Insteel IndustrIes
2007 AnnuAl report
rebuilding America’s Infrastructure
FI nAnc IAl H IgHlIgHts
(In thousands, except for per share amounts)
2007
2006
2005
operating results:
Net sales
Gross profit
% of net sales
Earnings from continuing operations
% of net sales
Net earnings
per share data:
Basic:
Earnings from continuing operations
Net earnings
Diluted:
Earnings from continuing operations
Net earnings
Cash dividends declared
returns:
Return on capital(1)
Return on equity(2)
Financial position:
Total assets
Total long-term debt
Shareholders’ equity
cash Flows:
$ 297,806
56,061
$ 329,507
70,871
$ 309,320
57,898
18.8%
21.5%
18.7%
$ 24,284
$ 34,377
$ 24,499
8.2%
10.4%
7.9%
$ 24,162
$ 33,040
$ 25,045
$
1.34
1.33
1.33
1.32
0.12
$
1.88
1.80
1.86
1.79
0.12
$
1.31
1.34
1.29
1.32
0.06
18.2%
18.2%
29.7%
31.3%
21.1%
29.1%
$ 173,529
—
143,850
$ 166,596
—
122,438
$ 138,276
11,860
97,036
Net cash provided by operating activities of
continuing operations
Capital expenditures
Depreciation and amortization
Repurchase of common stock
Cash dividends paid
$ 17,065
17,013
6,209
—
2,176
$ 42,650
18,959
5,107
8,529
2,222
$ 41,830
6,302
5,627
—
566
(1) Earnings from continuing operations/(average total long-term debt + average shareholders’ equity).
(2)Earnings from continuing operations/(average shareholders’ equity).
Net Sales
(in millions)
$329.5
$309.3
$297.8
Diluted Earnings
Per Share From
Continuing Operations
$1.86
$1.29
$1.33
Return on Equity(2)
31.3%
29.1%
18.2%
0
0.0
’05
’06
’07
’05
’06
’07
’05
’06
’07
350000
300000
250000
200000
150000
100000
50000
2.0
1.5
1.0
0.5
35
30
25
20
15
10
5
0
Insteel Industries is one of the nation’s largest manufacturers of steel wire reinforcing products for concrete construction
applications. We manufacture and market prestressed concrete strand (“pc strand”) and welded wire reinforcement,
including concrete pipe reinforcement, engineered structural mesh and standard welded wire reinforcement. our products
are sold primarily to manufacturers of concrete products that are used in nonresidential construction. Headquartered in
Mount Airy, north carolina, we operate six manufacturing facilities located in the u nited states.
Welded WIre reInForceMent
prefabricated reinforcement consisting of high-strength, cold-drawn or cold-rolled longitudinal and transverse wires welded together in
square or rectangular grids according to customer requirements. Wire intersections are electrically resistance-welded by a
computer-controlled continuous automatic welder which uses pressure and heat to fuse all wires in their proper position, creating
a consistent high-quality reinforcing product.
CoNCrete PIPe reINforCemeNt
Engineered made-to-order product that is used as the primary reinforcement in concrete pipe and box culverts for drainage and sewage systems,
water treatment facilities and other related applications.
PLANT LOCATIONS
Dayton, Texas
Mount Airy, North Carolina
Wilmington, Delaware
CuSTO meR SegmeNTS
eND uSe S
Concrete Pipe and Precast Producers
Nonresidential Construction
Residential Construction
eNgINeered StruCtural meSh
Engineered made-to-order product that is used as the primary reinforcement in concrete elements or structures, frequently serving as a
replacement for hot-rolled rebar.
PLANT LOCATIONS
Dayton, Texas
Mount Airy, North Carolina
CuSTO meR SegmeNTS
Precast and Prestressed Producers
Rebar Fabricators
Distributors
eND uSe S
Nonresidential Construction
StaNdard Welded WIre reINforCemeNt
Secondary reinforcing product that is produced in standard styles for crack control applications in residential and light nonresidential construction,
including driveways, sidewalks and a wide range of slab-on-grade applications.
PLANT LOCATIONS
Dayton, Texas
Hickman, Kentucky
Mount Airy, North Carolina
Wilmington, Delaware
CuSTO meR SegmeNTS
Rebar Fabricators
Distributors
eND uSe S
Nonresidential Construction
Residential Construction
prestressed concrete strAnd
High-strength seven-wire reinforcement consisting of six cold-drawn wires that are continuously wrapped around a center wire forming
a strand. the strand is heat-treated while under tension, which imparts low relaxation characteristics and increases the working range
of the product, providing engineers with greater flexibility in its application and the ability to better utilize its reinforcing properties.
pc strand is used to impart compression forces into prestressed concrete elements and structures, which may be either pretensioned
or posttensioned. pretensioned means that the strands are tensioned to their design load and anchored at the ends of a form. After
concrete has been placed and allowed to cure to sufficient strength, the load on the strand is transferred from the external anchors to the
cured member, creating compression forces within the element, or “prestressing” it. posttensioned means that the strands are tensioned
after the concrete has been placed and allowed to cure.
PLANT LOCATIONS
Gallatin, Tennessee
Sanderson, Florida
CuSTO meR SegmeNTS
Precast Prestress Producers
Posttension Suppliers
eND uSe S
Nonresidential Construction
Residential Construction
America faces a growing infrastructure crisis.
Deterioration. Congestion. Reduced reliability. A projected funding
gap of $1.6 trillion over the next five years.
After years of neglect, the warning signs are becoming increasingly apparent
across all sectors of our nation’s infrastructure. Nearly 30% of the bridges in the
U.S. are structurally deficient or functionally obsolete. Our interstate highway
system is reaching the end of its 50-year life cycle and will require substantial
rebuilding and maintenance. A recent study indicates that 83% of our transportation
infrastructure is incapable of meeting the country’s needs over the next 10 years.
In its most recent report card on America’s infrastructure, the American Society
of Civil Engineers gave our system an overall “D” which included 4 Cs and 10 Ds.
Our roads are becoming increasingly congested as the number of miles driven rose 23% from 1995
to 2005 while the length of roads increased only 2%. The average metropolitan driver spends
46 hours a year stuck in traffic which doubles for daily rush-hour commuters in large cities. The
lack of comprehensive and coordinated long-term strategies and financing solutions has left us
playing catch-up to other nations. Addressing these needs will require substantial increases in
funding at the federal, state and local level, which are likely to come from higher taxes and user
fees in addition to various forms of public/private partnerships and bond issues funded by user
fees and general tax revenues.
2
2
How does our nation’s infrastructure strategy impact Insteel? Through the intensive use of
our concrete reinforcing products in highway and infrastructure construction…PC strand and
ESM in bridges and overpasses, concrete pipe reinforcement in road drainage systems and
ESM in concrete barrier medians. We believe the heightened interest in addressing our nation’s
infrastructure needs will ultimately yield financing solutions that represent a substantial growth
opportunity for Insteel.
Insteel IndustrIes, Inc. and subsIdIarIes 3
Insteel IndustrIes, Inc. and subsIdIarIes 3
Insteel Industries
A name largely unfamiliar outside of the building
materials industry. A company that is one of the
largest manufacturers of steel wire reinforcing
products for concrete construction applications. A
leader in its markets with state-of-the-art facilities
and manufacturing capabilities. A provider of
concrete reinforcing solutions ideally positioned
to capitalize on the critical infrastructure needs
of our nation.
us82—Greenville bridge
The new Greenville Bridge on I-82 crossing the Mississippi River which
incorporated Insteel’s concrete reinforcing products and was previously featured
on the cover of our 2005 annual report.
Engineered structural mesh
A welded wire reinforcing product manufactured to customer specifications that frequently serves as a
replacement for hot-rolled rebar. A product produced as prefabricated sheets that offers significant
labor savings versus the time-intensive placing and tying inherent to rebar and requires less steel due
to its superior strength. A product gaining momentum in penetrating the rebar market in response to:
(1) increasing construction labor constraints and costs; and (2) improvements in welding equipment
technology that have made small batch production and quick delivery feasible. A product that can serve as
6
6
new esM production line at our Mount airy, nc plant
a substitute for rebar sizes representing approximately 80% of domestic rebar consumption. A market for
Insteel that could double in volume on just a few percentage points of market share growth. A product
frequently used with PC strand to provide a comprehensive concrete reinforcing solution.
With the two new production lines that started up during 2007 in our North Carolina and Texas facilities,
each with the capacity to generate $16–$20 million of revenues annually (at current average selling prices),
we are well-positioned to capitalize on the growing acceptance of ESM as a superior reinforcing solution
for many concrete construction applications.
Insteel IndustrIes, Inc. and subsIdIarIes 7
Insteel IndustrIes, Inc. and subsIdIarIes 7
$2.9
$6.3
2003
2004
2005
$19.0
2006
$17.0
2007
0
Investing for the future
During 2006 and 2007, we’ve invested $36 million in our manufacturing facilities. Adding new ESM
production lines in our North Carolina and Texas plants. Upgrading the equipment and reconfiguring
the process flow of our Tennessee and Florida PC strand facilities. Adding a new standard welded wire
reinforcement line in our Delaware plant. These projects share common characteristics by providing
additional capacity to satisfy future growth in demand and facilitating substantial improvements in our
labor productivity and unit conversion costs. When fully ramped up, they should add over $70 million
of revenue-generating capacity annually (at current average selling prices) and advance our ongoing
initiatives to operate as the lowest cost producer.
30
40
10
20
50
0
10
20
30
40
50
Let t er to Sh a r ehoLderS
In 2007, Insteel posted solid financial results coming off
the record highs that were achieved in 2006 despite
facing increasing headwinds in our markets. We contin-
ued to make strategic investments that position us for
future growth and enhance our manufacturing capabili-
ties. our business strategy remains focused
on generating returns that exceed our cost of capital by
(1) achieving leadership positions in our markets and
operating as the lowest cost producer, and (2) pursuing
growth opportunities in our core businesses that further
our penetration of existing markets or expand our geo-
graphic footprint.
FInancIal HIgHlIgHts
Sales for 2007 decreased 9.6% to $297.8 million from $329.5 million in 2006 as an 11.4% drop-off in
shipments offset a 2.0% increase in average selling prices. Earnings from continuing operations fell to
$24.3 million ($1.33 per diluted share) from $34.4 million ($1.86 per diluted share) in the prior year due to
the reduced shipments, increasing raw material costs and higher unit conversion costs resulting from lower
production levels.
Business conditions continued to be mixed during the year, characterized by strong demand for concrete
reinforcing products that are primarily used in nonresidential construction and weak demand from customers
with significant exposure to the housing market. During the second half of the year, our sales of PC strand
to commercial posttension accounts focused on residential construction applications declined due to
the elevated level of irrationally priced import competition, primarily from China. As a result, shipments
to posttensioners, which represented 14% of our total shipments in 2006 were minimal during the second
half of 2007.
We ended the year debt-free with $8.7 million of cash on hand. Our strong balance sheet and flexible
capital structure position us to enhance value for our shareholders by investing in the growth of our core
businesses through capital expenditures and acquisitions, paying cash dividends and utilizing our share
repurchase program on an opportunistic basis.
capItal ExpE ndItur E program
Capital expenditures were $17.0 million in 2007 as we continued to invest in a wide range of important
initiatives to expand revenues and drive cost improvements at our manufacturing facilities. When fully operational,
these projects have the capability of generating over $70.0 million of incremental revenues annually (at
current average selling prices) in addition to significantly reducing our unit conversion costs through higher
productivity and increased throughput.
10
With most of the outlays for these projects behind us, we plan on significantly scaling back capital
expenditures in 2008 as we assess the uncertainty in our markets and in the economy in general. At the
same time, our financial flexibility will allow us to capitalize on any growth opportunities that may develop.
Engineered Structural Mesh (“ESM”). We started up a new ESM production line in our North Carolina
facility during the first quarter and a second new line at our Texas plant during the fourth quarter. These
expansions position us to benefit from the growing market acceptance for ESM as a replacement for
hot-rolled rebar due to the inherent labor, cycle time and material cost advantages it offers for many concrete
reinforcing applications. With total domestic consumption of ESM representing less than 5% of the rebar
volume it could potentially replace, the product is still early in its life cycle where just a few percentage points
of market share growth translate into a substantial increase in demand. We expect each of the new
lines to generate $16.0 to $20.0 million of annual revenues (at current average selling prices) when ramped
up to capacity.
PC strand. During the first quarter, we completed the reconfiguration and expansion of our Tennessee PC
strand operation which entailed the consolidation of manufacturing processes previously performed in two
adjacent facilities together with the installation of a new production line. We also began work on the
upgrading of our Florida PC strand facility which is expected to be completed during the third quarter of
2008. These projects add a combined $30.0 million of annual revenue capacity (at current average selling
prices)—$25.0 million at the Tennessee facility and $5.0 million at the Florida plant. While the timing of these
additions may not coincide with robust market conditions, we view them as critical to extending our
leadership position in the North American market.
Standard welded wire reinforcement. During the fourth quarter, we started up a new standard welded
wire reinforcement line in our Delaware plant that adds $7.0 million of annual revenue capacity (at current
average selling prices).
lookI ng aHEad
As we move into 2008, we face significant near-term challenges in the form of rising raw material costs,
PC strand import competition and the continuation of mixed market conditions.
Raw materials. Prices for hot-rolled steel wire rod, our primary raw material, are on the rise and are likely
to continue trending up until the pricing for imports into the U.S. becomes more competitive with domestic
producers. These additional costs may be difficult to recover in our markets depending upon the strength
of demand and competitive dynamics, although we are hopeful that the increased discipline that has been
evident in our markets since 2004 continues going forward.
PC strand imports. Imports of PC strand from China continue to enter the U.S. market at unrealistically
low prices reflecting the dysfunctional nature of China’s non-market economy. It is clear that Chinese
producers lack any inherent manufacturing cost advantage relative to state-of-the-art domestic producers
such as Insteel. The Chinese pursuit of the U.S. market is largely a result of distorted economics resulting
Insteel IndustrIes, Inc. and subsIdIarIes 11
from the availability of low-cost financing and government subsidies that have resulted in an explosion of
capacity well in excess of China’s home market requirements. In July 2007, the Chinese government took
the first step towards leveling the competitive playing field by reducing the VAT rebate for exported PC strand
from 13% to 5%. This reduction, together with recent escalation in wire rod costs and ocean freight rates,
has made exporting to the U.S. substantially less attractive for Chinese producers, forcing them to raise
their selling prices. Although it would be premature to assume that these favorable trends will continue, we
believe the unfair trade practices of the Chinese will ultimately be resolved—either through further proactive
changes on the part of the Chinese government that allow true economics to prevail or through the filing of
trade actions on the part of U.S. strand producers should market conditions deteriorate to the point where we
can demonstrate injury. Under either scenario, Insteel will be well-positioned to capitalize through the expansion
and upgrading of our Tennessee and Florida PC strand facilities and our world-class cost structure.
Market outlook. We expect market conditions to remain mixed in 2008 with some moderation in the growth
rate for nonresidential construction from the elevated level of recent years due to the anticipated softening in
commercial construction. Other categories within nonresidential construction, however, are expected to remain
strong driven by continued growth in infrastructure-related spending and post-hurricane reconstruction in
the Gulf region. Longer term, we believe the heightened focus on addressing the critical infrastructure needs
that exist will yield creative financing solutions that favorably impact demand for our concrete reinforcing
products for an extended period.
In view of the inventory overhang of unsold homes and tightening in the credit markets, we expect the
weakness in residential construction to persist through 2009 and continue to adversely affect shipments to
customers that have greater exposure to the housing sector.
Despite these challenges, we anticipate gradually increasing returns from the substantial investments
we have made in our facilities over the past two years through reduced operating costs and additional
revenues, particularly for ESM as we further our penetration of the rebar market. In addition, we will
continue to evaluate and pursue other growth opportunities—organic as well as through acquisitions—that
strengthen our competitive position and create value for our shareholders.
We wish to thank our customers, employees and shareholders for their continued trust, confidence and
support. As we move into 2008, we are well-positioned to capitalize on the opportunities and respond to
the challenges that lie ahead.
Sincerely,
H.O. Woltz III
President and Chief Executive Officer
12
Contents
14 Management’s Discussion and Analysis of Financial Condition and
Results of Operations
21 Management’s Report on Internal Control Over Financial Reporting
22
23
24
25
26
28
29
44
45
46
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Internal Control Over Financial Reporting
Consolidated Statements of Operations
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Shareholders’ Equity and
Comprehensive Income
Notes to Consolidated Financial Statements
Stock Performance Graph
Financial Information by Quarter (Unaudited)
Selected Financial Data—Five-Year History
F i n a n c i a l R e v i e w
ManageMent’s Discussion anD analysis of financial conDition anD
Results of ope Rations
Forward-Looking StatementS
This annual report contains forward-looking statements
within the meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. When used in this
report, the words “believes,” “anticipates,” “expects,” “estimates,”
“plans,” “intends,” “may,” “should” 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,
such forward-looking statements are subject to a number of risks
and uncertainties, and we can provide no assurances that such
plans, intentions or expectations will be achieved. 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.
It is not possible to anticipate and list all risks and
uncertainties that may affect our future operations or financial
performance; however, they include, but are not limited to, the
risks discussed below and in our Form 10-K for the year ended
September 29, 2007 under the caption “Risk Factors” which
includes the following:
• Our business is cyclical and prolonged economic declines,
particularly in the level of construction activity, could have a
material adverse effect on our financial results.
• Demand for our products is highly variable and difficult
to forecast due to our minimal backlog and the unanticipated
changes that can occur in customer order patterns or inventory
levels.
• Our financial results can be negatively impacted by the
volatility in the cost and availability of our primary raw mate-
rial, hot-rolled carbon steel wire rod.
• Foreign competition could adversely impact our financial
results.
• Our manufacturing facilities are subject to unexpected
equipment failures, operational interruptions and casualty losses.
• Our financial results could be adversely impacted by the
continued escalation in certain of our operating costs.
• 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.
• Environmental compliance and remediation could result
in substantially increased capital investments and operating costs.
• Our production and earnings could be reduced by strikes
or work stoppages by our unionized employees.
• Our stock price can be volatile, often in connection with
matters beyond our control.
overview
Following our exit from the industrial wire busi-
ness (see Note 7 to the consolidated financial state-
ments), our operations are entirely focused on the
manufacture and marketing of concrete reinforcing
products for the concrete construction industry. The
results of operations for the industrial wire business
have been reported as discontinued operations for all
periods presented. Our business strategy is focused on:
(1) achieving leadership positions in our markets and
operating as the lowest cost producer; and (2) pursuing
growth opportunities within our core businesses that
further our penetration of current markets served or
expand our geographic reach.
CritiCaL aCCounting PoLiCieS
Our financial statements have been prepared in
accordance with accounting principles generally
accepted in the U.S. Our discussion and analysis of our
financial condition and results of operations are based
on these financial statements. The preparation of our
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 assump-
tions believed to be reasonable. Actual results could
differ from these estimates.
The following critical accounting policies are used
in the preparation of the financial statements:
Revenue recognition and credit risk. We recognize
revenue from product sales in accordance with Staff
Accounting Bulletin (“SAB”) No. 104 when products
are shipped and risk of loss and title has passed to the
customer. Substantially all of our accounts receivable
are due from customers that are located in the United
States and we generally require no collateral depending
14
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. If the financial condition
of our customers were to change significantly, adjust-
ments to the allowances may be required. While we
believe our recorded trade receivables will be collected,
in the event of default in payment of a trade receivable,
we would follow normal collection procedures.
Excess and obsolete inventory reserves. We write
down the carrying value of our inventory for estimated
obsolescence to reflect the lower of the cost of the
inventory or its estimated net realizable value based
upon assumptions about future demand and market
conditions. If actual market conditions for our products
are substantially different than our projections, adjust-
ments to these reserves may be required.
Accruals for self-insured liabilities and litigation.
We accrue estimates of the probable costs related to
self-insured medical and workers’ compensation claims
and legal matters. These estimates have been devel-
oped in consultation with actuaries, our legal counsel
and other advisors and are based on our current under-
standing of the underlying facts and circumstances.
Because of uncertainties related to the ultimate out-
come of these issues as well as the possibility of changes
in the underlying facts and circumstances, adjustments
to these reserves may be required in the future.
Recent accounting pronouncements. In July 2006,
the Financial Accounting Standards Board (“FASB”)
issued Interpretation No. 48, “Accounting for Uncer-
tainty in Income Taxes” (“FIN No. 48”) which clarifies
the criteria for the recognition of tax benefits under
Statement of Financial Accounting Standards (“SFAS”)
No. 109, “Accounting for Income Taxes.” FIN No. 48
specifies how tax benefits for uncertain tax positions
are to be recognized, measured and derecognized in
financial statements; requires certain disclosures of
uncertain tax matters; specifies how reserves for uncer-
tain tax positions should be classified on the balance
sheet; and provides transition and interim period guid-
ance, among other provisions. FIN No. 48 is effective
for us beginning in fiscal 2008 and requires that the
cumulative effect of applying its provisions be disclosed
separately as a one-time, non-cash charge against the
opening balance of retained earnings in the year of
adoption. Based on our preliminary analysis, the
adoption of FIN No. 48 is expected to result in an
estimated charge to retained earnings of approximately
$260,000. The actual amount of the adjustment will be
recorded in the first quarter of 2008 upon the finaliza-
tion of our analysis.
In September 2006, the FASB issued SFAS No.
157, “Fair Value Measurements” which defines fair
value, establishes a framework for measuring fair value
in generally accepted accounting principles, and
expands disclosures about fair value measurements.
SFAS No. 157 is effective for us beginning in fiscal
2009. At this time, we have not determined what effect,
if any, the adoption of SFAS No. 157 will have on our
financial position or results of operations.
In September 2006, the FASB issued SFAS No.
158, “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans.” SFAS No.
158 requires that an employer recognize the overfunded
or underfunded status of a defined benefit postretire-
ment plan in its statement of financial position and
changes in the funded status through other compre-
hensive income in the year in which the changes
occur. SFAS No. 158 also requires the measurement of
defined benefit plan assets and obligations as of the
date of the employer’s fiscal year-end statement of
financial position. The provisions regarding the recog-
nition of a plan’s funding status were effective for us in
fiscal 2007 and resulted in a $2.1 million decrease in
shareholders’ equity, net of tax. The provisions regard-
ing the change in the measurement date are effective
for us beginning in fiscal 2009. The adoption of SFAS
No. 158 is further discussed in Note 8 to the consoli-
dated financial statements.
insteel industRies, inc. and subsidiaRies 15
ManageMent’s Discussion anD analysis of financial conDition anD
Results of opeRations (continued)
reSuLtS oF oPerationS
Statements of Operations—Selected Data
(Dollars in thousands)
Net sales
Gross profit
Percentage of net sales
Selling, general and administrative expense
Percentage of net sales
Other expense (income), net
Interest expense
Effective income tax rate
Earnings from continuing operations
Earnings (loss) from discontinued operations
Net earnings
“N/M” = not meaningful
2007 ComPared with 2006
Net Sales
Net sales decreased 9.6% to $297.8 million in 2007
from $329.5 million in 2006 as lower shipments more
than offset higher average selling prices. Shipments
for the year decreased 11.4% while average selling
prices rose 2.0% from the prior year. The reduction in
shipments was driven by a combination of factors
including: (1) the continuation of weak demand and
inventory reduction measures pursued by customers
that have been negatively impacted by the downturn
in residential construction activity; (2) our decision to
solicit minimal new business from posttension custom-
ers in the PC strand market due to low-priced import
competition; and (3) less favorable weather conditions
in certain of our markets relative to the prior year
which reduced the level of construction activity.
Gross Profit
Gross profit decreased 20.9% to $56.1 million, or
18.8% of net sales in 2007 from $70.9 million, or 21.5%
of net sales in 2006. The decrease was primarily due to
the reduction in shipments, higher unit manufacturing
costs resulting from lower operating levels and higher
raw material costs which were partially offset by the
increase in average selling prices.
september 29,
2007
$297,806
56,061
18.8%
$ 17,583
5.9%
$ 4
592
36.6%
$ 24,284
(122)
24,162
Year Ended
September 30,
2006
$329,507
70,871
21.5%
$ 16,996
5.2%
$ (446)
669
36.2%
$ 34,377
(1,337)
33,040
Change
(9.6%)
(20.9%)
3.5%
N/M
(11.5%)
(29.4%)
N/M
(26.9%)
Change
6.5%
22.4%
October 1,
2005
$ 309,320
57,898
18.7%
5.1%
$ 16,175
N/M
(80.5%)
$
5.2%
(73)
3,427
36.1%
40.3%
N/M
31.9%
$ 24,499
546
25,045
Selling, General and Administrative Expense
Selling, general and administrative expense
(“SG&A expense”) increased 3.5% to $17.6 million,
or 5.9% of net sales in 2007 from $17.0 million, or
5.2% of net sales in 2006. The increase was primarily
due to higher compensation expense ($989,000)
which was partially offset by lower employee benefit
costs ($387,000).
Other Expense (Income), Net
Other expense was $4,000 in 2007 compared
with income of $446,000 in 2006. The income for the
prior year was primarily related to a $247,000 litigation
settlement and $128,000 of duties related to the
dumping and countervailing duty cases that were filed
by a coalition of domestic PC strand producers which
included us.
Interest Expense
Interest expense decreased $77,000, or 11.5%, to
$592,000 in 2007 from $669,000 in 2006. The decrease
was primarily due to lower average outstanding bal-
ances on the revolving credit facility in the current
year together with lower amortization expense associ-
ated with capitalized financing costs.
Income Taxes
Our effective income tax rate was relatively flat
for 2007 at 36.6% compared with 36.2% in 2006.
16
Earnings From Continuing Operations
Gross Profit
Earnings from continuing operations for 2007
decreased to $24.3 million, or $1.33 per diluted share,
compared to $34.4 million, or $1.86 per diluted share in
2006 primarily due to the lower sales and gross profit.
Earnings (Loss) From Discontinued Operations
The loss from discontinued operations for 2007
was $122,000, or $0.01 per diluted share compared to
$1.3 million, or $0.07 per diluted share in 2006. The
current year loss reflects the closure costs incurred
to exit the industrial wire business and close our
Fredericksburg, Virginia manufacturing facility. The
prior year loss reflects the operating losses incurred by
the industrial wire business together with the closure
costs which were partially offset by a $1.3 million pre-
tax gain on the sale of certain machinery and equip-
ment associated with the industrial wire business for
$6.0 million.
Net Earnings
Net earnings for 2007 decreased to $24.2 million,
or $1.32 per diluted share, compared to $33.0 million,
or $1.79 per diluted share in 2006 primarily due to the
lower sales and gross profit which was partially offset
by the reduction in the loss from discontinued opera-
tions associated with our exit from the industrial wire
business and closure of our Fredericksburg, Virginia
manufacturing facility.
2006 ComPared with 2005
Net Sales
Net sales increased 6.5% to $329.5 million in 2006
from $309.3 million in 2005 as higher shipments more
than offset lower average selling prices. Shipments for
the year increased 11.0% while average selling prices
decreased 4.0% from the prior year. The increase in
shipments was primarily due to the continued improve-
ment in nonresidential construction activity and
demand for our concrete reinforcing products together
with the completion of the inventory reduction mea-
sures pursued by customers during the prior year. The
decrease in average selling prices was due to compe-
titive activity in our markets which was offset by reduc-
tions in raw material costs.
Gross profit increased 22.4% to $70.9 million, or
21.5% of net sales in 2006 from $57.9 million, or 18.7%
of net sales in 2005. The increase in gross profit was
driven by higher shipments together with wider spreads
between average selling prices and raw material costs.
In addition, gross profit for 2005 was negatively
impacted by the sale of higher cost inventory as raw
material costs and selling prices declined over the
course of the year.
Selling, General and Administrative Expense
SG&A expense increased 5.1% to $17.0 million,
or 5.2% of net sales in 2006 from $16.2 million, or 5.2%
of net sales in 2005. We adopted SFAS No. 123(R) as
of the beginning of fiscal 2006 which required all
share-based payments to be recognized as expense over
the requisite service period based upon their fair values
as of the grant dates. Under the provisions of SFAS
No. 123(R), total stock-based compensation expense
for 2006 amounted to $1.2 million comprised of
$535,000 of stock option expense and $638,000 of
restricted stock amortization. Although we elected to
adopt SFAS No. 123(R) using the modified prospective
method, the 2005 amounts also reflect stock option
expense due to certain previous option plans that were
required to be accounted for as variable plans. Under
variable plan accounting, compensation expense was
recognized for the excess of the market price over the
exercise price and adjusted to reflect changes in market
valuation. As a result, total stock-based compensation
expense for 2005 amounted to $805,000 comprised of
$571,000 of stock option expense resulting from the
increase in our share price that occurred during 2005
and $234,000 of restricted stock amortization. Excluding
the stock-based compensation expense from both peri-
ods, SG&A expense increased $453,000 primarily due
to increases in compensation expense ($445,000),
allowance for doubtful accounts ($299,000), employee
benefit costs ($295,000), and travel-related expenses
($211,000) partially offset by lower legal expenses
($556,000) and consulting fees ($244,000).
insteel industRies, inc. and subsidiaRies 17
ManageMent’s Discussion anD analysis of financial conDition anD
Results of opeRations (continued)
Other Expense (Income), Net
Other income was $446,000 in 2006 compared
with $73,000 in 2005. The income for 2005 was pri-
marily related to a $247,000 litigation settlement and
$128,000 of duties related to the dumping and coun-
tervailing duty cases that were filed by a coalition of
domestic PC strand producers which included us.
Interest Expense
Interest expense decreased $2.8 million, or 80.5%,
to $669,000 in 2006 from $3.4 million in 2005. The
decrease was primarily due to the reduction in average
borrowing levels on our senior secured credit facility
($1.8 million) and lower amortization expense associ-
ated with capitalized financing costs and the unreal-
ized loss on the terminated interest rate swaps which
was fully amortized in 2005 ($959,000).
Income Taxes
Our effective income tax rate was relatively flat
for 2006 at 36.2% compared with 36.1% in 2005.
Earnings From Continuing Operations
Earnings from continuing operations for 2006
increased to $34.4 million, or $1.86 per diluted share,
compared to $24.5 million, or $1.29 per diluted share
in 2005 primarily due to the higher sales and gross
profit together with the reduction in interest expense
in 2006.
Liquidity and CaPitaL reSourCeS
Selected Financial Data
Earnings (Loss) From Discontinued Operations
The loss from discontinued operations for 2006
was $1.3 million, or $0.07 per diluted share com-
pared with earnings from discontinued operations of
$546,000, or $0.03 per diluted share in 2005. The 2006
loss related to the operating losses and closure costs
associated with our exit from the industrial wire busi-
ness and closure of our Fredericksburg, Virginia manu-
facturing facility. In 2006, we completed the sale of
certain machinery and equipment associated with the
industrial wire business for $6.0 million and recorded a
pre-tax gain of $1.3 million. The 2005 earnings con-
sisted of a $793,000 gain on the disposal of real estate,
the collection of a note receivable and the settlement
on the release of an equipment lien associated with
Insteel Construction Systems, a discontinued operation
that we had previously exited in 1997, partially offset
by a loss of $247,000 from the operations of the indus-
trial wire business.
Net Earnings
Net earnings for 2006 increased to $33.0 million,
or $1.79 per diluted share, compared to $25.0 million,
or $1.32 per diluted share in 2005 primarily due to the
higher sales and gross profit together with the reduc-
tion in interest expense during 2006 which was par-
tially offset by the loss from discontinued operations.
(Dollars in thousands)
Net cash provided by operating activities of continuing operations
Net cash used for investing activities of continuing operations
Net cash used for financing activities of continuing operations
Net cash provided by (used for) operating activities of discontinued operations
Net cash provided by investing activities of discontinued operations
Net cash used for financing activities of discontinued operations
Working capital
Total long-term debt
Percentage of total capital
Shareholders’ equity
Percentage of total capital
Total capital (total long-term debt + shareholders’ equity)
Year Ended
september 29,
2007
September 30,
2006
October 1,
2005
$ 17,065
(17,062)
(1,842)
(147)
—
—
70,697
—
—
$143,850
$ 42,650
(19,472)
(22,008)
2,185
5,963
—
56,938
—
—
$122,438
100%
100%
$ 41,830
(6,036)
(40,931)
2,630
2,120
(560)
51,662
11,860
11%
$ 97,036
89%
$143,850
$122,438
$ 108,896
18
CaSh FLow anaLySiS
Operating activities of continuing operations pro-
vided $17.1 million of cash in 2007 compared with
$42.7 million in 2006 and $41.8 million in 2005. The
year-over-year decrease in 2007 was largely due to the
$10.1 million reduction in earnings from continuing
operations and $18.9 million decrease in cash provided
by working capital. In 2007, the net change in receiv-
ables, inventory and accounts payable and accrued
expenses used $14.6 million of cash while providing
$4.3 million and $7.9 million in 2006 and 2005, respec-
tively. The cash used by working capital in the current
year was primarily due to the $17.0 million decrease in
accounts payable and accrued expenses resulting from
the sharp reduction in raw material purchases during
the fourth quarter together with changes in the mix of
vendor payment terms. Depreciation and amortization
rose $1.1 million, or 24.7%, primarily due to the
increase in capital expenditures during the current and
prior years and related asset additions. Deferred income
taxes provided $2.0 million of cash during 2007 while
using $1.6 million in 2006 primarily due to higher tax
basis gains on the sale of fixed assets in the prior year.
Investing activities of continuing operations used
$17.1 million of cash in 2007 compared with $19.5 mil-
lion in 2006 and $6.0 million in 2005. Capital expen-
ditures amounted to $17.0 million, $19.0 million and
$6.3 million in 2007, 2006 and 2005, respectively, with
the higher levels in the current and prior years primar-
ily related to capital outlays for the expansions of the
ESM and PC strand businesses. Capital expenditures
are expected to be $10.0 million in 2008 primarily
related to the upgrading of our Florida PC strand facil-
ity. The actual timing of these expenditures as well as
the amounts are subject to change based on adjust-
ments in the project timelines or scope, future market
conditions, our financial performance and additional
growth opportunities that may arise. In 2007, we sold
an idle facility which had been classified as assets held
for sale and realized net proceeds of $590,000. Investing
activities from discontinued operations did not provide
or utilize cash in 2007 while providing $6.0 million in
2006 from the net proceeds on the sale of certain
machinery and equipment associated with our discon-
tinued industrial wire business.
Financing activities of continuing operations used
$1.8 million of cash in 2007 compared with $22.0 mil-
lion in 2006 and $40.9 million in 2005. The year-over-
year decrease in 2007 was due to the $16.0 million
reduction in long-term debt and the $8.5 million of
share repurchases in the prior year.
Credit FaCiLitieS
As of September 29, 2007, we had a $100.0 mil-
lion revolving credit facility in place to supplement our
operating cash flow in funding our working capital,
capital expenditure and general corporate require-
ments. No borrowings were outstanding on the credit
facility as of September 29, 2007 and September 30,
2006 and outstanding letters of credit totaled $1.9 mil-
lion and $1.4 million, respectively. As of September 29,
2007, $54.7 million of borrowing capacity was available
on the credit facility (see Note 4 to the consolidated
financial statements).
Our balance sheet was debt-free as of September
29, 2007 and September 30, 2006. We believe that, in
the absence of significant unanticipated cash demands,
net cash generated by operating activities and amounts
available under our revolving credit facility will be
sufficient to satisfy our expected requirements for work-
ing capital, capital expenditures, dividends and share
repurchases, if any.
oFF-BaLanCe Sheet arrangementS
We do not have any material transactions,
arrangements, obligations (including contingent obli-
gations), 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 reason-
ably likely to have a material current or future impact
on our financial condition, results of operations, liquid-
ity, capital expenditures, capital resources or significant
components of revenues or expenses.
insteel industRies, inc. and subsidiaRies 19
ManageMent’s Discussion anD analysis of financial conDition anD
Results of opeRations (continued)
ContraCtuaL oBLigationS
Our contractual obligations and commitments at September 29, 2007 are as follows:
Contractual Obligations
(In thousands)
Operating leases
Raw material purchase commitments(1)
Other unconditional purchase obligations(2)
Pension benefit obligations
Supplemental employee retirement plan
Total
(1) Non-cancelable fixed price purchase commitments for raw materials.
(2) Contractual commitments for equipment purchases.
outLook
We expect continued growth in nonresidential
construction, our primary demand driver, in 2008, but
at a reduced rate from the elevated levels of recent
years. The outlook for commercial construction has
weakened due to the ongoing housing downturn and
recent tightening in the credit markets. However, other
segments within nonresidential construction are
expected to remain strong supported by: (1) higher
spending for infrastructure-related construction asso-
ciated with the recently enacted federal transporta-
tion funding authorization, the improved fiscal
positions of most states and the heightened focus on
addressing the critical infrastructure needs that exist;
and (2) post-hurricane reconstruction in the Gulf
region of the U.S.
At the same time, the drop-off in residential con-
struction is expected to continue through 2008, which
will adversely affect shipments to customers that have
greater exposure to the housing sector. We now believe
that a recovery in the housing market is unlikely to
occur until sometime in 2009, although the exact tim-
ing remains highly uncertain. In addition, increasing
imports of PC strand and escalating raw material costs
could compress margins depending upon the strength
of demand, competitive dynamics and our ability to
recover these additional costs in our markets.
Despite these near-term challenges, we expect
gradually increasing contributions during 2008 from
the substantial investments that have been made in
our facilities over the past two years to expand and
reconfigure our Tennessee PC strand facility, add new
ESM production lines in our North Carolina and Texas
plants and a new standard welded wire reinforcing line
at our Delaware facility, and upgrade our Florida PC
20
Payments Due by Period
Less Than
1 Year
$ 781
31,831
3,843
428
80
1–3
Years
$ 658
—
—
864
160
3–5
Years
$ 27
—
—
642
418
More Than
5 Years
$
—
—
—
8,270
17,654
Total
$ 1,466
31,831
3,843
10,204
18,312
$ 65,656
$ 36,963
$ 1,682
$ 1,087
$ 25,924
strand operation which is expected to be completed in
the third quarter of 2008. As we ramp up production
on the new equipment, we anticipate dual benefits in
the form of reduced operating costs and additional
capacity to support future growth. In addition to these
organic growth and cost reduction initiatives, we are
continually evaluating potential acquisitions in our
existing businesses that further our penetration in
current markets served or expand our geographic
reach. We anticipate that these actions, together with
the positive overall outlook for our nonresidential
construction-related markets, should have a favorable
impact on our financial performance in 2008 (see
“Forward-Looking State ments”).
quantitative and quaLitative diSCLoSureS aBout
market riSk
Our cash flows and earnings are subject to fluc-
tuations 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 deemed
appropriate, through the use of derivative financial
instruments. We do not use financial instruments for
trading purposes and we are not a party to any lever-
aged derivatives. We monitor our underlying market
risk exposures on an ongoing basis and believe that
we can modify or adapt our hedging strategies as
necessary.
Commodity Prices
We have not generally used derivative commodity
instruments to hedge our exposures to changes in com-
modity prices. Our principal commodity price exposure
is hot-rolled carbon steel wire rod, our primary raw
material, which we purchase from both domestic and
foreign suppliers and is denominated in U.S. dollars.
Prior to 2004, we typically negotiated quantities and
pricing on a quarterly basis for both domestic and
foreign steel wire rod purchases to manage our expo-
sure to price fluctuations and to ensure adequate avail-
ability of material consistent with our requirements.
However, beginning in 2004, a tightening of supply in
the rod market together with fluctuations in the raw
material costs of rod producers resulted in increased
price volatility which has continued through 2007. In
some instances, 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. Our ability to acquire
steel wire rod from foreign sources on favorable terms is
impacted by fluctuations in foreign currency exchange
rates, foreign taxes, duties, tariffs and other trade
actions. Although changes in wire rod costs and our
selling prices may be correlated over extended periods
of time, depending upon market conditions, there may
be periods during which we are unable to fully recover
increased rod costs through higher selling prices, which
reduces our gross profit and cash flow from operations.
Interest Rates
Although we were debt-free as of September 29,
2007, future borrowings under our senior secured credit
facility are sensitive to changes in interest rates.
Foreign Exchange Exposure
We have not typically hedged foreign currency
exposures related to transactions denominated in cur-
rencies other than U.S. dollars and any such trans-
actions have not been material in the past. We will
occasionally hedge firm commitments for 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 29, 2007.
ManageMent’s RepoRt on inte Rnal cont Rol oV eR financial RepoRting
Insteel’s management is responsible for establish-
ing and maintaining adequate internal control over
financial reporting, as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange
Act of 1934, as amended. Insteel’s internal control
over financial reporting is designed to provide reason-
able assurance regarding the reliability of financial
reporting and the preparation of financial statements
for external purposes in accordance with generally
accepted accounting principles. The Company’s inter-
nal control over financial reporting includes those
written policies and procedures that: (1) pertain to
maintaining records that in reasonable detail accu-
rately and fairly reflect the transactions and disposi-
tions of assets; (2) provide reasonable assurance that
transactions are recorded as necessary to permit prepa-
ration of financial statements in accordance with gen-
erally accepted accounting principles, and that receipts
and expenditures are made in accordance with autho-
rizations of management and directors; and (3) provide
reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposi-
tion of assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal con-
trol 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 compli-
ance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Insteel’s
internal control over financial reporting as of Sep-
tember 29, 2007. In making this assessment, manage-
ment used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commis-
sion in Internal Control—Integrated Framework. Based
on its assessment, management believes that, as of
September 29, 2007, Insteel’s internal control over
financial reporting was effective based on those criteria.
Grant Thornton LLP, an independent registered
public accounting firm, has audited management’s
assessment of the effectiveness of Insteel’s internal con-
trol over financial reporting and has issued an attesta-
tion report concurring with management’s assessment
which is on page 23.
insteel industRies, inc. and subsidiaRies 21
RepoRt of in DepenDent RegisteReD pu Blic accounting fi RM
consoliDateD financial stateM ents
The Board of Directors and Shareholders
Insteel Industries, Inc.:
We have audited the accompanying consolidated
balance sheets of Insteel Industries, Inc. and subsidiary
(a North Carolina corporation) as of September 29,
2007 and September 30, 2006 and the related consoli-
dated statements of operations, shareholders’ equity
and comprehensive income and cash flows for each of
the three years in the period ended September 29,
2007. These financial statements are the responsibility
of the Company’s management. Our responsibility is to
express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the
standards of the Public Company Accounting Over-
sight Board (United States). Those standards require
that we plan and perform the audit to obtain reason-
able assurance about whether the financial statements
are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements.
An audit also includes assessing the accounting
principles used and significant estimates made by man-
agement, as well as evaluating the overall financial
statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial state-
ments referred to above present fairly, in all material
respects, the financial position of Insteel Industries,
Inc. and subsidiary as of September 29, 2007 and
September 30, 2006 and the results of their opera-
tions and their cash flows for each of the three years in
the period ended September 29, 2007, in conformity
with accounting principles generally accepted in the
United States.
As discussed in Note 8 to the financial statements,
the Company has adopted Financial Accounting
Standards Board Statement No. 158, “Employers’
Accounting for Defined Benefit Pension and Other
Postretirement Plans,” as of September 29, 2007. In
addition, as discussed in Note 1, the Company adopted
Financial Accounting Standards Board Statement No.
123(R), “Share-Based Payment” on October 2, 2005.
We also have audited, in accordance with the
standards of the Public Company Accounting Over-
sight Board (United States), the effectiveness of Insteel
Industries, Inc. and subsidiary’s internal control over
financial reporting as of September 29, 2007, based on
criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO)
and our report dated November 19, 2007 expressed an
unqualified opinion.
Greensboro, North Carolina
November 19, 2007
22
RepoRt of in DepenDent RegisteReD pu Blic accounting fi RM
inteRnal cont Rol oV eR financial RepoRting
To the Board of Directors and Shareholders
Insteel Industries, Inc.:
We have audited Insteel Industries, Inc. and sub-
sidiary’s (a North Carolina corporation) internal con-
trol over financial reporting as of September 29, 2007,
based on criteria established in Internal Control—
Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commis-
sion (COSO). Insteel Industries, Inc. and subsidiary’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. Our responsibility is to express
an opinion on Insteel Industries, Inc. and subsidiary’s
internal control over financial reporting based on
our audit.
We conducted our audit in accordance with the
standards of the Public Company Accounting Over-
sight Board (United States). Those standards require
that we plan and perform the audit to obtain reason-
able assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understand-
ing of internal control over financial reporting, assess-
ing 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.
A company’s internal control over financial
reporting is a process designed to provide reasonable
assurance regarding the reliability of financial report-
ing 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 prepa-
ration of financial statements in accordance with gen-
erally 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 con-
trol 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 compli-
ance with the policies or procedures may deteriorate.
In our opinion, Insteel Industries, Inc. and sub-
sidiary maintained, in all material respects, effective
internal control over financial reporting as of Sep-
tember 29, 2007 based on criteria established in Internal
Control—Integrated Framework issued by the Com-
mittee of Sponsoring Organizations of the Treadway
Commission (COSO).
We have also audited, in accordance with the
standards of the Public Company Accounting Over-
sight Board (United States), the consolidated balance
sheets of Insteel Industries, Inc. and subsidiary as of
September 29, 2007 and September 30, 2006 and the
related consolidated statements of operations, share-
holders’ equity and comprehensive income and cash
flows for each of the three years in the period ended
September 29, 2007, and our report dated November
19, 2007, expressed an unqualified opinion on those
financial statements and contains an explanatory para-
graph relating to the adoption of Financial Account-
ing Standards Board Statement (“SFAS”) No. 158,
“Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans.” In addition, as dis-
cussed in Note 1, the Company adopted SFAS No.
123(R), “Share-Based Payment” on October 2, 2005.
Greensboro, North Carolina
November 19, 2007
insteel industRies, inc. and subsidiaRies 23
consoliDateD stateMents of opeRations
(In thousands, except for per share amounts)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expense
Other expense (income), net
Interest expense
Interest income
Earnings from continuing operations before income taxes
Income taxes
Earnings from continuing operations
Earnings (loss) from discontinued operations net of income taxes of
($77), ($851) and $330
Net earnings
Per share amounts:
Basic:
Earnings from continuing operations
Earnings (loss) from discontinued operations
Net earnings
Diluted:
Earnings from continuing operations
Earnings (loss) from discontinued operations
Net earnings
Cash dividends declared
Weighted shares outstanding:
Basic
Diluted
See accompanying notes to consolidated financial statements.
Year Ended
september 29,
2007
September 30,
2006
October 1,
2005
$297,806
241,745
$329,507
258,636
$309,320
251,422
56,061
17,583
4
592
(415)
38,297
14,013
24,284
70,871
16,996
(446)
669
(255)
53,907
19,530
34,377
57,898
16,175
(73)
3,427
—
38,369
13,870
24,499
(122)
(1,337)
546
$ 24,162
$ 33,040
$ 25,045
$
1.34
(0.01)
$
1.33
$
$
$
1.33
(0.01)
1.32
0.12
$
1.88
(0.08)
$
1.31
0.03
$
1.80
$
1.34
$
$
$
1.86
(0.07)
1.79
0.12
$
$
$
1.29
0.03
1.32
0.06
18,142
18,314
18,307
18,473
18,656
18,954
24
consoliDateD Balance sH eets
(In thousands, except for per share amounts)
Assets:
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories
Prepaid expenses and other
Current assets of discontinued operations
Total current assets
Property, plant and equipment, net
Other assets
Non-current assets of discontinued operations
Total assets
Liabilities and shareholders’ equity:
Current liabilities:
Accounts payable
Accrued expenses
Current liabilities of discontinued operations
Total current liabilities
Other liabilities
Long-term liabilities of discontinued operations
Commitments and contingencies
Shareholders’ equity:
Preferred stock, no par value
Authorized shares: 1,000
None issued
Common stock, $1 stated value
Authorized shares: 40,000
Issued and outstanding shares: 2007, 18,303; 2006, 18,213
Additional paid-in capital
Deferred stock compensation
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying notes to consolidated financial statements.
september 29,
2007
September 30,
2006
$ 8,703
34,518
47,401
4,640
—
95,262
67,147
7,485
3,635
$ 10,689
37,519
46,797
2,675
411
98,091
55,217
9,653
3,635
$ 173,529
$ 166,596
$ 16,705
7,613
247
24,565
4,862
252
$ 30,691
9,819
643
41,153
2,713
292
—
—
18,303
48,939
(1,132)
79,859
(2,119)
143,850
$ 173,529
18,213
47,005
(662)
57,882
—
122,438
$ 166,596
insteel industRies, inc. and subsidiaRies 25
consoliDateD state Ments of cas H floW s
(In thousands)
Cash Flows From Operating Activities:
Net earnings
Earnings (loss) from discontinued operations
Earnings from continuing operations
Adjustments to reconcile earnings from continuing operations to net cash
provided by operating activities of continuing operations:
Depreciation and amortization
Amortization of capitalized financing costs
Amortization of unrealized loss on financial instruments
Stock-based compensation expense
Excess tax benefits from exercise of stock options
Loss on sale of property, plant and equipment
Deferred income taxes
Increase in cash surrender value of life insurance over premiums paid
Net changes in assets and liabilities:
Accounts receivable, net
Inventories
Accounts payable and accrued expenses
Other changes
Total adjustments
Net cash provided by operating activities—
continuing operations
Net cash provided by (used for) operating activities—
discontinued operations
Net cash provided by operating activities
Cash Flows From Investing Activities:
Capital expenditures
Proceeds from sale of assets held for sale
Proceeds from sale of property, plant and equipment
Premium payments on life insurance policies
Net cash used for investing activities—
continuing operations
Net cash provided by investing activities—
discontinued operations
Net cash used for investing activities
Year Ended
september 29,
2007
September 30,
2006
October 1,
2005
$ 24,162
122
24,284
$ 33,040
1,337
$ 25,045
(546)
34,377
24,499
5,711
498
—
1,258
(122)
301
2,003
(277)
3,001
(604)
(17,019)
(1,969)
(7,219)
4,578
529
—
1,173
(459)
82
(1,627)
(193)
1,082
(15,228)
18,456
(120)
8,273
4,139
651
837
805
—
63
2,004
—
481
6,753
640
958
17,331
17,065
42,650
41,830
(147)
16,918
(17,013)
590
—
(639)
2,185
44,835
(18,959)
—
52
(565)
2,630
44,460
(6,302)
904
27
(665)
(17,062)
(19,472)
(6,036)
—
(17,062)
5,963
(13,509)
2,120
(3,916)
(continued)
26
(In thousands)
Cash Flows From Financing Activities:
Proceeds from long-term debt
Principal payments on long-term debt
Financing costs
Cash received from exercise of stock options
Excess tax benefits from exercise of stock options
Repurchase of common stock
Cash dividends paid
Other
Net cash used for financing activities—
continuing operations
Net cash used for financing activities—
discontinued operations
Net cash used for financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest
Income taxes
Non-cash financing activity:
Cashless exercise of stock options
Purchases of property, plant and equipment in accounts payable
Issuance of restricted stock
Declaration of cash dividends to be paid
Other
See accompanying notes to consolidated financial statements.
Year Ended
september 29,
2007
September 30,
2006
October 1,
2005
16,999
(16,999)
—
162
122
—
(2,176)
50
135,219
(147,079)
(307)
360
459
(8,529)
(2,222)
91
329,562
(370,070)
(23)
175
—
—
(566)
(9)
(1,842)
(22,008)
(40,931)
—
(1,842)
(1,986)
10,689
—
(560)
(22,008)
(41,491)
9,318
1,371
(947)
2,318
$ 8,703
$ 10,689
$ 1,371
$
93
16,785
$
202
17,489
$ 3,531
12,001
—
937
1,215
544
—
—
—
792
543
—
338
—
742
565
105
insteel industRies, inc. and subsidiaRies 27
consoliDateD stateMents of sH aReHol De Rs ’ eQuity anD coMpReHensiVe incoMe
(In thousands)
Balance at October 2, 2004
Comprehensive income:
Net earnings
Amortization of loss on financial instruments
included in net earnings
Recognition of additional pension plan liability
Comprehensive income(1)
Stock options exercised
Restricted stock granted
Restricted stock shares from dividend
Compensation expense associated with stock-
based plans
Retirement of shares held within grantor trust
Cash dividends declared
Excess tax benefits from exercise of stock options
Balance at October 1, 2005
Comprehensive income:
Net earnings
Reduction in pension liability
Comprehensive income(1)
Stock options exercised
Restricted stock granted
Restricted stock shares from dividend
Compensation expense associated with stock-
based plans
Excess tax benefits from exercise of stock options
Repurchase of common stock
Cash dividends declared
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Deferred
Compensation
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)(1)
Total
Shareholders’
Equity
18,244
$ 18,244
$ 43,677
$ —
$ 10,927
$ (1,637)
$ 71,211
25,045
656
(111)
570
82
570
83
(36)
(36)
(395)
659
3
571
488
(742)
234
(69)
(1,131)
25,045
656
(111)
25,590
175
—
3
805
(105)
(1,131)
488
18,860
$ 18,861
$ 45,003
$ (508)
$ 34,772
$ (1,092)
$ 97,036
33,040
1,092
101
51
1
101
50
1
(800)
(800)
259
742
7
535
459
(792)
638
(7,729)
(2,201)
33,040
1,092
34,132
360
—
8
1,173
459
(8,529)
(2,201)
Balance at September 30, 2006
18,213
$ 18,213
$ 47,005
$ (662)
$ 57,882
$ —
$ 122,438
Comprehensive income:
Net earnings
Recognition of additional pension plan liability
Adjustment to adopt SFAS No. 158
Comprehensive income(1)
Stock options exercised
Restricted stock granted
Restricted stock shares from dividend
Compensation expense associated with stock-
based plans
Excess tax benefits from exercise of stock options
Cash dividends declared
24,162
(9)
(2,110)
23
67
23
67
139
1,148
12
513
122
(1,215)
745
(2,185)
24,162
(9)
(2,110)
22,043
162
—
12
1,258
122
(2,185)
Balance at September 29, 2007
18,303
$ 18,303
$48,939
$(1,132)
$79,859
$(2,119)
$143,850
(1) Components of accumulated other comprehensive income (loss) are reported net of related income taxes.
See accompanying notes to consolidated financial statements.
28
notes to consoli DateD financial state Ments
Years Ended September 29, 2007, September 30, 2006 and October 1, 2005
(1) deSCriPtion oF BuSineSS
Insteel Industries, Inc. (“Insteel” or “the Com-
pany”) is one of the nation’s largest manufacturers of
steel wire reinforcing products for concrete construc-
tion applications. Insteel is the parent holding com-
pany for a wholly-owned operating subsidiary, Insteel
Wire Products Company (“IWP”). The Company
manufactures and markets PC strand and welded wire
reinforcement products, including concrete pipe rein-
forcement, engineered structural mesh and standard
welded wire reinforcement. The Company’s products
are primarily sold to manufacturers of concrete prod-
ucts and to a lesser extent to distributors and rebar
fabricators that are located nationwide as well as into
Canada, Mexico, and Central and South America.
The Company’s exit from the industrial wire
business in June 2006 (see Note 7 to the consolidated
financial statements) narrowed its strategic and opera-
tional focus to concrete reinforcing products. The
results of operations for the industrial wire products
business have been reported as discontinued operations
for all periods presented.
(2) Summary oF SigniFiCant aCCounting PoLiCieS
Fiscal year. The Company’s fiscal year is the 52 or
53 weeks ending on the Saturday closest to September
30. Fiscal years 2007, 2006 and 2005 were 52-week fis-
cal years. All references to years relate to fiscal years
rather than calendar years.
Principles of consolidation.
The consolidated finan-
cial statements include the accounts of the Company
and its subsidiaries. All significant intercompany bal-
ances and transactions have been eliminated.
Use of estimates. The preparation of financial
statements in conformity with accounting principles
generally accepted in the U.S. requires management
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.
The Company considers all highly
liquid investments purchased with original maturities
of three months or less to be cash equivalents.
Stock options.
Effective October 2, 2005, the
Company began recording compensation expense asso-
ciated with stock options and other forms of equity
compensation in accordance with Statement of Finan-
cial Accounting Standards (“SFAS”) No. 123(R),
“Share-Based Payment” as interpreted by Staff
Accounting Bulletin (“SAB”) No. 107. Previously the
Company had accounted for stock option plans under
the intrinsic value method prescribed by Accounting
Principals Board Opinion (“APB”) No. 25, “Accounting
for Stock Issued to Employees,” and therefore no related
compensation expense was recorded for awards granted
with no intrinsic value. The Company adopted the
modified prospective transition method provided for
under SFAS No. 123(R) and consequently, has not ret-
roactively adjusted results from prior periods. Under
this transition method, (1) stock compensation expense
associated with options granted on or after October 2,
2005 is recorded in accordance with the provisions of
SFAS No. 123(R); and (2) stock compensation expense
associated with the remaining unvested portion of
stock options granted prior to October 2, 2005 is
recorded based on the grant date fair value of the
options estimated in accordance with the original
provisions of SFAS No. 123, “Accounting for Stock-
Based Compensation.”
Under the provisions of SFAS No. 123(R), the
Company recorded $513,000 and $535,000 of compen-
sation expense for stock options within selling, general
and administrative expense for the years ended
September 29, 2007 and September 30, 2006, respec-
tively. The Company recorded $571,000 of compensa-
tion expense for the year ended October 1, 2005 for
stock options associated with certain previous option
plans that were required to be accounted for as vari-
able plans under the provisions of APB No. 25. Under
variable plan accounting, compensation expense was
recognized for the excess of the market price over the
exercise price and adjusted each reporting period to
reflect changes in market valuation. Under the pro-
visions of SFAS No. 123(R), these options are now
accounted for as equity awards and, since the options
were fully vested as of October 2, 2005, no compensa-
tion expense was recorded in 2006 and 2007.
insteel industRies, inc. and subsidiaRies 29
notes to consoliDateD financial stateMents (continued)
Years Ended September 29, 2007, September 30, 2006 and October 1, 2005
Prior to the adoption of SFAS No. 123(R), the
benefit of tax deductions in excess of recognized stock
compensation expense was reported as a reduction of
taxes paid within operating cash flow. SFAS No.
123(R) requires that such benefits be reported as a
financing cash flow. For the years ended September 29,
2007 and September 30, 2006, $122,000 and $459,000
of excess tax benefits were generated from option exer-
cises, respectively.
The following table illustrates the effect on net
earnings and earnings per share if the Company had
applied the fair value recognition provisions of SFAS
No. 123 to options granted under the Company’s option
plans for the year ended October 1, 2005:
(In thousands, except for per share amounts)
Net earnings—as reported
Stock-based compensation expense included in
reported net earnings, net of related tax effects
Total stock-based compensation expense determined
under fair-value based method for all awards, net
of related tax effects
Net earnings—pro forma
Basic net earnings per share—as reported
Basic net earnings per share—pro forma
Diluted net earnings per share—as reported
Diluted net earnings per share—pro forma
Basic shares outstanding—as reported and pro forma
Diluted shares outstanding—as reported
Diluted shares outstanding—pro forma
Year Ended
October 1,
2005
$25,045
(214)
(141)
$24,690
$ 1.34
1.32
1.32
1.30
18,656
18,954
18,940
Revenue recognition and credit risk. The Company
recognizes revenue from product sales in accordance
with SAB No. 104 when the products are shipped and
risk of loss and title has passed to the customer. Sub-
stantially all of the Company’s accounts receivable are
due from customers that are located in the U.S. and
the Company generally requires no collateral depend-
ing upon the creditworthiness of the account. The
Company provides an allowance for doubtful accounts
based upon its assessment of the credit risk of specific
customers, historical trends and other information.
The Company writes off accounts receivable when
they become uncollectible and payments subsequently
received are credited to the allowance for doubtful
accounts. There is no disproportionate concentration
of credit risk.
Shipping and handling costs.
The Company
includes all of the outbound freight, shipping and han-
dling costs associated with the shipment of products
to customers in cost of sales. Any amounts paid by
customers to the Company for shipping and handling
are recorded in net sales on the consolidated statement
of operations.
Inventories.
Inventories are valued at the lower of
average cost (which approximates computation on a
first-in, first-out basis) or market (net realizable value or
replacement cost).
Property, plant and equipment. Property, plant and
equipment are stated at cost 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; land improvements, 5–15
years. Depreciation expense was approximately $5.7
million in 2007, $4.6 million in 2006 and $4.1 million
in 2005. Capitalized software is amortized over the
shorter of the estimated useful life or 5 years. No inter-
est costs were capitalized in 2007, 2006 or 2005.
Other assets. Other assets consist principally of
non-current deferred tax assets, capitalized financing
costs, the cash surrender value of life insurance policies
and assets held for sale. Capitalized financing costs
are amortized using the straight-line method, which
approximates the effective interest method over the life
of the related credit agreement.
Long-lived assets. Long-lived assets include prop -
erty, plant and equipment and identifiable intangible
assets with definite useful lives. The Company assesses
the impairment of long-lived assets whenever events
or changes in circumstance indicate that the carrying
value may not be fully recoverable. When the Company
determines that the carrying value of such assets may
not be recoverable, it measures 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 recog-
nized during the period incurred. An impairment loss
is calculated as the difference between the carrying
30
value and the present value of estimated future net
cash flows or comparable market values. There were no
impairment losses in 2007, 2006 or 2005.
Fair value of financial instruments. The carrying
amounts for cash and cash equivalents, accounts receiv-
able, 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 conse-
quences of temporary differences between the tax bases
of assets and liabilities and their reported amounts.
The Company assesses the need to establish a valua-
tion allowance against its deferred tax assets to the
extent the Company no longer believes it is more likely
than not that the tax assets will be fully utilized.
Earnings per share.
Basic earnings per share
(“EPS”) are computed by dividing net earnings by the
weighted average number of common shares outstand-
ing during the period. Diluted EPS are computed by
dividing net earnings by the weighted average number
of common shares and other dilutive equity securities
outstanding during the period. Securities that have
the effect of increasing EPS are considered to be anti-
dilutive and are not included in the computation of
diluted EPS.
Recent accounting pronouncements. In July 2006,
the Financial Accounting Standards Board (“FASB”)
issued Interpretation No. 48, “Accounting for Uncer-
tainty in Income Taxes” (“FIN No. 48”) which clarifies
the criteria for the recognition of tax benefits under
SFAS No. 109, “Accounting for Income Taxes.” FIN
No. 48 specifies how tax benefits for uncertain tax
positions are to be recognized, measured and derecog-
nized in financial statements; requires certain disclo-
sures of uncertain tax matters; specifies how reserves
for uncertain tax positions should be classified on the
balance sheet; and provides transition and interim
period guidance, among other provisions. FIN No. 48
is effective for the Company beginning in fiscal 2008
and requires that the cumulative effect of applying
its provisions be disclosed separately as a one-time,
non-cash charge against the opening balance of
retained earnings in the year of adoption. Based on
the Company’s preliminary analysis, the adoption of
FIN No. 48 is expected to result in an estimated charge
to retained earnings of approximately $260,000. The
actual amount of the adjustment will be recorded in
the first quarter of 2008 upon the finalization of the
Company’s analysis.
In September 2006, the FASB issued SFAS No.
157, “Fair Value Measurements” which defines fair
value, establishes a framework for measuring fair value
in generally accepted accounting principles, and
expands disclosures about fair value measurements.
SFAS No. 157 is effective for the Company beginning
in fiscal 2009. At this time, the Company has not
determined what effect, if any, the adoption of SFAS
No. 157 will have on its financial position or results
of operations.
In September 2006, the FASB issued SFAS No.
158, “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans.” SFAS No.
158 requires that an employer recognize the overfunded
or underfunded status of a defined benefit postretire-
ment plan in its statement of financial position and
changes in the funded status through comprehensive
income in the year in which the changes occur. SFAS
No. 158 also requires the measurement of defined
benefit plan assets and obligations as of the date of
the employer’s fiscal year-end statement of financial
position. The provisions regarding the recognition of
a plan’s funding status were effective for the Company
in fiscal 2007 and resulted in a $2.1 million decrease
in shareholders’ equity, net of tax. The provisions
regarding the change in the measurement date are
effective for the Company beginning in fiscal 2009.
The adoption of SFAS No. 158 is further discussed in
Note 8 to the consolidated financial statements.
(3) StoCk SPLit
On May 16, 2006, the Board of Directors approved
a two-for-one split of the Company’s common stock
payable in the form of a stock dividend. The stock
split entitled each shareholder of record on June 2,
2006 to receive one share of common stock for each
outstanding share of common stock held on that date
and was distributed on June 16, 2006. Unless other-
wise indicated, the capital stock accounts and all share
and earnings per share amounts in this report give
effect to the stock split, applied retroactively, to all
periods presented.
insteel industRies, inc. and subsidiaRies 31
notes to consoliDateD financial stateMents (continued)
Years Ended September 29, 2007, September 30, 2006 and October 1, 2005
(4) Credit FaCiLitieS
Financial Covenants
As of September 29, 2007, the Company had a
$100.0 million revolving credit facility in place to sup-
plement its operating cash flow in funding its working
capital, capital expenditure and general corporate
requirements. No borrowings were outstanding on the
credit facility as of September 29, 2007 and September
30, 2006 and outstanding letters of credit totaled $1.9
million and $1.4 million, respectively. As of September
29, 2007, $54.7 million of borrowing capacity was avail-
able on the credit facility.
Advances under the credit facility are limited to
the lesser of the revolving credit commitment or a bor-
rowing base amount that is calculated based upon a
percentage of eligible receivables and inventories plus,
upon the Company’s request and subject to certain
conditions, a percentage of eligible equipment and real
estate. Interest rates on the revolver are based upon
(1) a base rate that is established at the higher of
the prime rate or 0.50% plus the federal funds rate, or
(2) at the election of the Company, a LIBOR rate, plus
in either case, an applicable interest rate margin. The
applicable interest rate margins are adjusted on a quar-
terly basis based upon the amount of excess availability
on the revolver within the range of 0.00%–0.50% for
the base rate and 1.25%–2.00% for the LIBOR rate. In
addition, the applicable interest rate margins would
be adjusted to the highest percentage indicated for
each range upon the occurrence of certain events
of default provided for under the credit facility. Based
on the Company’s excess availability as of September
29, 2007, the applicable interest rate margins were
0.00% for the base rate and 1.25% for the LIBOR rate
on the revolver.
In connection with the refinancing of the pre-
vious credit facility, the Company terminated interest
rate swap agreements for payments totaling $2.1 mil-
lion and recorded a corresponding unrealized loss for
hedging instruments in fiscal 2004 which, in accor-
dance with generally accepted accounting principals
(“GAAP”) was amortized and recorded as interest
expense through the original termination date of the
swap agreement of January 31, 2005.
The Company’s ability to borrow available
amounts under the revolving credit facility will be
restricted or eliminated in the event of certain cove-
nant breaches, events of default or if the Company
is unable to make certain representations and
warranties.
32
The terms of the credit facility require the
Company to maintain a Fixed Charge Coverage Ratio
(as defined in the Credit Agreement) of not less than:
(1) 1.10 at the end of each fiscal quarter for the twelve-
month period then ended when the amount of excess
availability on the revolving credit facility is less than
$10.0 million and the applicable borrowing base only
includes eligible receivables and inventories; or (2) 1.15
at the end of each fiscal quarter for the twelve-month
period then ended when the amount of excess avail-
ability on the revolving credit facility is less than $10.0
million and the applicable borrowing base includes
eligible receivables, inventories, equipment and real
estate. As of September 29, 2007, the Company was in
compliance with all of the financial covenants under
the credit facility.
Negative Covenants
In addition, the terms of the credit facility restrict
the Company’s 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
the Company’s stock subject to certain minimum bor-
rowing availability requirements; incur or assume
indebtedness; issue securities; enter into certain trans-
actions with affiliates of the Company; or permit liens
to encumber the Company’s property and assets. As
of September 29, 2007, the Company was in compli-
ance with all of the negative covenants under the
credit facility.
Events of Default
Under the terms of the credit facility, an event of
default will occur with respect to the Company upon
the occurrence of, among other things: a default
or breach by the Company or any of its subsidiaries
under any agreement resulting in the acceleration of
amounts due in excess of $500,000 under such agree-
ment; certain payment defaults by the Company or any
of its subsidiaries in excess of $500,000; certain events
of bankruptcy or insolvency with respect to the
Company; an entry of judgment against the Company
or any of its subsidiaries for greater than $500,000,
which amount is not covered by insurance; or a change
of control of the Company.
Amortization of capitalized financing costs asso-
ciated with the senior secured facility was $498,000
in 2007, $529,000 in 2006 and $651,000 in 2005.
Accumulated amortization of capitalized financing
costs was $2.6 million and $2.1 million as of September
29, 2007 and September 30, 2006, respectively. The
Company expects the amortization of capitalized
financing costs to approximate the following amounts
for the next five fiscal years:
Fiscal year
2008
2009
2010
2011
2012
In thousands
$499
499
345
—
—
(5) StoCk-BaSed ComPenSation
Under the Company’s stock option plans, employ-
ees 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 these plans
generally vest over three years and expire ten years
from the date of the grant. The fair value of each
option award granted prior to October 1, 2005 was
estimated on the date of grant using a Black-Scholes
option-pricing model. With the adoption of SFAS No.
123(R), the Company determined that it would use a
Monte Carlo valuation model for options that are
granted subsequent to October 1, 2005. The weighted
average estimated fair values of stock options granted
during 2007, 2006, and 2005 were $8.69, $8.82 and
$7.74 per share, respectively, based on the following
weighted average assumptions:
Year Ended
september 29,
2007
September 30,
2006
October 1,
2005
3.16
4.70%
3.20
7.00
4.82%
4.14%
65.84%
74.72%
180.40%
0.65%
0.70%
0.79%
Expected term
(in years)
Risk-free interest
rate
Expected
volatility
Expected
dividend
yield
The assumptions utilized in the model are evalu-
ated and revised, as necessary, to reflect market condi-
tions and actual historical experience. 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 dividend yield
was calculated based on the Company’s annual divi-
dend as of the option grant date. The expected vol-
atility was derived using a term structure based on
historical volatility and the volatility implied by
exchange-traded options on the Company’s stock. 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.
At September 29, 2007, there were 1,340,000 shares available for future grants under the Company’s equity
incentive plans. The following table summarizes stock option activity during 2005, 2006 and 2007:
(Share amounts in thousands)
Outstanding at October 2, 2004
Granted
Exercised
Outstanding at October 1, 2005
Granted
Exercised
Outstanding at September 30, 2006
Granted
Exercised
Forfeited
Outstanding at September 29, 2007
Vested and anticipated to vest in future
at September 29, 2007
Exercisable at September 29, 2007
Options
Outstanding
938
96
(706)
328
55
(101)
282
79
(23)
(2)
336
327
196
Exercise Price Per Share
Range
$ 0.18 – $ 5.43
9.12
5.43
6.89 –
0.18 –
9.12
0.18 –
15.64 – 20.26
9.12
0.18 –
0.18 – 20.26
17.11 – 20.27
4.56 – 15.64
20.26 – 20.26
0.18 – 20.27
Weighted
Average
$ 2.36
8.24
2.17
4.48
17.54
3.56
7.37
18.54
7.12
20.26
9.95
Contractual
Term—
Weighted
Average
Aggregate
Intrinsic Value
(in thousands)
$4,762
1,396
228
6.70 years
2,179
9.79
5.41
6.64 years
5.08 years
2,165
1,989
insteel industRies, inc. and subsidiaRies 33
notes to consoliDateD financial stateMents (continued)
Years Ended September 29, 2007, September 30, 2006 and October 1, 2005
The remaining unrecognized compensation cost
related to unvested awards at September 29, 2007 was
$582,000 which is expected to be recognized over a
weighted average period of 1.26 years.
Restricted stock awards. During the years ended
September 29, 2007, September 30, 2006 and October
1, 2005, the Company granted 67,000, 51,000 and
82,000 shares of restricted stock, respectively, to key
employees and directors which had a total market value
of $1.2 million, $792,000 and $742,000, respectively, as
of the grant date. The following table summarizes
restricted stock activity during 2005, 2006 and 2007:
(Share amounts in thousands)
Balance, October 2, 2004
Granted
Released
Balance, October 1, 2005
Granted
Released
Balance, September 30, 2006
Granted
Released
Balance, September 29, 2007
Restricted
Stock Awards
Outstanding
Weighted
Average
Grant Date
Fair Value
—
82
—
82
51
(30)
103
67
(28)
142
$ —
8.98
—
8.98
15.64
8.72
12.27
18.18
12.51
15.00
The Company recorded amortization expense of
$745,000, $638,000 and $234,000 pertaining to the
restricted stock for the years ended September 29, 2007,
September 30, 2006 and October 1, 2005, respectively.
The Company will continue to amortize the remaining
unamortized balance of $1.1 million over the vesting
period of one to three years.
(6) inCome taxeS
The components of the provision for income taxes
on continuing operations are as follows:
(Dollars in
thousands)
Provision for
income taxes:
Current:
Federal
State
Deferred:
Federal
State
Year Ended
september 29,
2007
September 30,
2006
October 1,
2005
$10,801
1,209
12,010
1,821
182
2,003
$18,603
2,554
21,157
(1,437)
(190)
(1,627)
$10,457
1,409
11,866
1,802
202
2,004
Income taxes
$14,013
$19,530
$13,870
Effective income
tax rate
36.6%
36.2%
36.1%
The reconciliation between income taxes computed at the federal statutory rate and the provision for income
taxes on continuing operations is as follows:
(Dollars in thousands)
Provision for income taxes at federal statutory rate
State income taxes, net of federal tax benefit
Qualified production activities deduction
Other permanent book and tax differences, net
Stock option expense (benefit)
Valuation allowance
Revisions to estimates based on filing of final tax return
Other, net
september 29,
2007
$13,403
904
(374)
—
126
—
(32)
(14)
35.0%
2.4
(1.0)
—
0.3
—
(0.1)
(0.0)
Year Ended
September 30,
2006
$18,867
1,381
(490)
—
151
(37)
(21)
(321)
35.0%
2.6
(0.9)
—
0.3
(0.1)
(0.1)
(0.6)
October 1,
2005
$13,429
1,166
—
77
(575)
(227)
—
—
35.0%
3.0
—
0.2
(1.5)
(0.6)
—
—
Provision for income taxes
$14,013
36.6%
$19,530
36.2%
$13,870
36.1%
34
The components of deferred tax assets and liabili-
ties are as follows:
(In thousands)
Deferred tax assets:
Accrued expenses or asset
reserves for financial
statements, not yet
deductible for tax
purposes
State net operating loss
carryforwards
Goodwill, amortizable for
tax purposes
Defined benefit plans
Nonqualified stock
options not deductible
in current year
Valuation allowance
Gross deferred tax assets
Deferred tax liabilities:
Plant and equipment
principally due to differ-
ences in depreciation
and impairment charges
Other reserves
Gross deferred tax
liabilities
Net deferred
tax asset
september 29,
2007
September 30,
2006
$ 2,492
$ 2,440
601
2,346
1,299
239
(601)
6,376
944
2,686
—
204
(599)
5,675
(3,001)
(671)
(1,467)
(800)
(3,672)
(2,267)
$ 2,704
$ 3,408
The Company has recorded the following amounts
for deferred taxes on its consolidated balance sheets
as of September 29, 2007 and September 30, 2006: a
current deferred tax asset (net of valuation allowance)
of $1.2 million for both years in prepaid expenses and
other, and a non-current deferred tax asset (net of val-
uation allowance) of $1.5 million and $2.2 million,
respectively, in other assets. The Company has $9.6
million of gross state operating loss carryforwards that
begin to expire in six years, but principally expire in
13–17 years.
The realization of the Company’s deferred tax
assets is entirely dependent upon the Company’s abil-
ity to generate future taxable income in applicable
jurisdictions. GAAP requires that the Company peri-
odically assess the need to establish a valuation allow-
ance against its deferred tax assets to the extent the
Company no longer believes it is more likely than
not that they will be fully utilized. As of September 29,
2007, the Company had recorded a valuation allow-
ance of $601,000 pertaining to various state NOLs
that were not anticipated to be utilized. The valuation
allowance established by the Company is subject to
periodic review and adjustment based on changes in
facts and circumstances and would be reduced should
the Company utilize the state net operating loss carry-
forwards against which an allowance had been pro-
vided or determine that such utilization is more likely
than not.
(7) diSContinued oPerationS
In April 2006, the Company decided to exit
the industrial wire business with the closure of its
Fredericksburg, Virginia facility which manufactured
tire bead wire and other industrial wire for commer-
cial and industrial applications. The Company’s deci-
sion was based on the weakening in the business
outlook for the facility and the expected continua-
tion of difficult market conditions and reduced operat-
ing levels. Manufacturing activities at the Virginia
facility ceased in June 2006 and the Company is cur-
rently in the process of liquidating the remaining assets
of the business.
The Company has determined that the exit from
the industrial wire business meets the criteria of a
discontinued operation in accordance with SFAS No.
144, “Accounting for the Impairment or Disposal of
Long-Lived Assets.” Accordingly, the results of opera-
tions and related non-recurring closure costs associated
with the industrial wire business have been reported
as discontinued operations for all periods presented.
Additionally, the assets and liabilities of the discontin-
ued operations have been segregated in the accompa-
nying consolidated balance sheets.
The following table summarizes the results of dis-
continued operations for the years ended September
29, 2007, September 30, 2006 and October 1, 2005,
respectively:
(In thousands)
Net sales
Earnings (loss)
before income
taxes
Income taxes
Net earnings
(loss)
Year Ended
september 29,
2007
September 30,
2006
October 1,
2005
$ —
$22,544
$36,216
(199)
(77)
(122)
(2,188)
851
(1,337)
876
(330)
546
Included within results from discontinued opera-
tions is an allocation of interest expense which was
calculated based on the net assets of the industrial wire
business relative to the consolidated net assets of the
Company. Interest expense allocated to discontinued
insteel industRies, inc. and subsidiaRies 35
notes to consoliDateD financial stateMents (continued)
Years Ended September 29, 2007, September 30, 2006 and October 1, 2005
operations was $64,000 and $802,000 for the years
ended September 30, 2006 and October 1, 2005,
respectively.
The net loss from discontinued operations for the
year ended September 30, 2006 includes a pre-tax gain
of $1.3 million on the sale of certain machinery and
equipment associated with the industrial wire business.
The net earnings from discontinued operations for the
year ended October 1, 2005 includes a pre-tax gain of
$1.3 million relating to the disposal of real estate, the
collection of a note receivable, and the settlement on
the release of an equipment lien associated with Insteel
Construction Systems (“ICS”), a discontinued opera-
tion that the Company had previously exited in 1997.
Assets and liabilities of discontinued operations
as of September 29, 2007 and September 30, 2006 are
as follows:
(In thousands)
Assets:
Current assets:
Accounts receivable, net
Prepaid expenses and other
Total current assets
Other assets
Total assets
Liabilities:
Current liabilities:
Accounts payable
Accrued expenses
Total current liabilities
Other liabilities
Total liabilities
september 29,
2007
September 30,
2006
$ —
—
—
3,635
$3,635
$ 4
243
247
252
$ 499
$ 407
4
411
3,635
$4,046
$ 25
618
643
292
$ 935
As of September 29, 2007, there was approximately
$285,000 of accrued expenses and other liabilities
related to ongoing lease obligations and closure-related
liabilities incurred as a result of the Company’s exit
from the industrial wire business.
(8) emPLoyee BeneFit PLanS
Adoption of SFAS No. 158. On September 29, 2007,
the Company adopted the recognition and disclosure
provisions of SFAS No. 158, “Employers’ Accounting
for Defined Benefit Pension and Other Postretirement
Plans.” Prior to the adoption of SFAS No. 158, the
Company accounted for its defined benefit postretire-
ment plans under SFAS No. 87, “Employers’ Account-
ing for Pensions” and SFAS No. 106, “Employers’
Accounting for Postretirement Benefits Other than
Pensions.” SFAS No. 158 requires an employer to rec-
ognize the funded status of its defined benefit plans in
its statement of financial position, with a correspond-
ing adjustment to accumulated other comprehensive
income, net of tax. The adjustment to accumulated
other comprehensive income at adoption represents
the net unrecognized actuarial gains and unrecognized
prior service costs which were previously netted against
the funded status of the plans in the Company’s state-
ment of financial position. These amounts will subse-
quently be recognized as net benefit cost consistent
with the Company’s historical accounting policy for
amortizing such amounts. In addition, actuarial gains
and losses that arise in subsequent periods and are
not recognized as net periodic benefit cost in the
same periods will be recognized as a component of net
periodic benefit cost on the same basis as the amount
recognized in accumulated other comprehensive
income at the adoption of SFAS No. 158.
SFAS No. 158 affects the accounting for the
Company’s defined benefit pension plan and its supple-
mental employee retirement plan, both of which are
discussed below. The effects of adopting the provisions
of SFAS No. 158 on the Company’s consolidated bal-
ance sheet as of September 29, 2007 are presented in
the following table. The adoption of SFAS No. 158 had
no effect on the Company’s consolidated statement of
operations for the year ended September 29, 2007 or
for any prior period presented, and will not affect the
Company’s operating results in future periods.
(In thousands)
Prepaid expenses
and other
Deferred tax asset
Other non-current
liabilities
Accumulated other com-
prehensive income
Before
Application
of SFAS
No. 158
$5,960
1,410
2,779
9
Adjustments
$(1,320)
1,294
2,083
2,110
After
Application
of SFAS
No. 158
$4,640
2,704
4,862
2,119
36
Retirement plans. The Company has one defined benefit pension plan, the Insteel Wire Products Company
Retirement Income Plan for Hourly Employees, Wilmington, Delaware (“the Delaware Plan”). The Delaware Plan
provides benefits for eligible employees based primarily upon years of service and compensation levels. The
Company’s funding policy is to contribute amounts at least equal to those required by law. No contributions
were made to the Delaware Plan during 2007. The Company expects to contribute $200,000 to the Delaware Plan
in 2008.
The reconciliation of the projected benefit obligation, plan assets, funded status of the plan and amounts
recognized in the Company’s consolidated balance sheets at September 29, 2007, September 30, 2006 and
October 1, 2005 is as follows:
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial loss (gain)
Distributions
Benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Distributions
Fair value of plan assets at end of year
Reconciliation of funded status to net amount recognized:
Funded status
Unrecognized net loss
Unrecognized prior service cost
Net amount recognized
Amounts recognized in the consolidated balance sheet consist of:
Current prepaid pension asset
Non-current prepaid pension asset
Accrued benefit liability
Intangible asset related to prior service cost
Accumulated other comprehensive loss (net of tax)
Net amount recognized
Amounts recognized in accumulated other comprehensive income:
Unrecognized net loss
Unrecognized prior service cost
Net amount recognized
Other changes in plan assets and benefit obligations recognized in other
comprehensive income:
Net gain
Amortization of prior service cost
Total recognized in other comprehensive income
Year Ended
september 29,
2007
September 30,
2006
October 1,
2005
$ 4,702
82
253
(306)
(204)
$4,527
$3,334
79
1,318
(204)
$4,527
$ —
1,476
2
$ 1,478
$ 236
1,242
—
—
—
$ 1,478
$ 4,036
91
268
512
(205)
$ 4,702
$ 2,633
350
556
(205)
$ 3,334
$(1,368)
1,762
2
$ 396
$ 396
—
(1,764)
2
1,092
$ (274)
$ 4,527
78
269
203
(642)
$4,435
$ 4,527
536
—
(642)
$4,421
$ (14)
—
—
$ (14)
$ —
—
(14)
—
827
$ 813
$1,333
1
$1,334
$ (143)
(1)
$ (144)
insteel industRies, inc. and subsidiaRies 37
notes to consoliDateD financial stateMents (continued)
Years Ended September 29, 2007, September 30, 2006 and October 1, 2005
Net periodic pension cost includes the following components:
(In thousands)
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Recognized net actuarial loss
Net periodic pension cost
The estimated net loss and prior service cost that
will be amortized from accumulated other comprehen-
sive income into net periodic pension cost over the
next fiscal year is $96,000 and $1,000, respectively.
The assumptions used in the valuation of the plan
are as follows:
Measurement Date
september 29,
2007
September 30,
2006
October 1,
2005
Assumptions at
year-end:
Discount rate
Rate of increase
in compensa-
tion levels
Expected long-
term rate of
return on
assets
6.50%
6.25%
6.00%
n/a
N/A
N/A
8.00%
8.00%
8.00%
The projected benefit payments under the plan
are as follows:
Fiscal year(s)
2008
2009
2010
2011
2012
2013–2017
In thousands
$ 428
428
436
437
205
1,617
The Delaware Plan has a long-term target asset
mix of 65% equities and 35% fixed income. The ranges
for the long-term allocation are: equities 60% to 80%,
fixed income 20% to 40% and cash reserves 0 to 10%.
The investment strategy for equities emphasizes U.S.
large cap equities with the portfolio’s performance
Year Ended
september 29,
2007
September 30,
2006
October 1,
2005
$ 78
269
(324)
1
134
$ 158
$ 82
253
(243)
1
143
$ 236
$ 91
268
(217)
3
151
$ 296
measured against the S&P 500 index or other applica-
ble indices. The investment strategy for fixed income
investments is focused on maintaining an overall port-
folio 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 total fund has an expected return of 8.0% based
on the overall policy allocation and historical market
returns, compared to the expected long-term rate of
return of 8.0% used to develop the plan’s net periodic
pension cost.
Supplemental employee retirement plan.
The
Company has Retirement Security Agreements (each,
a “SERP”) with certain of its employees (each, a
“Participant”). Under the SERP, if the Participant
remains in continuous service with the Company for a
period of at least 30 years, the Company will pay to the
Participant a supplemental retirement benefit for the
15-year period following the Participant’s retirement
equal to 50% of the Participant’s highest average
annual base salary for five consecutive years in the
10-year period preceding the Participant’s retirement.
If the Participant retires prior to the later of age 65 or
the completion of 30 years of continuous service with
the Company, but has completed at least 10 years of
continuous service with the Company, the amount of
the supplemental retirement benefit will be reduced by
1/360th for each month short of 30 years that the
Participant was employed by the Company. In 2005,
the Company amended the SERP to add Participants
and increase benefits to certain Participants already
included in the plan.
38
The reconciliation of the projected benefit obligation, plan assets, funded status of the plan and amounts
recognized in the Company’s consolidated balance sheets for the SERP at September 29, 2007, September 30, 2006
and October 1, 2005 is as follows:
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial loss
Distributions
Benefit obligation at end of year
Change in plan assets:
Actual employer contributions
Actual distributions
Plan assets at fair value at end of year
Reconciliation of funded status to net amount recognized:
Funded status
Unrecognized net loss
Unrecognized prior service cost
Net amount recognized
Amounts recognized in accumulated other comprehensive loss:
Unrecognized prior service costs
Net amount recognized
Other changes in plan assets and benefit obligations recognized in other
comprehensive loss:
Net loss
Prior service costs
Total recognized in other comprehensive loss
Net periodic pension cost includes the following components:
(In thousands)
Service cost
Interest cost
Prior service cost
Recognized net actuarial loss
Net periodic pension cost
Year Ended
september 29,
2007
(Revised)
September 30,
2006
(Revised)
October 1,
2005
$ 3,574
106
207
61
(80)
$ 3,868
$ 80
(80)
$ —
$(3,868)
510
1,588
$ (1,770)
$ 3,315
103
196
—
(40)
$ 3,574
$ 40
(40)
$ —
$ (3,574)
451
1,815
$(1,308)
$ 3,868
163
230
11
(80)
$ 4,192
$ 80
(80)
$ —
$(4,192)
—
—
$(4,192)
$ 2,083
$ 2,083
$ 1
(227)
$ (226)
Year Ended
september 29,
2007
September 30,
2006
October 1,
2005
$ 163
230
227
10
$ 630
$ 106
207
227
2
$ 542
$ 103
196
227
11
$ 537
The estimated net loss and prior service costs that will be amortized from accumulated other comprehensive
income into net periodic pension cost over the next fiscal year is $8,000 and $227,000, respectively.
insteel industRies, inc. and subsidiaRies 39
notes to consoliDateD financial stateMents (continued)
Years Ended September 29, 2007, September 30, 2006 and October 1, 2005
The assumptions used in the valuation of the
SERP are as follows:
Measurement Date
september 29,
2007
December 1,
2005
December 1,
2004
Assumptions at
year-end:
Discount rate
Rate of
increase in
compensa-
tion levels
6.25%
5.60%
5.60%
3.00%
3.00%
3.00%
The projected benefit payments under the SERP
are as follows:
Fiscal year(s)
2008
2009
2010
2011
2012
2013–2017
In thousands
$ 80
80
80
169
249
1,375
As noted above, the SERP was amended in 2005
to add Participants and increase benefits to certain
Participants already included in the plan. However, for
certain Participants the Company still maintains the
benefits of the SERP that were in effect prior to the
2005 amendment. These Participants are entitled to
fixed cash benefits upon retirement at age 65, payable
annually for 15 years. This plan is supported by life
insurance polices on the Participants purchased and
owned by the Company. The cash benefits paid under
this plan were $74,000 in 2007, 2006 and 2005, respec-
tively. The plan expense was $11,000 in 2007, $10,000
in 2006 and $3,000 in 2005.
Retirement savings plan. In 1996, the Company
adopted the Retirement Savings Plan of Insteel
Industries, Inc. (“the Plan”) to provide retirement ben-
efits and stock ownership for its employees. The Plan is
an amendment and restatement of the Company’s
Employee Stock Ownership Plan (“ESOP”). As allowed
under Sections 401(a) and 401(k) of the Internal
Revenue Code, the Plan provides for tax-deferred
salary deductions for eligible employees.
Employees may contribute up to 15% of their
annual compensation to the Plan, limited to a maxi-
mum annual amount as set periodically by the Internal
Revenue Code. The Plan allows for discretionary con-
tributions to be made by the Company as determined
by the Board of Directors. Such contributions to the
Plan are allocated among eligible participants based on
their compensation relative to the total compensation
of all participants. In 2007, the Company matched
employee contributions up to 50% of the first 7% of
eligible compensation that was contributed by employ-
ees. In 2006 and 2005, the Company matched employee
contributions up to 50% of the first 5% of eligible com-
pensation that was contributed by employees. Company
contributions to the Plan were $402,000 in 2007,
$351,000 in 2006 and $265,000 in 2005.
Voluntary Employee Beneficiary Associations
(“VEBA”). The Company has a VEBA. Under the plan,
both employees and the Company may make contribu-
tions to pay for medical costs. Company contributions
to the VEBA were $2.4 million in 2007, $3.1 million in
2006 and $2.5 million in 2005. The Company is pri-
marily self-insured for employee’s healthcare costs, car-
rying stop-loss insurance coverage for individual claims
in excess of $150,000. The Company’s 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. Management reviews
current and historical claims data in developing its
estimates.
(9) CommitmentS and ContingenCieS
Leases and purchase commitments. The Company
leases a portion of its equipment under operating leases
that expire at various dates through 2010. Under most
lease agreements, the Company pays insurance, taxes
and maintenance. Rental expense for operating leases
was $920,000 in 2007, $836,000 in 2006 and $701,000
in 2005. Minimum rental commitments under all non-
cancelable leases with an initial term in excess of one
year are payable as follows: 2008, $781,000; 2009,
$445,000; 2010, $213,000; 2011, $27,000; 2012 and
beyond, $0.
40
As of September 29, 2007, the Company had
$31.8 million in non-cancelable fixed price purchase
commitments for raw material extending as long as
approximately 120 days. In addition, the Company has
contractual commitments for the purchase of certain
equipment. Portions of such contracts not completed
at year-end are not reflected in the consolidated finan-
cial statements and amounted to $3.8 million as of
September 29, 2007.
Legal proceedings.
On November 19, 2007, Dywidag
Systems International, Inc. (“DSI”) filed a third-party
lawsuit in the Ohio Court of Claims alleging that certain
epoxy-coated strand sold by the Company to DSI in
2002, and supplied by DSI to the Ohio Department of
Transportation (“ODOT”) for a bridge project, was
defective. The third-party action seeks recovery of any
damages which may be assessed against DSI in the
action against it filed by ODOT, which allegedly could
be in excess of $8.3 million, plus $2.7 million in damages
allegedly incurred by DSI. The Company had previously
filed a lawsuit in North Carolina against DSI seeking
recovery of $1.4 million (plus interest) owed for other
products sold to DSI and a judgment declaring that the
Company had no liability to DSI arising out of the
bridge project. The Company believes North Carolina is
the appropriate venue for these proceedings and otherwise
intends to vigorously defend the claims asserted against
it by DSI in addition to pursuing full recovery of the
amounts owed to it by DSI.
The Company also is involved in other lawsuits,
claims, investigations and proceedings, including com-
mercial, environmental and employment matters,
which arise in the ordinary course of business. The
Company does not expect that the ultimate costs
to resolve these matters will have a material adverse
effect on its financial position, results of operations or
cash flows.
Severance and change of control agreements. The
Company has entered into severance agreements with
its Chief Executive Officer and Chief Financial Officer
that provide certain termination benefits to these
executives in the event that an executive’s employment
with the Company is terminated without cause. The
initial term of each agreement is two years and the
agreements provide for an automatic renewal of one
year unless the Company or the executive provides
notice of termination as specified in the agreement.
Under the terms of these agreements, in the event
of termination without cause, the executives would
receive termination benefits equal to one and one-half
times the executive’s 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’s stock options and restricted stock
would vest immediately and outplacement services
would be provided.
The Company has also entered into change in
control agreements with key members of management,
including its executive officers, which specify the terms
of separation in the event that termination of employ-
ment followed a change in control of the Company.
The initial term of each agreement is two years and
the agreements provide for an automatic renewal of
one year unless the Company or the executive provides
notice of termination as specified in the agreement.
The agreements do not provide assurances of contin-
ued employment, nor do they specify the terms of
an executive’s termination should the termination
occur in the absence of a change in control. Under the
terms of these agreements, in the event of termination
within two years of a change of control, the Chief
Executive Officer and Chief Financial Officer 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. The other key members
of management, including the Company’s other two
executive officers, would receive severance benefits
equal to one times base compensation, one times the
average bonus for the prior three years and the con-
tinuation of health and welfare benefits for one year.
In addition, all of the executive’s stock options and
restricted stock would vest immediately and outplace-
ment services would be provided.
insteel industRies, inc. and subsidiaRies 41
notes to consoliDateD financial stateMents (continued)
Years Ended September 29, 2007, September 30, 2006 and October 1, 2005
(10) earningS Per Share
The reconciliation of basic and diluted earnings per share (“EPS”) is as follows:
(In thousands, except for per share amounts)
Net earnings
Weighted average shares outstanding:
Weighted average shares outstanding (basic)
Dilutive effect of stock-based compensation
Weighted average shares outstanding (diluted)
Per share (basic):
Earnings from continuing operations
Earnings (loss) from discontinued operations
Net earnings
Per share (diluted):
Earnings from continuing operations
Earnings (loss) from discontinued operations
Net earnings
Year Ended
september 29,
2007
September 30,
2006
October 1,
2005
$24,162
$33,040
$25,045
18,142
172
18,314
$ 1.34
(0.01)
$ 1.33
$ 1.33
(0.01)
$ 1.32
18,307
166
18,473
$ 1.88
(0.08)
$ 1.80
$ 1.86
(0.07)
$ 1.79
18,656
298
18,954
$ 1.31
0.03
$ 1.34
$ 1.29
0.03
$ 1.32
Options to purchase 67,000 shares in 2007, 42,000
shares in 2006 and 34,000 shares in 2005 were anti-
dilutive and were not included in the diluted EPS
computation.
(11) BuSineSS Segment inFormation
Following the Company’s exit from the industrial
wire business (see Note 7 to the consolidated financial
statements), the Company’s operations are entirely
focused on the manufacture and marketing of concrete
reinforcing products for the concrete construction
industry. Based on the criteria specified in SFAS No.
131, “Disclosures about Segments of an Enterprise and
Related Information,” the Company has one reportable
segment. The results of operations for the industrial
wire products business have been reported as discon-
tinued operations for all periods presented.
(12) reLated Party tranSaCtionS
In connection with the Company’s stock repur-
chase program, on January 30, 2006, the Company
repurchased approximately 400,000 shares of its com-
mon stock held by the Chairman of the Company’s
Board of Directors and his wife. The purchase price for
the shares repurchased was $21.322 per share based on
a predetermined formula, which represented a 15%
discount from the closing price on January 27, 2006.
The number of shares repurchased and purchase price
per share are prior to the effect of the two-for-one split
of the Company’s common stock that was distributed
as a stock dividend on June 16, 2006.
Sales to a company affiliated with one of the
Company’s directors amounted to $967,000 in 2007,
$929,000 in 2006 and $701,000 in 2005. Purchases
from a company affiliated with one of the Company’s
directors amounted to $418,000 in 2007 and $1.5 mil-
lion in 2006.
(13) ComPrehenSive LoSS
The components of accumulated other compre-
hensive loss are as follows:
(In thousands)
Adjustment to adopt SFAS
No. 158
Additional pension plan
liability
Accumulated other compre-
hensive loss
september 29,
2007
September 30,
2006
$(2,110)
(9)
$(2,119)
$ —
—
$ —
42
(14) other FinanCiaL data
(15) rightS agreement
Balance sheet information:
(In thousands)
Accounts receivable, net:
Accounts receivable
Less allowance for doubtful
accounts
september 29,
2007
September 30,
2006
$ 35,128
$ 38,183
(610)
(664)
Total
$ 34,518
$ 37,519
Inventories:
Raw materials
Work in process
Finished goods
Total
Other assets:
Cash surrender value of
life insurance policies
Non-current deferred
tax assets
Capitalized financing
costs, net
Prepaid pension cost
Assets held for sale
Other
$ 25,443
2,083
19,875
$ 47,401
$ 27,160
1,657
17,980
$ 46,797
$ 4,367
$ 3,500
1,480
1,342
—
—
296
2,176
1,841
1,242
583
311
Total
$ 7,485
$ 9,653
Property, plant and
equipment, net:
Land and land
improvements
Buildings
Machinery and equipment
Construction in progress
Less accumulated
depreciation
Total
Accrued expenses:
Salaries, wages and related
expenses
Customer rebates
Property taxes
Cash dividends
Worker’s compensation
Sales allowance reserve
Income taxes
Other
Total
Other liabilities:
Deferred compensation
Deferred revenues
Total
$ 5,621
31,981
86,560
3,955
128,117
(60,970)
$ 67,147
$ 4,278
840
749
544
499
236
—
467
$ 7,613
$ 4,584
278
$ 4,862
$ 5,345
28,473
60,090
18,013
111,921
(56,704)
$ 55,217
$ 4,084
758
641
543
119
236
2,805
633
$ 9,819
$ 2,147
566
$ 2,713
On April 26, 1999, the Company’s Board of
Directors adopted a Rights Agreement and declared a
dividend distribution of one right per share of the
Company’s common stock to shareholders of record as
of May 17, 1999. In addition, the Rights Agreement
provides that one right will attach to each share of
the Company’s common stock issued after May 17,
1999 until the tenth business day following a public
announcement that a person or group has acquired,
obtained the right to acquire or made a tender or
exchange offer for 20% or more of the outstanding
shares of the Company’s common stock (such tenth
business day, the “Distribution Date”).
Currently, the rights are not exercisable but trade
automatically with the Company’s common stock
shares. The rights become exercisable on the Distri-
bution Date. Each right will entitle the holder, other
than the acquiring person or group, to purchase one
one-hundredth of a share (a “Unit”) of the Company’s
Series A Junior Participating Preferred Stock at a pur-
chase price of $80 per Unit, subject to adjustment as
described in the Rights Agreement (the “Purchase
Price”). All rights beneficially owned or acquired by
the acquiring person or group will become null and
void as of the Distribution Date. If an acquiring person
or group acquires 20% or more of the Company’s out-
standing common stock, each rights holder, other than
the acquiring person or group, upon exercise of his
or her rights and payment of the Purchase Price, will
severally have the right to receive shares of the
Company’s common stock having a value equal to two
times the Purchase Price or, at the discretion of the
Board of Directors, upon exercise and without payment
of the Purchase Price, will have the right to purchase
the number of shares of the Company’s common stock
having a value equal to two times the Purchase Price at
a 50% discount.
In addition, each rights holder, other than an
acquiring person or group, upon exercise of his or her
rights will have the right to receive shares of the com-
mon stock of the acquiring corporation having a value
equal to two times the Purchase Price for such holder’s
rights if the Company engages in a merger or other
business combination where it is not the surviving
entity or where it is the surviving entity and all or part
of the Company’s common stock is exchanged for the
stock or other securities of the other company, or if
50% or more of the Company’s assets or earning power
is sold or transferred.
insteel industRies, inc. and subsidiaRies 43
6,000
5,000
4,000
3,000
2,000
1,000
0
notes to consoliDateD financial stateMents (continued)
Years Ended September 29, 2007, September 30, 2006 and October 1, 2005
The rights will expire on April 26, 2009, and may
be redeemed by the Company at any time prior to the
Distribution Date at a price of $0.01 per right.
(16) ProduCt warrantieS
The Company’s products are used in applications
which are subject to inherent risks including perfor-
mance deficiencies, personal injury, property damage,
environmental contamination or loss of production.
The Company warrants its products to meet certain
specifications and actual or claimed deficiencies from
these specifications may give rise to claims. The
Company does not maintain a reserve for warranties
as the historical claims have been immaterial. The
Company maintains product liability insurance cover-
age to minimize its exposure to such risks.
stock peRfoRMance gRapH
totaL return to SharehoLderS
The following graph compares the total returns (including the reinvestment of dividends) of the Company,
the S&P 500 Index and the S&P Building Products Index. The graph assumes $100 invested on September 28,
2002 in the Company’s stock and September 30, 2002 in each of the indices. Total returns for the indices are
calculated on a month-end basis.
Insteel Industries
S&P 500
S&P Building Products
$6,000
5,000
4,000
3,000
2,000
1,000
0
9/28/02
9/27/03
10/2/04
10/1/05
9/30/06
9/29/07
(In dollars)
Insteel Industries
S&P 500
S&P Building Products
9/28/02
9/27/03
10/2/04
10/1/05
9/30/06
9/29/07
100.00
100.00
100.00
110.29
124.40
130.00
2,136.62
141.65
184.61
2,267.65
159.01
186.79
5,938.86
176.17
171.61
4,619.25
205.13
172.86
44
financial infoRMation By QuaRteR (unauDiteD)
(In thousands, except for per share and price data)
december 30 March 31
June 30
september 29
Quarter ended
2007
Operating results:
Net sales
Gross profit
Earnings from continuing operations
Earnings (loss) from discontinued operations
Net earnings
Per share data:
Basic:
Earnings from continuing operations
Earnings (loss) from discontinued operations
Net earnings
Diluted:
Earnings from continuing operations
Earnings (loss) from discontinued operations
Net earnings
Stock prices(1)
High
Low
Cash dividends declared
2006
Operating results:
Net sales
Gross profit
Earnings from continuing operations
Earnings (loss) from discontinued operations
Net earnings
Per share data:
Basic:
Earnings from continuing operations
Earnings (loss) from discontinued operations
Net earnings
Diluted:
Earnings from continuing operations
Earnings (loss) from discontinued operations
Net earnings
Stock prices(1)
High
Low
Cash dividends declared
(1) Prices adjusted to reflect 2-for-1 stock split on June 16, 2006.
$69,716
13,624
5,931
(152)
5,779
$74,766
12,358
4,944
(31)
4,913
$ 78,966
17,352
8,344
(37)
8,307
$74,358
12,727
5,065
98
5,163
0.33
(0.01)
0.32
0.32
—
0.32
21.97
16.58
0.03
0.27
—
0.27
0.27
—
0.27
19.06
15.89
0.03
0.46
—
0.46
0.46
(0.01)
0.45
19.66
16.43
0.03
0.28
—
0.28
0.28
—
0.28
23.00
15.35
0.03
Quarter Ended
December 31
April 1
July 1
September 30
$ 75,604
17,113
8,013
(335)
7,678
$ 79,776
16,979
7,845
(444)
7,401
$ 91,644
18,486
9,066
(1,184)
7,882
$ 82,483
18,293
9,453
626
10,079
0.43
(0.02)
0.41
0.42
(0.02)
0.40
8.68
6.89
0.03
0.43
(0.02)
0.41
0.42
(0.02)
0.40
29.70
8.13
0.03
0.50
(0.07)
0.43
0.50
(0.07)
0.43
30.00
18.77
0.03
0.52
0.04
0.56
0.52
0.03
0.55
24.85
16.33
0.03
insteel industRies, inc. and subsidiaRies 45
selecteD financial Data—fiVe-yeaR HistoRy
(In thousands, except for per share amounts)
Operating Results:
Net sales
Gross profit
% of net sales
Selling, general and administrative
expense
Interest expense
Earnings from continuing operations
% of net sales
Earnings (loss) from discontinued
operations
Net earnings
Per Share Data:
Per share (basic):
Earnings from continuing operations
Earnings (loss) from discontinued
operations
Net earnings
Per share (diluted):
Earnings from continuing operations
Earnings (loss) from discontinued
operations
Net earnings
Cash dividends declared
Returns:
Return on capital(1)
Return on equity(2)
Financial Position:
Total assets
Total long-term debt
Shareholders’ equity
Cash Flows:
Net cash provided by operating activities
Capital expenditures
Depreciation and amortization
Repurchase of common stock
Cash dividends paid
Other Data:
Number of employees at year-end
Year Ended
(52 weeks)
september 29,
2007
(52 weeks)
September 30,
2006
(52 weeks)
October 1,
2005
(53 weeks)
October 2,
2004
(52 weeks)
September 27,
2003
$ 297,806
56,061
$ 329,507
70,871
$309,320
57,898
$ 298,754
78,956
$184,868
19,632
18.8%
21.5%
18.7%
26.4%
10.6%
$ 17,583
592
24,284
$ 16,996
669
34,377
$ 16,175
3,427
24,499
$ 21,194
5,832
32,035
$ 11,165
4,126
9,512
8.2%
10.4%
7.9%
10.7%
5.1%
$ (122)
24,162
$ (1,337)
33,040
$ 546
25,045
$ (546)
31,489
$ (2,790)
6,722
$ 1.34
$ 1.88
$ 1.31
$ 1.85
$ 0.56
(0.01)
1.33
1.33
(0.01)
1.32
0.12
(0.08)
1.80
1.86
(0.07)
1.79
0.12
0.03
1.34
1.29
0.03
1.32
0.06
(0.03)
1.82
1.78
(0.03)
1.75
—
(0.16)
0.40
0.55
(0.16)
0.39
—
18.2%
18.2%
29.7%
31.3%
21.1%
29.1%
28.6%
62.5%
9.7%
34.8%
$173,529
—
143,850
$ 16,918
17,013
6,209
—
2,176
$166,596
—
122,438
$ 44,835
18,959
5,108
8,529
2,222
$ 138,276
11,860
97,036
$ 44,460
6,302
5,627
—
566
$151,291
52,368
71,211
$ 28,122
2,921
6,209
—
—
$132,930
69,453
31,272
$ 5,290
933
5,143
—
—
559
621
655
669
677
(1) Earnings from continuing operations/(average total long-term debt + average shareholders’ equity).
(2) Earnings from continuing operations/(average shareholders’ equity).
46
corpor Ate InForMAtIon
Board of directors
louis e. hannen (1)
Retired Senior Vice President
Wheat, First Securities, Inc.
Charles B. Newsome (2)
Executive Vice President
Johnson Concrete Company
gary l. Pechota (1)
Retired Chairman, President and
Chief Executive Officer
Giant Cement Holding, Inc.
W. allen rogers II (1)
Principal
Ewing Capital Partners, LLC
William J. Shields (2)
Retired Chairman and
Chief Executive Officer
Co-Steel, Inc.
C. richard Vaughn (2,3)
Chairman
John S. Clark Company, Inc.
howard o. Woltz, Jr.(3)
Chairman of the Board
Insteel Industries, Inc.
h.o. Woltz III (3)
President and Chief Executive Officer
Insteel Industries, Inc.
(1) Member of the Audit Committee
(2) Member of the Executive Compensation
Committee
(3) Member of the Executive Committee
executive officers
h.o. Woltz III
President and Chief Executive Officer
michael C. gazmarian
Vice President, Chief Financial Officer
and Treasurer
James f. Petelle
Vice President—Administration
and Secretary
richard t. Wagner
Vice President and General Manager—Insteel
Wire Products Company
shareholder information
corporate headquarters
1373 Boggs Drive
Mount Airy, North Carolina 27030-2148
(336) 786-2141
independent Public accountants
Grant Thornton LLP
Greensboro, North Carolina
annual meeting
Insteel shareholders are invited to attend
our annual meeting which will be held at
10:00 A.M. on Tuesday, February 19, 2008,
at the Cross Creek Country Club,
845 Greenhill Road,
Mount Airy, North Carolina.
common stock
The Common Stock of Insteel Industries,
Inc. is traded on the NASDAQ Global
Select Market under the symbol IIIN.
At November 27, 2007, there were 1,142
shareholders of record.
shareholder services
For change of name, address, ownership
of stock; to replace lost stock certificates;
or to consolidate accounts, please contact:
American Stock Transfer &
Trust Company
59 Maiden Lane
New York, New York 10038
(866) 627-2704
www.amstock.com
investor relations
For information on the Company,
additional copies of this report,
Form 10-K, or other financial infor-
mation, contact Michael C. Gazmarian,
Vice President, Chief Financial Officer
and Treasurer, at the Company’s head-
quarters. You may also visit the Investor
Information section on the Company’s
Web site at www.investor.insteel.com.
m
o
c
.
s
r
o
n
n
o
c
-
n
a
r
r
u
c
.
w
w
w
/
.
c
n
i
,
s
r
o
n
n
o
c
&
n
a
r
r
u
c
y
b
d
e
n
g
i
s
e
d
Insteel IndustrIes, Inc.
1373 Boggs Drive, Mount Airy, North Carolina 27030-2148
phone (336) 786-2141
www.insteel.com
ListeD oN
uNDer the syMBoL “IIIN”