
estimates used in the preparation of our consolidated financial statements.
Revenue recognition. We recognize revenue from product sales when products are shipped and risk of loss and title has passed to the customer. Sales taxes collected from customers are excluded from revenues and recorded on a net basis.
Concentration of credit risk. Financial instruments that subject us to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. Our cash is concentrated primarily at one financial institution, which at times exceeds federally insured limits. We are exposed to credit risk in the event of default by institutions in which our cash and cash equivalents are held and by customers to the extent of the amounts recorded on the balance sheet. We invest excess cash primarily in money market funds, which are highly liquid securities that bear minimal risk.
Most of our accounts receivable are due from customers that are located in the U.S. and are generally not secured by collateral depending upon the creditworthiness of the account. We provide an allowance for doubtful accounts based upon our assessment of the credit risk of specific customers, historical trends and other information. There is no disproportionate concentration of credit risk.
Allowance for doubtful accounts.We maintain allowances for doubtful accounts for estimated losses resulting from the potential inability of our customers to make required payments on outstanding balances owed to us. Significant management judgments and estimates are used in establishing the allowances. These judgments and estimates consider such factors as the financial position, cash flows and payment history of our customers as well as current and expected business conditions. It is reasonably likely that actual collections will differ from our estimates, which may result in increases or decreases in the allowances. Adjustments to the allowances may also be required if there are significant changes in the financial condition of our customers.
Inventory valuation.We periodically evaluate the carrying value of our inventory. This evaluation includes assessing the adequacy of allowances for losses in the normal course of operations, providing for excess and obsolete inventory, and ensuring that inventory is valued at the lower of cost or estimated net realizable value. Our evaluation considers such factors as the cost of inventory, future demand, our historical experience and market conditions. In assessing the realization of inventory values, we are required to make judgments and estimates regarding future market conditions. Because of the subjective nature of these judgments and estimates, it is reasonably likely that actual outcomes will differ from our estimates. Adjustments to these reserves may be required if actual market conditions are substantially different than the assumptions underlying our estimates.
Long-lived assets. We review long-lived assets, which consist principally of property, plant and equipment and finite-lived intangibles, for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be fully recoverable. Recoverability of long-lived assets to be held and used is measured based on the future net undiscounted cash flows expected to be generated by the related asset or asset group. If it is determined that an impairment loss has been incurred, the impairment loss is recognized in the period in which it is incurred and is calculated based on the difference between the carrying value and the present value of estimated future net cash flows or comparable market values. Assets to be disposed of by sale are recorded at the lower of carrying value or fair value less selling cost when we have committed to a disposal plan, and are reported separately as assets held for sale on our balance sheet. Unforeseen events and changes in circumstances and market conditions could negatively affect the value of assets and result in an impairment charge.
Goodwill. Goodwill is tested annually for impairment and whenever events or circumstances change that would make it more likely than not that an impairment may have occurred. We perform our annual impairment analysis as of the first day of the fourth quarter each fiscal year, which involves comparing the current estimated fair value of the reporting unit to its recorded value, including goodwill.
We perform a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. It may be necessary to perform a quantitative analysis where a discounted cash flow model is used to determine the current estimated fair value of the reporting unit. Key assumptions used to determine the fair value of the reporting unit as part of our annual testing (and any required interim testing) include: (a) expected cash flows for the five-year period following the testing date; (b) an estimated terminal value using a terminal year growth rate based on the growth prospects of the reporting unit; (c) a discount rate based on our estimated after-tax weighted average cost of capital; and (d) a probability-weighted scenario approach by which varying cash flows are assigned to alternative scenarios based on their likelihood of occurrence. In developing these assumptions, we consider historical and anticipated future results, general economic and market conditions, the impact of planned business and operational strategies and all available information at the time the fair value of the reporting unit is estimated.
WeWe monitor our operating results throughout the year to determine if events or changes in circumstances warrant any interim impairment testing. Otherwise, goodwill will be subject to the required annual impairment test during our fourth quarter. Changes in the judgments and estimates underlying our analysis of goodwill for possible impairment, including the expected future operating cash flows and discount rate, could reduce our estimated fair value in the future and result in an impairment of goodwill. There was no goodwill impairment loss recognized in fiscal 2017.
Self-insurance.We are self-insured for certain losses relating to medical and workers’ compensation claims. Self-insurance claims filed and claims incurred but not reported are accrued based upon our estimates of the discounted ultimate cost for uninsured claims incurred using actuarial assumptions followed by the insurance industry and historical experience. These estimates are subject to a high degree of variability based upon future inflation rates, litigation trends, changes in benefit levels and claim settlement patterns. Because of uncertainties related to these factors as well as the possibility of changes in the underlying facts and circumstances, future adjustments to these reserves may be required.
Litigation.We are involved in claims, lawsuits and other proceedings, which arise in the ordinary course of business. The eventual outcome of such matters and the potential losses that we may ultimately incur are subject to a high degree of uncertainty. We record expenses for litigation when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We estimate the probability of such losses based on the advice of legal counsel, the outcome of similar litigation, the status of the lawsuits and other factors. Due to the numerous factors that enter into these judgments and assumptions, it is reasonably likely that actual outcomes will differ from our estimates. We monitor our potential exposure to these contingencies on a regular basis and may adjust our estimates as additional information becomes available or as there are significant developments.
Stock-based compensation. We account for stock-based compensation arrangements, including stock option grants and restricted stock units, in accordance with the provisions of ASC Topic 718, Compensation - Stock Compensation. Under these provisions, compensation cost is recognized based on the fair value of equity awards on the date of grant and amortized on a straight-line basis over the vesting period. We use the Monte Carlo valuation model to determine the fair value of stock options at the date of grant, which requires us to make assumptions for the expected term, volatility, dividend yield, risk-free interest rate and forfeiture rates. These assumptions are based on historical information and judgment regarding market factors and trends. If actual results differ from our assumptions and judgments used in estimating these factors, future adjustments to these estimates may be required.
Assumptions for employee benefit plan.We account for our supplemental employee retirement plans (each, a “SERP”) in accordance with ASC Topic 715, Compensation - Retirement Benefits. Under the provisions of ASC Topic 715, we recognize net periodic pension cost and value liabilities based on certain actuarial assumptions, principally the assumed discount rate.
The discount rate we utilize for determining net periodic pension cost and the related benefit obligation for the SERPs is based, in part, on current interest rates earned on long-term bonds that receive one of the two highest ratings assigned by recognized rating agencies. Our discount rate assumptions are adjusted as of each valuation date to reflect current interest rates on such long-term bonds. The discount rate is used to determine the actuarial present value of the benefit obligations as of the valuation date as well as the interest component of the net periodic pension cost for the following year. The discount rate for the SERPs was 3.75% for fiscal years 2017 and 2016 and 4.25% for fiscal 2015.
The assumed discount rate is reevaluated annually. Changes in this assumption can result in the recognition of a materially different pension cost over different periods and a materially different liability amount in our consolidated financial statements. A reduction in the assumed discount rate generally results in an actuarial loss, as the actuarially-determined present value of estimated future benefit payments will increase. Conversely, an increase in the assumed discount rate generally results in an actuarial gain. However, any actuarial gains generated in future periods reduce the negative amortization effect of any cumulative unamortized actuarial losses, while any actuarial losses generated in future periods reduce the favorable amortization effect of any cumulative unamortized actuarial gains.
The projected benefit obligations and net periodic pension cost for the SERPs are based in part on expected increases in future compensation levels. Our assumption for the expected increase in future compensation levels is based upon our average historical experience and our intentions regarding future compensation increases, which generally approximates average long-term inflation rates.
We currently expect net periodic pension cost for fiscal 2018 to be $806,000 for the SERPs. Cash contributions to the SERPs during fiscal 2018 are expected to be $358,000.
A 0.25% decrease in the assumed discount rate for our SERPs would have increased our projected and accumulated benefit obligations as of September 30, 2017 by approximately $284,000 and $230,000, respectively, and our expected net periodic pension cost for fiscal 2018 by approximately $31,000.
See Note 10 to our consolidated financial statements for the related accounting and disclosures surrounding our terminated pension plan, the Insteel Wire Products Company Retirement Income Plan for Hourly Employees, Wilmington, Delaware (the “Delaware Plan”).2020.
Recent Accounting Pronouncements.
The nature and impact of recent accounting pronouncements is discussed in Note 3 to our consolidated financial statements and incorporated herein by reference.
Results of Operations
The table below presents a summary of our results of operations for fiscal 2020 and fiscal 2019. See Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended September 28, 2019, filed with the SEC on October 25, 2019, for Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended September 29, 2018.
Results of Operations
Statements of Operations – Selected Data
(Dollars in thousands)
Year Ended | Year Ended | |||||||||||||||||||||||||||||||
September 30, | October 1, | October 3, | October 3, | September 28, | ||||||||||||||||||||||||||||
2017 | Change | 2016 | Change | 2015 | 2020 | Change | 2019 | |||||||||||||||||||||||||
Net sales | $ | 388,871 | (7.1 | %) | $ | 418,547 | (6.5 | %) | $ | 447,504 | $ | 472,618 | 3.7 | % | $ | 455,713 | ||||||||||||||||
Gross profit | 59,781 | (29.8 | %) | 85,188 | 46.0 | % | 58,333 | 55,787 | 85.6 | % | 30,061 | |||||||||||||||||||||
Percentage of net sales | 15.4 | % | 20.4 | % | 13.0 | % | 11.8 | % | 6.6 | % | ||||||||||||||||||||||
Selling, general and administrative expense | $ | 25,508 | (2.2 | %) | $ | 26,069 | 0.9 | % | $ | 25,824 | $ | 31,348 | 27.9 | % | $ | 24,504 | ||||||||||||||||
Percentage of net sales | 6.6 | % | 6.2 | % | 5.8 | % | 6.6 | % | 5.4 | % | ||||||||||||||||||||||
Pension plan settlement loss | $ | - | N/M | $ | 2,539 | N/M | $ | - | ||||||||||||||||||||||||
Restructuring charges, net | 164 | 42.6 | % | 115 | (67.0 | %) | 349 | $ | 1,695 | 100.0 | % | $ | – | |||||||||||||||||||
Other expense (income), net | 53 | (71.0 | %) | 183 | N/M | (1,113 | ) | |||||||||||||||||||||||||
| Acquisition costs | 195 | 100.0 | % | – | ||||||||||||||||||||||||||||
Other income, net | (1,254 | ) | (29.3 | %) | (1,773 | ) | ||||||||||||||||||||||||||
Interest expense | 136 | (13.9 | %) | 158 | (50.6 | %) | 320 | 106 | (36.9 | %) | 168 | |||||||||||||||||||||
Interest income | (248 | ) | 49.4 | % | (166 | ) | N/M | (11 | ) | (473 | ) | 61.4 | % | (293 | ) | |||||||||||||||||
Effective income tax rate | 34.0 | % | 33.8 | % | 34.1 | % | 21.4 | % | 24.9 | % | ||||||||||||||||||||||
Net earnings | $ | 22,548 | (39.5 | %) | $ | 37,245 | 71.6 | % | $ | 21,710 | $ | 19,009 | 239.6 | % | $ | 5,598 | ||||||||||||||||
"N/M" = not meaningful | ||||||||||||||||||||||||||||||||
20
201720 Compared with 20169
Net Sales
Net sales decreased 7.1%increased 3.7% to $388.9$472.6 million in 20172020 from $418.5$455.7 million in 20162019, reflecting a 17.3% increase in shipments offset by an 11.5% decrease in average selling prices. The increase in shipments was primarily due to lower shipments asimproved market conditions, the additional business provided by the STM Acquisition, the extra week in 2020 based on our fiscal calendar and strengthening demand for our products relative to the prior year, which was unfavorably impacted by unusually wet weather across many of our markets. The decrease in average selling prices was driven primarily by competitive pricing pressures resulting from an increase in low-priced import competition. Shipments for the current year were essentially unchanged. Shipments in 2017 were unfavorablynot materially impacted by adverse weather conditions during the second half of the year including the effect from hurricanes Harvey and Irma on our Texas and Florida facilities together with a reduction in new project activity and competitive pricing pressures.COVID-19 pandemic.
Gross Profit
Gross profit decreased 29.8%increased 85.6% to $59.8$55.8 million, or 15.4%11.8% of net sales, in 20172020 from $85.2$30.1 million, or 20.4%6.6% of net sales, in 2016.2019. The year-over-year decreaseyear over year increase was primarily due to lowerhigher spreads between average selling prices and raw material costs ($16.820.3 million), and the decreaseincrease in shipments ($6.4 million) and higher unit conversion costs ($3.45.4 million). The decreaseincrease in spreads was driven by higherlower raw material costs ($16.283.6 million) and freight expense ($0.7 million)691,000) partially offset by higherlower average selling prices ($0.164.0 million).
Selling, General and Administrative Expense
Selling, general and administrative expense (“SG&A expense”) decreased 2.2%increased 27.9% to $25.5$31.3 million, or 6.6% of net sales, in 20172020 from $26.1$24.5 million, or 6.2%5.4% of net sales, in 2016 primarily due to lower compensation expense ($762,000) together with the relative year-over-year change in the cash surrender value of life insurance policies ($332,000), which was partially offset by higher bad debt ($186,000), travel ($163,000) and employee benefit expense ($160,000). The decrease in compensation expense was largely driven by lower incentive plan expense based on our weaker results in 2017. The cash surrender value of life insurance policies increased $812,000 in 2017 compared with $480,000 in the prior year due to the changes in the value of the underlying investments. The increase in bad debt expense was due to a prior year adjustment to the allowance for doubtful accounts based on our favorable collections experience. The increase in employee benefit costs was2019 primarily due to higher employee supplemental retirement plan expense.
Pension Plan Settlement Loss
A pension plan settlement loss of $2.5 million was incurred in 2016 related to the termination of the Delaware Plan.
Restructuring Charges, Net
Net restructuring charges of $164,000 were incurred in 2017 for equipment relocation costs related to the consolidation of our PC strand facilities. Net restructuring charges of $115,000 were incurred in 2016, which included equipment relocation costscompensation ($186,000), facility closure costs ($89,000) and impairment charges related to the decommissioning of equipment ($20,000) partially offset by a gain on the sale of equipment previously associated with the Newnan, Georgia PC strand facility ($180,000).
Income Taxes
Our effective income tax rate for 2017 increased slightly to 34.0% from 33.8% in 2016 due to changes in permanent book versus tax differences.
Net Earnings
Net earnings decreased to $22.5 million ($1.17 per diluted share) in 2017 from $37.2 million ($1.95 per diluted share) in 2016 primarily due to the decrease in gross profit partially offset by lower SG&A expense and the pension plan settlement loss incurred in 2016.
2016 Compared with 2015
Net Sales
Net sales decreased 6.5% to $418.5 million in 2016 from $447.5 million in 2015 as a 2.6% increase in shipments was offset by an 8.8% reduction in average selling prices. Shipments for the prior year benefited from an extra week based on our fiscal calendar. On a pro forma basis adjusting both years to reflect the same 52-week period as 2016, the year-over-year shipment increase was 4.8%. The increase in shipments was primarily due to improved market conditions and increased demand for our products relative to the prior year. The decrease in average selling prices was driven by competitive pricing pressures.
Gross Profit
Gross profit increased 46.0% to $85.2 million, or 20.4% of net sales, in 2016 from $58.3 million, or 13.0% of net sales, in 2015. The year-over-year increase was primarily due to higher spreads between average selling prices and raw material costs ($22.33.2 million), lower unit conversion costsearnout ($2.31.4 million), legal ($1.4 million) and the increase in shipments ($1.6 million). The increase in spreads was driven by lower raw material costs ($62.4 million) and freight expense ($0.5 million) partially offset by lower average selling prices ($40.6 million).
Selling, General and Administrative Expense
SG&A expense increased 0.9% to $26.1 million, or 6.2% of net sales, in 2016 from $25.8 million, or 5.8% of net sales, in 2015 primarily due to higher compensation expense ($1.8 million), which was partially offset by lower employee benefit ($657,000), bad debt ($250,000) and legal expense ($114,000) together with the relative year-over-year change in the cash surrender value of life insurance policies ($441,000).196,000) expense. The increase in compensation expense was largely driven by higher incentive plan expense due to our improved financial results in 2016.the current year. The decreaseincrease in employee benefit costsearnout expense was due to a revaluation of a contingent earnout liability. The increase in legal expense was primarily related to a reduction in high-dollar health insurance claims. The decrease in bad debt expense was due to an adjustment to the allowance for doubtful accounts based on our favorable collections experience. The cash surrender value of life insurance policies increased $480,000 in 2016 comparedcosts associated with $39,000 in 2015 due to the changes in the value of the underlying investments.trade matters.
Pension Plan Settlement Loss
A pension plan settlement loss of $2.5 million was incurred in 2016 related to the termination of the Delaware Plan.
Restructuring Charges, Net
Net restructuring charges of $115,000$1.7 million were incurred in 2016 related to the consolidation of our PC strand facilities, including equipment relocation costs ($186,000), facility closure costs ($89,000) and impairment charges related to the decommissioning of equipment ($20,000) partially offset by a gain on the sale of equipment previously associated with the Newnan, Georgia PC strand facility ($180,000). Net restructuring charges of $349,000 were incurred in 20152020 related to the closure of the NewnanSummerville, South Carolina facility, which had been acquired through the STM Acquisition. Restructuring charges included facility closure costs ($547,000)806,000), equipment relocation costs ($482,000), impairment charges related to the decommissioning of equipment ($543,000), equipment relocation costs ($79,000)343,000) and employee separation costs ($75,000)182,000). These charges were partially offset by an $895,000a $119,000 gain onfrom the sale of the real estate and certain of the equipment associated with the NewnanSummerville facility.
Acquisition Costs
Acquisition costs of $195,000 were incurred in 2020 for legal, accounting and other professional fees related to the STM Acquisition.
Other Expense (Income)Income, Net
Other expenseincome was $1.3 million for 2016 was $0.2 million2020 compared with other income of $1.1$1.8 million in 2015. The other2019. Other income for 2015the current year was primarily related to a $1.7 million net gain from the disposition of assets held for sale. Other income in the prior year was primarily related to gains from property insurance proceeds attributable to($1.2 million) and the replacementdisposition of property, plant and equipment damaged in the fire at our Gallatin, Tennessee PC strand facility in 2014, partially offset by a $0.7 million charge related to the settlement of a customer dispute.($497,000).
Interest Expense
Interest expense decreased 50.6% to $158,000 in 2016 from $320,000 in 2015 primarily due to borrowings on our revolving credit facility during the prior year.
Income Taxes
Our effective income tax rate for 20162020 decreased slightly to 33.8%21.4% from 34.1%24.9% in 20152019 due to changeslower state tax expense resulting from the utilization of net operating losses and a tax benefit that was recorded in permanent book versus tax differences.connection with the net operating loss carryback provisions of the Coronvirus Aid, Relief and Economic Security Act, which was enacted in March 2020.
Net Earnings
Net earnings increased to $37.2$19.0 million ($1.950.98 per diluted share) in 20162020 from $21.7$5.6 million ($1.150.29 per diluted share) in 20152019 primarily due to the increase in gross profit partially offset by higher SG&A expense and restructuring charges associated with the pension plan settlement loss.consolidation of our PC strand operations.
Liquidity and Capital Resources
Selected Financial Data
(Dollars in thousands)
Year Ended | Year Ended | |||||||||||||||||||
September 30, | October 1, | October 3, | October 3, | September 28, | ||||||||||||||||
2017 | 2016 | 2015 | 2020 | 2019 | ||||||||||||||||
Net cash provided by operating activities | $ | 20,303 | $ | 54,536 | $ | 35,774 | $ | 56,224 | $ | 6,608 | ||||||||||
Net cash used for investing activities | (20,880 | ) | (12,972 | ) | (3,039 | ) | (23,174 | ) | (9,556 | ) | ||||||||||
Net cash used for financing activities | (26,191 | ) | (15,949 | ) | (2,527 | ) | (2,543 | ) | (2,812 | ) | ||||||||||
Cash and cash equivalents | 32,105 | 58,873 | 33,258 | 68,688 | 38,181 | |||||||||||||||
Net working capital | 117,873 | 126,704 | 105,532 | 143,360 | 132,171 | |||||||||||||||
Total debt | - | - | - | - | - | |||||||||||||||
Percentage of total capital | - | - | - | - | - | |||||||||||||||
Shareholders' equity | $ | 223,376 | $ | 224,566 | $ | 200,215 | $ | 264,803 | $ | 246,017 | ||||||||||
Percentage of total capital | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||
Total capital (total debt + shareholders' equity) | $ | 223,376 | $ | 224,566 | $ | 200,215 | $ | 264,803 | $ | 246,017 | ||||||||||
Operating Activities
Operating activities provided $20.3$56.2 million of cash in 20172020 primarily from net earnings adjusted for non-cash items together with an increase in working capital. Working capital provided $19.4 million of cash due to a $20.2 million increase in accounts payable and accrued expenses and a $5.1 million decrease in inventories partially offset by a $5.8 million increase in accounts receivable. The increase in accounts payable and accrued expenses was primarily related to higher raw material purchases near the end of the year together with increases in accrued salaries, wages and related expenses, earnout liability and income taxes. The decrease in inventories was primarily driven by lower unit costs partially offset by higher raw material purchases. The increase in accounts receivable was primarily related to higher shipments partially offset by lower average selling prices.
Operating activities provided $6.6 million of cash in 2019 primarily from net earnings adjusted for non-cash items partially offset by an increase in the net working capital components of accounts receivable, inventories, and accounts payable and accrued expenses. Net workingcapital. Working capital used $15.5$12.0 million of cash due to an $11.9a $42.6 million decrease in accounts payable and accrued expenses and a $10.7 million increase in inventories partially offset by a $7.1$23.3 million decrease in inventories and a $7.3 million decrease in accounts receivable. The decreasereductions in accounts payable and accrued expenses waswere primarily related to lower raw material purchases near the end of the period alongyear relative to the elevated level at the beginning of the year together with a decrease in accrued salaries, wages and related expenses. The increasereduction in inventories was due to higher raw material costs and, to a lesser extent, quantities on-hand. The decrease in accounts receivable was primarily due to lower sales during the period.
Operating activities provided $54.5 million of cash in 2016 primarily from net earnings adjusted for non-cash items and a reduction in the net working capital components of accounts receivable, inventories, and accounts payable and accrued expenses. Net working capital provided $3.2 million of cash due to a $9.0 million increase in accounts payable and accrued expenses partially offsetdriven by a $5.2 million increase in inventories and a $0.6 million increase in accounts receivable. The increases in accounts payable and accrued expenses and inventories were largely related to higher raw material purchases near the end of the period. The increase in accounts receivable was primarily due to an increase in days sales outstanding partially offset by lower selling prices.
Operating activities provided $35.8 million of cash in 2015 primarily from net earnings adjusted for non-cash items and a reduction in the net working capital components of accounts receivable, inventories, and accounts payable and accrued expenses. Net working capital provided $2.3 million of cash due to a $15.9 million decrease in inventories and a $4.3 million decrease in accounts receivable partially offset by a $17.9 million decrease in accounts payable and accrued expenses. The decrease in inventories and accounts payable and accrued expenses was primarily due to lower raw material purchases and unit costs. The decreasereduction in accounts receivable was primarily related to lower selling prices.prices and a decrease in days sales outstanding.
We may elect to adjust our operating activities as there are changes in the conditions in our construction end-markets, which could materially impact our cash requirements. While a downturn in the level of construction activity affects sales to our customers, it generally reduces our working capital requirements.
Investing Activities
Investing activities used $20.9 $23.2 million of cash in 20172020 primarily due to $20.6 million ofthe STM Acquisition ($18.4 million) and capital expenditures largely related to the expansion of the Houston, Texas PC strand facility and the addition of a new ESM production line at the St. Joseph, Missouri facility. Investing activities used $13.0 million of cash in 2016 primarily due to capital expenditures largely related to the expansion of the Houston facility. Investing activities used $3.0 million of cash in 2015 primarily related to $7.2 million of capital expenditures and the $1.5 million acquisition of an intangible asset from a competitor, which was($7.1 million) partially offset by $3.5 millionthe receipt of proceeds from the sale of the real estate and certainassets held for sale ($2.2 million). Investing activities used $9.6 million in 2019 primarily due to $10.5 million of the equipment associated with the Newnan, Georgia PC Strand facility, $1.7capital expenditures offset by $1.2 million of insurance proceeds related to thean insurance claim for the fire at our Gallatin, Tennessee PC strand facilityDayton, Texas facility. Capital expenditures for both years focused on cost and productivity improvement initiatives in 2014 and $0.5 million of post-closing adjustments associated with the ASW Acquisition.addition to recurring maintenance requirements. Our investing activities are largely discretionary, providing us with the ability to significantly curtail outlays should future business conditions warrant that such actions be taken.
Financing Activities
Financing activities used $26.2$2.5 million of cash in 2017, $15.92020 and $2.8 million of cash in 2016 and $2.5 million in 2015.2019. In 2017, $26.02020, $2.3 million of cash was used for dividend payments (including a special cash dividend of $23.7 million, or $1.25 per share, and regular cash dividends totalingpayments. In 2019, $2.3 million). In 2016, $20.9 million of cash was used for dividend payments (including a special cash dividend of $18.6 million, or $1.00 per share, and regular cash dividends totaling $2.3 million), which was partially offset by $5.1 million of proceeds from the exercise of stock options. In 2015, $2.2 million of cash was used for dividend payments and $0.2 million$263,000 for financing costs that were incurred in connectionassociated with the amendment of our revolving credit facility.
Cash Management
Our cash is principally concentrated at one financial institution, which at times exceeds federally insured limits. We invest excess cash primarily in money market funds, which are highly liquid securities that bear minimal risk.
Credit Facility
We have a $100.0 million revolving credit facility (the “Credit Facility”) that is used to supplement our operating cash flow and fund our working capital, capital expenditure, general corporate and growth requirements. In May 2015,2019, we entered into a new credit agreement, which amended and restated in its entirety the previous agreement pertaining to the revolving credit facility that had been in effect since June 2010. The new credit agreement, among other changes, extended the maturity date of the Credit Facility to, among other changes, extend its maturity date from June 2, 2016May 13, 2020 to May 13, 2020.15, 2024 and provided for an accordion feature whereby its size may be increased by up to $50.0 million, subject to our lender’s approval. Advances under the Credit Facility are limited to the lesser of the revolving loan commitment amount (currently $100.0 million) or a borrowing base amount that is calculated based upon a percentage of eligible receivables and inventories. As of September 30, 2017,October 3, 2020, no borrowings were outstanding on the Credit Facility, $85.4$90.0 million of borrowing capacity was available and outstanding letters of credit totaled $1.8$1.5 million (see Note 78 to the consolidated financial statements). As of October 1, 2016,September 28, 2019, there were no borrowings outstanding on the Credit Facility.
We believe that, in the absence of significant unanticipated cash demands, cash and cash equivalents, cash generated by operating activities and the borrowing availability provided under the Credit Facility will be sufficient to satisfy our expected requirements for working capital, capital expenditures, dividends and share repurchases, if any. We also expect to have access to the amounts available under our Credit Facility as required. However, should we experience future reductions in our operating cash flows due to weakening conditions in our construction end-markets and reduced demand from our customers, we may need to curtail capital and operating expenditures, delay or restrict share repurchases, cease dividend payments and/or realign our working capital requirements.
Should we determine, at any time, that we required additional short-term liquidity, we would evaluate the alternative sources of financing that were potentially available to provide such funding. There can be no assurance that any such financing, if pursued, would be obtained, or if obtained, would be adequate or on terms acceptable to us. However, we believe that our strong balance sheet, flexible capital structure and borrowing capacity available to us under our Credit Facility position us to meet our anticipated liquidity requirements for the foreseeable future.
Impact of Inflation
We are subject to inflationary risks arising from fluctuations in the market prices for our primary raw material, hot-rolled carbon steel wire rod, and, to a much lesser extent, freight, energy and other consumables that are used in our manufacturing processes. We have generally been able to adjust our selling prices to pass through increases in these costs or offset them through various cost reduction and productivity improvement initiatives. However, our ability to raise our selling prices depends on market conditions and competitive dynamics, and there may be periods during which we are unable to fully recover increases in our costs.
In 2020, selling prices for our products declined in response to low-priced import competition, which negatively impacted our financial results. During 2017, we were unable to fully recover2019, the year-over-year escalation in our raw material costs through price increasesexceeded the increase in our selling prices due to the weakening in demand and competitive pricing pressures. During the second half of 2016, our raw material costs rose over most of the period due to increasing scrap costs for wire rod producers which we were generally able to recover through price increases. During 2015 and through the first half of 2016, wire rod prices declined through most of the period due to reductions in scrap costs which favorably impacted our margins after the higher cost inventory we had purchased in earlier periods was consumed. The timing and magnitude of any future increases in the prices for wire rodraw material costs and the impact on selling prices for our products is uncertain at this time.
Off-Balance Sheet Arrangements
We do not have any material transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons, as defined by Item 303(a)(4) of Regulation S-K of the SEC, that have or are reasonably likely to have a material current or future impact on our financial condition, results of operations, liquidity, capital expenditures, capital resources or significant components of revenues or expenses.
Contractual Obligations
Our contractual obligations and commitments at September 30, 2017October 3, 2020 are as follows:
Payments Due by Period | ||||||||||||||||||||
(In thousands) | ||||||||||||||||||||
Less Than | More Than | |||||||||||||||||||
| Total | 1 Year | 1 - 3 Years | 3 – 5 Years | 5 Years | |||||||||||||||
Contractual obligations: | ||||||||||||||||||||
Raw material purchase commitments(1) | $ | 28,897 | $ | 28,897 | $ | - | $ | - | $ | - | ||||||||||
Supplemental employee retirement plan obligations | 20,208 | 358 | 561 | 783 | 18,506 | |||||||||||||||
Operating leases | 1,621 | 984 | 634 | 3 | - | |||||||||||||||
Trade letters of credit | 1,781 | 1,781 | - | - | - | |||||||||||||||
Commitment fee on unused portion of credit facility | 855 | 320 | 535 | - | - | |||||||||||||||
Other unconditional purchase obligations(2) | 15,498 | 15,498 | - | - | - | |||||||||||||||
Total | $ | 68,860 | $ | 47,838 | $ | 1,730 | $ | 786 | $ | 18,506 | ||||||||||
Payments Due by Period | ||||||||||
(In thousands) |
Less Than | More Than | |||||||||||||||||||
Contractual obligations: | Total | 1 Year | 1 - 3 Years | 3 – 5 Years | 5 Years | |||||||||||||||
Raw material purchase commitments(1) | $ | 32,762 | $ | 32,762 | $ | - | $ | - | $ | - | ||||||||||
Supplemental employee retirement plan obligations | 19,191 | 255 | 1,139 | 1,422 | 16,375 | |||||||||||||||
Trade letters of credit | 1,506 | 1,506 | - | - | - | |||||||||||||||
Commitment fee on unused portion of credit facility | 826 | 225 | 450 | 151 | - | |||||||||||||||
Other unconditional purchase obligations(2) | 9,736 | 9,736 | - | - | - | |||||||||||||||
Total | $ | 64,021 | $ | 44,484 | $ | 1,589 | $ | 1,573 | $ | 16,375 | ||||||||||
(1)Non-cancelable purchase commitments for raw materials. | ||||||||||
(2)Contractual commitments for capital expenditures. |
Outlook
As we lookLooking ahead to 2018,2021, the impact of COVID-19 on the strength and direction of the U.S. economic recovery remains a primary risk to our business. As a result, we expect improvedour financial results will remain vulnerable to uncertain market conditions for our products. While recent third-party forecasts for non-residential construction spending indicate a bottoming or modest improvement from trends earlier in our construction end-markets. Customer sentimentthe year, the sustainability of those trends into 2021 remains positive and we expect the infrastructure-related portion of our business will be favorably impactedunclear. The impact on public infrastructure spending has varied by higher state and localregion, and the prospect of future funding in many of our markets. We also expect to benefit from modest increases in nonresidential construction together with the continued recovery of the housing market. We believe the recent compression in spreads that we have experienced will diminish as these factors begin to drive increased demand for our products.support or constraints cannot be accurately predicted at this time.
WeIn response to this lingering uncertainty, we will continue to focus on the operational fundamentals ofthose factors within our business:control: closely managing and controlling our expenses;expenses, aligning our production schedules with demand in a proactive manner as there are changes in market conditions to minimize our cash operating costs; and pursuing further improvements in the productivity and effectiveness of allour manufacturing activities; and managing the risk to our employees and operations.
Despite the economic uncertainties, we remain optimistic about our key initiatives to drive growth in the business. Our success in the ESM market in fiscal 2020 should position us for continued growth in 2021. Additionally, the trade cases filed in 2020 alleging illegal activity by importers in certain of our manufacturing, sellingmarkets, which are expected to be resolved in fiscal 2021, have progressed favorably and administrative activities. We expect that our financial results will be favorably impacted bywe believe the realization of additional operating synergies associated withfacts supporting the ASW Acquisition and the related reconfiguration of our PC strand operations as we ramp up the new raw material cleaning and production lines at our Houston plant. As market conditions improve, we also expect gradually increasing contributions from the substantial investments we have made in our facilities in the form of reduced operating costs and additional capacity to support future growth. In addition,cases are strong. Finally, we will continue to pursue further acquisitions opportunistically in our existing businesses, much like our acquisition of STM in March 2020, that expand our penetration of markets we currently serve or expand our footprint.
The statements contained in this section are forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors”.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.Risk.
Our cash flows and earnings are subject to fluctuations resulting from changes in commodity prices, interest rates and foreign exchange rates. We manage our exposure to these market risks through internally established policies and procedures and, when appropriate, through the use of derivative financial instruments. We do not use financial instruments for trading purposes and are not a party to any leveraged derivatives. We monitor our underlying market risk exposures on an ongoing basis and believe we can modify or adapt our hedging strategies as necessary.
Commodity Prices
WeWe are subject to significant fluctuations in the cost and availability of our primary raw material, hot-rolled carbon steel wire rod, which we purchase from both domestic and foreign suppliers. We negotiate quantities and pricing for both domestic and foreign wire rod purchases for varying periods (most recently monthly for domestic suppliers), depending upon market conditions, to manage our exposure to price fluctuations and to ensure adequate availability of material consistent with our requirements. We do not use derivative commodity instruments to hedge our exposure to changes in prices as such instruments are not currently available for wire rod. Our ability to acquire wire rod from foreign sources on favorable terms is impacted by fluctuations in foreign currency exchange rates, foreign taxes, duties, tariffs, quotas and other trade actions. Although changes in our wire rod costs and selling prices tend to be correlated, in weaker market environments, we may be unable to fully recover increased wire rod costs, through higher selling prices, which would reduce our earnings and cash flows. Additionally, when raw material costs decline, our financial results may be negatively impacted if the selling prices for our products decrease to an even greater extent and if we are consuming higher cost material from inventory. Based on our 20172020 shipments and average wire rod cost reflected in cost of sales, a 10% increase in the price of wire rod would have resulted in a $21.7$28.3 million decrease in our annual pre-tax earnings (assuming there was not a corresponding change in our selling prices).
Interest Rates
Although we did not have any balances outstanding on our Credit Facility as of September 30, 2017,October 3, 2020, future borrowings under the facility are subject to a variable rate of interest and are sensitive to changes in interest rates.
Foreign Exchange Exposure
We have not typically hedged foreign currency exposures related to transactions denominated in currencies other than U.S. dollars, as such transactions have not been material historically. We will occasionally hedge firm commitments for certain equipment purchases that are denominated in foreign currencies. The decision to hedge any such transactions is made by us on a case-by-case basis. There were no forward contracts outstanding as of September 30, 2017.October 3, 2020. During 2017,2020, a 10% increase or decrease in the value of the U.S. dollar relative to foreign currencies to which we are typically exposed would not have had a material impact on our financial position, results of operations or cash flows.
Item 8. Financial Statements and Supplementary Data.
(a) Financial Statements
Consolidated Statements of Operations for the years ended |
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Consolidated Statements of Comprehensive Income for the years ended |
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Consolidated Balance Sheets as of October 3, 2020 and September |
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Consolidated Statements of |
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Consolidated Statements of Cash Flows for the years ended |
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Notes to Consolidated Financial Statements |
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Report of Independent Registered Public Accounting Firm – Consolidated Financial Statements |
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Schedule II – Valuation and Qualifying Accounts for the years ended |
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(b) Supplementary Data
Selected quarterly financial data for 20172020 and 20162019 is as follows:
Financial Information by Quarter (Unaudited)
(In thousands, except per share and price data)amounts)
Quarter Ended | Quarter Ended | |||||||||||||||||||||||||||||||
December 31 | April 1 | July 1 | September 30 | December 28 | March 28 | June 27 | October 3 | |||||||||||||||||||||||||
2017 | ||||||||||||||||||||||||||||||||
2020 | ||||||||||||||||||||||||||||||||
Operating results: | ||||||||||||||||||||||||||||||||
Net sales | $ | 93,888 | $ | 101,159 | $ | 96,938 | $ | 96,886 | $ | 97,569 | $ | 114,859 | $ | 121,959 | $ | 138,231 | ||||||||||||||||
Gross profit | 13,010 | 18,294 | 16,676 | 11,801 | 6,237 | 15,283 | 14,805 | 19,462 | ||||||||||||||||||||||||
Net earnings | 4,460 | 7,420 | 6,869 | 3,799 | 555 | 4,364 | 6,664 | 7,426 | ||||||||||||||||||||||||
Net earnings per share: | ||||||||||||||||||||||||||||||||
Basic | 0.24 | 0.39 | 0.36 | 0.20 | 0.03 | 0.23 | 0.35 | 0.38 | ||||||||||||||||||||||||
Diluted | 0.23 | 0.39 | 0.36 | 0.20 | 0.03 | 0.23 | 0.34 | 0.38 | ||||||||||||||||||||||||
Quarter Ended | Quarter Ended | |||||||||||||||||||||||||||||||
January 2 | April 2 | July 2 | October 1 | December 29 | March 30 | June 29 | September 28 | |||||||||||||||||||||||||
2016 | ||||||||||||||||||||||||||||||||
2019 | ||||||||||||||||||||||||||||||||
Operating results: | ||||||||||||||||||||||||||||||||
Net sales | $ | 92,391 | $ | 107,414 | $ | 115,629 | $ | 103,113 | $ | 104,110 | $ | 111,948 | $ | 126,252 | $ | 113,403 | ||||||||||||||||
Gross profit | 16,423 | 18,615 | 27,547 | 22,603 | 10,976 | 7,021 | 8,236 | 3,828 | ||||||||||||||||||||||||
Net earnings | 6,708 | 7,152 | 13,531 | 9,854 | ||||||||||||||||||||||||||||
Net earnings per share: | ||||||||||||||||||||||||||||||||
Net earnings (loss) | 4,126 | 1,049 | 2,190 | (1,767 | ) | |||||||||||||||||||||||||||
Net earnings (loss) per share: | ||||||||||||||||||||||||||||||||
Basic | 0.36 | 0.38 | 0.72 | 0.52 | 0.21 | 0.05 | 0.11 | (0.09 | ) | |||||||||||||||||||||||
Diluted | 0.36 | 0.38 | 0.71 | 0.51 | 0.21 | 0.05 | 0.11 | (0.09 | ) | |||||||||||||||||||||||
INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES | ||||||
CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||
(In thousands, except per share amounts) |
Year Ended | ||||||||||||
October 3, | September 28, | September 29, | ||||||||||
2020 | 2019 | 2018 | ||||||||||
Net sales | $ | 472,618 | $ | 455,713 | $ | 453,217 | ||||||
Cost of sales | 416,831 | 425,652 | 382,410 | |||||||||
Gross profit | 55,787 | 30,061 | 70,807 | |||||||||
Selling, general and administrative expense | 31,348 | 24,504 | 28,304 | |||||||||
Restructuring charges, net | 1,695 | 0 | 0 | |||||||||
Acquisition costs | 195 | 0 | 0 | |||||||||
Other expense (income), net | (1,254 | ) | (1,773 | ) | 274 | |||||||
Interest expense | 106 | 168 | 114 | |||||||||
Interest income | (473 | ) | (293 | ) | (515 | ) | ||||||
Earnings before income taxes | 24,170 | 7,455 | 42,630 | |||||||||
Income taxes | 5,161 | 1,857 | 6,364 | |||||||||
Net earnings | $ | 19,009 | $ | 5,598 | $ | 36,266 | ||||||
Net earnings per share: | ||||||||||||
Basic | $ | 0.99 | $ | 0.29 | $ | 1.90 | ||||||
Diluted | 0.98 | 0.29 | 1.88 | |||||||||
Cash dividends declared | 0.12 | 0.12 | 1.12 | |||||||||
Weighted average shares outstanding: | ||||||||||||
Basic | 19,278 | 19,243 | 19,079 | |||||||||
Diluted | 19,383 | 19,340 | 19,277 | |||||||||
See accompanying notes to consolidated financial statements.
INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES | ||||||
CONSOLIDATED STATEMENTS OF | ||||||
(In |
Year Ended | ||||||||||||
September 30, | October 1, | October 3, | ||||||||||
2017 | 2016 | 2015 | ||||||||||
Net sales | $ | 388,871 | $ | 418,547 | $ | 447,504 | ||||||
Cost of sales | 329,090 | 333,359 | 389,171 | |||||||||
Gross profit | 59,781 | 85,188 | 58,333 | |||||||||
Selling, general and administrative expense | 25,508 | 26,069 | 25,824 | |||||||||
Pension plan settlement loss | - | 2,539 | - | |||||||||
Restructuring charges, net | 164 | 115 | 349 | |||||||||
Other expense (income), net | 53 | 183 | (1,113 | ) | ||||||||
Interest expense | 136 | 158 | 320 | |||||||||
Interest income | (248 | ) | (166 | ) | (11 | ) | ||||||
Earnings before income taxes | 34,168 | 56,290 | 32,964 | |||||||||
Income taxes | 11,620 | 19,045 | 11,254 | |||||||||
Net earnings | $ | 22,548 | $ | 37,245 | $ | 21,710 | ||||||
Net earnings per share: | ||||||||||||
Basic | $ | 1.19 | $ | 1.99 | $ | 1.18 | ||||||
Diluted | 1.17 | 1.95 | 1.15 | |||||||||
Cash dividends declared | 1.37 | 1.12 | 0.12 | |||||||||
Weighted average shares outstanding: | ||||||||||||
Basic | 19,011 | 18,754 | 18,418 | |||||||||
Diluted | 19,217 | 19,055 | 18,803 | |||||||||
|
Year Ended | ||||||||||||
October 3, | September 28, | September 29, | ||||||||||
2020 | 2019 | 2018 | ||||||||||
Net earnings | $ | 19,009 | $ | 5,598 | $ | 36,266 | ||||||
Adjustment to defined benefit plan liability, net of income taxes of ($93), $239 and ($44), respectively | 292 | (754 | ) | 139 | ||||||||
Other comprehensive (loss) income | 292 | (754 | ) | 139 | ||||||||
Comprehensive income | $ | 19,301 | $ | 4,844 | $ | 36,405 | ||||||
See accompanying notes to consolidated financial statements.
INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES | ||||
CONSOLIDATED BALANCE SHEETS | ||||
(In thousands, except per share amounts) |
October 3, | September 28, | |||||||
2020 | 2019 | |||||||
Assets: | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 68,688 | $ | 38,181 | ||||
Accounts receivable, net | 53,817 | 44,182 | ||||||
Inventories | 68,963 | 70,851 | ||||||
Other current assets | 5,570 | 7,370 | ||||||
Total current assets | 197,038 | 160,584 | ||||||
Property, plant and equipment, net | 101,392 | 104,960 | ||||||
Intangibles, net | 8,567 | 8,610 | ||||||
Goodwill | 9,745 | 8,293 | ||||||
Other assets | 21,160 | 10,562 | ||||||
Total assets | $ | 337,902 | $ | 293,009 | ||||
Liabilities and shareholders’ equity: | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 38,961 | $ | 21,595 | ||||
Accrued expenses | 14,717 | 6,818 | ||||||
Total current liabilities | 53,678 | 28,413 | ||||||
Other liabilities | 19,421 | 18,579 | ||||||
Commitments and contingencies | ||||||||
Shareholders’ equity: | ||||||||
Preferred stock, no par value Authorized shares: 1,000 None issued | 0 | 0 | ||||||
Common stock, $1 stated value Authorized shares: 50,000 Issued and outstanding shares: 2020, 19,304; 2019, 19,261 | 19,304 | 19,261 | ||||||
Additional paid-in capital | 76,387 | 74,632 | ||||||
Retained earnings | 171,068 | 154,372 | ||||||
Accumulated other comprehensive loss | (1,956 | ) | (2,248 | ) | ||||
Total shareholders’ equity | 264,803 | 246,017 | ||||||
Total liabilities and shareholders’ equity | $ | 337,902 | $ | 293,009 | ||||
See accompanying notes to consolidated financial statements.
INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES | |||||||||||||
CONSOLIDATED STATEMENTS OF | |||||||||||||
| |||||||||||||
Year Ended | ||||||||||||
September 30, | October 1, | October 3, | ||||||||||
2017 | 2016 | 2015 | ||||||||||
Net earnings | $ | 22,548 | $ | 37,245 | $ | 21,710 | ||||||
Pension plan settlement, net of income taxes of ($733) | - | 1,197 | - | |||||||||
Adjustment to defined benefit plan liability, net of income taxes of ($127), $363 and $218 | 208 | (592 | ) | (356 | ) | |||||||
Other comprehensive income (loss) | 208 | 605 | (356 | ) | ||||||||
Comprehensive income | $ | 22,756 | $ | 37,850 | $ | 21,354 | ||||||
| ||||||
| |||||||||||||
| |||||||||||||
(In | |||||||||||||
September 30, | October 1, | |||||||
2017 | 2016 | |||||||
Assets: | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 32,105 | $ | 58,873 | ||||
Accounts receivable, net | 40,284 | 47,389 | ||||||
Inventories | 81,853 | 71,186 | ||||||
Other current assets | 5,949 | 3,039 | ||||||
Total current assets | 160,191 | 180,487 | ||||||
Property, plant and equipment, net | 98,670 | 88,193 | ||||||
Intangibles, net | 7,913 | 9,063 | ||||||
Goodwill | 6,965 | 6,965 | ||||||
Other assets | 9,334 | 8,184 | ||||||
Total assets | $ | 283,073 | $ | 292,892 | ||||
Liabilities and shareholders’ equity: | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 33,651 | $ | 42,759 | ||||
Accrued expenses | 8,667 | 11,024 | ||||||
Total current liabilities | 42,318 | 53,783 | ||||||
Other liabilities | 17,379 | 14,543 | ||||||
Commitments and contingencies | ||||||||
Shareholders’ equity: | ||||||||
Preferred stock, no par value | ||||||||
Authorized shares: 1,000 | ||||||||
None issued | - | - | ||||||
Common stock, $1 stated value | ||||||||
Authorized shares: 50,000 | ||||||||
Issued and outstanding shares: 2017, 19,041; 2016, 18,976 | 19,041 | 18,976 | ||||||
Additional paid-in capital | 69,817 | 67,817 | ||||||
Retained earnings | 135,851 | 139,314 | ||||||
Accumulated other comprehensive loss | (1,333 | ) | (1,541 | ) | ||||
Total shareholders’ equity | 223,376 | 224,566 | ||||||
Total liabilities and shareholders’ equity | $ | 283,073 | $ | 292,892 | ||||
|
Accumulated | ||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||
Common Stock | Paid-In | Retained | Comprehensive | Shareholders' | ||||||||||||||||||||
Shares | Amount | Capital | Earnings | Income (Loss)(1) | Equity | |||||||||||||||||||
Balance at September 30, 2017 | 19,041 | $ | 19,041 | $ | 69,817 | $ | 135,851 | $ | (1,333 | ) | $ | 223,376 | ||||||||||||
Net earnings | 36,266 | 36,266 | ||||||||||||||||||||||
Other comprehensive income(1) | 139 | 139 | ||||||||||||||||||||||
Stock options exercised | 143 | 143 | 1,938 | 2,081 | ||||||||||||||||||||
Vesting of restricted stock units | 39 | 39 | (39 | ) | - | |||||||||||||||||||
Compensation expense associated with stock-based plans | 2,078 | 2,078 | ||||||||||||||||||||||
Restricted stock units and stock options surrendered for withholding taxes payable | (942 | ) | (942 | ) | ||||||||||||||||||||
Reclassification of stranded tax effects | 300 | (300 | ) | 0 | ||||||||||||||||||||
Cash dividends declared | (21,333 | ) | (21,333 | ) | ||||||||||||||||||||
Balance at September 29, 2018 | 19,223 | 19,223 | 72,852 | 151,084 | (1,494 | ) | 241,665 | |||||||||||||||||
Net earnings | 5,598 | 5,598 | ||||||||||||||||||||||
Other comprehensive loss(1) | (754 | ) | (754 | ) | ||||||||||||||||||||
Vesting of restricted stock units | 38 | 38 | (38 | ) | 0 | |||||||||||||||||||
Compensation expense associated with stock-based plans | 2,057 | 2,057 | ||||||||||||||||||||||
Restricted stock units and stock options surrendered for withholding taxes payable | (239 | ) | (239 | ) | ||||||||||||||||||||
Cash dividends declared | (2,310 | ) | (2,310 | ) | ||||||||||||||||||||
Balance at September 28, 2019 | 19,261 | 19,261 | 74,632 | 154,372 | (2,248 | ) | 246,017 | |||||||||||||||||
Net earnings | 19,009 | 19,009 | ||||||||||||||||||||||
Other comprehensive income(1) | 292 | 292 | ||||||||||||||||||||||
Vesting of restricted stock units | 43 | 43 | (43 | ) | 0 | |||||||||||||||||||
Compensation expense associated with stock-based plans | 2,028 | 2,028 | ||||||||||||||||||||||
Restricted stock units and stock options surrendered for withholding taxes payable | (230 | ) | (230 | ) | ||||||||||||||||||||
Cash dividends declared | (2,313 | ) | (2,313 | ) | ||||||||||||||||||||
Balance at October 3, 2020 | 19,304 | $ | 19,304 | $ | 76,387 | $ | 171,068 | $ | (1,956 | ) | $ | 264,803 | ||||||||||||
| |||||||||||||
| |||||||||||||
| |||||||||||||
Accumulated | ||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||
Common Stock | Paid-In | Retained | Comprehensive | Shareholders' | ||||||||||||||||||||
Shares | Amount | Capital | Earnings | Income (Loss)(1) | Equity | |||||||||||||||||||
Balance at September 27, 2014 | 18,377 | $ | 18,377 | $ | 58,867 | $ | 103,429 | $ | (1,790 | ) | $ | 178,883 | ||||||||||||
Net earnings | 21,710 | 21,710 | ||||||||||||||||||||||
Other comprehensive loss(1) | (356 | ) | (356 | ) | ||||||||||||||||||||
Stock options exercised | 24 | 24 | 176 | 200 | ||||||||||||||||||||
Vesting of restricted stock units | 65 | 65 | (65 | ) | - | |||||||||||||||||||
Compensation expense associated with stock-based plans | 2,298 | 2,298 | ||||||||||||||||||||||
Excess tax benefits from stock-based compensation | 169 | 169 | ||||||||||||||||||||||
Restricted stock units and stock options surrendered for withholding taxes payable | (478 | ) | (478 | ) | ||||||||||||||||||||
Cash dividends declared | (2,211 | ) | (2,211 | ) | ||||||||||||||||||||
Balance at October 3, 2015 | 18,466 | 18,466 | 60,967 | 122,928 | (2,146 | ) | 200,215 | |||||||||||||||||
Net earnings | 37,245 | 37,245 | ||||||||||||||||||||||
Other comprehensive income(1) | 605 | 605 | ||||||||||||||||||||||
Stock options exercised | 463 | 463 | 4,602 | 5,065 | ||||||||||||||||||||
Vesting of restricted stock units | 47 | 47 | (47 | ) | - | |||||||||||||||||||
Compensation expense associated with stock-based plans | 2,439 | 2,439 | ||||||||||||||||||||||
Excess tax benefits from stock-based compensation | 1,717 | 1,717 | ||||||||||||||||||||||
Restricted stock units and stock options surrendered for withholding taxes payable | (1,861 | ) | (1,861 | ) | ||||||||||||||||||||
Cash dividends declared | (20,859 | ) | (20,859 | ) | ||||||||||||||||||||
Balance at October 1, 2016 | 18,976 | 18,976 | 67,817 | 139,314 | (1,541 | ) | 224,566 | |||||||||||||||||
Net earnings | 22,548 | 22,548 | ||||||||||||||||||||||
Other comprehensive income(1) | 208 | 208 | ||||||||||||||||||||||
Stock options exercised | 26 | 26 | 81 | 107 | ||||||||||||||||||||
Vesting of restricted stock units | 39 | 39 | (39 | ) | - | |||||||||||||||||||
Compensation expense associated with stock-based plans | 2,245 | 2,245 | ||||||||||||||||||||||
Excess tax benefits from stock-based compensation | 537 | 537 | ||||||||||||||||||||||
Restricted stock units and stock options surrendered for withholding taxes payable | (824 | ) | (824 | ) | ||||||||||||||||||||
Cash dividends declared | (26,011 | ) | (26,011 | ) | ||||||||||||||||||||
Balance at September 30, 2017 | 19,041 | $ | 19,041 | $ | 69,817 | $ | 135,851 | $ | (1,333 | ) | $ | 223,376 | ||||||||||||
(1)Activity within accumulated other comprehensive income (loss) is reported net of related income taxes: |
See accompanying notes to consolidated financial statements. |
INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES | |||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||
| |||||||
|
Year Ended | ||||||||||||
September 30, | October 1, | October 3, | ||||||||||
2017 | 2016 | 2015 | ||||||||||
Cash Flows From Operating Activities: | ||||||||||||
Net earnings | $ | 22,548 | $ | 37,245 | $ | 21,710 | ||||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 11,649 | 11,544 | 11,934 | |||||||||
Amortization of capitalized financing costs | 65 | 65 | 89 | |||||||||
Stock-based compensation expense | 2,245 | 2,439 | 2,298 | |||||||||
Deferred income taxes | 2,503 | 536 | 333 | |||||||||
Pension plan settlement loss, net of cash contributed | - | 620 | - | |||||||||
Asset impairment charges | - | 20 | 543 | |||||||||
Excess tax benefits from stock-based compensation | (537 | ) | (1,717 | ) | (169 | ) | ||||||
Loss (gain) on sale and disposition of property, plant and equipment | 64 | 61 | (2,652 | ) | ||||||||
Increase in cash surrender value of life insurance policies over premiums paid | (812 | ) | (480 | ) | (39 | ) | ||||||
Net changes in assets and liabilities: | ||||||||||||
Accounts receivable, net | 7,105 | (607 | ) | 4,266 | ||||||||
Inventories | (10,667 | ) | (5,177 | ) | 15,890 | |||||||
Accounts payable and accrued expenses | (11,930 | ) | 9,009 | (17,861 | ) | |||||||
Other changes | (1,930 | ) | 978 | (568 | ) | |||||||
Total adjustments | (2,245 | ) | 17,291 | 14,064 | ||||||||
Net cash provided by operating activities | 20,303 | 54,536 | 35,774 | |||||||||
Cash Flows From Investing Activities: | ||||||||||||
Capital expenditures | (20,575 | ) | (12,977 | ) | (7,153 | ) | ||||||
Proceeds from surrender of life insurance policies | 100 | 140 | 40 | |||||||||
Increase in cash surrender value of life insurance policies | (405 | ) | (375 | ) | (328 | ) | ||||||
Acquisition of intangible asset | - | - | (1,460 | ) | ||||||||
Acquisition of business | - | - | 480 | |||||||||
Proceeds from sale of assets held for sale | - | 180 | 3,537 | |||||||||
Proceeds from fire loss insurance | - | - | 1,713 | |||||||||
Proceeds from sale of property, plant and equipment | - | 60 | 132 | |||||||||
Net cash used for investing activities | (20,880 | ) | (12,972 | ) | (3,039 | ) | ||||||
Cash Flows From Financing Activities: | ||||||||||||
Proceeds from long-term debt | 404 | 328 | 60,978 | |||||||||
Principal payments on long-term debt | (404 | ) | (328 | ) | (60,978 | ) | ||||||
Cash dividends paid | (26,011 | ) | (20,859 | ) | (2,211 | ) | ||||||
Cash received from exercise of stock options | 107 | 5,065 | 200 | |||||||||
Excess tax benefits from stock-based compensation | 537 | 1,717 | 169 | |||||||||
Payment of employee tax withholdings related to net share transactions | (824 | ) | (1,861 | ) | (478 | ) | ||||||
Financing costs | - | (11 | ) | (207 | ) | |||||||
Net cash used for financing activities | (26,191 | ) | (15,949 | ) | (2,527 | ) | ||||||
Net increase (decrease) in cash and cash equivalents | (26,768 | ) | 25,615 | 30,208 | ||||||||
Cash and cash equivalents at beginning of period | 58,873 | 33,258 | 3,050 | |||||||||
Cash and cash equivalents at end of period | $ | 32,105 | $ | 58,873 | $ | 33,258 | ||||||
Supplemental Disclosures of Cash Flow Information: | ||||||||||||
Cash paid during the period for: | ||||||||||||
Interest | $ | - | $ | - | $ | 143 | ||||||
Income taxes, net | 9,300 | 19,184 | 7,805 | |||||||||
Non-cash investing and financing activities: | ||||||||||||
Purchases of property, plant and equipment in accounts payable | 465 | 1,746 | 570 | |||||||||
Restricted stock units and stock options surrendered for withholding taxes payable | 824 | 1,861 | 478 | |||||||||
|
Year Ended | ||||||||||||
October 3, | September 28, | September 29, | ||||||||||
2020 | 2019 | 2018 | ||||||||||
Cash Flows From Operating Activities: | ||||||||||||
Net earnings | $ | 19,009 | $ | 5,598 | $ | 36,266 | ||||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 14,255 | 13,553 | 12,818 | |||||||||
Amortization of capitalized financing costs | 66 | 65 | 65 | |||||||||
Stock-based compensation expense | 2,028 | 2,057 | 2,078 | |||||||||
Deferred income taxes | (424 | ) | 1,798 | (2,807 | ) | |||||||
Asset impairment charges | 343 | 0 | 0 | |||||||||
Loss (gain) on sale and disposition of property, plant and equipment | (1,114 | ) | (1,688 | ) | 381 | |||||||
Increase in cash surrender value of life insurance policies over premiums paid | (243 | ) | (187 | ) | (553 | ) | ||||||
Gain from life insurance proceeds | (200 | ) | 0 | 0 | ||||||||
Net changes in assets and liabilities (net of assets and liabilities acquired): | ||||||||||||
Accounts receivable, net | (5,806 | ) | 7,302 | (11,200 | ) | |||||||
Inventories | 5,060 | 23,306 | (12,304 | ) | ||||||||
Accounts payable and accrued expenses | 20,159 | (42,592 | ) | 28,234 | ||||||||
Other changes | 3,091 | (2,604 | ) | 991 | ||||||||
Total adjustments | 37,215 | 1,010 | 17,703 | |||||||||
Net cash provided by operating activities | 56,224 | 6,608 | 53,969 | |||||||||
Cash Flows From Investing Activities: | ||||||||||||
Acquisition of business | (18,356 | ) | 0 | (3,300 | ) | |||||||
Capital expenditures | (7,114 | ) | (10,512 | ) | (18,449 | ) | ||||||
Proceeds from property insurance | 0 | 1,192 | 0 | |||||||||
Proceeds from sale of property, plant and equipment | 40 | 19 | 0 | |||||||||
Proceeds from surrender of life insurance policies | 260 | 67 | 165 | |||||||||
Increase in cash surrender value of life insurance policies | (390 | ) | (322 | ) | (355 | ) | ||||||
Proceeds from sale of assets held for sale | 2,186 | 0 | 0 | |||||||||
Proceeds from life insurance claims | 200 | 0 | 0 | |||||||||
Net cash used for investing activities | (23,174 | ) | (9,556 | ) | (21,939 | ) | ||||||
Cash Flows From Financing Activities: | ||||||||||||
Proceeds from long-term debt | 322 | 44,333 | 372 | |||||||||
Principal payments on long-term debt | (322 | ) | (44,333 | ) | (372 | ) | ||||||
Cash dividends paid | (2,313 | ) | (2,310 | ) | (21,333 | ) | ||||||
Cash received from exercise of stock options | 0 | 0 | 2,081 | |||||||||
Payment of employee tax withholdings related to net share transactions | (230 | ) | (239 | ) | (942 | ) | ||||||
Financing costs | 0 | (263 | ) | 0 | ||||||||
Net cash used for financing activities | (2,543 | ) | (2,812 | ) | (20,194 | ) | ||||||
Net increase (decrease) in cash and cash equivalents | 30,507 | (5,760 | ) | 11,836 | ||||||||
Cash and cash equivalents at beginning of period | 38,181 | 43,941 | 32,105 | |||||||||
Cash and cash equivalents at end of period | $ | 68,688 | $ | 38,181 | $ | 43,941 | ||||||
Supplemental Disclosures of Cash Flow Information: | ||||||||||||
Cash paid during the period for: | ||||||||||||
Interest | $ | 0 | $ | 49 | $ | 0 | ||||||
Income taxes, net | 1,919 | 1,743 | 7,777 | |||||||||
Non-cash investing and financing activities: | ||||||||||||
Purchases of property, plant and equipment in accounts payable | 769 | 377 | 967 | |||||||||
Restricted stock units and stock options surrendered for withholding taxes payable | 230 | 239 | 942 | |||||||||
Payable related to holdback for business acquired | 1,000 | 0 | 0 | |||||||||
See accompanying notes to consolidated financial statements.
INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 3, 2020, SEPTEMBER 30, 2017, 2OCTOBER 1, 20168, 2019 AND OCTOBER 3, 2015SEPTEMBER 29, 2018
(1)(1) Description of Business
Insteel Industries, Inc. (“(“we,” “us,” “our,” “Insteel” or “the Company”) is the nation’s largest manufacturer of steel wire reinforcing products for concrete construction applications. Insteel is the parent holding company for two wholly-owned subsidiaries, Insteel Wire Products Company (“IWP”), an operating subsidiary, and Intercontinental Metals Corporation, an inactive subsidiary. We manufacture and market prestressed concrete strand (“PC strand”) and welded wire reinforcement (“WWR”), including engineered structural mesh, concrete pipe reinforcement and standard welded wire reinforcement. Our products are primarily sold to manufacturers of concrete products and, to a lesser extent, distributors, rebar fabricators and contractors. We sell our products nationwide across the U.S. and, to a much lesser extent, into Canada, Mexico, and Central and South America.
On March 16, 2020, we, through our wholly-owned subsidiary, IWP, purchased substantially all of the assets of Strand-Tech Manufacturing, Inc. (“STM”) (see Note 5 to the consolidated financial statements).
We have evaluated all subsequent events that occurred after the balance sheet date through the time of filing this Annual Report on Form 10-K10-K and concluded there were no events or transactions during this period that required additional recognition or disclosure in our consolidated financial statements.
(2)(2) Summary of Significant Accounting Policies
Fiscal year. Our fiscal year is the 52 or 53 weeks ending on the Saturday closest to September 30. Fiscal years 2017 and 2016 were 52-week periodsyear 2020 was a 53-week period, and fiscal year 2015 was a 53-week period.years 2019 and 2018 were 52-week periods. All references to years relate to fiscal years rather than calendar years.
Principles of consolidation. The consolidated financial statements include the accounts of Insteel and our subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation.
Use of estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S.” and such accounting principles, “GAAP”) requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. There is no assurance that actual results will not differ from these estimates.
Cash equivalents. We consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.
Concentration of credit risk. Financial instruments that subject us to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. Our cash is principally concentrated at one financial institution, which at times exceeds federally insured limits. We are exposed to credit risk in the event of default by institutions in which our cash and cash equivalents are held and by customers to the extent of the amounts recorded on the balance sheet. We invest excess cash primarily in money market funds, which are highly liquid securities.
The majority of our accounts receivable are due from customers that are located in the U.S. and are generally not secured by collateral depending upon the creditworthiness of the account. We provide an allowance for doubtful accounts based upon our assessment of the credit risk of specific customers, historical trends and other information. We write off accounts receivable when they become uncollectible. There is no disproportionate concentration of credit risk.
Stock-based compensation. We account for stock-based compensation in accordance with the fair value recognition provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, Compensation – Stock Compensation, which requires stock-based compensation expense to be recognized in net earnings based on the fair value of the award on the date of the grant. We account for forfeitures as they occur. We determine the fair value of stock options issued by using a Monte Carlo valuation model at the grant date, which considers a range of assumptions including the expected term, volatility, dividend yield and risk-free interest rate.
Employee benefit plan.We account for our supplemental retirement benefit agreements (each, a “SRBA”) in accordance with ASC Topic 715, Compensation - Retirement Benefits. Under the provisions of ASC Topic 715, we recognize net periodic pension cost and value liabilities based on certain actuarial assumptions, principally the assumed discount rate.
The discount rate we utilize for determining net periodic pension cost and the related benefit obligation for the SRBAs is based, in part, on current interest rates earned on long-term bonds that receive one of the two highest ratings assigned by recognized rating agencies. Our discount rate assumptions are adjusted as of each valuation date to reflect current interest rates on such long-term bonds. The discount rate is used to determine the actuarial present value of the benefit obligations as of the valuation date as well as the interest component of the net periodic pension cost for the following year. We currently expect net periodic pension cost for 2021 to be $843,000 for the SRBAs. Cash contributions to the SRBAs during 2021 are expected to be $255,000.
The assumed discount rate is reevaluated annually. A reduction in the assumed discount rate generally results in an actuarial loss, as the actuarially-determined present value of estimated future benefit payments will increase. Conversely, an increase in the assumed discount rate generally results in an actuarial gain. However, any actuarial gains generated in future periods reduce the negative amortization effect of any cumulative unamortized actuarial losses, while any actuarial losses generated in future periods reduce the favorable amortization effect of any cumulative unamortized actuarial gains.
The projected benefit obligations and net periodic pension cost for the SRBAs are based in part on expected increases in future compensation levels. Our assumption for the expected increase in future compensation levels is based upon our average historical experience and our intentions regarding future compensation increases, which generally approximates average long-term inflation rates. A 0.25% decrease in the assumed discount rate for our SRBAs would have increased our projected and accumulated benefit obligations as of October 3, 2020 by approximately $320,000 and $277,000, respectively, and our expected net periodic pension cost for 2021 by approximately $35,000.
Revenue recognition. We recognize revenue from product salesrevenues when obligations under the terms of a contract with our customers are satisfied, which generally occurs when products are shipped and riskcontrol is transferred. Revenue is measured as the amount of loss and title has passedconsideration expected to the customer. Sales taxes collected from customers are excluded from revenues and recorded on a net basis.
Shipping and handling costs. We include all of the outbound freight, shipping and handling costs associated with the shipment of products to customersbe received in cost of sales. Any amounts paid by customers to usexchange for shipping and handling are recorded in net sales on the consolidated statements of operations.our products.
Inventories. Inventories are valued at the lower of weighted average cost (which approximates computation on a first-in, first-outfirst-in, first-out basis) or market (netand net realizable value or replacement cost).value. The valuation of inventory includes the costs for material, labor and manufacturing overhead.
Property, plant and equipment. Property, plant and equipment are recorded at cost or fair market value in the case of the assets acquired through acquisitions, or otherwise at reduced values to the extent there have been asset impairment write-downs. Expenditures for maintenance and repairs are charged directly to expense when incurred, while major improvements are capitalized. Depreciation is computed for financial reporting purposes principally by use of the straight-line method over the following estimated useful lives: machinery and equipment, 3 - 15 years; buildings, 10 - 30 years; and land improvements, 5 - 15 years. Depreciation expense was approximately $10.5$13.2 million in 2017, $10.42020, $12.5 million in 20162019 and $10.9$11.6 million in 20152018 and reflected in cost of sales and selling, general and administrative expense (“SG&A expense”) in the consolidated statements of operations. Capitalized software is amortized over the shorter of the estimated useful life or 5 years and reflected in SG&A expense in the consolidated statements of operations. expense. No interest costs were capitalized in 2017, 20162020,2019 and 2015.2018.
Goodwill. Goodwill is the excess of cost over the fair value of net assets of businesses acquired. Goodwill is not amortized but is tested annually for impairment and whenever events or circumstances change that would make it more likely than not that an impairment may have occurred. We perform our annual impairment analysis as of the first day of the fourth quarter each year. The evaluation of impairment involves comparing the current estimated fair value of the reporting unit to its recorded value, including goodwill. We perform a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. It may be necessary to perform a quantitative analysis where a discounted cash flow model is used to determine the current estimated fair value of the reporting unit. Key assumptions used to determine the fair value of the reporting unit as part of our annual testing (and any required interim testing) include: (a) expected cash flows for the five-yearfive-year period following the testing date; (b) an estimated terminal value using a terminal year growth rate based on the growth prospects of the reporting unit; (c) a discount rate based on our estimated after-tax weighted average cost of capital; and (d) a probability-weighted scenario approach by which varying cash flows are assigned to alternative scenarios based on their likelihood of occurrence. In developing these assumptions, we consider historical and anticipated future results, general economic and market conditions, the impact of planned business and operational strategies and all available information at the time the fair value of the reporting unit is estimated. Assumptions in estimating future cash flows are subject to a high degree of judgment and complexity. Changes in assumptions and estimates may affect the fair value of goodwill and could result in impairment charges in future periods. Based on the results of our impairment analysis, no goodwill impairment losses were recognized in the consolidated statements of operations for 2017.2020. Subsequent to the analysis, there have been no events or circumstances that indicate any potential impairment of goodwill.
Other assets. Other assets consist principally of capitalized financing costs and the cash surrender value of life insurance policies. Capitalized financing costs are amortized using the straight-line method, which approximates the effective interest method over the term of the related credit agreement, and reflected in interest expense in the consolidated statements of operations.
Long-lived assets. Long-lived assets include property, plant and equipment and identifiable intangible assets with definite useful lives. Finite-lived intangible assets are amortized over their estimated useful lives. Our intangible assets consist of customer relationships, developed technology and know-how, and non-competition agreements thatand trade names, and are being amortized on a straight-line basis over their finite useful lives (see Note 67 to the consolidated financial statements). We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be fully recoverable. When we determine that the carrying value of such assets may not be recoverable, we measure recoverability based on the undiscounted cash flows expected to be generated by the related asset or asset group. If it is determined that an impairment loss has occurred, the loss is recognized in the period in which it is incurred and is calculated as the difference between the carrying value and the present value of estimated future net cash flows or comparable market values.
There were no impairment losses in 2017. During 2016 and 2015,2020, we recorded $20,000 and $0.3 million respectively, of impairment charges related to long-lived assets resulting from the consolidation of our PC strand operations with the closure of the Newnan, Georgiaour Summerville, South Carolina facility (see Note 45 to the consolidated financial statements). There were no impairment losses in 2019 and 2018.
Fair value of financial instruments. The carrying amounts for cash and cash equivalents, accounts receivable, and accounts payable and accrued expenses approximate fair value because of their short maturities.
Income taxes. Income taxes are based on pretax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. We assess the need to establish a valuation allowance against deferred tax assets to the extent we no longer believe it is more likely than not that the tax assets will be fully realized. We recognize uncertain tax positions when we have determined it is more likely than not that a tax position will be sustained upon examination. However, new information may become available, or applicable laws or regulations may change, thereby resulting in a favorable or unfavorable adjustment to amounts recorded.
Earnings per share. Basic earnings per share (“EPS”) are computed by dividing earnings available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted EPS are computed by dividing earnings available to common shareholders by the weighted average number of shares of common stock and other dilutive equity securities outstanding during the period. Securities that have the effect of increasing EPS are considered to be antidilutive and are not included in the computation of diluted EPS.
(3) Recent Accounting Pronouncements
FutureCurrent Adoptions
In February 2016, the FASB issued Accounting Standard Update (“ASU”) No.2016-02 “Leases (Topic 842),” which requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet for leases with terms greater than twelve months. We adopted the new lease standard in the first quarter of 2020 using the modified retrospective method, which allows for the recognition of a cumulative effect adjustment to the beginning balance of retained earnings in the period of adoption without adjusting the comparative periods prior to adoption. We elected the package of practical expedients permitted under the new lease standard, which among other things, allowed us to carry forward historical lease classification. We also elected the short-term lease exemption such that the new lease standard was applied to leases greater than one year in duration. We did not elect the hindsight practical expedient to determine the lease term for existing leases. The adoption of the new lease standard had a material effect on our consolidated financial statements as it resulted in a $1.9 million increase in total assets and total liabilities on our consolidated balance sheet as of September 29, 2019. The new lease standard did not have a material impact on our consolidated earnings or cash flows.
In May 2017, the FASB issued Accounting Standards Update (“ASU”) ASU No. 2017-092017-09 “Compensation – Stock Compensation (Topic 718)718): Scope of Modification Accounting.” ASU No. 2017-092017-09 was issued to clarify and reduce both (i) diversity in practice and (ii) cost and complexity when applying its guidance to changes in the terms and conditions of a share-based payment award. ASU No. 2017-092017-09 became effective for us in the first quarter of 2020. The adoption of this update did not impact our consolidated financial statements.
Future Adoptions
In June 2016, the FASB issued ASU No.2016-13 “Credit Losses - Measurement of Credit Losses on Financial Instruments.” ASU No.2016-13 significantly changes how entities will measure credit losses for most financial assets, including accounts and notes receivables, by replacing today’s “incurred loss” approach with an “expected loss” model under which allowances will be recognized based on expected rather than incurred losses. ASU No.2016-13 will become effective for us in the first quarter of fiscal 2020. We are evaluating the impact that the2021. The adoption of this update will nothave a material impact on our consolidated financial statements.
In August 2016, January 2017, the FASB issued ASU No. 2016-15 “Statement of Cash Flows Topic 230: Classification of Certain Cash Receipts2017-04 “Intangibles—Goodwill and Cash Payments.Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which simplifies the accounting for goodwill impairments by eliminating step 2 from the goodwill impairment test. ASU No. 2016-15 addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows with the objective of reducing existing differences in the presentation of these items. The amendments in ASU No. 2016-15 are to be adopted retrospectively and2017-04 will become effective for us in the first quarter of fiscal 2019. We do not expect the2021 and early adoption is permitted. The adoption of this update will nothave a material effect on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09 “Compensation – Stock Compensation Topic 718: Improvements to Employee Share-Based Payment Accounting,” which is intended to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU No. 2016-09 will become effective for us in the first quarter of fiscal 2018. We do not expect the adoption of this update will have a material effect on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02 “Leases,” which will replace the guidance in ASC Topic 840. ASU No. 2016-02 was issued to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset. ASU No. 2016-02 will become effective for us in the first quarter of fiscal 2020. We are evaluating the impact that the adoption of this update will have on our consolidated financial statements.
In July 2015, December 2019, the FASB issued ASU No. 2015-11 “Simplifying2019-12 "Simplifying the Measurement of Inventory,” which requires that an entity measure inventory atAccounting for Income Taxes (Topic 740)." ASU No.2019-12 removes certain exceptions to the lower of costgeneral principles in ASC740 and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposalalso clarifies and transportation.amends existing guidance to provide for more consistent application. ASU No. 2015-112019-12 will become effective for us in the first quarter of fiscal 2018. We do not expect the2021. The adoption of this update will nothave a material effectimpact on our consolidated financial statements.
In May 2014,(4) Revenue Recognition
We recognize revenues when performance obligations under the FASB issued ASU No. 2014-09 “Revenue from Contractsterms of a contract with Customers,”our customers are satisfied, which will supersede nearly all existing revenue recognition guidance under GAAP. ASU No. 2014-09 providesgenerally occurs when products are shipped and control is transferred. We enter into contracts that an entity recognize revenue when it transfers promised goodspertain to products, which are accounted for as separate performance obligations and typically one year or services to customersless in anduration. We do not exercise significant judgment in determining the timing for the satisfaction of performance obligations or the transaction price. Revenue is measured as the amount that reflects theof consideration to which the entity expectsexpected to be entitledreceived in exchange for those goodsour products. We have elected to apply the practical expedient provided for in ASU No.2014-09 and not disclose information regarding remaining performance obligations that have original expected durations of one year or services. This update also requires additional disclosure aboutless.
Variable consideration that may affect the nature, amount, timingtotal transaction price, including contractual discounts, rebates, returns and uncertaintycredits are included in net sales. Estimates for variable consideration are based on historical experience, anticipated performance and management's judgment and are updated as of revenueeach reporting date. Shipping and cash flows arising fromrelated expenses associated with outbound freight are accounted for as fulfillment costs and included in cost of sales. We do not have significant financing components.
Contract assets primarily relate to our rights to consideration for products that are delivered but not billed as of the reporting date and are reclassified to receivables when the customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurredis invoiced. Contract liabilities primarily relate to obtain or fulfill a contract. ASU No. 2014-09 allows for either full retrospective or modified retrospective adoption and will become effective for usperformance obligations that are to be satisfied in the first quarterfuture and arise when we bill the customer in advance of fiscal 2019. While weshipments. Contract costs are not significant and are recognized as incurred. Contract assets and liabilities were not material as of October 3, 2020.
Accounts receivable includes amounts billed and currently due from customers stated at their net estimated realizable value. Customer payment terms are generally 30 days. We maintain an allowance for doubtful accounts to provide for the estimated amount of receivables that will not be collected, which is based upon our assessment of customer creditworthiness, historical payment experience and the age of outstanding receivables. Past-due trade receivable balances are written off when our collection efforts have not yet identified any material changes inbeen unsuccessful.
See Note 15 for the timingdisaggregation of revenue recognition, our evaluation is ongoingnet sales by product line and not complete.geography.
(45) Restructuring ChargesBusiness Combination
In 2014 On March 16, 2020, we purchased substantially all of the assets of STM for an adjusted purchase price of $19.4 million, reflecting certain post-closing adjustments (the “STM Acquisition”), which included a $1.0 million holdback that is payable one year from the acquisition date.
STM was a leading manufacturer of PC strand for concrete construction applications. We acquired, among other assets, STM’s accounts receivable, inventories, production equipment and facility located in Summerville, South Carolina, and assumed certain of its accounts payable and accrued liabilities. The STM Acquisition serves to strengthen our competitive position as we contend with increased low-priced import competition.
Following is a summary of our final allocation of the adjusted purchase price to the fair values of the assets acquired and liabilities assumed as of the acquisition date:
(In thousands) | ||||
Assets acquired: | ||||
Accounts receivable | $ | 3,829 | ||
Inventories | 3,172 | |||
Other current assets | 178 | |||
Property, plant and equipment | 10,919 | |||
Intangibles | 970 | |||
Total assets acquired | $ | 19,068 | ||
Liabilities assumed: | ||||
Accounts payable | $ | 852 | ||
Accrued expenses | 312 | |||
Total liabilities assumed | 1,164 | |||
Net assets acquired | 17,904 | |||
Adjusted purchase price | 19,356 | |||
Goodwill | $ | 1,452 |
In connection with the STM Acquisition, we acquired certain intangible assets including customer relationships, a trade name and non-competition agreement. Goodwill associated with the STM Acquisition, which is deductible for tax purposes, consists largely of the synergies we expect to realize through the integration of the acquired assets with our operations.
The STM Acquisition was accounted for as a business purchase pursuant to ASC Topic 805,Business Combinations (“ASC 805”). Under the provisions of ASC 805, acquisition and integration costs are recorded as expenses in the period in which such costs are incurred rather than included as components of consideration transferred.
Following the STM Acquisition, net sales of the STM facility in 2020 were approximately $3.0 million. The actual net sales specifically attributable to the STM Acquisition, however, cannot be quantified due to our integration efforts which involved the reassignment of business between the former STM facility and our existing PC strand business facilities. As a result, we have determined that the presentation of American Spring Wire Corporation (“ASW Acquisition”). SubsequentSTM’s earnings for 2020 is impractical due to the ASWintegration of STM’s operations following the STM Acquisition.
The following unaudited supplemental pro forma financial information reflects our combined results of operations had the STM Acquisition in 2014, we incurred employee separation costsoccurred at the beginning of 2019. The pro forma information reflects certain adjustments related to the STM Acquisition, including adjusted amortization and depreciation expense based on the fair values of the assets acquired. The pro forma information does not reflect any potential operating efficiencies or cost savings that may result from the STM Acquisition. Accordingly, this pro forma information is for staffing reductions associatedillustrative purposes and is not intended to represent the actual results of operations of the combined company that would have been achieved had the STM Acquisition occurred at the beginning of 2019, nor is it intended to indicate future results of operations. The pro forma combined results of operations for the current and comparative prior year periods are as follows:
Years Ended | ||||||||
October 3, | September 28, | |||||||
(In thousands) | 2020 | 2019 | ||||||
Net sales | $ | 485,121 | $ | 487,467 | ||||
Earnings before income taxes | 22,628 | 6,085 | ||||||
Net earnings | 16,950 | 4,542 | ||||||
Restructuring charges. In connection with the acquisition. In February 2015,STM acquisition, we elected to consolidate our PC strand operations withthrough the closure of the Newnan, GeorgiaSummerville facility that had been acquired throughand the ASW Acquisition, which was completedredeployment of its equipment to our other three PC strand production facilities located in March 2015.
Gallatin, Tennessee; Houston, Texas; and Sanderson, Florida. Operations at the Summerville facility ceased during the third quarter of 2020.Following is a summary of the restructuring activities and associated costs that were incurredactivity during 2017, 2016 and 2015:2020:
| Severance and |
| ||||||||||||||||||||||
(In thousands) | Asset Impairment | Equipment | Other Employee Separation | Facility | Gain on Sale of Property | |||||||||||||||||||
Charges | Relocation Costs | Costs | Closure Costs | and Equipment | Total | |||||||||||||||||||
2017 | ||||||||||||||||||||||||
Liability as of October 1, 2016 | $ | - | $ | 31 | $ | 239 | $ | - | $ | - | $ | 270 | ||||||||||||
Restructuring charges | - | 164 | - | - | - | 164 | ||||||||||||||||||
Cash payments | - | (195 | ) | (239 | ) | - | - | (434 | ) | |||||||||||||||
Non-cash charges | - | - | - | - | - | - | ||||||||||||||||||
Liability as of September 30, 2017 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
2016 | ||||||||||||||||||||||||
Liability as of October 3, 2015 | $ | - | $ | - | $ | 735 | $ | - | $ | - | $ | 735 | ||||||||||||
Restructuring charges (recoveries) | 20 | 186 | - | 89 | (180 | ) | 115 | |||||||||||||||||
Cash payments | - | (155 | ) | (496 | ) | (89 | ) | - | (740 | ) | ||||||||||||||
Non-cash charges | (20 | ) | - | - | - | 180 | 160 | |||||||||||||||||
Liability as of October 1, 2016 | $ | - | $ | 31 | $ | 239 | $ | - | $ | - | $ | 270 | ||||||||||||
2015 | ||||||||||||||||||||||||
Liability as of September 27, 2014 | $ | - | $ | - | $ | 1,208 | $ | - | $ | - | $ | 1,208 | ||||||||||||
Restructuring charges (recoveries) | 543 | 79 | 75 | 547 | (895 | ) | 349 | |||||||||||||||||
Cash payments | - | (79 | ) | (548 | ) | (547 | ) | - | (1,174 | ) | ||||||||||||||
Non-cash charges | (543 | ) | - | - | - | 895 | 352 | |||||||||||||||||
Liability as of October 3, 2015 | $ | - | $ | - | $ | 735 | $ | - | $ | - | $ | 735 | ||||||||||||
Employee | Equipment | Facility | Loss (Gain) | |||||||||||||||||||||
(In thousands) | Separation | Relocation | Closure | Asset | on Sale of | |||||||||||||||||||
Costs | Costs | Costs | Impairments | Equipment | Total | |||||||||||||||||||
2020 | ||||||||||||||||||||||||
Restructuring charges, net | $ | 182 | $ | 482 | $ | 806 | $ | 343 | $ | (118 | ) | $ | 1,695 | |||||||||||
Cash payments | (182 | ) | (462 | ) | (655 | ) | 0 | 0 | (1,299 | ) | ||||||||||||||
Non-cash charges | 0 | 0 | 0 | (343 | ) | 118 | (225 | ) | ||||||||||||||||
Liability as of October 3, 2020 | $ | 0 | $ | 20 | $ | 151 | $ | 0 | $ | 0 | $ | 171 | ||||||||||||
As of October 1, 2016, 3, 2020, we recorded a liability of $171,000 for restructuring liabilities amounting to $0.3 millionin accrued expenses on our consolidated balance sheet, including $0.1 million in accounts payable and $0.2 million in accrued expenses.sheet. We do not currently expect to incur anyapproximately $700,000 of additional restructuring charges during 2018 related to the consolidation of our PC strand operations.for equipment relocation and facility closure costs.
Acquisition costs. During 2020, we recorded $195,000 of acquisition-related costs associated with the STM Acquisition for accounting, legal and other professional fees.
(56) Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative guidance for fair value measurements establishes a three-levelthree-level fair value hierarchy that encourages an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs used to measure fair value are as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities, including certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
As of October 3, 2020 and September 30, 2017 and October 1, 2016, 28, 2019, we held financial assets that are required to be measured at fair value on a recurring basis, which are summarized below:
(In thousands) | Total | Quoted Prices in Active Markets (Level 1) | Observable Inputs (Level 2) | Total | Quoted Prices in Active Markets (Level 1) | Observable Inputs (Level 2) | ||||||||||||||||||
Year ended September 30, 2017: | ||||||||||||||||||||||||
As of October 3, 2020: | ||||||||||||||||||||||||
Current assets: | ||||||||||||||||||||||||
Cash equivalents | $ | 31,659 | $ | 31,659 | $ | - | $ | 72,234 | $ | 72,234 | $ | 0 | ||||||||||||
Other assets: | ||||||||||||||||||||||||
Cash surrender value of life insurance policies | 9,026 | - | 9,026 | 10,584 | 0 | 10,584 | ||||||||||||||||||
Total | $ | 40,685 | $ | 31,659 | $ | 9,026 | $ | 82,818 | $ | 72,234 | $ | 10,584 | ||||||||||||
Year ended October 1, 2016: | ||||||||||||||||||||||||
As of September 28, 2019: | ||||||||||||||||||||||||
Current assets: | ||||||||||||||||||||||||
Cash equivalents | $ | 58,846 | $ | 58,846 | $ | - | $ | 37,826 | $ | 37,826 | $ | 0 | ||||||||||||
Other assets: | ||||||||||||||||||||||||
Cash surrender value of life insurance policies | 7,909 | - | 7,909 | 10,211 | 0 | 10,211 | ||||||||||||||||||
Total | $ | 66,755 | $ | 58,846 | $ | 7,909 | $ | 48,037 | $ | 37,826 | $ | 10,211 | ||||||||||||
Cash equivalents, which include all highly liquid investments with original maturities of three months or less, are classified as Level 1 of the fair value hierarchy. The carrying amount of our cash equivalents, which consist of investments in money market funds, approximates fair value due to their short maturities. Cash surrender value of life insurance policies are classified as Level 2. The fair value of the life insurance policies was determined by the underwriting insurance company’s valuation models and represents the guaranteed value we would receive upon surrender of these policies as of the reporting date.
As of October 3, 2020 and September 30, 2017 and October 1, 2016, 28, 2019, we had no0 nonfinancial assets that are required to be measured at fair value on a nonrecurring basis.basis other than the assets and liabilities that were acquired from STM at fair value in the current year (see Note 5 to the consolidated financial statements). The carrying amounts of accounts receivable, accounts payable and accrued expenses approximates fair value due to the short-term maturities of these financial instruments.
(67) Intangible Assets
The primary components of our intangible assets and the related accumulated amortization are as follows:
(In thousands) | Weighted- Average Useful Life (Years) | Gross | Accumulated Amortization | Net Book Value | ||||||||||||
Year ended September 30, 2017: | ||||||||||||||||
Customer relationships |
| 20.0 | $ | 6,500 | $ | (1,018 | ) | $ | 5,482 | |||||||
Developed technology and know-how |
| 20.0 | 1,800 | (283 | ) | 1,517 | ||||||||||
Non-competition agreements | 4.8 | 3,577 | (2,663 | ) | 914 | |||||||||||
| $ | 11,877 | $ | (3,964 | ) | $ | 7,913 | ||||||||||
Year ended October 1, 2016: | ||||||||||||||||
Customer relationships |
| 20.0 | $ | 6,500 | $ | (693 | ) | $ | 5,807 | |||||||
Developed technology and know-how |
| 20.0 | 1,800 | (192 | ) | 1,608 | ||||||||||
Non-competition agreements | 4.8 | 3,577 | (1,929 | ) | 1,648 | |||||||||||
| $ | 11,877 | $ | (2,814 | ) | $ | 9,063 | ||||||||||
(In thousands) | Weighted- Average Useful Life (Years) | Gross | Accumulated Amortization | Net Book Value | ||||||||||||
As of October 3, 2020: | ||||||||||||||||
Customer relationships | 17.1 | $ | 9,870 | $ | (2,837 | ) | $ | 7,033 | ||||||||
Developed technology and know-how | 20.0 | 1,800 | (551 | ) | 1,249 | |||||||||||
Non-competition agreements | 5.0 | 1,860 | (1,663 | ) | 197 | |||||||||||
Trade name | 2.7 | 250 | (162 | ) | 88 | |||||||||||
| $ | 13,780 | $ | (5,213 | ) | $ | 8,567 | ||||||||||
As of September 28, 2019: | ||||||||||||||||
Customer relationships | 16.9 | $ | 9,070 | $ | (2,207 | ) | $ | 6,863 | ||||||||
Developed technology and know-how | 20.0 | 1,800 | (461 | ) | 1,339 | |||||||||||
Non-competition agreements | 5.0 | 1,800 | (1,466 | ) | 334 | |||||||||||
Trade name | 4.0 | 140 | (66 | ) | 74 | |||||||||||
| $ | 12,810 | $ | (4,200 | ) | $ | 8,610 | ||||||||||
Amortization expense for intangibles was $1.2$1.0 million in 2017 and 2016 and2020, $1.1 million in 2015.2019 and $1.3 million in 2018. Amortization expense for the next five years, assuming no change in the estimated useful lives of identified intangible assets, is $918,000$910,000 in 2018, $705,0002021, $822,000 in 2019, $537,0002022, $757,000 in 20202023, $751,000 in 2024 and $414,000$744,000 in 2021 and 2022.2025.
(78) Long-Term Debt
Revolving Credit Facility. We have a $100.0 million revolving credit facility (the “Credit Facility”) that is used to supplement our operating cash flow and fund our working capital, capital expenditure, general corporate and growth requirements. In May 2015, 2019, we entered into a new credit agreement, which amended and restated in its entirety the previous agreement pertaining to the revolving credit facility that had been in effect since June 2010. The new credit agreement, among other changes, extended the maturity date of the Credit Facility to, among other changes, extend its maturity date from June 2, 2016 to May 13, 2020.2020 to May 15, 2024 and provided for an accordion feature whereby its size may be increased by up to $50.0 million, subject to our lender’s approval. Advances under the Credit Facility are limited to the lesser of the revolving loan commitment amount (currently $100.0$100.0 million) or a borrowing base amount that is calculated based upon a percentage of eligible receivables and inventories. As of September 30, 2017, noOctober 3, 2020, 0 borrowings were outstanding on the Credit Facility, $85.4$90.0 million of borrowing capacity was available and outstanding letters of credit totaled $1.8$1.5 million. As of October 1, 2016, September 28, 2019, there were no0 borrowings outstanding on the Credit Facility.
Interest rates on the Credit Facility are based upon (1)(1) an index rate that is established at the highest of the prime rate, 0.50% plus the federal funds rate or the LIBOR rate plus the excess of the then-applicable margin for LIBOR loans over the then-applicable margin for index rate loans, or (2)(2) at our election, a LIBOR rate, plus in either case, an applicable interest rate margin. The applicable interest rate margins are adjusted on a quarterly basis based upon the amount of excess availability on the Credit Facility within the range of 0.25% to 0.75%0.50% for index rate loans and 1.25% to 1.75%1.50% for LIBOR loans. In addition, the applicable interest rate margins would be increased by 2.00% upon the occurrence of certain events of default provided for under the terms of the Credit Facility. Based on our excess availability as of September 30, 2017, October 3, 2020, the applicable interest rate margins on the Credit Facility were 0.25% for index rate loans and 1.25% for LIBOR loans.
Our ability to borrow available amounts under the Credit Facility will be restricted or eliminated in the event of certain covenant breaches, events of default or if we are unable to make certain representations and warranties provided for under the terms of the Credit Facility. We are required to maintain a fixed charge coverage ratio of not less than 1.101.0 at the end of each fiscal quarter for the twelve-monthtwelve-month period then ended when the amount of liquidity on the Credit Facility is less than $12.5$10.0 million. In addition, the terms of the Credit Facility restrict our ability to, among other things: engage in certain business combinations or divestitures; make investments in or loans to third parties, unless certain conditions are met with respect to such investments or loans; pay cash dividends or repurchase shares of our stock subject to certain minimum borrowing availability requirements; incur or assume indebtedness; issue securities; enter into certain transactions with our affiliates; or permit liens to encumber our property and assets. The terms of the Credit Facility also provide that an event of default will occur upon the occurrence of, among other things: defaults or breaches under the loan documents, subject in certain cases to cure periods; defaults or breaches by us or any of our subsidiaries under any agreement resulting in the acceleration of amounts above certain thresholds or payment defaults above certain thresholds; certain events of bankruptcy or insolvency; certain entries of judgment against us or any of our subsidiaries, which are not covered by insurance; or a change of control. As of September 30, 2017, October 3, 2020, we were in compliance with all of the financial and negative covenants under the Credit Facility and there have not been any events of default.
Amortization of capitalized financing costs associated with the Credit Facility was $66,000 in 2020, and $65,000 in 20172019 and 2016 and $89,000 in 2015. Accumulated amortization of capitalized financing costs was $4.6 million as of September 30, 2017 and $4.5 million as of October 1, 2016.2018. We expect the amortization of capitalized financing costs to approximate the following amounts for the next five fiscal years:
Fiscal year | In thousands | |||
2021 | $ | 65 | ||
2022 | 65 | |||
2023 | 65 | |||
2024 | 41 | |||
Fiscal year | In thousands | |||
2018 | $ | 65 | ||
2019 | 65 | |||
2020 | 41 | |||
2021 | - | |||
2022 | - | |||
(89) Stock-Based Compensation
Under our equity incentive plan, employees and directors may be granted stock options, restricted stock, restricted stock units and performance awards. Effective February 17, 2015, 11, 2020, our shareholders approved an amendment to the 2015 Equity Incentive Plan of Insteel Industries, Inc. (the “2015“2015 Plan”), which authorizes up to 900,000an additional 750,000 shares of our common stock for future grants under the plan. The 2015 Plan, whichplan and expires on February 17, 2025, replaces the 2005 Equity Incentive Plan of Insteel Industries, Inc., which expired on February 15, 2015. 2025. As of September 30, 2017, October 3, 2020, there were 433,000738,000 shares of our common stock available for future grants under the 2015 Plan, which is our only active equity incentive plan.
Stock option awards. Under our equity incentive plan, employees and directors may be granted options to purchase shares of common stock at the fair market value on the date of the grant. Options granted under the plan generally vest over three years and expire ten years from the date of the grant. Compensation expense associated with stock options is as follows:
Year Ended | ||||||||||||
September 30, | October 1, | October 3, | ||||||||||
(In thousands) | 2017 | 2016 | 2015 | |||||||||
Stock options: | ||||||||||||
Compensation expense | $ | 1,007 | $ | 988 | $ | 1,007 | ||||||
The remainingwas $810,000 in 2020, $889,000 in 2019 and $906,000 in 2018. As of October 3, 2020, there was $367,000 of unrecognized compensation cost related to unvested options at September 30, 2017 was $330,000, which is expected to be recognized over a weighted average period of 1.491.69 years.
The fair value of each option award granted is estimated on the date of grant using a Monte Carlo valuation model. The weighted-average estimated fair values of stock options granted during 2017, 20162020,2019 and 20152018 were $11.08, $9.92$8.05, $7.15 and $7.10$12.06 per share, respectively, based on the following weighted-average assumptions:
Year Ended | Year Ended | |||||||||||||||||||||||
September 30, | October 1, | October 3, | October 3, | September 28, | September 29, | |||||||||||||||||||
2017 | 2016 | 2015 | 2020 | 2019 | 2018 | |||||||||||||||||||
Expected term (in years) | 5.14 | 5.45 | 5.72 | 4.81 | 4.59 | 4.79 | ||||||||||||||||||
Risk-free interest rate | 1.98 | % | 1.30 | % | 2.18 | % | 2.75 | % | 2.03 | % | 2.71 | % | ||||||||||||
Expected volatility | 38.32 | % | 39.00 | % | 37.99 | % | 47.18 | % | 42.79 | % | 37.32 | % | ||||||||||||
Expected dividend yield | 0.37 | % | 0.48 | % | 0.61 | % | 0.59 | % | 0.56 | % | 0.37 | % | ||||||||||||
The assumptions utilized in the Monte Carlo valuation model are evaluated and revised, as necessary, to reflect market conditions and actual historical experience. The expected term for options was based on the results of a Monte Carlo simulation model, using the model’s estimated fair value as an input to the Black-Scholes-Merton model, and then solving for the expected term. The risk-free interest rate for periods within the contractual life of the option was based on the U.S. Treasury yield curve in effect at the time of the grant. The expected volatility was derived using a term structure based on historical volatility and the volatility implied by exchange-traded options on our common stock. The dividend yield was calculated based on our annual dividend as of the option grant date.
The following table summarizes stock option activity:
| Contractual | |||||||||||||||||||||||||||||||||||||||||||
Exercise Price | Contractual | Aggregate | Exercise Price | Term - | Aggregate | ||||||||||||||||||||||||||||||||||||||
Per Share | Term - | Intrinsic | Per Share | Weighted | Intrinsic | ||||||||||||||||||||||||||||||||||||||
Options | Weighted | Weighted | Value | Options | Weighted | Average | Value | ||||||||||||||||||||||||||||||||||||
(Share amounts in thousands) | Outstanding | Range | Average | Average (in years) | (in thousands) | Outstanding | Range | Average | (in years) | (in thousands) | |||||||||||||||||||||||||||||||||
Outstanding at September 27, 2014 | 871 | $6.89 | - | $20.50 | $ | 14.23 | |||||||||||||||||||||||||||||||||||||
Outstanding at September 30, 2017 | 392 | $9.16 | - | $37.06 | $ | 23.40 | |||||||||||||||||||||||||||||||||||||
Granted | 134 | 18.05 | - | 21.96 | 19.89 | 77 | 29.69 | - | 41.85 | 34.84 | |||||||||||||||||||||||||||||||||
Exercised | (27 | ) | 6.89 | - | 11.15 | 9.17 | $ | 328 | (196 | ) | 9.16 | - | 37.06 | 19.68 | $ | 3,866 | |||||||||||||||||||||||||||
Forfeited | (55 | ) | 9.16 | - | 21.96 | 15.37 | (9 | ) | 23.95 | - | 37.06 | 29.88 | |||||||||||||||||||||||||||||||
Outstanding at October 3, 2015 | 923 | 7.55 | - | 21.96 | 15.14 | ||||||||||||||||||||||||||||||||||||||
Outstanding at September 29, 2018 | 264 | 10.23 | - | 41.85 | 29.25 | ||||||||||||||||||||||||||||||||||||||
Granted | 99 | 23.95 | - | 34.49 | 28.47 | 129 | 18.25 | - | 21.57 | 19.74 | |||||||||||||||||||||||||||||||||
Exercised | (651 | ) | 7.55 | - | 21.96 | 13.93 | 8,718 | (5 | ) | 18.05 | - | 26.75 | 23.95 | 21 | |||||||||||||||||||||||||||||
Outstanding at October 1, 2016 | 371 | 9.16 | - | 34.49 | 20.81 | ||||||||||||||||||||||||||||||||||||||
Outstanding at September 28, 2019 | 388 | 10.23 | - | 41.85 | 26.16 | ||||||||||||||||||||||||||||||||||||||
Granted | 88 | 26.75 | - | 37.06 | 30.93 | 121 | 19.86 | - | 22.09 | 21.08 | |||||||||||||||||||||||||||||||||
Exercised | (67 | ) | 9.16 | - | 23.95 | 19.05 | 1,212 | ||||||||||||||||||||||||||||||||||||
Outstanding at September 30, 2017 | 392 | 9.16 | - | 37.06 | 23.40 | 7.64 | 1,845 | ||||||||||||||||||||||||||||||||||||
Forfeited | (27 | ) | 18.05 | - | 41.85 | 25.88 | |||||||||||||||||||||||||||||||||||||
Outstanding at October 3, 2020 | 482 | 10.23 | - | 41.85 | 24.90 | 6.50 | 160 | ||||||||||||||||||||||||||||||||||||
Vested and anticipated to vest in future at September 30, 2017 | 388 | 23.36 | 7.63 | 1,837 | |||||||||||||||||||||||||||||||||||||||
Vested and anticipated to vest in the future at October 3, 2020 | 477 | 24.95 | 6.47 | 159 | |||||||||||||||||||||||||||||||||||||||
Exercisable at September 30, 2017 | 194 | 19.05 | 6.41 | 1,491 | |||||||||||||||||||||||||||||||||||||||
Exercisable at October 3, 2020 | 283 | 26.99 | 4.69 | 133 | |||||||||||||||||||||||||||||||||||||||
Stock option exercises include “net exercises” for which the optionee received shares of common stock equal to the intrinsic value of the options (fair market value of common stock on the date of exercise less exercise price) reduced by any applicable withholding taxes.
Restricted stock units. Restricted stock units (“RSUs”) granted under our equity incentive plan are valued based upon the fair market value on the date of the grant and provide for a dividend equivalent payment which is included in compensation expense. The vesting period for RSUs is generally one year from the date of the grant for RSUs granted to directors and three years from the date of the grant for RSUs granted to employees. RSUs do not have voting rights. RSU grants and compensation expense are as follows:
Year Ended | Year Ended | |||||||||||||||||||||||
September 30, | October 1, | October 3, | October 3, | September 28, | September 29, | |||||||||||||||||||
(In thousands) | 2017 | 2016 | 2015 | 2020 | 2019 | 2018 | ||||||||||||||||||
Restricted stock unit grants: | ||||||||||||||||||||||||
Units | 37 | 57 | 62 | 68 | 61 | 35 | ||||||||||||||||||
Market value | $ | 1,180 | $ | 1,516 | $ | 1,253 | $ | 1,444 | $ | 1,225 | $ | 1,175 | ||||||||||||
Compensation expense | 1,238 | 1,451 | 1,291 | 1,218 | 1,168 | 1,172 | ||||||||||||||||||
The remainingAs of October 3, 2020, there was $589,000 of unrecognized compensation cost related to unvested RSUs on September 30, 2017 was $548,000 which is expected to be recognized over a weighted average period of 1.691.86 years.
The following table summarizes RSU activity:
Weighted | Weighted | |||||||||||||||
Restricted | Average | Restricted | Average | |||||||||||||
Stock Units | Grant Date | Stock Units | Grant Date | |||||||||||||
(Unit amounts in thousands) | Outstanding | Fair Value | Outstanding | Fair Value | ||||||||||||
Balance, September 27, 2014 | 197 | $ | 15.68 | |||||||||||||
Balance, September 30, 2017 | 128 | $ | 25.92 | |||||||||||||
Granted | 62 | 20.33 | 35 | 33.52 | ||||||||||||
Forfeited | (13 | ) | 17.52 | (3 | ) | 29.60 | ||||||||||
Released | (89 | ) | 12.86 | (57 | ) | 22.26 | ||||||||||
Balance, October 3, 2015 | 157 | 18.96 | ||||||||||||||
Balance, September 29, 2018 | 103 | 30.40 | ||||||||||||||
Granted | 61 | 20.18 | ||||||||||||||
Released | (49 | ) | 27.64 | |||||||||||||
Balance, September 28, 2019 | 115 | 26.16 | ||||||||||||||
Granted | 57 | 26.57 | 68 | 21.29 | ||||||||||||
Forfeited | (2 | ) | 23.95 | (6 | ) | 25.49 | ||||||||||
Released | (67 | ) | 17.95 | (55 | ) | 27.07 | ||||||||||
Balance, October 1, 2016 | 145 | 22.35 | ||||||||||||||
Granted | 37 | 31.95 | ||||||||||||||
Released | (54 | ) | 20.43 | |||||||||||||
Balance, September 30, 2017 | 128 | 25.92 | ||||||||||||||
Balance, October 3, 2020 | 122 | 23.07 | ||||||||||||||
(910) Income Taxes
The components of the provision for income taxes are as follows:
Year Ended | ||||||||||||
September 30, | October 1, | October 3, | ||||||||||
(Dollars in thousands) | 2017 | 2016 | 2015 | |||||||||
Current: | ||||||||||||
Federal | $ | 8,269 | $ | 17,075 | $ | 10,149 | ||||||
State | 848 | 1,434 | 772 | |||||||||
| 9,117 | 18,509 | 10,921 | ||||||||||
Deferred: | ||||||||||||
Federal | 2,455 | 396 | 222 | |||||||||
State | 48 | 140 | 111 | |||||||||
| 2,503 | 536 | 333 | ||||||||||
Income taxes | $ | 11,620 | $ | 19,045 | $ | 11,254 | ||||||
Effective income tax rate | 34.0 | % | 33.8 | % | 34.1 | % | ||||||
Year Ended | ||||||||||||
October 3, | September 28, | September 29, | ||||||||||
(Dollars in thousands) | 2020 | 2019 | 2018 | |||||||||
Provision for income taxes: | ||||||||||||
Current: | ||||||||||||
Federal | $ | 5,056 | $ | (126 | ) | $ | 8,265 | |||||
State | 529 | 185 | 906 | |||||||||
| 5,585 | 59 | 9,171 | ||||||||||
Deferred: | ||||||||||||
Federal | (288 | ) | 1,649 | (2,862 | ) | |||||||
State | (136 | ) | 149 | 55 | ||||||||
| (424 | ) | 1,798 | (2,807 | ) | ||||||||
Income taxes | $ | 5,161 | $ | 1,857 | $ | 6,364 | ||||||
Effective income tax rate | 21.4 | % | 24.9 | % | 14.9 | % | ||||||
The reconciliation between income taxes computed at the federal statutory rate and the provision for income taxes is as follows:
Year Ended | Year Ended | |||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | September 30, 2017 | October 1, 2016 | October 3, 2015 | October 3, 2020 | September 28, 2019 | September 29, 2018 | ||||||||||||||||||||||||||||||||||||||||||
Provision for income taxes at federal statutory rate | $ | 11,959 | 35.0 | % | $ | 19,701 | 35.0 | % | $ | 11,537 | 35.0 | % | $ | 5,076 | 21.0 | % | $ | 1,566 | 21.0 | % | $ | 10,444 | 24.5 | % | ||||||||||||||||||||||||
State income taxes, net of federal tax benefit | 319 | 1.3 | 297 | 4.0 | 739 | 1.7 | ||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | 128 | 0.5 | 90 | 1.2 | (634 | ) | (1.5 | ) | ||||||||||||||||||||||||||||||||||||||||
Net operating loss carryback - CARES Act | (223 | ) | (0.9 | ) | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||||||
Valuation allowance | (50 | ) | (0.2 | ) | 24 | 0.3 | (18 | ) | (0.0 | ) | ||||||||||||||||||||||||||||||||||||||
Federal tax return true-up | 0 | 0 | (142 | ) | (1.9 | ) | (147 | ) | (0.3 | ) | ||||||||||||||||||||||||||||||||||||||
Change in federal tax rate - Tax Cuts and Jobs Act | 0 | 0 | 0 | 0 | (3,307 | ) | (7.8 | ) | ||||||||||||||||||||||||||||||||||||||||
Qualified production activities deduction | (768 | ) | (2.2 | ) | (1,596 | ) | (2.8 | ) | (1,005 | ) | (3.0 | ) | 0 | 0 | 0 | 0 | (832 | ) | (2.0 | ) | ||||||||||||||||||||||||||||
Valuation allowance | (29 | ) | (0.1 | ) | (213 | ) | (0.4 | ) | (55 | ) | (0.2 | ) | ||||||||||||||||||||||||||||||||||||
State income taxes, net of federal tax benefit | 598 | 1.8 | 1,093 | 1.9 | 612 | 1.9 | ||||||||||||||||||||||||||||||||||||||||||
Other, net | (140 | ) | (0.5 | ) | 60 | 0.1 | 165 | 0.4 | (89 | ) | (0.3 | ) | 22 | 0.3 | 119 | 0.3 | ||||||||||||||||||||||||||||||||
Provision for income taxes | $ | 11,620 | 34.0 | % | $ | 19,045 | 33.8 | % | $ | 11,254 | 34.1 | % | $ | 5,161 | 21.4 | % | $ | 1,857 | 24.9 | % | $ | 6,364 | 14.9 | % | ||||||||||||||||||||||||
The components of deferred tax assets and liabilities are as follows:
September 30, | October 1, | October 3, | September 28, | |||||||||||||
(In thousands) | 2017 | 2016 | 2020 | 2019 | ||||||||||||
Deferred tax assets: | ||||||||||||||||
Defined benefit plans | $ | 3,556 | $ | 3,497 | $ | 2,727 | $ | 2,661 | ||||||||
Accrued expenses and asset reserves | 3,069 | 2,942 | 1,885 | 1,207 | ||||||||||||
Stock-based compensation | 1,907 | 1,652 | 1,328 | 1,259 | ||||||||||||
Operating lease liability | 568 | 0 | ||||||||||||||
State net operating loss carryforwards and tax credits | 284 | 354 | 92 | 120 | ||||||||||||
Goodwill, amortizable for tax purposes | - | 277 | ||||||||||||||
Federal net operating loss carryforward | 0 | 363 | ||||||||||||||
Valuation allowance | (251 | ) | (280 | ) | (207 | ) | (257 | ) | ||||||||
Deferred tax assets | 8,565 | 8,442 | 6,393 | 5,353 | ||||||||||||
Deferred tax liabilities: | ||||||||||||||||
Plant and equipment | (15,093 | ) | (12,915 | ) | (10,766 | ) | (10,625 | ) | ||||||||
Prepaid insurance and other reserves | (1,575 | ) | (999 | ) | ||||||||||||
Prepaid insurance | (1,217 | ) | (1,311 | ) | ||||||||||||
Right of use assets | (566 | ) | 0 | |||||||||||||
Goodwill | (412 | ) | (317 | ) | ||||||||||||
Deferred tax liabilities | (16,668 | ) | (13,914 | ) | (12,961 | ) | (12,253 | ) | ||||||||
Net deferred tax liability | $ | (8,103 | ) | $ | (5,472 | ) | $ | (6,568 | ) | $ | (6,900 | ) | ||||
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was enacted, which, among other changes, reduced the federal statutory corporate tax rate from 35% to 21% effective January 1, 2018. Since our fiscal year ends on the Saturday closest to September 30 rather than the calendar year, we are subject to IRS rules relating to transitional income tax rates. Based on these rules, our federal statutory rate was 24.5% for 2018 and is 21% for 2019 and beyond. We remeasured our deferred tax assets and liabilities and adjusted our estimated annual federal income tax rate to incorporate the lower corporate tax rate provided for under the Act in our first quarter tax provision for 2018, which resulted in a $3.3 million reduction in income tax expense for 2018.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law. The CARES Act includes several changes impacting business, including, but not limited to, enhanced business interest deductibility, net operating loss ("NOL") carryback provisions, payroll tax deferral provisions and employee retention tax credits. We recorded a $223,000 tax benefit in 2020 resulting from the NOL carryback provisions of the CARES Act.
As of October 3, 2020 and September 30, 2017, 28, 2019, we recorded a non-current deferred tax liabilityliabilities (net of valuation allowance)allowances) of $8.1$6.6 million in other liabilities on our consolidated balance sheet. As of October 1, 2016, we recorded a non-current deferred tax liability (net of valuation allowance) of $5.5and $6.9 million, respectively, in other liabilities on our consolidated balance sheet. We have $7.4$2.5 million of state net operating loss carryforwards (“NOLs”)NOLs that begin to expire in 2018,2022, but principally expire between 20182022 and 2031. We have also recorded deferred tax assets for various state tax credits of $46,000, which will begin to expire in 2019 and principally expire between 2019 and 2020.2035.
The realization of our deferred tax assets is entirely dependent upon our ability to generate future taxable income in applicable jurisdictions. GAAP requires that we periodically assess the need to establish a valuation allowancereserve against our deferred tax assets to the extent we no longer believe it is more likely than not that they will be fully utilized.realized. As of September 30, 2017, October 3, 2020, we had recorded a valuation allowance of $251,000$207,000 pertaining to various state NOLs and tax credits that were not expected to be utilized. The valuation allowance is subject to periodic review and adjustment based on changes in facts and circumstances and would be reduced should we utilize the state net operating loss carryforwardsNOLs and tax credits against which an allowance had previously been provided or determine that such utilization iswas more likely than not. The $29,000$50,000 decrease in the valuation allowance during 20172020 is primarily due to the reduction in enactedutilization of state tax rates andNOLs for which an allowance had been recorded together with the expiration of state NOLstax credits for which an allowance had been previously recorded.
As of September 30, 2017, October 3, 2020, we had no material, known tax exposures that required the establishment of contingency reserves for uncertain tax positions.
We classify interest and penalties related to unrecognized tax benefits as part of income tax expense. There were no0 interest and penalties related to unrecognized tax benefits incurred during 2017, 20162020,2019 and 2015. 2018.
We file U.S. federal income tax returns as well as state and local income tax returns in various jurisdictions. Federal and various state tax returns filed subsequent to 20122015 remain subject to examination.
(101) Employee Benefit Plans
Retirement plans. We had one defined benefit pension plan, the Insteel Wire Products Company Retirement Income Plan for Hourly Employees, Wilmington, Delaware (the “Delaware Plan”). The Delaware Plan provided benefits for eligible employees based primarily upon years of service and compensation levels. The Delaware Plan was frozen effective September 30, 2008 whereby participants no longer earned additional benefits.
During 2016, we terminated the Delaware Plan and settled plan liabilities through either lump sum distributions to plan participants or annuity contracts purchased from a third-party insurance company that provided for the payment of vested benefits to those participants that did not elect the lump sum option. As of October 1, 2016, there were no remaining plan assets. We made contributions totaling $1.9 million and $234,000 to the Delaware Plan during 2016 and 2015, respectively.
As a result of the pension termination, unrecognized losses, which previously were recorded in accumulated other comprehensive loss on our consolidated balance sheets, were recognized as expense and the pension plan settlement loss of $2.5 million was recorded on our consolidated statements of operations for the year ended October 1, 2016.
The reconciliation of the projected benefit obligation, plan assets, funded status and amounts recognized in our consolidated balance sheets for the Delaware Plan is as follows:
Year Ended | ||||||||
October 1, | October 3, | |||||||
(In thousands) | 2016 | 2015 | ||||||
Change in benefit obligation: | ||||||||
Benefit obligation at beginning of year | $ | 3,463 | $ | 3,078 | ||||
Interest cost | 147 | 130 | ||||||
Actuarial loss | 324 | 514 | ||||||
Plan settlement | 290 | - | ||||||
Distributions | (4,224 | ) | (259 | ) | ||||
Benefit obligation at end of year | $ | - | $ | 3,463 | ||||
Change in plan assets: | ||||||||
Fair value of plan assets at beginning of year | $ | 2,201 | $ | 2,253 | ||||
Actual return on plan assets | 104 | (27 | ) | |||||
Employer contributions | 1,919 | 234 | ||||||
Plan settlement | (4,003 | ) | - | |||||
Distributions | (221 | ) | (259 | ) | ||||
Fair value of plan assets at end of year | $ | - | $ | 2,201 | ||||
Reconciliation of funded status to net amount recognized: | ||||||||
Funded status | $ | - | $ | (1,263 | ) | |||
Net amount recognized | $ | - | $ | (1,263 | ) | |||
Amounts recognized on the consolidated balance sheet: | ||||||||
Accrued benefit liability | $ | - | $ | (1,263 | ) | |||
Accumulated other comprehensive loss (net of tax) | - | 1,197 | ||||||
Net amount recognized | $ | - | $ | (66 | ) | |||
Amounts recognized in accumulated other comprehensive loss: | ||||||||
Unrecognized net loss | $ | - | $ | 1,930 | ||||
Net amount recognized | $ | - | $ | 1,930 | ||||
Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss): | ||||||||
Net loss | $ | 685 | $ | 723 | ||||
Amortization of net loss | (76 | ) | (53 | ) | ||||
Settlement loss | (2,539 | ) | - | |||||
Total recognized in other comprehensive income (loss) | $ | (1,930 | ) | $ | 670 | |||
Net periodic pension cost for the Delaware Plan includes the following components:
Year Ended | ||||||||
October 1, | October 3, | |||||||
(In thousands) | 2016 | 2015 | ||||||
Interest cost | $ | 147 | $ | 130 | ||||
Expected return on plan assets | (175 | ) | (181 | ) | ||||
Settlement loss recognized | 2,539 | - | ||||||
Amortization of net loss | 76 | 53 | ||||||
Net periodic pension cost | $ | 2,587 | $ | 2 | ||||
The assumptions used in the valuation of the Delaware Plan are as follows:
Measurement Date | ||||||||
October 1, | October 3, | |||||||
2016 | 2015 | |||||||
Assumptions at year-end: | ||||||||
Discount rate | 3.75 | % | 4.25 | % | ||||
Expected long-term rate of return on assets | N/A | 8.00 | % | |||||
The assumed discount rate is established as of our fiscal year-end measurement date. In establishing the discount rate, we reviewed published market indices of high-quality debt securities, adjusted as appropriate for duration, and high-quality bond yield curves applicable to the expected benefit payments of the Delaware Plan. To develop the expected long-term rate of return on assets assumption, we considered the historical returns and future expectations of returns for each asset class, as well as the target asset allocation of the Delaware Plan portfolio.
Prior to the termination and settlement of the Delaware Plan the fundamental goal underlying the investment policy was to ensure that its assets were invested in a prudent manner to meet its obligations as such obligations became due. The primary investment objectives included providing a total return that would promote the goal of benefit security by attaining an appropriate ratio of plan assets to plan obligations, diversifying investments across and within asset classes, minimizing the impact of losses in single investments and adhering to investment practices that complied with applicable laws and regulations. The investment strategy for equities emphasized U.S. large cap equities with the portfolio’s performance measured against the S&P 500 index or other applicable indices. The investment strategy for fixed income investments was focused on maintaining an overall portfolio with a minimum credit rating of A-1 as well as a minimum rating of any security at the time of purchase of Baa/BBB by Moody’s or Standard & Poor’s, if rated.
The Delaware Plan had a long-term target asset mix of 60% equities and 40% fixed income. The asset allocations for the Delaware Plan as of October 3, 2015 were as follows:
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Supplemental employee retirement benefit plan. We have Retirement Security Agreements (each, a “SERP”)SRBAs with certain of our employees (each, a “Participant”). Under the SERPs,SRBAs, if the Participant remains in continuous service with us for a period of at least 30 years, we will pay themthe Participant a supplemental retirement benefit for the 15-year period following theirthe Participant’s retirement equal to 50% of theirthe Participant’s highest average annual base salary for five consecutive years in the 10-year period preceding theirthe Participant’s retirement. If the Participant retires prior to the later of age 65 or the completion of 30 years of continuous service with us, but has completed at least 10 years of continuous service, the amount of theirthe Participant’s supplemental retirement benefit will be reduced by 1/360th for each month short of 30 years that they werethe Participant was employed by us. In 2005, we revised the SERPs to add Participants and increase benefits to certain existing Participants.
The reconciliation of the projected benefit obligation, plan assets, funded status and amounts recognized for the SERPsSRBAs in our consolidated balance sheets is as follows:
Year Ended | Year Ended | |||||||||||||||||||||||
September 30, | October 1, | October 3, | October 3, | September 28, | September 29, | |||||||||||||||||||
(In thousands) | 2017 | 2016 | 2015 | 2020 | 2019 | 2018 | ||||||||||||||||||
Change in benefit obligation: | ||||||||||||||||||||||||
Benefit obligation at beginning of year | $ | 9,159 | $ | 7,821 | $ | 7,480 | $ | 11,278 | $ | 9,749 | $ | 9,389 | ||||||||||||
Service cost | 344 | 263 | 287 | 338 | 297 | 310 | ||||||||||||||||||
Interest cost | 338 | 326 | 323 | 334 | 384 | 345 | ||||||||||||||||||
Actuarial (gain) loss | (162 | ) | 1,039 | 21 | ||||||||||||||||||||
Actuarial loss (gain) | (91 | ) | 1,133 | (33 | ) | |||||||||||||||||||
Distributions | (290 | ) | (290 | ) | (290 | ) | (249 | ) | (285 | ) | (262 | ) | ||||||||||||
Benefit obligation at end of year | $ | 9,389 | $ | 9,159 | $ | 7,821 | $ | 11,610 | $ | 11,278 | $ | 9,749 | ||||||||||||
Change in plan assets: | ||||||||||||||||||||||||
Actual employer contributions | $ | 290 | $ | 290 | $ | 290 | $ | 249 | $ | 285 | $ | 262 | ||||||||||||
Actual distributions | (290 | ) | (290 | ) | (290 | ) | (249 | ) | (285 | ) | (262 | ) | ||||||||||||
Plan assets at fair value at end of year | $ | - | $ | - | $ | - | $ | 0 | $ | 0 | $ | 0 | ||||||||||||
Reconciliation of funded status to net amount recognized: | ||||||||||||||||||||||||
Funded status | $ | (9,389 | ) | $ | (9,159 | ) | $ | (7,821 | ) | $ | (11,610 | ) | $ | (11,278 | ) | $ | (9,749 | ) | ||||||
Net amount recognized | $ | (9,389 | ) | $ | (9,159 | ) | $ | (7,821 | ) | $ | (11,610 | ) | $ | (11,278 | ) | $ | (9,749 | ) | ||||||
Amounts recognized in accumulated other comprehensive loss: | ||||||||||||||||||||||||
Unrecognized net loss | $ | 2,149 | $ | 2,485 | $ | 1,531 | $ | 2,574 | $ | 2,958 | $ | 1,966 | ||||||||||||
Net amount recognized | $ | 2,149 | $ | 2,485 | $ | 1,531 | $ | 2,574 | $ | 2,958 | $ | 1,966 | ||||||||||||
Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss): | ||||||||||||||||||||||||
Net loss (gain) | $ | (162 | ) | $ | 1,039 | $ | 21 | $ | (91 | ) | $ | 1,133 | $ | (33 | ) | |||||||||
Amortization of net loss | (174 | ) | (85 | ) | (117 | ) | (294 | ) | (140 | ) | (150 | ) | ||||||||||||
Total recognized in other comprehensive income (loss) | $ | (336 | ) | $ | 954 | $ | (96 | ) | $ | (385 | ) | $ | 993 | $ | (183 | ) | ||||||||
Net periodic pension cost for the SERPsSRBAs includes the following components:
Year Ended | Year Ended | |||||||||||||||||||||||
September 30, | October 1, | October 3, | October 3, | September 28, | September 29, | |||||||||||||||||||
(In thousands) | 2017 | 2016 | 2015 | 2020 | 2019 | 2018 | ||||||||||||||||||
Service cost | $ | 344 | $ | 263 | $ | 287 | $ | 338 | $ | 297 | $ | 310 | ||||||||||||
Interest cost | 338 | 326 | 323 | 334 | 384 | 345 | ||||||||||||||||||
Amortization of net loss | 174 | 85 | 117 | 294 | 140 | 150 | ||||||||||||||||||
Net periodic pension cost | $ | 856 | $ | 674 | $ | 727 | $ | 966 | $ | 821 | $ | 805 | ||||||||||||
The estimated net loss that will be amortized from accumulated other comprehensive loss into net periodic pension cost during 20182021 is $150,000.$215,000.
The assumptions used in the valuation of the SERPsSRBAs are as follows:
Measurement Date | Measurement Date | |||||||||||||||||||||||
September 30, | October 1, | October 3, | October 3, | September 28, | September 29, | |||||||||||||||||||
2017 | 2016 | 2015 | 2020 | 2019 | 2018 | |||||||||||||||||||
Assumptions at year-end: | ||||||||||||||||||||||||
Discount rate | 3.75 | % | 3.75 | % | 4.25 | % | 2.75 | % | 3.00 | % | 4.00 | % | ||||||||||||
Rate of increase in compensation levels | 3.00 | % | 3.00 | % | 3.00 | % | 3.00 | % | 3.00 | % | 3.00 | % | ||||||||||||
The assumed discount rate is established as of our fiscal year-end measurement date. In establishing the discount rate, we review published market indices of high-quality debt securities, adjusted as appropriate for duration, and high-quality bond yield curves applicable to the expected benefit payments of the plan.SRBAs. The SERPsSRBAs expected rate of increase in compensation levels is based on the anticipated increases in annual compensation.
The projected benefit payments under the SERPsSRBAs are as follows:
Fiscal year(s) | In thousands | ||||
2018 | $ | 358 | |||
2019 | 320 | ||||
2020 | 240 | ||||
2021 | 240 | ||||
2022 | 543 | ||||
| 2023- 2027 | 3,652 | ||||
As noted above, the SERPs were revised in 2005 to add Participants and increase benefits to certain existing Participants. However, for certain Participants we still maintain the benefits of the respective SERPs that were in effect prior to the 2005 changes, which entitle them to fixed cash benefits upon retirement at age 65, payable annually for 15 years. These SERPs are supported by life insurance policies on the Participants that are purchased and owned by us. The cash benefits paid under these SERPs were $40,000 in 2017 and 25,000 in 2016 and 2015. The expense attributable to these SERPs was $34,000 in 2017, $26,000 in 2016 and $23,000 in 2015.
Fiscal year(s) | In thousands | |||
2021 | $ | 255 | ||
2022 | 570 | |||
2023 | 570 | |||
2024 | 530 | |||
2025 | 892 | |||
| 2026 - 2030 | 4,109 | |||
Retirement savings plan. In 1996, we adopted the Retirement Savings Plan of Insteel Industries, Inc. (the “Plan”) to provide retirement benefits and stock ownership for our employees. The Plan is an amendment and restatement of our Employee Stock Ownership Plan. As allowed under Sections 401(a)401(a) and 401(k)401(k) of the Internal Revenue Code, the Plan provides for tax-deferred salary deductions for eligible employees.
The Plan allows for discretionary contributions to be made by us as determined by the Board of Directors, which are allocated among eligible participants based on their compensation relative to the total compensation of all participants. Employees are permitted to contribute up to 75% of their annual compensation to the Plan, limited to a maximum annual amount as set periodically by the Internal Revenue Code. During 2015 to 2017, we matchedWe match employee contributions up to 100% of the first 1% and 50% of the next 5% of eligible compensation that wasis contributed by employees. Our contributions to the Plan were $1.3 million in 2020, $1.2 million in 2019 and $1.1 million in 2017 and $1.0 million in 2016 and 2015.2018.
Voluntary Employee Beneficiary Associations (“VEBA”). We have a VEBA which allows both us and our employees to make contributions to pay for medical costs. Our contributions to the VEBA were $5.6$6.0 million in 2017, $5.42020, $5.8 million in 20162019 and $6.3$5.1 million in 2015.2018. We are primarily self-insured for our employee’s healthcare costs, carrying stop-loss insurance coverage for individual claims in excess of $175,000 per benefit plan year. Our self-insurance liabilities are based on the total estimated costs of claims filed and claims incurred but not reported, less amounts paid against such claims. We review current and historical claims data in developing our estimates.
(112) Commitments and Contingencies
Insurance recoveries. During August and September of 2017, operations at our four manufacturing facilities located in Texas and Florida were adversely affected by hurricanes Harvey and Irma. We are in the process of completing the supporting analysis for insurance claims relating to the business interruption and property damage resulting from the storm.
During 2014, a fire occurred at our Gallatin, Tennessee PC strand manufacturing facility, damaging a portion of the facility and requiring the temporary curtailment of operations until the necessary repairs were completed. In response, we reassigned a portion of our strand production requirements to our facility located in Sanderson, Florida, which was operating at a reduced utilization level. During the first quarter of 2015, we completed the remainder of the repairs and the Gallatin facility was fully operational.
We maintainedmaintain general liability, business interruption and replacement cost property insurance coverage on our facilitiesfacilities.
In August 2018, a transformer outage and electrical fire occurred at our Dayton, Texas manufacturing facility, which resulted in the temporary curtailment of operations. Alternative power arrangements for the facility were subsequently made that was sufficientallowed operations to covercontinue until permanent repairs were completed during the losses incurred fromfirst quarter of 2019. We reached a final settlement on the fire. Weproperty damage and business interruption claim with our insurance carrier in the prior year. During 2019, we received $2.0$2.2 million of insurance proceeds in 2015 related to the claim that was partially applied against the beginning receivable balance of $462,000 with the remainder recorded in other income ($1.1 million), cost of sales ($645,000) and SG&A expense ($48,000) on the consolidated statements of operations. During 2018, we received $183,000 of insurance proceeds related to the claim and recorded a $462,000 receivable for the anticipated insurance proceeds associated with the expenses incurred as of the end of the year.
In August 2017, operations at our manufacturing facility located in Dayton, Texas were adversely affected by hurricane Harvey. We reached a final settlement on the property damage and business interruption claim with our insurance carrier in the first quarter of 2019. During 2019, we received $150,000 of proceeds related to this claim of which $98,000 was recorded in other income on the consolidated statements of operations. During 2018, we received $439,000 of insurance proceeds related to the claim and recorded a $52,000 receivable for the anticipated insurance proceeds associated with the expenses that were incurred and capital outlays that were required to replace property and equipment damaged in the fire. During 2015, thestorm. The insurance proceeds attributable to the additional expenses incurred were recorded in cost of sales ($244,000) and439,000), SG&A expense ($69,000)26,000) and other income ($26,000) on ourthe consolidated statementstatements of operations.
The insurance proceeds attributable to the property and equipment damaged in the fire wereare reported in cash flows from investing activities and all other insurance proceeds received wereare reported in cash flows from operating activities on ourthe consolidated statementstatements of cash flows. We reached a final settlement on this claim with our insurance carrier during the third quarter of 2015.
Leases and pPurchase commitments. We lease a portion of our equipment under operating leases that expire at various dates through 2022. Additionally, we leased our facility in Houston, Texas through September 30, 2017 and subsequently exercised the $4.9 million purchase option under the lease on October 2, 2017. Under most lease agreements, we pay insurance, taxes and maintenance. Rental expense for operating leases was $1.8 million in 2017, 2016 and 2015. As of September 30, 2017, minimum rental commitments under all non-cancelable leases with an initial term in excess of one year are payable as follows: 2018, $984,000; 2019, $498,000;October 3, 2020, $136,000; 2021, $2,000 and 2022 and beyond, $1,000.
As of September 30, 2017, we had $28.9$32.8 million in non-cancelable purchase commitments for raw material extending as long as approximately 100 days and $15.5$9.7 million of contractual commitments for the purchase of certain equipment that had not been fulfilled and are not reflected in theour consolidated financial statements.
Customer dispute.During 2015, we settled a dispute with a customer resulting in a $0.7 million charge that was recorded in other expense on our consolidated statement of operations.
Legal proceedings. We are involved in lawsuits, claims, investigations and proceedings, including commercial, environmental and employment matters, which arise in the ordinary course of business. We do not expect the ultimate outcome or cost to resolve these matters will have a material adverse effect on our financial position, results of operations or cash flows.
Severance and change of control agreements. We have entered into a severance agreementsagreement with our Chief Executive Officer and Chief Financial Officer that provide themprovides him with certain termination benefits in the event theirhis employment with us is terminated without cause. The initial term of eachthe agreement is was two years and theyit automatically renewrenews for successive one year terms unless we or the executiveour Chief Executive Officer provide notice of termination as specified in the agreement. In the event of termination of the executive’sChief Executive Officer’s employment without cause, these agreements providethis agreement provides that theyhe would receive termination benefits equal to one and one-halfone-half times theirhis annual base salary in effect on the termination date and the continuation of health and welfare benefits for eighteen months. In addition, all of the executive’shis stock options and restricted stock would vest immediately, and outplacement services would be provided.
We have also entered into change in control agreements with key members of management, including our executive officers, which specify the terms of separation in the event that termination of their employment followed a change in control. The initial term of each agreement is two years and they automatically renew for successive one year terms unless we or the executive provide notice of termination as specified in the agreement. The agreements do not provide assurances of continued employment or specify the terms of an executive’s termination should one occur in the absence of a change in control. The compensation payable under the terms of these agreements differs between the Chief Executive Officer and Chief Financial Officer, and the other covered executives. In the event of termination of the Chief Executive Officer or the Chief Financial Officer within two years of a change of control, theyhe would receive severance benefits equal to two times base compensation, two times the average bonus for the prior three years and the continuation of health and welfare benefits for two years. In the event of such a termination of the other key members of management, including our other twothree executive officers, within two years of a change of control, they would receive severance benefits equal to one times base compensation, one times the average bonus for the prior three years and the continuation of health and welfare benefits for one year. In addition, for any covered executive that is terminated within two years of a change of control, all of their stock options and restricted stock would vest immediately, and outplacement services would be provided.
(13) Leases
We have operating leases for certain equipment, office space and vehicles. We determine whether an arrangement is a lease at its inception if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Leases with an initial term of twelve months or less are not recorded on our consolidated balance sheet. Lease expense for operating leases with original terms of more than twelve months was $1.3 million in 2020, $1.6 million in 2019 and $1.5 million in 2018.
Most of our leases include options to extend or terminate the leases which are exercised at our sole discretion. As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate as of the commencement date in determining the present value of lease payments, which represents an estimate of the interest rate we would incur at the lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term.
Supplemental cash flow and non-cash information related to leases is as follows:
Year Ended | ||||
(In thousands) | October 3, 2020 | |||
Cash paid for operating leases included in operating cash flows | $ | 1,301 | ||
Right-of-use assets obtained in exchange for new lease obligations | 1,771 | |||
Supplemental balance sheet information related to leases is as follows:
(In thousands) | October 3, 2020 | |||
Right-of-use assets: | ||||
Other assets | $ | 2,522 | ||
Lease liabilities: | ||||
Accrued expenses | 1,230 | |||
Other liabilities | 1,300 | |||
Total operating lease liabilities | $ | 2,530 | ||
As of October 3, 2020, our operating leases had a weighted average remaining lease term of 2.3 years and a weighted average discount rate of 4.4%. Aggregate future operating lease payments as of October 3, 2020 are as follows:
(In thousands) | ||||
2021 | $ | 1,290 | ||
2022 | 874 | |||
2023 | 408 | |||
2024 | 59 | |||
2025 | 2 | |||
Thereafter | 0 | |||
Total future operating lease payments | 2,633 | |||
Less: imputed interest | (103 | ) | ||
Present value of lease liabilities | $ | 2,530 |
(124) Earnings Per Share
The computation of basic and diluted earnings per share attributable to common shareholders is as follows:
Year Ended | Year Ended | |||||||||||||||||||||||
September 30, | October 1, | October 3, | October 3, | September 28, | September 29, | |||||||||||||||||||
(In thousands, except per share amounts) | 2017 | 2016 | 2015 | 2020 | 2019 | 2018 | ||||||||||||||||||
Net earnings | $ | 22,548 | $ | 37,245 | $ | 21,710 | $ | 19,009 | $ | 5,598 | $ | 36,266 | ||||||||||||
Basic weighted average shares outstanding | 19,011 | 18,754 | 18,418 | 19,278 | 19,243 | 19,079 | ||||||||||||||||||
Dilutive effect of stock-based compensation | 206 | 301 | 385 | 105 | 97 | 198 | ||||||||||||||||||
Diluted weighted average shares outstanding | 19,217 | 19,055 | 18,803 | 19,383 | 19,340 | 19,277 | ||||||||||||||||||
Net earnings per share: | ||||||||||||||||||||||||
Basic | $ | 1.19 | $ | 1.99 | $ | 1.18 | $ | 0.99 | $ | 0.29 | $ | 1.90 | ||||||||||||
Diluted | 1.17 | 1.95 | 1.15 | 0.98 | 0.29 | 1.88 | ||||||||||||||||||
Options and RSUs representing 76,000 shares in 2017, 51,000 shares in 2016 and 144,000 shares in 2015that were antidilutive and were not included in the diluted EPS computation.calculation amounted to 369,000 shares in 2020, 240,000 shares in 2019 and 83,000 shares in 2018.
(135) Business Segment Information
Our operations are entirely focused on the manufacture and marketing of steel wire reinforcing products for concrete construction applications. Our concrete reinforcing products consist of two product lines: PC strand and WWR. Based on the criteria specified in ASC Topic 280,Segment Reporting, we have one reportable segment.
Our net sales and long-lived assets (consisting of net property, plant and equipment, assets held for sale, the cash surrender value of life insurance policies, right of use assets, goodwill and intangible assets) by geographic region are as follows:
Year Ended | Year Ended | |||||||||||||||||||||||
September 30, | October 1, | October 3, | October 3, | September 28, | September 29, | |||||||||||||||||||
(In thousands) | 2017 | 2016 | 2015 | 2020 | 2019 | 2018 | ||||||||||||||||||
Net sales: | ||||||||||||||||||||||||
United States | $ | 387,199 | $ | 416,391 | $ | 444,475 | $ | 470,420 | $ | 454,373 | $ | 451,418 | ||||||||||||
Foreign | 1,672 | 2,156 | 3,029 | 2,198 | 1,340 | 1,799 | ||||||||||||||||||
Total | $ | 388,871 | $ | 418,547 | $ | 447,504 | $ | 472,618 | $ | 455,713 | $ | 453,217 | ||||||||||||
Long-lived assets: | ||||||||||||||||||||||||
United States | $ | 122,574 | $ | 112,130 | $ | 108,557 | $ | 140,588 | $ | 132,074 | $ | 133,913 | ||||||||||||
Foreign | - | - | - | 0 | 0 | 0 | ||||||||||||||||||
Total | $ | 122,574 | $ | 112,130 | $ | 108,557 | $ | 140,588 | $ | 132,074 | $ | 133,913 | ||||||||||||
Our net sales by product line are as follows:
Year Ended | Year Ended | |||||||||||||||||||||||
September 30, | October 1, | October 3, | October 3, | September 28, | September 29, | |||||||||||||||||||
(In thousands) | 2017 | 2016 | 2015 | 2020 | 2019 | 2018 | ||||||||||||||||||
Net sales: | ||||||||||||||||||||||||
Welded wire reinforcement | $ | 239,522 | $ | 256,801 | $ | 255,219 | $ | 294,129 | $ | 290,423 | $ | 273,658 | ||||||||||||
Prestressed concrete strand | 149,349 | 161,746 | 192,285 | 178,489 | 165,290 | 179,559 | ||||||||||||||||||
Total | $ | 388,871 | $ | 418,547 | $ | 447,504 | $ | 472,618 | $ | 455,713 | $ | 453,217 | ||||||||||||
There were no customers that accounted for 10% or more of our net sales in 2017, 20162020,2019 and 2015.2018.
(146) Related Party Transactions
Sales to a company affiliated with one of our former directors amounted to $622,000$716,000 in 2017, $420,0002019 and $699,000 in 2016 and $361,0002018. There were 0 related party transactions in 2015.2020.
(157) Other Financial Data
Balance sheet information:
September 30, | October 1, | October 3, | September 28, | |||||||||||||
(In thousands) | 2017 | 2016 | 2020 | 2019 | ||||||||||||
Accounts receivable, net: | ||||||||||||||||
Accounts receivable | $ | 40,485 | $ | 47,680 | $ | 54,108 | $ | 44,436 | ||||||||
Less allowance for doubtful accounts | (201 | ) | (291 | ) | (291 | ) | (254 | ) | ||||||||
Total | $ | 40,284 | $ | 47,389 | $ | 53,817 | $ | 44,182 | ||||||||
Inventories: | ||||||||||||||||
Raw materials | $ | 51,808 | $ | 45,032 | $ | 31,553 | $ | 27,667 | ||||||||
Work in process | 2,637 | 2,788 | 3,813 | 4,885 | ||||||||||||
Finished goods | 27,408 | 23,366 | 33,597 | 38,299 | ||||||||||||
Total | $ | 81,853 | $ | 71,186 | $ | 68,963 | $ | 70,851 | ||||||||
Other current assets: | ||||||||||||||||
Prepaid insurance | $ | 3,796 | $ | 1,805 | $ | 4,096 | $ | 4,545 | ||||||||
Income taxes receivable | 925 | 205 | 0 | 1,215 | ||||||||||||
Other | 1,228 | 1,029 | 1,474 | 1,610 | ||||||||||||
Total | $ | 5,949 | $ | 3,039 | $ | 5,570 | $ | 7,370 | ||||||||
Other assets: | ||||||||||||||||
Cash surrender value of life insurance policies | $ | 9,026 | $ | 7,909 | $ | 10,584 | $ | 10,211 | ||||||||
Assets held for sale | 7,778 | 0 | ||||||||||||||
Right-of-use assets | 2,522 | 0 | ||||||||||||||
Capitalized financing costs, net | 105 | 170 | 170 | 237 | ||||||||||||
Other | 203 | 105 | 106 | 114 | ||||||||||||
Total | $ | 9,334 | $ | 8,184 | $ | 21,160 | $ | 10,562 | ||||||||
Property, plant and equipment, net: | ||||||||||||||||
Land and land improvements | $ | 12,177 | $ | 9,619 | $ | 14,520 | $ | 14,548 | ||||||||
Buildings | 50,373 | 43,739 | 52,462 | 56,404 | ||||||||||||
Machinery and equipment | 153,484 | 143,789 | 172,617 | 165,609 | ||||||||||||
Construction in progress | 5,641 | 11,318 | 3,978 | 5,285 | ||||||||||||
| 221,675 | 208,465 | 243,577 | 241,846 | |||||||||||||
Less accumulated depreciation | (123,005 | ) | (120,272 | ) | (142,185 | ) | (136,886 | ) | ||||||||
Total | $ | 98,670 | $ | 88,193 | $ | 101,392 | $ | 104,960 | ||||||||
Accrued expenses: | ||||||||||||||||
Salaries, wages and related expenses | $ | 5,520 | $ | 6,619 | $ | 4,971 | $ | 2,463 | ||||||||
Property taxes | 1,384 | 1,328 | 1,726 | 1,820 | ||||||||||||
Customer rebates | 1,015 | 1,296 | 1,581 | 1,381 | ||||||||||||
Workers' compensation | 116 | 127 | ||||||||||||||
Operating lease liabilities | 1,230 | 0 | ||||||||||||||
Income taxes | 1,201 | 0 | ||||||||||||||
Holdback for business acquired | 1,000 | 0 | ||||||||||||||
State sales and use taxes | 544 | 136 | ||||||||||||||
Sales allowance reserves | 21 | 577 | 0 | 544 | ||||||||||||
Restructuring liabilities | - | 239 | ||||||||||||||
Other | 611 | 838 | 2,464 | 474 | ||||||||||||
Total | $ | 8,667 | $ | 11,024 | $ | 14,717 | $ | 6,818 | ||||||||
Other liabilities: | ||||||||||||||||
Deferred compensation | $ | 9,276 | $ | 9,071 | $ | 11,553 | $ | 11,679 | ||||||||
Deferred income taxes | 8,103 | 5,472 | 6,568 | 6,900 | ||||||||||||
Operating lease liabilities | 1,300 | 0 | ||||||||||||||
Total | $ | 17,379 | $ | 14,543 | $ | 19,421 | $ | 18,579 | ||||||||
(16)Rights Agreement
On April 26, 1999, our Board of Directors declared a dividend distribution of one right per share of our outstanding common stock as of May 17, 1999 pursuant to a Rights Agreement, dated as of April 27, 1999. The Rights Agreement also provides that one right will attach to each share of our common stock issued after May 17, 1999. On April 21, 2009, effective April 25, 2009, our Board of Directors amended the Rights Agreement to, among other changes, extend the final expiration date and adjust the purchase price payable upon exercise of a right.
The rights are not currently exercisable but trade with our common stock shares and become exercisable on the distribution date. The distribution date will occur upon the earliest of 10 business days following a public announcement that either a person or group of affiliated or associated persons (an “acquiring person”) has acquired, or obtained the right to acquire, beneficial ownership of 20% or more (after adjustment for certain derivative transactions) of the outstanding shares of common stock (the “stock acquisition date”), or of a tender offer or exchange offer that would, if consummated, result in an acquiring person beneficially owning 20% or more of such outstanding shares of common stock, subject to certain limitations.
Each right will entitle the holder, other than the acquiring person or group, to purchase one two-hundredths of a share (a “Unit”) of our Series A Junior Participating Preferred Stock (“Preferred Stock”) at a purchase price of $46 per Unit, subject to adjustment as described in the Rights Agreement (the “purchase price”). At the time specified, each holder of a right will have the right to receive in lieu of Preferred Stock, upon exercise and payment of the purchase price, common stock (or, in certain circumstances, cash, property or other securities of the Company) having a value equal to two times the purchase price or, at the discretion of the Board, upon exercise and without payment of the purchase price, common stock (or, in certain circumstances, cash, property or other securities of the Company) having a value equal to the difference between the purchase price and the value of the consideration which a person exercising the right and paying the purchase price would receive. Rights that are or (under specified circumstances) were, beneficially owned by any acquiring person will be null and void. The purchase price payable and the number of Units of Preferred Stock or other securities or property issuable upon exercise of the rights are subject to adjustment from time to time. At any time after any person becomes an acquiring person, we may exchange all or part of the rights for shares of common stock at an exchange ratio of one share per right, as appropriately adjusted to reflect any stock dividend, stock split or similar transaction.
In addition, each rights holder, other than an acquiring person, upon exercise of rights will have the right to receive shares of the common stock of the acquiring corporation having a value equal to two times the purchase price for such holder’s rights if we engage in a merger or other business combination where we are not the surviving entity or where we are the surviving entity and all or part of our common stock is exchanged for the stock or other securities of the other company, or if 50% or more of our assets or earning power is sold or transferred.
The rights will expire on April 24, 2019, and may be redeemed by us at any time prior to the distribution date at a price of $0.005 per right.
(178) Product Warranties
Our products are used in applications which are subject to inherent risks including performance deficiencies, personal injury, property damage, environmental contamination or loss of production. We warrant our products to meet certain specifications, and actual or claimed deficiencies from these specifications may give rise to claims. We do not maintain a reserve for warranties as the historical claims have been immaterial. We maintain product liability insurance coverage to minimize our exposure to such risks.
(189) Share Repurchases
On November18,2008, our Board of Directors approved a share repurchase authorization to buy back up to $25.0 million of our outstanding common stock (the “Authorization”). Repurchases Under the Authorization, repurchases may be made from time to time in the open market or in privately negotiated transactions subject to market conditions, applicable legal requirements and other factors. We are not obligated to acquire any particular amount of common stock and may commence or suspend the programmay be commenced or suspended at any time at our discretion without prior notice. The Authorization continues in effect until terminated by the Board of Directors. As of September 30, 2017, October 3, 2020, there was $24.8 million remaining available for future share repurchases under thethis Authorization. There were no0 share repurchases during 2017, 20162020,2019 and 2015.2018.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED FINANCIAL STATEMENTS
To the Board of Directors and Shareholders
Insteel Industries, Inc.:
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Insteel Industries,, Inc. (a North Carolina corporation) and subsidiaries (the “Company”) as of October 3, 2020 and September 30, 2017 and October 1, 2016, and28, 2019, the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended September 30, 2017. Our audits ofOctober 3, 2020, and the basic consolidated financial statements included therelated notes and financial statement schedule listedincluded under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of October 3, 2020 and September 28, 2019 and the results of its operations and its cash flows for each of the three years in the index appearing under Schedule II, as listedperiod ended of October 3, 2020, in conformity with accounting principles generally accepted in the index at Item 15(a)(2). United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of October 3, 2020, based on criteria established in the 2013 Internal Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated October 29, 2020 expressed an unqualified opinion.
Basis for opinion
These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesethe Company’s financial statements and financial statement schedule based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Insteel Industries, Inc. and subsidiaries as of September 30, 2017 and October 1, 2016, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of September 30, 2017, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated October 27, 2017 expressed an unqualified opinion.
/s/ Grant Thornton LLP
We have served as the Company’s auditor since fiscal 2002.
Charlotte, North Carolina
October 27, 2017October 29, 2020
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED OCTOBER 3, 2020, SEPTEMBER 30, 2017, 2OCTOB8ER 1, 2016, 2019 AND OCTOBER 3, 2015SEPTEMBER 29, 2018
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(In thousands)
Year Ended | ||||||||||||
September 30, | October 1, | October 3, | ||||||||||
2017 | 2016 | 2015 | ||||||||||
Balance, beginning of year | $ | 291 | $ | 638 | $ | 888 | ||||||
Amounts charged to earnings | (57 | ) | (244 | ) | 5 | |||||||
Write-offs, net of recoveries | (33 | ) | (103 | ) | (255 | ) | ||||||
Balance, end of year | $ | 201 | $ | 291 | $ | 638 | ||||||
Year Ended | ||||||||||||
October 3, | September 28, | September 29, | ||||||||||
2020 | 2019 | 2018 | ||||||||||
Balance, beginning of year | $ | 254 | $ | 295 | $ | 201 | ||||||
Amounts charged to earnings | 65 | (41 | ) | 100 | ||||||||
Write-offs, net of recoveries | (28 | ) | 0 | (6 | ) | |||||||
Balance, end of year | $ | 291 | $ | 254 | $ | 295 | ||||||
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.Procedures.
Evaluation of Disclosure Controls and Procedures
We have conducted an evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2017.October 3, 2020. This evaluation was conducted under the supervision and with the participation of management, including our principal executive officer and our principal financial officer. Based upon that evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Furthermore, we concluded that our disclosure controls and procedures were effective to ensure that such information is accumulated and communicated to management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management’sManagement’s Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes: (1) maintaining records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets; (2) providing reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are made only in accordance with authorizations of management and directors; and (3) providing reasonable assurance that unauthorized acquisition, use or disposition of assets that could have a material effect on financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting can only provide reasonable assurance that a misstatement of financial statements would be prevented or detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our managementmanagement assessed the effectiveness of our internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in the 2013 Internal Control – Integrated Framework. Based on this assessment, our management concluded that our internal control over financial reporting was effective as of September 30, 2017.October 3, 2020. During the quarter ended September 30, 2017,October 3, 2020, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Our independent registered public accounting firm has issued an audit report on the effectivenesseffectiveness of our internal control over financial reporting as of September 30, 2017,October 3, 2020, which appears below.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and Shareholders
Insteel Industries, Inc.:
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Insteel Industries, Inc. (a North Carolina corporation) and subsidiaries (the “Company”) as of September 30, 2017,October 3, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 3, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended October 3, 2020, and our report dated October 29, 2020 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s ReportReports on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2017, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended September 30, 2017, and our report dated October 27, 2017 expressed an unqualified opinion on those financial statements.
/s/ Grant Thornton LLP
Charlotte, North Carolina
October 27, 2017October 29, 2020
Item 9B. Other Information.Information.
None.None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information called for by this item and not presented herein appears under the captions “Item Number One: Election of Directors”, “Security Ownership of Directors and Executive Officers – Delinquent Section 16(a) Beneficial Reporting Compliance”Reports” and “Corporate Governance Guidelines and Board Matters” in our Proxy Statement for the 20182021 Annual Meeting of Shareholders and is incorporated herein by reference. Information on executive officers appears under the caption “Executive Officers of the Company” in Part I of this report.
We have adopted a Code of Business Conduct that applies to all directors, officers and employees, which is available on our web sitewebsite at https://insteelgcs.gcs-web.com/corporate-governance/governance-documents. To the extent permissible under applicable law (the rules of the SEC or NASDAQNasdaq listing standards), we intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K by posting on our web sitewebsite any amendment or waiver to a provision of our Code of Business Conduct that requires disclosure under applicable law (the rules of the SEC or NASDAQNasdaq listing standards). Our web sitewebsite does not constitute part of this Annual Report on Form 10-K.
Item 11. Executive Compensation.
The information called for by this item appears under the captions “Executive Compensation”, “Compensation Committee Interlocks and Insider Participation” and “Director Compensation” in our Proxy Statement for the 20182021 Annual Meeting of Shareholders and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information called for by this item appears under the captions “Security Ownership of Certain Beneficial Owners”, “Security Ownership of Directors and Executive Officers” and “Equity Compensation Plan Information” in our Proxy Statement for the 20182021 Annual Meeting of Shareholders and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information called for by this item appears under the captions “Certain Relationships and Related Person Transactions” and “Corporate Governance Guidelines and Board Matters” in our Proxy Statement for the 20182021 Annual Meeting of Shareholders and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information called for by this item appears under the caption “Item Number Three:Four: Ratification of the Appointment of Grant Thornton LLP” in our Proxy Statement for the 20182021 Annual Meeting of Shareholders and is incorporated herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules.Schedules.
(a)(1) Financial Statements
The financial statements as set forth under Item 8 are filed as part of this report.
(a)(2) Financial Statement Schedules
Supplemental Schedule II - Valuation and Qualifying Accounts appears on page 45 of this report.
All other schedules have been omitted because they are either not required or not applicable.
(a)(3) Exhibits
The list of exhibits filed as part of this annual report is set forth on the Exhibit Index immediately preceding the signatures to this annual report and is incorporated herein by reference.
(b) Exhibits
See Exhibit Index on pages 4950 and 50.51.
(c) Financial Statement Schedules
See Item 15(a)15(a)(2) above.
Item 16.16. Form 10-K Summary.Summary
None.
EXHIBIT INDEX | |
Exhibit Number | Description |
2.1 | |
3.1 | Restated Articles of Incorporation for the Company (incorporated by reference to Exhibit 3.1 of the |
3.2 | Articles of Amendment to the Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of the |
3.3 | |
3.4 | |
3.5 | |
4.1 | |
4.2 | |
4.3 | |
4.4 | |
10.1 | |
10.2 | |
10.3 | |
| |
10.5 | |
10.6* | |
| |
| |
| |
| |
EXHIBIT INDEX | |
Exhibit Number | Description |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
10.21* | |
10.22* | |
10.23* | |
10.24* | |
10.25* | |
10.26* | |
21.1 | List of Subsidiaries of Insteel Industries, Inc. at |
23.1 | |
31.1 | |
31.2 | |
32.1 | |
32.2 | |
101 | The following financial information from our Annual Report on Form 10-K for the fiscal year ended |
| 104 | The cover page from our Annual Report on Form 10-K for the year ended October 3, 2020, filed October 29, 2020, formatted in iXBRL (included in Exhibit 101). |
* | Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate. |
Our SEC file number reference for documents filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended, is | |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
INSTEEL INDUSTRIES, INC.
Registrant
|
|
| |
| By: | /s/ Mark A. Carano | |
Mark A. Carano | |||
Senior Vice President, Chief Financial Officer and Treasurer | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on October 27, 201729, 2020 below by the following persons on behalf of the registrant and in the capacities indicated:
Name and Signature | Position(s) | |
/s/ H. O. WOLTZ III
| President, Chief Executive Officer and Chairman of the Board | |
| (Principal Executive Officer) | |
/s/
| Senior Vice President, Chief Financial Officer and Treasurer | |
| MARK A. CARANO | (Principal Financial Officer) | |
/s/ SCOT
| Vice President, Chief Accounting Officer and Corporate Controller | |
| SCOT R. JAFROODI | (Principal Accounting Officer) | |
/s/
| Director | |
| ABNEY S. BOXLEY III | ||
/s/
| Director | |
| ANNE H. LLOYD | ||
/s/
| Director | |
| W. ALLEN ROGERS II | ||
/s/
| Director | |
| JON M. RUTH | ||
/s/
| Director | |
| JOSEPH A. RUTKOWSKI | ||
/s/ G. KENNEDY THOMPSON | Director | |
| G. KENNEDY THOMPSON |
51