2009 AnnuAl RepoRt
2009 AnnuAl RepoRt
Leadership Positions in Attractive Markets
State-of-the-Art Facilities and Manufacturing Capabilities
Financial Strength and Flexibility
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 engineered structural mesh, concrete pipe reinforcement and stan-
dard 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
seven manufacturing facilities located in the United States.
Financial Highlights
(In thousands, except for per share amounts)
2009
2008
2007
operating Results:
Net sales
Gross profit (loss)
% of net sales
Earnings (loss) from continuing operations
% of net sales
Net earnings (loss)
per Share Data:
Basic:
Earnings (loss) from continuing operations
Net earnings (loss)
Diluted:
Earnings (loss) from continuing operations
Net earnings (loss)
Cash dividends declared
Returns:
Return on total capital (1)
Return on shareholders’ equity(2)
Financial position:
Cash and cash equivalents
Total assets
Total long-term debt
Shareholders’ equity
Cash Flows:
Net cash provided by operating activities
of continuing operations
Capital expenditures
Depreciation and amortization
Repurchases of common stock
Cash dividends paid
$ 230,236
(15,093)
$ 353,862
86,755
$ 297,806
56,061
(6.6%)
24.5%
18.8%
$ (20,940)
$ 43,717
$ 24,284
(9.1%)
12.4%
8.2%
$ (22,086)
$ 43,752
$ 24,162
$
(1.20)
(1.27)
$
(1.20)
(1.27)
0.12
2.49
2.49
2.47
2.47
0.62
$
1.34
1.33
1.33
1.32
0.12
(13.2%)
(13.2%)
27.9%
27.9%
18.2%
18.2%
$ 35,102
182,117
—
147,070
$ 26,493
228,220
—
169,847
$ 8,703
173,529
—
143,850
$ 22,092
2,377
7,377
—
11,381
$ 36,808
9,456
7,271
8,691
2,141
$ 17,065
17,013
5,711
—
2,176
(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)
$353.9
$297.8
Diluted Earnings (Loss)
Per Share From
Continuing Operations
Return on Total Capital(1)
$2.47
27.9%
$230.2
$1.33
18.2%
$(1.20)
(13.2%)
2007
2008
2009
2007
2008
2009
2007
2008
2009
400
350
300
250
200
150
100
50
0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
30
25
20
15
10
5
0
-5
-10
-15
weLded wire reinForCeMent
(% oF totAL net SALeS: 2009—53%, 2008—55%, 2007—56%)
Prefabricated reinforcement consisting of high-strength, cold-drawn or cold-rolled wires that are welded into square
or rectangular grids according to customer requirements. Wire intersections are electrically resistance-welded by com-
puter controlled continuous automatic welding lines that use pressure and heat to fuse wires in their proper positions. The
technology used by Insteel allows for production of sheets and rolls of high-strength reinforcing products with exacting
dimensional tolerances.
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
customer segments
Precast and Prestressed Producers
Rebar Fabricators
Distributors
end uses
Nonresidential Construction
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
customer segments
Concrete Pipe and Precast Producers
end uses
Nonresidential Construction
Residential 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
customer segments
Rebar Fabricators
Distributors
end uses
Nonresidential Construction
Residential Construction
PreStreSSed ConCrete StrAnd
(% oF totAL net SALeS: 2009—47%, 2008—45%, 2007—44%)
High-strength seven-wire reinforcement consisting of six cold-drawn wires that are continuously wrapped around a center
wire forming a strand, which is heat-treated while under tension to impart low relaxation characteristics and increase the
working range of the product. 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 the 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
customer segments
Precast Prestress Producers
Posttensioning Suppliers
end uses
Nonresidential Construction
Residential Construction
We market our products through sales representatives that are our employees and through a sales agent.
Our sales force is organized by product line and trained in the technical applications of our products. Our products are sold
nationwide as well as into Canada, Mexico, and Central and South America, and delivered primarily by truck, using common
or contract carriers.
Letter to Shareholders
2009 was a year of unprecedented change for nearly all industrial companies, including Insteel
following the record financial results that we achieved in 2008. The recessionary conditions in
the economy coupled with the ongoing tightness in credit markets spurred a heightened focus
on liquidity throughout our supply chain. Demand for our products plummeted through the first
nine months of the year as the decline in end use consumption was compounded by dramatic
inventory destocking across our customer base. Prices for our primary raw material, hot-rolled
steel wire rod, as well as for our concrete reinforcing products, which had surged to record
high levels in the prior year, abruptly reversed course, spiraling downward through most of
2009. In our PC strand business, these macro factors were exacerbated by the glut of Chinese
imports that had accumulated in various distribution channels towards the end of the prior
year, which created substantial downward pressure on shipments and pricing through the first
three quarters of 2009.
We responded aggressively to these challenges by realigning our operating schedules with the
depressed level of demand, reducing staffing by 16% over the course of the year, ratcheting
down our discretionary spending, intensifying our focus on process improvements and closely
managing working capital while continuing to meet the expectations of our customers.
Financial Results
Net sales for 2009 fell 34.9% to $230.2 million from $353.9 million in 2008 on a 29.7% decrease in
shipments and a 7.5% decrease in average selling prices. We incurred a loss from continuing operations of
$20.9 million ($1.20 per diluted share), which included a pre-tax charge of $25.9 million ($16.6 million after-
tax or $0.96 per share) for inventory write-downs to reduce the carrying value of inventory to the lower
of cost or market resulting from the decline in selling prices. In comparison, earnings from continuing opera-
tions were $43.7 million ($2.47 per diluted share) in 2008. On a positive note, we returned to profitability in
our fourth fiscal quarter following three consecutive quarterly losses.
Despite the loss, operating activities generated $22.1 million of cash in 2009, which was primarily used to
pay $11.5 million of dividends, fund $2.4 million of capital expenditures and increase our cash balance by
$8.6 million. We ended the year with a debt-free balance sheet and $35.1 million of cash. In connection with
the loss that was incurred for the year, we also have an estimated tax refund of $13.0 million that we expect
to receive during 2010, which will further strengthen our financial position.
Pc stR and tR ade cases
In May 2009, Insteel together with two other U.S. producers of PC strand filed antidumping and countervailing
duty petitions, alleging that imports of PC strand from China were injuring the domestic PC strand industry.
The trade cases were in response to a surge in imports in recent years that resulted in Chinese producers
representing 92% of total PC strand imports entering the U.S. in 2008 and capturing 41% of the domestic
market. We believe that these extraordinary results were achieved through commercial practices that are
1
While the short-term environment is formidable, we remain confident
about our long-term prospects. We will continue to focus on generat-
ing returns that exceed our cost of capital by: (1) maintaining and
building upon our market leadership positions; (2) operating as the
lowest cost producer; and (3) pursuing growth opportunities in our
core businesses that further our penetration of existing markets or
expand our geographic footprint.
inconsistent with U.S. trade law rather than by exploiting any legitimate strategic or cost advantage. The
pricing tactics employed by the Chinese to undersell domestic producers have severely impacted Insteel’s
shipping volumes and selling prices, resulting in significant margin erosion. On a level playing field, we are
confident that our manufacturing costs for PC strand compare favorably with any other producer, domestic
or foreign.
The trade cases allege that imports of PC strand from China were being “dumped” or sold in the U.S. at
less than fair value and that subsidies were being provided to Chinese PC strand producers by the Chinese
government. The alleged dumping margins range from 140% to 315%, with an average margin of 223%.
Fortunately, we have already benefited from the trade cases as Chinese producers have practically aban-
doned the U.S. market while they run their course, providing us an opportunity to restore our participation
with customers that had been relying heavily on Chinese sources of supply. The entire investigative process
is anticipated to take approximately one year, with the final determinations of injury, dumping and subsidies
expected to occur in mid-2010.
looking ahe ad
As we move into 2010, our level of visibility remains limited in view of the ongoing uncertainty regarding
future economic conditions, the relative availability of financing in the credit markets, and the timing and
magnitude of the infrastructure-related funding provided for under the American Recovery and Reinvestment
Act (“ARRA”) and the next federal highway funding authorization. The seasonal downturn that we typically
experience during our first and second fiscal quarters is likely to be exacerbated by the actions taken by
certain of our competitors and customers to minimize inventories. We expect market conditions to remain
challenging for the near-term, particularly in the commercial construction sector, where backlogs have
eroded due to the drop-off in new projects. Although the infrastructure spending provided for under ARRA is
expected to ramp up during 2010 and 2011, the extent to which it offsets the anticipated decline in other
categories of nonresidential construction is unknown at this time. In the residential construction sector, we
expect that market conditions will remain weak, but gradually improve over the course of the year.
Following the extended downturn that occurred during 2009, wire rod prices appear to have leveled out and
are expected to be influenced by changes in steel scrap prices in the coming months. The closures of two
2
U.S. rod mills in July and September 2009 that represented over 20% of total domestic capacity could
potentially tighten availability and drive prices higher as market conditions improve, particularly if imports
remain at reduced levels. However, the impact of the plant closures has been minimal up to this point due to
the depressed level of demand.
Insteel has weathered difficult times in the past. While the short-term environment is formidable, we remain
confident about our long-term prospects. We will continue to focus on generating returns that exceed
our cost of capital by: (1) maintaining and building upon our market leadership positions; (2) operating as
the lowest cost producer; and (3) pursuing growth opportunities in our core businesses that further our
penetration of existing markets or expand our geographic footprint.
Insteel’s strength and stability lie in our commitment to operating the Company as efficiently and effectively
as possible. Our highly skilled workforce is dedicated to finding new ways to best meet our customers’
requirements by improving efficiencies, reducing costs and right-sizing our business on a continuous basis.
Following the completion of our three-year $45.4 million capital investment program in 2008, we believe that
our state-of-the-art facilities and manufacturing capabilities are unsurpassed in our industry. We anticipate
gradually increasing contributions from these investments in the form of reduced operating costs and
additional capacity to satisfy future growth in demand. Finally, our strong balance sheet and financial flexibility
position us to capitalize on any attractive growth opportunities that may arise in this difficult environment.
As we navigate our way through this challenging period, we wish to thank our employees, customers and
shareholders for their continued trust, confidence and support.
Sincerely,
h.o. Woltz iii
Chairman, President and Chief Executive Officer
3
Leadership Positions in Attractive Markets
Insteel is the largest manufacturer of welded wire reinforcement and PC strand in the United States.
We are also the only domestic producer that manufactures both of these products, which are used
in combination for a broad range of concrete reinforcing applications. Our strategically located facilities
place us in close proximity to our customers and provide us with a national presence—a significant
advantage relative to single location producers.
We sell into attractive markets that offer considerable growth potential and a diverse customer base
with minimal concentration. Demographic trends and the ongoing deterioration in our nation’s infra-
structure are expected to spur long-term growth in construction spending and demand for our
Precast/prestressed and posttensioned concrete technologies, which rely on
PC strand, are being used in the construction of Hoover Dam Bypass, which will
be the longest single-arch concrete crossing in North America, spanning the
Colorado River between Nevada and Arizona.
4
products. In addition, concrete continues to gain market share in the construction sector relative to
competing building materials due to its lower life cycle cost and superior performance with respect
to durability and safety.
Engineered structural mesh (“ESM”) is undergoing a similar growth dynamic as it has gradually
penetrated the rebar market where it can serve as a higher strength, less labor intensive and lower
cost reinforcing solution for many applications. We have found that as rebar users initially convert
projects to ESM and experience first-hand the advantages that it offers, they tend to become repeat
ESM customers going forward. As market conditions improve, we plan on pursuing additional
investments in ESM to capitalize on the growing acceptance for the product.
5
State-of-the-Art Facilities and Manufacturing Capabilities
Given the highly competitive nature of our markets, a key element of our business strategy is to
operate as the lowest cost producer. From 2006 to 2008, we invested $45.4 million in our facilities,
adding two new ESM production lines, reconfiguring and expanding our two PC strand facilities, and
upgrading and expanding our standard welded wire reinforcement operations. These projects
provide dual benefits in the form of operating cost reductions together with additional capacity that
can be ramped up as market conditions improve. Although the unprecedented collapse in demand
that we experienced over the past year has negated any contribution from the incremental capacity
that was added, we have achieved sizable improvements in efficiencies and productivity as we have
shifted volume over to the new equipment. These improvements are largely a result of the
The long span beams used in highway construction are
frequently reinforced with both PC strand and ESM.
6
technological advancements in equipment that have occurred in recent years, particularly for the
production of ESM, and have favorably impacted our unit conversion costs.
Our world-class manufacturing facilities are supported by a sophisticated information systems
infrastructure that provides us with real-time data on our business processes and a broad range of
performance metrics and decision-support tools. Through the sizable investments that we have
made, we believe that our state-of-the-art facilities and systems infrastructure are second-to-none
in our industry, placing us in a strong competitive position across all our product lines.
Box culverts, which are used for water drainage applications,
are typically reinforced with ESM.
7
Financial Strength and Flexibility
We are committed to preserving a capital structure that provides us with the flexibility to pursue
future growth opportunities while maintaining sufficient liquidity to withstand economic or cyclical
downturns and the inherent volatility in our working capital requirements. Despite the recessionary
conditions in our markets over the past year, we ended fiscal 2009 with a debt-free balance sheet
and $35.1 million of cash. Our strong balance sheet and flexible capital structure allow us to create
value for our shareholders through capital expenditures, acquisitions, regular quarterly cash
dividends and the repurchase of shares on an opportunistic basis.
A recent study indicated that more than 25% of the bridges in the U.S. are estimated to be either structurally deficient
or functionally obsolete. The eventual upgrading and replacement of these structures together with the ongoing
construction of new bridges to alleviate the growing congestion on our roadways should favorably impact demand for
Insteel’s concrete reinforcing products in the coming years.
8
We believe the ongoing weakness in business conditions and tightness in the credit markets could
serve as a catalyst for potential acquisition candidates to become available at attractive valuations.
There may be growth opportunities in our core welded wire reinforcement and PC strand
businesses that further our penetration of the markets that we currently serve or expand our
geographic footprint. Such opportunities would offer substantial synergies and value-creation
potential, typically in the form of operating cost reductions through improved efficiencies and the
elimination of redundant expenses, reduced freight costs and additional purchasing leverage.
Our primary focus, however, is to maintain our strong financial position, and we will be disciplined in
pursuing any growth opportunities to ensure that the anticipated returns meet the expectations of
our shareholders.
9
contents
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48
48
49
50
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Management’s Report on Internal Control Over Financial Reporting
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 Shareholders’ Equity and
Comprehensive Income (Loss)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Stock Price and Dividend Data
Supplementary Quarterly Financial Data (Unaudited)
Stock Performance Graph
Selected Financial Data—Five-Year History
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, particularly in the “Letter to Shareholders” and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” When used in this report, the words “believes,” “anticipates,” “expects,” “estimates,” “intends,”
“may,” “should” and similar expressions are intended to identify forward-looking statements. Although we believe that our plans, inten-
tions and expectations reflected in or suggested by such forward-looking statements are reasonable, they are subject to a number of
risks and uncertainties, and we can provide no assurances that such plans, intentions or expectations will be achieved. Many of these
risks and uncertainties are discussed in detail in our periodic and other reports and statements that we file with the U.S. Securities and
Exchange Commission (the “SEC”), in particular in our Annual Report on Form 10-K for the year ended October 3, 2009. You should
carefully review these risks and uncertainties.
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 state-
ments 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 would include, but are not limited to, the following: general economic and competitive conditions in the markets in which
we operate; credit market conditions and the impact of the measures that have been taken by the federal government on the relative
availability of financing for us, our customers and the construction industry as a whole; the timing and magnitude of the impact of the
additional federal infrastructure-related funding provided for under the American Recovery and Reinvestment Act; the anticipated
reduction in spending for nonresidential construction, particularly commercial construction, and the impact on demand for our concrete
reinforcing products; the severity and duration of the downturn in residential construction activity and the impact on those portions of
our business that are correlated with the housing sector; the cyclical nature of the steel and building material industries; fluctuations in
the cost and availability of our primary raw material, hot-rolled steel wire rod, from domestic and foreign suppliers; our ability to raise
selling prices in order to recover increases in wire rod costs; changes in United States or foreign trade policy affecting imports or
exports of steel wire rod or our products, including the outcome of the trade cases that have been filed by domestic producers of
prestressed concrete strand (“PC strand”) regarding imports of PC strand from China; unanticipated changes in customer demand,
order patterns or inventory levels; the impact of weak demand and reduced capacity utilization levels on our unit manufacturing costs;
our ability to further develop the market for engineered structural mesh (“ESM”) and expand our shipments of ESM; the actual
net proceeds realized and closure costs incurred in connection with our exit from the industrial wire business; legal, environmental
or regulatory developments that significantly impact our operating costs; unanticipated plant outages, equipment failures or labor dif-
ficulties; continued escalation in certain of our operating costs; and the “Risk Factors” discussed in our Annual Report on Form 10-K
for the year ended October 3, 2009.
10
2009 Financial Review ManageMent’s Discussion anD analysis of financial conDition anD
Results of opeRations
Overview
Following our exit from the industrial wire busi-
ness (see Note 8 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;
(2) operating as the lowest cost producer; and (3) pur-
suing growth opportunities within our core busi-
nesses 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 United States (“GAAP”). Our discus-
sion and analysis of our financial condition and
results of operations are based on these financial
statements. The preparation of our financial state-
ments requires the application of these accounting
principles in addition to certain estimates and
judgments based on current available information,
actuarial estimates, historical results and other
assumptions believed to be reasonable. Actual results
could differ from these estimates.
Following is a discussion of our most critical
accounting policies, which are those that are both
important to the depiction of our financial condition
and results of operations and that require judgments,
assumptions and estimates.
Revenue recognition. We recognize revenue from prod-
uct sales in accordance with Financial Accounting
Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) Topic 605, Revenue Recognition
when products are shipped and risk of loss and title
has passed to the customer. Sales taxes collected from
customers are recorded on a net basis and as such, are
excluded from revenue.
Concentration of credit risk. Financial instruments that
subject us to concentrations of credit risk consist
principally of cash and cash equivalents and trade
accounts receivable. We are exposed to credit risk in
the event of default by institutions in which our cash
and cash equivalents are held and by customers to the
extent of the amounts recorded on the balance sheet.
We invest excess cash primarily in money market
funds, which are highly liquid securities that bear
minimal risk. Our cash is concentrated primarily at
one financial institution, which at times exceeds fed-
erally insured limits.
Most of our accounts receivable are due from
customers that are located in the U.S. and we gener-
ally require no collateral depending upon the credit-
worthiness of the account. We utilize credit insurance
on certain accounts receivable due from customers
located outside of the U.S. We provide an allowance
for doubtful accounts based upon our assessment of
the credit risk of specific customers, historical trends
and other information. There is no disproportionate
concentration of credit risk.
Allowance for doubtful accounts. We maintain allowances
for doubtful accounts for estimated losses resulting
from the potential inability of our customers to make
required payments on outstanding balances owed
to us. Significant management judgments and esti-
mates are used in establishing the allowances. These
judgments and estimates consider such factors as cus-
tomers’ financial position, cash flows and payment
history as well as current and expected business con-
ditions. It is reasonably likely that actual collections
will differ from our estimates, which may result in
increases or decreases in the allowances. Adjustments
to the allowances may also be required if there are
significant changes in the financial condition of our
customers.
Inventory valuation. We periodically evaluate the carry-
ing value of our inventory. This evaluation includes
assessing the adequacy of allowances to cover losses
in the normal course of operations, providing for
excess and obsolete inventory, and ensuring that
inventory is valued at the lower of cost or estimated
net realizable value. Our evaluation considers such
factors as the cost of inventory, future demand, our
historical experience and market conditions. In
assessing the realization of inventory values, we are
required to make judgments and estimates regarding
12
future market conditions. Because of the subjective
nature of these judgments and estimates, it is reason-
ably likely that actual outcomes will differ from our
estimates. Adjustments to these reserves may be
required if actual market conditions for our products
are substantially different than the assumptions
underlying our estimates.
Self-insurance. We are self-insured for certain losses
relating to medical and workers’ compensation
claims. Self-insurance claims filed and claims
incurred but not reported are accrued based upon
management’s estimates of the discounted ultimate
cost for uninsured claims incurred using actuarial
assumptions followed by the insurance industry and
historical experience. These estimates are subject to a
high degree of variability based upon future inflation
rates, litigation trends, changes in benefit levels and
claim settlement patterns. Because of uncertainties
related to these factors as well as the possibility of
changes in the underlying facts and circumstances,
future adjustments to these reserves may be required.
Litigation. From time to time, we may be involved in
claims, lawsuits and other proceedings. Such matters
involve uncertainty as to the eventual outcomes and
the potential losses that we may ultimately incur.
We record expenses for litigation when it is probable
that a liability has been incurred and the amount
of the loss can be reasonably estimated. We estimate
the probability of such losses based on the advice of
legal counsel, the outcome of similar litigation, the
status of the lawsuits and other factors. Due to the
numerous factors that enter into these judgments and
assumptions, it is reasonably likely that actual out-
comes will differ from our estimates. We monitor
our potential exposure to these contingencies on a
regular basis and may adjust our estimates as addi-
tional information becomes available or as there are
significant developments.
Assumptions for employee benefit plans. We account for
our defined employee benefit plans, the Insteel
Wire Products Company Retirement Income Plan
for Hourly Employees, Wilmington, Delaware (the
“Delaware Plan”) and the supplemental employee
retirement plans (each, a “SERP”) in accordance
with FASB ASC Topic 715, Compensation—Retire-
ment Benefits. Under the provisions of ASC Topic
715, we recognize net periodic pension costs and
value pension assets or liabilities based on certain
actuarial assumptions, principally the assumed dis-
count rate and the assumed long-term rate of return
on plan assets.
The discount rates we utilize for determining
net periodic pension costs and the related benefit
obligations for our plans are based, in part, on current
interest rates earned on long-term bonds that receive
one of the two highest ratings assigned by recognized
rating agencies. Our discount rate assumptions are
adjusted as of each valuation date to reflect current
interest rates on such long-term bonds. The discount
rates are used to determine the actuarial present
value of the benefit obligations as of the valuation
date as well as the interest component of the net
periodic pension cost for the following year. The dis-
count rate for the Delaware Plan was 5.5%, 7.0% and
6.5% for 2009, 2008 and 2007, respectively. The dis-
count rate for the SERPs was 5.5%, 7.0% and 6.25% for
2009, 2008 and 2007, respectively.
The assumed long-term rate of return on plan
assets for the Delaware Plan represents the estimated
average rate of return expected to be earned on the
funds invested or to be invested in the plan’s assets to
fund the benefit payments inherent in the projected
benefit obligations. Unlike the discount rate, which is
adjusted each year based on changes in current long-
term interest rates, the assumed long-term rate of
return on plan assets will not necessarily change
based upon the actual short-term performance of the
plan assets in any given year. The amount of net peri-
odic pension cost that is recorded each year is based
on the assumed long-term rate of return on plan
assets for the plan and the actual fair value of the
plan assets as of the beginning of the year. We regu-
larly review our actual asset allocation and, when
appropriate, rebalance the investments in the plan to
more accurately reflect the targeted allocation.
For 2009, 2008 and 2007, the assumed long-term
rate of return utilized for plan assets of the Delaware
Plan was 8%. We currently expect to use the same
assumed rate for the long-term return on plan assets
in 2010. In determining the appropriateness of this
INSTEEL INDUSTRIES, INC. // 2009 annual report
13
ManageMent’s Discussion anD analysis of financial conDition anD
Results of opeRations (continued)
assumption, we considered the historical rate of
return of the plan assets, the current and projected
asset mix, our investment objectives and information
provided by our third-party investment advisors.
The projected benefit obligations and net peri-
odic pension cost for the Delaware Plan are based in
part on expected increases in future compensation
levels. Our assumption for the expected increase in
future compensation levels is based upon our average
historical experience and management’s intentions
regarding future compensation increases, which gen-
erally approximates average long-term inflation rates.
Assumed discount rates and rates of return
on plan assets are reevaluated annually. Changes
in these assumptions can result in the recognition
of materially different pension costs over different
periods and materially different asset and liability
amounts in our consolidated financial statements.
A reduction in the assumed discount rate gener-
ally results in an actuarial loss, as the actuarially-
determined present value of estimated future benefit
payments will increase. Conversely, an increase in the
assumed discount rate generally results in an actuar-
ial gain. In addition, an actual return on plan assets
for a given year that is greater than the assumed
return on plan assets results in an actuarial gain,
while an actual return on plan assets that is less
than the assumed return results in an actuarial loss.
Other actual outcomes that differ from previous
assumptions, such as individuals living longer or
shorter lives than assumed in the mortality tables that
are also used to determine the actuarially-determined
present value of estimated future benefit payments,
changes in such mortality tables themselves or plan
amendments will also result in actuarial losses or
gains. Under GAAP, actuarial gains and losses are
deferred and amortized into income over future
periods based upon the expected average remaining
service life of the active plan participants (for plans
for which benefits are still being earned by active
employees) or the average remaining life expectancy
of the inactive participants (for plans for which bene-
fits are not still being earned by active employees).
However, any actuarial gains generated in future
periods reduce the negative amortization effect of any
cumulative unamortized actuarial losses, while any
actuarial losses generated in future periods reduce
the favorable amortization effect of any cumulative
unamortized actuarial gains.
The amounts recognized as net periodic pension
cost and as pension assets or liabilities are based
upon the actuarial assumptions discussed above.
We believe that all of the actuarial assumptions used
for determining the net periodic pension costs and
pension assets or liabilities related to the Delaware
Plan are reasonable and appropriate. The funding
requirements for the Delaware Plan are based upon
applicable regulations, and will generally differ from
the amount of pension cost recognized under ASC
Topic 715 for financial reporting purposes. No contri-
butions were required to be made to the Delaware
Plan during 2009, 2008 and 2007.
We currently expect to record net periodic pen-
sion costs totaling $199,600 during 2010, although we
do not expect any cash contributions to the Delaware
Plan will be required during the year. Contributions
to the SERPs are expected to total $155,000 during
2010, matching the required benefit payments.
A 0.25% decrease in the assumed discount rate
for the Delaware Plan would have increased our
projected and accumulated benefit obligations as of
October 3, 2009 by approximately $90,200 and the
expected net periodic pension cost for 2010 by approx-
imately $3,400. A 0.25% decrease in the assumed dis-
count rate for our SERPs would have increased our
projected and accumulated benefit obligations as
of October 3, 2009 by approximately $182,000 and
$137,000, respectively, and increased the net periodic
pension cost for 2010 by approximately $16,000.
A 0.25% decrease in the assumed long-term rate
of return on plan assets for the Delaware Plan would
have increased the expected net periodic pension cost
for 2010 by approximately $7,100.
reCent aCCOunting PrOnOunCements
Current Adoptions
In June 2009, FASB issued Accounting Standards
Update (ASU) No. 2009-01, the FASB Accounting
Standards Codification™ (“Codification”) and the
Hierarchy of Generally Accepted Accounting Prin-
ciples (“ASU 2009-01”). This update established the
Codification as the source of authoritative accounting
14
principles recognized by the FASB in the preparation
of financial statements in conformity with GAAP. All
existing accounting standard documents will be
superseded and all other accounting literature not
included in the Codification will be considered non-
authoritative. As the Codification was not intended to
change or alter existing GAAP, the adoption of ASU
2009-01 did not have an impact on our consolidated
financial statements.
In August 2009, the FASB issued ASU No. 2009-
05, Measuring Liabilities at Fair Value (“ASU 2009-
05”). This update provides amendments to ASC Topic
820, Fair Value Measurement and Disclosure, for the
fair value measurement of liabilities. The purpose of
this amendment is to reduce ambiguity in financial
reporting when measuring the fair value of liabilities.
The adoption of ASU 2009-05 did not have an impact
on our consolidated financial statements.
Future Adoptions
In December 2007, the FASB amended certain
provisions of ASU Topic 805, Business Combina-
tions (previously reported as Statement of Financial
Accounting Standards “SFAS” No. 141R, “Business
Combinations”). This amendment requires the acquir-
ing entity in a business combination to recognize all
the assets acquired and liabilities assumed in the
transaction; establishes the acquisition-date fair value
as the measurement objective for all assets acquired
and liabilities assumed; and requires the acquirer to
disclose all of the information required to evaluate
and understand the nature and financial effect of the
business combination. This amendment is effective
for acquisition dates on or after the beginning of
the first annual reporting period beginning after
December 15, 2008 and is not expected to have a mate-
rial effect on our consolidated financial statements
to the extent that we do not enter into business com-
binations subsequent to adoption.
In December 2007, the FASB amended certain
provisions of ASU Topic 810, Consolidation (previ-
ously reported as SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements”). This
amendment establishes accounting and reporting
standards for non-controlling interests in subsidiaries
and for the deconsolidation of subsidiaries. This
amendment also clarifies that a non-controlling inter-
est in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity
in the consolidated financial statements. This amend-
ment is effective for fiscal years beginning after
December 15, 2008 and is not expected to have a mate-
rial effect on our consolidated financial statements
to the extent that we do not obtain any minority
interests in subsidiaries subsequent to adoption.
In June 2008, the FASB amended certain provi-
sions of ASU Topic 260, Earnings per Share (previ-
ously reported as FASB Staff Position “FSP” Emerging
Issues Task Force “EITF” No. 03-6-1, “Determining
Whether Instruments Granted in Share-Based Pay-
ment Transactions are Participating Securities”). This
amendment requires that unvested share-based pay-
ment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be
included in the computation of earnings per share
pursuant to the two-class method. This amendment
is effective for financial statements issued for fiscal
years beginning after December 15, 2008 and interim
periods within those years, and requires that all prior
period earnings per share data presented (including
interim financial statements, summaries of earnings
and selected financial data) be adjusted retrospec-
tively to conform to its provisions. We are currently
evaluating the impact, if any, that the adoption of this
amendment will have on our consolidated financial
statements.
In December 2008, the FASB amended certain
provisions of ASU Topic 715, Compensation—Retire-
ment Benefits (previously reported as FSP No. FAS
132(R)-1, “Employers’ Disclosures about Postretire-
ment Benefit Plan Assets”). This amendment requires
objective disclosures about postretirement benefit
plan assets including investment policies and strate-
gies, categories of plan assets, fair value measure-
ments of plan assets and significant concentrations of
risk. This amendment is effective, on a prospective
basis, for fiscal years ending after December 15, 2009.
We are currently evaluating the impact, if any, that
the adoption of this amendment will have on our con-
solidated financial statements.
INSTEEL INDUSTRIES, INC. // 2009 annual report
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 (loss)
Percentage of net sales
Selling, general and administrative expense
Percentage of net sales
Other expense (income), net
Interest expense
Interest income
Effective income tax rate
Earnings (loss) from continuing operations
Earnings (loss) from discontinued operations
Net earnings (loss)
“N/M” = not meaningful
October 3,
2009
$230,236
(15,093)
(6.6%)
Change
(34.9%)
(117.4%)
Year Ended
September 27,
2008
$353,862
86,755
24.5%
Change
18.8%
54.8%
September 29,
2007
$297,806
56,061
18.8%
$ 17,243
(7.4%)
$ 18,623
5.9%
$ 17,583
7.5%
(135)
641
(144)
36.0%
$ (20,940)
(1,146)
(22,086)
N/M
7.9%
(80.0%)
(147.9%)
N/M
(150.5%)
5.3%
85
594
(721)
35.9%
$ 43,717
35
43,752
N/M
0.3%
73.7%
80.0%
N/M
81.1%
5.9%
4
592
(415)
36.6%
$ 24,284
(122)
24,162
2009 COmPared with 2008
Net Sales
Net sales decreased 34.9% to $230.2 million in
2009 from $353.9 million in 2008. Shipments for the
year decreased 29.7% while average selling prices
declined 7.5% from the prior year levels. The reduc-
tion in shipments was primarily due to the general
economic downturn, the tightening in credit markets
and the surge in low-priced imports of PC strand
during 2008, which resulted in customer inventory
destocking through most of the year. The decline in
average selling prices was driven by the collapse in
steel prices that occurred through most of the current
year together with weakening demand following the
unprecedented escalation in raw material costs and
selling prices that occurred during the prior year.
Gross Profit (Loss)
The gross loss for 2009 was $15.1 million, or
6.6% of net sales compared to gross profit of $86.8
million, or 24.5% of net sales in 2008. The gross loss
for the year reflects a pre-tax charge of $25.9 million
for inventory write-downs to reduce the carrying
value of inventory to the lower of cost or market
resulting from the decline in selling prices for certain
products during the year relative to higher raw mate-
rial costs under the first-in, first-out (“FIFO”) method
of accounting. The gross loss for the current year
also reflects the unfavorable impact of the reductions
in shipments and selling prices, the consumption of
higher cost inventory that was purchased prior to the
recent collapse in steel prices and the escalation in
unit conversion costs resulting from reduced operat-
ing schedules at our manufacturing facilities.
Selling, General and Administrative Expense
Selling, general and administrative expense
(“SG&A expense”) decreased 7.4% to $17.2 million,
or 7.5% of net sales in 2009 from $18.6 million, or
5.3% of net sales in 2008 primarily due to reductions
in employee incentive plan expense ($2.6 million),
supplemental employee retirement plan expense
($246,000), travel expense ($201,000) and bad debt
expense ($139,000). The reduction in employee incen-
tive plan expense was related to the decline in our
financial performance during the current year. The
reduction in travel expense was primarily due to
the implementation of various cost reduction meas-
ures. These reductions were partially offset by the
net gain on a life insurance settlement in the prior
year ($661,000), and increases in stock-based compen-
sation expense ($375,000), legal expense ($257,000),
employee benefit costs ($231,000) and consulting
expense ($138,000). The increase in legal expense was
primarily associated with the trade cases that have
been filed regarding imports of PC strand from
China. The increase in employee benefit expense was
largely due to higher employee medical costs.
Interest Expense
Interest expense for 2009 increased $47,000, or
7.9% to $641,000 from $594,000 in 2008 primarily due
to higher average outstanding balances on the revolv-
ing credit facility in the current year.
16
Interest Income
Gross Profit
Interest income for 2009 decreased $577,000, or
80.0%, to $144,000 from $721,000 in 2008 primarily
due to lower rates of return on cash investments in
the current year.
Income Taxes
Our effective income tax rate for 2009 was rela-
tively flat at 36.0% compared with 35.9% in 2008.
Earnings (Loss) From Continuing Operations
The loss from continuing operations for 2009 was
$20.9 million ($1.20 per share) compared with earn-
ings from continuing operations of $43.7 million
($2.47 per diluted share) in 2008 due to the decreases
in net sales and gross profit.
Earnings (Loss) From Discontinued Operations
The loss from discontinued operations for 2009
was $1.1 million ($0.07 per share) compared with
earnings of $35,000 in 2008, which had no effect
on earnings per share. The current year loss is pri-
marily due to a pre-tax impairment charge of $1.8
million ($1.1 million or $0.06 per share after-tax) to
write down the carrying value of the real estate held
for sale associated with the industrial wire business,
which we exited in 2006. The earnings in 2008
resulted from escrow payments we received that were
forfeited by a prospective buyer of the industrial wire
facility.
Net Earnings (Loss)
The net loss for 2009 was $22.1 million ($1.27
per share) compared to net earnings of $43.8 million
($2.47 per diluted share) in 2008 primarily due to the
decreases in net sales and gross profit.
2008 COmPared with 2007
Net Sales
Net sales increased 18.8% to $353.9 million in
2008 from $297.8 million in 2007. Average selling
prices for the year increased 28.7% while shipments
decreased 7.7% from the prior year levels. The
increase in average selling prices was driven by price
increases that were implemented during the year
to recover the unprecedented escalation in our raw
material costs. The reduction in shipments was pri-
marily due to the continuation of weak demand from
customers that have been negatively impacted by the
downturn in residential construction activity.
Gross profit increased 54.8% to $86.8 million, or
24.5% of net sales in 2008 from $56.1 million, or 18.8%
of net sales in 2007 primarily due to higher spreads
between average selling prices and raw material
costs, which more than offset lower shipments and
higher unit conversion costs. The widening in spreads
during the current year was primarily driven by the
price increases that were implemented together with
the consumption of lower cost inventory under the
first-in, first-out (“FIFO”) method of accounting.
Selling, General and Administrative Expense
Selling, general and administrative expense
(“SG&A expense”) increased 5.9% to $18.6 million,
or 5.3% of net sales in 2008 from $17.6 million, or
5.9% of net sales in 2007 primarily due to increases in
employee benefit costs ($812,000), bad debt expense
($630,000), compensation expense ($370,000) and
supplemental employee retirement plan expense
($291,000), which were partially offset by the net
gain on life insurance settlements ($661,000) and
decreases in consulting expense ($204,000), travel
expense ($167,000) and legal fees ($79,000).
Interest Expense
Interest expense for 2008 was relatively flat at
$594,000 compared to $592,000 in 2007, primarily con-
sisting of non-cash amortization expense associated
with capitalized financing costs.
Interest Income
Interest income for 2008 increased $306,000, or
73.7%, to $721,000 from $415,000 in 2007 primarily
due to higher average cash balances.
Income Taxes
Our effective income tax rate decreased to 35.9%
in 2008 from 36.6% in 2007 due to an increase in per-
manent differences resulting from higher tax credits
attributable to domestic production activities and
nontaxable proceeds associated with life insurance
settlements.
Earnings From Continuing Operations
Earnings from continuing operations for 2008
increased to $43.7 million ($2.47 per diluted share)
compared to $24.3 million ($1.33 per diluted share)
in 2007 primarily due to the increases in sales and
gross profit which more than offset the increase in
SG&A expense.
INSTEEL INDUSTRIES, INC. // 2009 annual report
17
ManageMent’s Discussion anD analysis of financial conDition anD
Results of opeRations (continued)
Earnings (Loss) From Discontinued Operations
Earnings from discontinued operations for 2008
were $35,000, which had no effect on earnings per
share, compared with a loss of $122,000 ($0.01 per
share) in 2007. The earnings in 2008 resulted from
escrow payments we received that were forfeited
by a prospective buyer of our Fredericksburg,
Virginia manufacturing facility, which we had closed
in 2006 in connection with our exit from the indus-
trial wire business.
Net Earnings
Net earnings for 2008 increased to $43.8 million
($2.47 per diluted share) compared to $24.2 million
($1.32 per diluted share) in 2007 primarily due to the
increases in sales and gross profit which more than
offset the increase in SG&A expense.
liquidity and CaPital resOurCes
Selected Financial Data
(Dollars in thousands)
Year Ended
October 3,
2009
September 27,
2008
September 29,
2007
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
$ 22,092
(2,166)
(11,347)
$ 36,808
(8,249)
(10,710)
$ 17,065
(17,062)
(1,842)
Net cash provided by (used for) operating 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)
30
(59)
(147)
82,252
—
—
$147,070
97,566
—
—
$169,847
70,697
—
—
$143,850
100%
100%
100%
$147,070
$169,847
$143,850
Cash flOw analysis
Operating activities of continuing operations
provided $22.1 million of cash during 2009 compared
to $36.8 million in 2008 and $17.1 million in 2007. The
year-over-year change in 2009 was primarily due to
the loss that was incurred in the current year, which
was partially offset by the cash provided by the
net working capital components of accounts receiv-
able, inventories, and accounts payable and accrued
expenses. The current year loss reflects a pre-tax
charge of $25.9 million for inventory write-downs.
Net working capital provided $20.3 million of cash in
the current year largely due to the $28.3 million
decrease in accounts receivable resulting from the
reductions in shipments and selling prices, and the
$6.7 million decrease in inventories (excluding the
impact of the inventory write-downs) resulting from
our inventory reduction initiatives. These decreases
were partially offset by the $14.8 million decrease in
accounts payable and accrued expenses that was pri-
marily due to the payment of $10.9 million of accrued
income taxes payable and lower raw material pur-
chases. In addition to these changes in working capi-
tal, the $14.2 million of other changes in assets and
liabilities in the current year includes $13.0 million of
estimated income taxes receivable that were recorded
in prepaid expenses and other resulting from the
current year loss. Net working capital used $20.2 mil-
lion and $14.6 million in 2008 and 2007, respectively.
The cash used by working capital in 2008 was due
to the $23.8 million increase in inventories and the
$15.1 million increase in accounts receivable resulting
from the escalation in raw material costs and selling
prices, which were partially offset by an $18.7 million
increase in accounts payable and accrued expenses
largely related to higher raw material purchases. The
cash used by working capital in 2007 was primarily
due to the $17.0 million decrease in accounts payable
and accrued expenses resulting from the sharp reduc-
tion in raw material purchases together with changes
in the mix of vendor payments. Additionally, depre-
ciation and amortization expense increased $1.6 mil-
lion from 2007 to 2008 as a result of the elevated level
18
of capital expenditures and related asset additions.
As the impact and duration of the current economic
slowdown become clearer, we may make additional
adjustments in our operating activities, which could
materially impact our cash requirements. While an
economic slowdown adversely affects sales to our
customers, it generally reduces our working capital
requirements.
Investing activities used $2.2 million of cash dur-
ing 2009 compared to $8.2 million during 2008 and
$17.1 million in 2007. Capital expenditures amounted
to $2.4 million, $9.5 million and $17.0 million in 2009,
2008 and 2007, respectively, with the higher levels in
the prior years primarily related to the expansion and
upgrading of our manufacturing facilities. Capital
expenditures are expected to total less than $5.0 mil-
lion for fiscal 2010. Current year investing activities
also include $413,000 of proceeds from the surrender
of life insurance policies compared to $170,000 in the
prior year and a $215,000 increase in the cash surren-
der value of life insurance policies resulting from the
increase in the value of the underlying investments
compared to $190,000 in 2008 and $639,000 in 2007.
Investing activities in 2008 also include $1.1 million
of proceeds from claims on life insurance policies.
Investing activities are largely discretionary and
future outlays could be reduced significantly or elim-
inated should economic conditions warrant.
Financing activities used $11.3 million of cash
during 2009 compared to $10.7 million and $1.8
million during 2008 and 2007, respectively. During
the current year, $11.4 million of cash dividends were
paid compared to $2.1 million and $2.2 million dur-
ing 2008 and 2007, respectively. Additionally, $8.7
million of shares were repurchased during 2008.
Credit faCility
We have a $100.0 million revolving credit facility
in place, which matures in June 2010 and supplements
our operating cash flow in funding our working
capital, capital expenditure and general corporate
requirements. No borrowings were outstanding on
the credit facility as of October 3, 2009 and September
27, 2008 and outstanding letters of credit totaled $1.1
million and $1.2 million, respectively. As of October 3,
2009, $38.7 million of borrowing capacity was avail-
able on the credit facility (see Note 5 to the consoli-
dated financial statements). During the year ended
October 3, 2009, ordinary course borrowings on our
revolving credit facility were as high as $10.0 million.
We believe that, in the absence of significant
unanticipated cash demands, cash and cash equiva-
lents, and net cash generated by operating activities
will be sufficient to satisfy our expected requirements
for working capital, capital expenditures, dividends
and share repurchases, if any. We can also access the
amounts available under our revolving credit facility,
which we expect to either extend or replace prior to
the June 2010 maturity date. In the event that we
elected not to extend or replace the existing revolving
credit facility or if we were unable to do so, we believe
that cash and cash equivalents, and net cash gen-
erated by operating activities will be sufficient to
meet our expected funding requirements. However,
further deterioration in general economic conditions
could result in additional reductions in demand
from our customers, which would likely reduce our
oper ating cash flows. Under such circumstances, we
may need to curtail capital and operating expen-
ditures, delay or restrict share repurchases, cease
dividend payments and/or realign our working capi-
tal requirements.
Should we determine, at any time, that we
require additional short-term liquidity, we would
evaluate the alternative sources of financing that
are potentially available to provide such funding.
There can be no assurance that any such financing,
if pursued, would be obtained, or if obtained, would
be adequate or on terms acceptable to us. However,
we believe that our strong balance sheet and capital
structure as of October 3, 2009 positions us to meet
our anticipated liquidity requirements for the fore-
seeable future. Our liquidity position is further
supported by the borrowing capacity available to us
under our existing credit facility.
imPaCt Of inflatiOn
We are subject to inflationary risks arising from
fluctuations in the market prices for our primary raw
material, hot-rolled steel wire rod, and, to a much
lesser extent, freight, energy and other consumables
that are used in our manufacturing processes. We
have generally been able to adjust our selling prices to
pass through increases in these costs or offset them
through various cost reduction and productivity
improvement initiatives. However, our ability to raise
INSTEEL INDUSTRIES, INC. // 2009 annual report
19
ManageMent’s Discussion anD analysis of financial conDition anD
Results of opeRations (continued)
our selling prices depends on market conditions and
competitive dynamics, and there may be periods dur-
ing which we are unable to fully recover increases
in our costs. During 2009, selling prices for our prod-
ucts declined dramatically in response to softening
demand and the inventory destocking measures pur-
sued by our customers, which negatively impacted
our financial results as we consumed higher cost
inventory that was purchased prior to the collapse in
steel prices. In contrast, during 2008, we implemented
price increases in response to the unprecedented
escalation in wire rod costs, which materially
increased our net sales and earnings as we consumed
lower cost inventory. During 2007, inflation did not
have a material impact on our sales or earnings.
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,
liquidity, capital expenditures, capital resources or
significant components of revenues or expenses.
COntraCtual OBligatiOns
Our contractual obligations and commitments at October 3, 2009 are as follows:
(In thousands)
Contractual obligations:
Raw material purchase commitments(1)
Supplemental employee retirement plan obligations
Pension benefit obligations
Operating leases
Trade letters of credit
Other unconditional purchase obligations(2)
Commitment fee on unused portion of credit facility
Total
(1) Non-cancelable fixed price purchase commitments for raw materials.
(2) Contractual commitments for capital expenditures.
Payments Due by Period
Total
Less Than
1 Year
1–3
Years
3–5
Years
More Than
5 Years
$28,389
19,260
7,391
1,595
1,118
298
197
$28,389
155
399
615
1,118
298
197
$ — $ —
487
469
69
—
—
—
487
494
508
—
—
—
$ —
18,131
6,029
403
—
—
—
$58,248
$31,171
$ 1,489
$ 1,025
$24,563
OutlOOk
Our visibility for business conditions in 2010 is
clouded by the continued uncertainty regarding
future global economic conditions, the availability of
financing in the credit markets and the timing and
magnitude of the impact of the federal infrastructure-
related funding provided for under the American
Recovery and Reinvestment Act (“ARRA”) as well as
the next federal highway funding authorization.
Although we expect nonresidential construction, our
primary demand driver, to decrease from the levels of
recent years, particularly for commercial projects
which have been the most severely impacted by the
economic downturn, the additional infrastructure
funding provided for under ARRA should serve to
at least partially mitigate this decline. We anticipate
that residential construction will remain weak, but
gradually improve over the course of the year, favor-
ably impacting shipments to customers that have
greater exposure to the housing sector.
Following an extended downward trend that
began in September 2008, prices for our primary raw
material, hot-rolled steel wire rod, appear to have
leveled out in recent months, although their future
direction remains highly uncertain. The recent
closures of two U.S. rod mills that represented over
20% of total domestic capacity has the potential to
drive prices higher, although the impact is likely to be
minimized to the extent that demand for wire rod
remains at depressed levels.
20
In response to the challenges facing us, we will
continue to focus on the operational fundamentals of
our business: closely managing and controlling our
expenses; aligning our production schedules with
demand in a proactive manner as there are changes
in market conditions to minimize our cash operating
costs; and pursuing further improvements in the
productivity and effectiveness of all of our manufac-
turing, selling and administrative activities. We also
expect gradually increasing contributions from the
substantial investments we have made in our facili-
ties in recent years in the form of reduced operating
costs and additional capacity to support future
growth when market conditions improve (see
“Forward-Looking Statements”). In addition to these
organic growth and cost reduction initiatives, we
are continually evaluating potential acquisitions
in our existing businesses that further our penetra-
tion in current markets served or expand our geo-
graphic reach.
quantitative and qualitative disClOsures aBOut
market risk
Our cash flows and earnings are subject to
fluctuations resulting from changes in commodity
prices, interest rates and foreign exchange rates. We
manage our exposure to these market risks through
internally established policies and procedures and,
when deemed appropriate, through the use of deriva-
tive financial instruments. We do not use financial
instruments for trading purposes and we are not a
party to any leveraged 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 are subject to significant fluctuations in the
cost and availability of our primary raw material, hot-
rolled carbon steel wire rod, which we purchase from
both domestic and foreign suppliers. We negotiate
quantities and pricing for both domestic and foreign
steel wire rod purchases for varying periods (most
recently monthly for domestic suppliers), depending
upon market conditions, to manage our exposure to
price fluctuations and to ensure adequate availability
of material consistent with our requirements. We do
not use derivative commodity instruments to hedge
our exposure to changes in prices as such instru-
ments are not currently available for steel wire rod.
Our ability to acquire steel wire rod from foreign
sources on favorable terms is impacted by fluctua-
tions 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, depend-
ing upon market conditions and competitive dynam-
ics, there may be periods during which we are unable
to fully recover increased rod costs through higher
selling prices, which would reduce our gross profit
and cash flow from operations. Additionally, should
wire rod costs decline, our financial results may be
negatively impacted if the selling prices for our prod-
ucts decrease to an even greater degree and to the
extent that we are consuming higher cost material
from inventory. Based on our 2009 shipments and
average rod cost reflected in cost of sales, a 10%
increase in the price of steel wire rod would have
resulted in a $19.1 million decrease in our annual pre-
tax earnings (assuming there was not a correspond-
ing change in our selling prices).
Interest Rates
Although we were debt-free as of October 3, 2009,
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
currencies other than U.S. dollars and any such trans-
actions historically have not been material. We will
occasionally hedge firm commitments for equipment
purchases that are denominated in foreign curren-
cies. 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 October 3,
2009. During fiscal 2009, a 10% increase or decrease in
the value of the U.S. dollar relative to foreign curren-
cies to which we are typically exposed would not
have had a material impact on our financial position,
results of operations or cash flows.
INSTEEL INDUSTRIES, INC. // 2009 annual report
21
ManageMent’s RepoRt on inteRnal contRol oVeR financial RepoRting
Our management is responsible for establishing
and maintaining adequate internal control over
financial reporting. Internal control over financial
reporting is a process to provide reasonable assur-
ance regarding the reliability of our financial report-
ing for external purposes in accordance with
generally accepted accounting principles. Internal
control over financial reporting includes: (1) main-
taining records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of
assets; (2) providing reasonable assurance that trans-
actions are recorded as necessary for preparation of
financial statements, and that receipts and expendi-
tures are made in accordance with authorizations of
management and directors; and (3) providing reason-
able assurance that unauthorized acquisition, use or
disposition of assets that could have a material effect
on financial statements would be prevented or
detected on a timely basis. Because of its inherent
limitations, internal control over financial reporting
is not intended to provide absolute assurance that a
misstatement of financial statements would be pre-
vented or detected. Also, projections of any evalua-
tion 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 our
internal control over financial reporting based on the
criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in
Internal Control—Integrated Framework. Based on this
assessment, management concluded that our internal
control over financial reporting was effective as of
October 3, 2009.
Our independent registered public accounting
firm has issued an audit report on the effectiveness of
our internal control over financial reporting as of
October 3, 2009 which is on page 24.
22
RepoRt of inDepenDent RegisteReD puBlic accounting fiRM
consoliDateD financial stateMents
To the Board of Directors and Shareholders
Insteel Industries, Inc.:
We have audited the accompanying consolidated
balance sheets of Insteel Industries, Inc. and subsid-
iaries (a North Carolina corporation) as of October 3,
2009 and September 27, 2008, and the related consoli-
dated statements of operations, shareholders’ equity
and comprehensive income (loss) and cash flows for
each of the three years in the period ended October 3,
2009. 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 prin-
ciples 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 subsidiaries as of October 3, 2009 and
September 27, 2008, and the results of their operations
and their cash flows for each of the three years in
the period ended October 3, 2009 in conformity
with accounting principles generally accepted in the
United States.
As discussed in Note 2 to the financial state-
ments, the Company adopted certain provisions of
ASC Topic 740, “Income Taxes” (previously reported
as Financial Accounting Standards Board Interpre-
tation No. 48, “Accounting for Uncertainty in Income
Taxes”) at the beginning of 2008. In addition, as dis-
cussed in Note 9, the Company adopted certain provi-
sions of ASC Topic 715, Compensation—Retirement
Benefits (previously reported as Financial Accounting
Standards Board Statement No. 158, “Employers’
Accounting for Defined Benefit Pension and Other
Postretirement Plans”) on September 29, 2007.
We also have audited, in accordance with the
standards of the Public Company Accounting Over-
sight Board (United States), Insteel Industries, Inc.
and subsidiaries’ internal control over financial
report ing as of October 3, 2009, based on criteria
established in Internal Control—Integrated Frame work
issued by the Committee of Sponsoring Organiza-
tions of the Treadway Commission (COSO) and our
report dated November 9, 2009 expressed an unquali-
fied opinion.
Greensboro, North Carolina
November 9, 2009
INSTEEL INDUSTRIES, INC. // 2009 annual report
23
RepoRt of inDepenDent RegisteReD puBlic accounting fiRM
inteRnal contRol oVeR financial RepoRting
To the Board of Directors and Shareholders
Insteel Industries, Inc.:
We have audited Insteel Industries, Inc. and sub-
sidiaries’ (a North Carolina corporation) internal con-
trol over financial reporting as of October 3, 2009,
based on criteria established in Internal Control—
Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Com-
mission (COSO). Insteel Industries, Inc. and subsid-
iaries’ management is responsible for maintaining
effective internal control over financial reporting
and for its assessment of the effectiveness of internal
control over financial reporting, included in the
accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to
express an opinion on Insteel Industries, Inc. and sub-
sidiaries’ 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 con-
trol over financial reporting was maintained in all
material respects. Our audit included obtaining an
understanding of internal control over financial
reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operat-
ing 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 poli-
cies and procedures that (1) pertain to the mainte-
nance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary
to permit preparation of financial statements in
accordance with generally accepted accounting prin-
ciples, 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 unau-
thorized acquisition, use, or disposition of the com-
pany’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-
sidiaries maintained, in all material respects, effective
internal control over financial reporting as of October
3, 2009, based on criteria established in Internal
Control—Integrated Framework issued by 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 subsidiaries
as of October 3, 2009 and September 27, 2008 and
the related consolidated statements of operations,
shareholders’ equity and comprehensive income
(loss) and cash flows for each of the three years in
the period ended October 3, 2009, and our report
dated Novem ber 9, 2009, expressed an unqualified
opinion on those financial statements and contains an
explanatory paragraph relating to the adoption of cer-
tain provisions of ASC Topic 740, “Income Taxes”
(previously reported as Financial Accounting
Standards Board Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes”) at the beginning of
2008. In addition, as discussed in Note 9, the Company
adopted certain provisions of ASC Topic 715,
“Compensation—Retirement Benefits” (previously
reported as Financial Account ing Standards Board
Statement No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement
Plans”) on September 29, 2007.
Greensboro, North Carolina
November 9, 2009
24
consoliDateD stateMents of opeRations
(In thousands, except for per share amounts)
Net sales
Cost of sales
Inventory write-downs
Gross profit (loss)
Selling, general and administrative expense
Other expense (income), net
Interest expense
Interest income
Earnings (loss) from continuing operations before income taxes
Income taxes
Earnings (loss) from continuing operations
Earnings (loss) from discontinued operations net of of income
taxes of ($729), $23 and ($77)
Net earnings (loss)
Per share amounts:
Basic:
Earnings (loss) from continuing operations
Earnings (loss) from discontinued operations
Net earnings (loss)
Diluted:
Earnings (loss) from continuing operations
Earnings (loss) from discontinued operations
Net earnings (loss)
Cash dividends declared
Weighted shares outstanding:
Basic
Diluted
See accompanying notes to consolidated financial statements.
Year Ended
October 3,
2009
September 27,
2008
September 29,
2007
$230,236
219,388
25,941
$353,862
267,107
—
$297,806
241,745
—
(15,093)
17,243
(135)
641
(144)
(32,698)
(11,758)
(20,940)
86,755
18,623
85
594
(721)
68,174
24,457
43,717
56,061
17,583
4
592
(415)
38,297
14,013
24,284
(1,146)
35
(122)
$ (22,086)
$ 43,752
$ 24,162
$ (1.20)
(0.07)
$ 2.49
—
$ (1.27)
$ 2.49
$ (1.20)
(0.07)
$ 2.47
—
$ (1.27)
$ 2.47
$ 0.12
$ 0.62
$ 1.34
(0.01)
$ 1.33
$ 1.33
(0.01)
$ 1.32
$ 0.12
17,380
17,380
17,547
17,712
18,142
18,314
INSTEEL INDUSTRIES, INC. // 2009 annual report
25
consoliDateD Balance sHeets
(In thousands, except for per share amounts)
Assets:
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories
Prepaid expenses and other
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: 20,000
Issued and outstanding shares: 2009, 17,525; 2008, 17,507
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
October 3,
2009
September 27,
2008
$ 35,102
21,283
38,542
16,724
111,651
64,204
4,382
1,880
$ 26,493
49,581
71,220
3,122
150,416
69,105
5,064
3,635
$182,117
$228,220
$ 23,965
5,215
219
29,399
5,465
183
$ 23,581
29,081
188
52,850
5,306
217
—
—
17,525
43,774
88,291
(2,520)
147,070
17,507
41,746
112,479
(1,885)
169,847
Total liabilities and shareholders’ equity
$182,117
$228,220
See accompanying notes to consolidated financial statements.
26
consoliDateD stateMents of sHaReHolDeRs’ eQuity anD
coMpReHensiVe incoMe (loss)
(In thousands)
Common Stock
Shares Amount
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)(1)
Total
Shareholders’
Equity
Balance at September 30, 2006
18,213
$18,213
$46,343
$ 57,882
$ —
$122,438
Comprehensive income:
Net earnings
Recognition of additional pension plan liability(1)
Adjustment to adopt certain provisions of
ASC Topic 715
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 stock-based compensation
Cash dividends declared
24,162
(9)
(2,110)
23
67
23
67
139
(67)
12
1,258
122
(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
$47,807
$ 79,859
$(2,119)
$143,850
Comprehensive income:
Net earnings
Adjustment to defined benefit plan liability(1)
Comprehensive income(1)
Stock options exercised
Restricted stock granted
Compensation expense associated with
stock-based plans
Adjustment to adopt certain provisions of
ASC Topic 740
Excess tax benefits from stock-based compensation
Repurchases of common stock
Restricted stock surrendered for withholding
taxes payable
Cash dividends declared
43,752
234
24
93
24
93
(906)
(906)
96
(93)
1,759
31
(7,785)
(7)
(7)
(69)
(256)
(10,876)
43,752
234
43,986
120
—
1,759
(256)
31
(8,691)
(76)
(10,876)
Balance at September 27, 2008
17,507
$17,507
$41,746
$112,479
$(1,885)
$169,847
Comprehensive loss:
Net loss
Adjustment to defined benefit plan liability(1)
Comprehensive loss(1)
Stock options exercised
Compensation expense associated with
stock-based plans
Excess tax deficiencies from stock-based
compensation
Restricted stock surrendered for withholding
taxes payable
Cash dividends declared
Balance at October 3, 2009
(22,086)
(635)
20
20
46
2,036
(32)
(22)
(2,102)
(2)
(2)
(22,086)
(635)
(22,721)
66
2,036
(32)
(24)
(2,102)
17,525
$17,525
$43,774
$ 88,291
$(2,520)
$147,070
(1) Activity within accumulated other comprehensive income (loss) is reported net of related income taxes: 2007–$1,299, 2008–($143), 2009–$389.
See accompanying notes to consolidated financial statements.
INSTEEL INDUSTRIES, INC. // 2009 annual report
27
consoliDateD stateMents of casH floWs
(In thousands)
Cash Flows From Operating Activities:
Net earnings (loss)
Loss (earnings) from discontinued operations
Earnings (loss) from continuing operations
Adjustments to reconcile earnings (loss) from continuing
operations to net cash provided by operating activities of
continuing operations:
Depreciation and amortization
Amortization of capitalized financing costs
Stock-based compensation expense
Excess tax deficiencies (benefits) from stock-based compensation
Inventory write-downs
Loss on sale of property, plant and equipment
Deferred income taxes
Gain from life insurance proceeds
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
Proceeds from surrender of life insurance policies
Increase in cash surrender value of life insurance policies
Proceeds from life insurance claims
Net cash used for investing activities—
continuing operations
Net cash used for investing activities
Year Ended
October 3,
2009
September 27,
2008
September 29,
2007
$(22,086)
1,146
(20,940)
$ 43,752
(35)
43,717
$ 24,162
122
24,284
7,377
508
2,036
32
25,941
24
997
—
—
28,298
6,737
(14,761)
(14,157)
43,032
7,271
498
1,759
(31)
—
289
484
(661)
—
(15,063)
(23,819)
18,699
3,665
(6,909)
5,711
498
1,258
(122)
—
301
2,003
—
(277)
3,001
(604)
(17,019)
(1,969)
(7,219)
22,092
36,808
17,065
30
22,122
(2,377)
—
13
413
(215)
—
(2,166)
(2,166)
(59)
36,749
(9,456)
—
116
170
(190)
1,111
(8,249)
(8,249)
(147)
16,918
(17,013)
590
—
—
(639)
—
(17,062)
(17,062)
(continued)
28
(In thousands)
Cash Flows From Financing Activities:
Proceeds from long-term debt
Principal payments on long-term debt
Cash received from exercise of stock options
Excess tax benefits (deficiencies) from stock-based compensation
Repurchases of common stock
Cash dividends paid
Other
Net cash used for financing activities—
continuing operations
Net cash used for financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Year Ended
October 3,
2009
September 27,
2008
September 29,
2007
22,920
(22,920)
66
(32)
—
(11,381)
—
(11,347)
(11,347)
8,609
26,493
951
(951)
120
31
(8,691)
(2,141)
(29)
(10,710)
(10,710)
17,790
8,703
16,999
(16,999)
162
122
—
(2,176)
50
(1,842)
(1,842)
(1,986)
10,689
Cash and cash equivalents at end of period
$ 35,102
$ 26,493
$ 8,703
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest
Income taxes
Non-cash financing activity:
$ 133
11,454
$ 95
11,563
$ 93
16,785
Purchases of property, plant and equipment in accounts payable
Issuance of restricted stock
Declaration of cash dividends to be paid
Restricted stock surrendered for withholding taxes payable
136
—
—
24
178
1,185
9,279
76
937
1,215
544
—
See accompanying notes to consolidated financial statements.
INSTEEL INDUSTRIES, INC. // 2009 annual report
29
notes to consoliDateD financial stateMents
Years Ended October 3, 2009, September 27, 2008 and September 29, 2007
(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 two wholly-owned subsidiaries, Insteel Wire
Products Company (“IWP”) and Intercontinental
Metals Corporation. The Company manufactures and
markets PC strand and welded wire reinforcement
products, including concrete pipe reinforcement,
engineered structural mesh and standard welded
wire reinforcement. The Company’s products are pri-
marily sold to manufacturers of concrete products
and to a lesser extent to distributors and rebar fabri-
cators that are located nationwide as well as in
Canada, Mexico, and Central and South America.
In 2006, the Company exited the industrial wire
business in order to narrow its strategic and opera-
tional focus to concrete reinforcing products (see
Note 8 to the consolidated financial statements). The
results of operations for the industrial wire business
have been reported as discontinued operations for all
periods presented.
The Company has evaluated all subsequent
events that occurred after the balance sheet date
through November 9, 2009, the date its financial state-
ments were issued, and concluded there were no
events or transactions occurring during this period
that required recognition or disclosure in its financial
statements.
(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 year 2009 was a 53-week fiscal year, and
fiscal years 2008 and 2007 were 52-week fiscal years.
All references to years relate to fiscal years rather
than calendar years.
Principles of consolidation. The consolidated financial
statements include the accounts of the Company and
its subsidiaries. All significant intercompany balances
and transactions have been eliminated.
Use of estimates. The preparation of financial state-
ments in conformity with accounting principles
generally accepted in the United States 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 maturi-
ties of three months or less to be cash equivalents.
Concentration of credit risk. Financial instruments that
subject the Company to concentrations of credit risk
consist principally of cash and cash equivalents and
trade accounts receivable. The Company is exposed to
credit risk in the event of default by these institutions
and customers to the extent of the amounts recorded
on the balance sheet. The Company invests excess
cash primarily in money market funds, which are
highly liquid securities. The Company’s cash is con-
centrated primarily at one financial institution, which
at times exceeds federally insured limits.
The majority of the Company’s accounts receiv-
able are due from customers that are located in the
United States and the Company generally requires
no collateral depending upon the creditworthiness of
the account. The Company utilizes credit insurance
on certain accounts receivable due from customers
located outside of the United States. The Company
provides an allowance for doubtful accounts based
upon its assessment of the credit risk of specific cus-
tomers, 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.
Stock-based compensation. The Company accounts for
stock-based compensation in accordance with the fair
value recognition provisions of Financial Accounting
Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) Topic 718, Compensation—
Stock Compensation, which requires stock-based
compensation expense to be recognized in net earn-
ings based on the fair value of the award on the date
of the grant. The Company determines the fair
value of stock options issued by using a Monte Carlo
valuation model at the grant date. The Monte Carlo
valuation model considers a range of assumptions
including the expected term, volatility, dividend yield
and risk-free interest rate. Excess tax deficiencies
(benefits) generated from option exercises during
2009, 2008 and 2007 were $32,000, ($31,000) and
($122,000), respectively.
30
Revenue recognition. The Company recognizes revenue
from product sales in accordance with FASB ASC
Topic 605, Revenue Recognition, when the products
are shipped and risk of loss and title has passed to the
customer. Sales taxes collected from customers are
recorded on a net basis and as such, are excluded
from revenue.
Shipping and handling costs. The Company includes
all of the outbound freight, shipping and handling
costs associated with the shipment of products to cus-
tomers in cost of sales. Any amounts paid by custom-
ers 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
weighted average cost (which approximates computa-
tion on a first-in, first-out basis) or market (net realiz-
able value or replacement cost).
Property, plant and equipment. Property, plant and equip-
ment are recorded at cost or otherwise at reduced
values to the extent there have been asset impair-
ment 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 pur-
poses 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 $7.4 million in 2009, $7.3 million in
2008 and $5.7 million in 2007 and reflected in cost of
sales and selling, general and administrative expense
(“SG&A expense”) in the consolidated statement of
operations. Capitalized software is amortized over
the shorter of the estimated useful life or 5 years and
reflected in SG&A expense in the consolidated state-
ment of operations. No interest costs were capitalized
in 2009, 2008 or 2007.
Other assets. Other assets consist principally of non-
current deferred tax assets, capitalized financing
costs, the cash surrender value of life insurance poli-
cies 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, and
reflected in interest expense in the consolidated state-
ment of operations.
Long-lived assets. Long-lived assets include property,
plant and equipment and identifiable intangible
assets with definite useful lives. The Company
assesses the impairment of long-lived assets when-
ever 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 impair-
ment loss has occurred, the loss is recognized during
the period incurred and is calculated as the differ-
ence between the carrying value and the present
value of estimated future net cash flows or compara-
ble market values. The Company recorded a pre-tax
impairment loss of $1.8 million during 2009 for the
write-down to fair value of an idle manufacturing
facility currently classified as held for sale. The
impairment loss is included within the results of dis-
continued operations (see Note 8 to the consolidated
financial statements). There were no impairment
losses in 2008 or 2007.
Fair value of financial instruments. The carrying amounts
for cash and cash equivalents, accounts receivable,
and accounts payable and accrued expenses approxi-
mate fair value because of their short maturities.
Income taxes. Income taxes are based on pretax finan-
cial 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 valuation 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. The Company adopted certain provisions of
FASB ASC Topic 740, Income Taxes (formerly reported
as FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes,” “FIN No. 48”) effective
September 30, 2007, the beginning of fiscal year 2008.
The cumulative effect of adopting these provisions
resulted in a $256,000 increase in tax reserves and a
corresponding decrease in the Company’s retained
earnings balance as of September 30, 2007.
Earnings per share. Basic earnings per share (“EPS”) are
computed by dividing net earnings by the weighted
average number of common shares outstanding
INSTEEL INDUSTRIES, INC. // 2009 annual report
31
notes to consoliDateD financial stateMents (continued)
Years Ended October 3, 2009, September 27, 2008 and September 29, 2007
during the period. Diluted EPS are computed by
dividing net earnings by the weighted average num-
ber of common shares and other dilutive equity secu-
rities outstanding during the period. Securities that
have the effect of increasing EPS are considered to be
antidilutive and are not included in the computation
of diluted EPS.
(3) reCent aCCOunting PrOnOunCements
Current Adoptions
In June 2009, FASB issued Accounting Standards
Update (ASU) No. 2009-01, the FASB Accounting
Standards Codification™ (“Codification”) and the
Hierarchy of Generally Accepted Accounting Prin-
ciples (“ASU 2009-01”). This update established the
Codification as the source of authoritative accounting
principles recognized by the FASB in the preparation
of financial statements in conformity with GAAP. All
existing accounting standard documents will be
superseded and all other accounting literature not
included in the Codification will be considered non-
authoritative. As the Codification was not intended to
change or alter existing GAAP, the adoption of ASU
2009-01 did not have an impact on the Company’s
consolidated financial statements.
In August 2009, the FASB issued ASU No. 2009-
05, Measuring Liabilities at Fair Value (“ASU 2009-
05”). This update provides amendments to ASC Topic
820, Fair Value Measurement and Disclosure, for the
fair value measurement of liabilities. The purpose of
this amendment is to reduce ambiguity in financial
reporting when measuring the fair value of liabilities.
The adoption of ASU 2009-05 did not have an impact
on the Company’s consolidated financial statements.
Future Adoptions
In December 2007, the FASB amended certain
provisions of ASU Topic 805, Business Combinations
(previously reported as Statement of Financial
Accounting Standards “SFAS” No. 141R, “Business
Combinations”). This amendment requires the
acquiring entity in a business combination to recog-
nize all the assets acquired and liabilities assumed in
the transaction; establishes the acquisition-date fair
value as the measurement objective for all assets
acquired and liabilities assumed; and requires the
acquirer to disclose all of the information required to
evaluate and understand the nature and financial
effect of the business combination. This amendment
is effective for acquisition dates on or after the
beginning of the first annual reporting period begin-
ning after December 15, 2008 and is not expected to
have a material effect on the Company’s consolidated
financial statements to the extent that it does not enter
into business combinations subsequent to adoption.
In December 2007, the FASB amended certain
provisions of ASU Topic 810, Consolidation (previ-
ously reported as SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements”). This
amendment establishes accounting and reporting
standards for non-controlling interests in subsidiaries
and for the deconsolidation of subsidiaries. This
amendment clarifies that a non-controlling interest in
a subsidiary is an ownership interest in the consoli-
dated entity that should be reported as equity in the
consolidated financial statements. This amendment is
effective for fiscal years beginning after December 15,
2008 and is not expected to have a material effect on
the Company’s consolidated financial statements to
the extent that it does not obtain any minority inter-
ests in subsidiaries subsequent to adoption.
In June 2008, the FASB amended certain provi-
sions of ASU Topic 260, Earnings per Share (previ-
ously reported as FASB Staff Position “FSP” Emerging
Issues Task Force (“EITF”) No. 03-6-1, “Determining
Whether Instruments Granted in Share-Based Pay-
ment Transactions are Participating Securities”). This
amendment requires that unvested share-based pay-
ment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be
included in the computation of earnings per share
pursuant to the two-class method. This amendment
is effective for financial statements issued for fiscal
years beginning after December 15, 2008 and interim
periods within those years, and requires that all prior
period earnings per share data presented (including
interim financial statements, summaries of earnings
and selected financial data) be adjusted retrospec-
tively to conform to its provisions. The Company is
currently evaluating the impact, if any, that the adop-
tion of this amendment will have on its consolidated
financial statements.
In December 2008, the FASB amended certain
provisions of ASU Topic 715, Compensation—Retire-
ment Benefits (previously reported as FSP No.
FAS 132(R)-1, “Employers’ Disclosures about Post-
retire ment Benefit Plan Assets”). This amendment
requires objective disclosures about postretirement
benefit plan assets including investment policies
32
and strategies, categories of plan assets, fair value
measurements of plan assets and significant concen-
trations of risk. This amendment is effective, on a pro-
spective basis, for fiscal years ending after December
15, 2009. The Company is currently evaluating the
impact, if any, that the adoption of this amendment
will have on its consolidated financial statements.
at the measurement date. ASC Topic 820 also estab-
lishes a three-level fair value hierarchy that priori-
tizes the inputs used to measure fair value. This
hierarchy requires that the Company maximize the
use of observable inputs and minimize the use of
unobservable inputs. The three levels of inputs used
to measure fair value are as follows:
(4) fair value measurements
Effective September 28, 2008, the Company
adopted ASC Topic 820, Fair Value Measurements
and Disclosures, (previously reported as “SFAS No.
157” as amended by “FSP No. 157-2”) for financial
assets and liabilities. The Company will adopt the
non-financial assets and liabilities provisions in the
first quarter of fiscal 2010. ASC Topic 820 defines fair
value, establishes a framework for measuring fair
value under generally accepted accounting principles
and expands disclosures about fair value measure-
ments. The fair value is the price that would be
received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants
Level 1—Quoted prices in active markets for
identical assets or liabilities.
Level 2—Observable inputs other than quoted
prices included in Level 1, such as quoted prices
for similar assets and liabilities in active markets,
similar assets and liabilities in markets that are
not active or can be corroborated by observable
market data.
Level 3—Unobservable inputs that are supported
by little or no market activity and that are signifi-
cant to the fair value of the assets or liabilities.
This includes certain pricing models, discounted
cash flow methodologies and similar techniques
that use significant unobservable inputs.
As of October 3, 2009, the Company held assets that are required to be measured at fair value on a recurring
basis. The financial assets held by the Company and the fair value hierarchy used to determine their fair values
are as follows:
(In thousands)
Current assets:
Cash equivalents
Other assets:
Cash surrender value of life insurance policies
Total
Quoted Prices in
Active Markets
(Level 1)
Observable
Inputs
(Level 2)
Total
$35,391
$35,391
3,739
$39,130
—
$35,391
$ —
3,739
$3,739
Cash equivalents, which include all highly liquid
investments with original maturities of three months
or less, are classified as Level 1 of the fair value hier-
archy. The carrying amount of the Company’s cash
equivalents, which consist of money market funds,
approximates fair value due to the short maturities of
these investments. Cash surrender value of life insur-
ance policies are classified as Level 2. The value was
determined by the underwriting insurance compa-
ny’s valuation models and represents the guaranteed
value the Company would receive upon surrender of
these policies as of October 3, 2009.
The carrying amounts of accounts receivable,
accounts payable and accrued expenses approximates
fair value due to the short-term maturities of these
financial instruments.
(5) Credit faCility
The Company has a $100.0 million revolving
credit facility in place, which matures in June 2010
and supplements its operating cash flow in funding
its working capital, capital expenditures and general
corporate requirements. No borrowings were out-
standing on the credit facility as of October 3, 2009
INSTEEL INDUSTRIES, INC. // 2009 annual report
33
notes to consoliDateD financial stateMents (continued)
Years Ended October 3, 2009, September 27, 2008 and September 29, 2007
and September 27, 2008 and outstanding letters of
credit totaled $1.1 million and $1.2 million, respec-
tively. As of October 3, 2009, $38.7 million of borrow-
ing capacity was available on the credit facility.
Advances under the credit facility are limited to
the lesser of the revolving credit commitment or a
borrowing base amount that is calculated based upon
a percentage of eligible receivables and inventories
plus, upon the Company’s request and subject to cer-
tain 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
quarterly 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 per-
centage indicated for each range upon the occurrence
of certain events of default provided for under the
credit facility. Based on the Company’s excess avail-
ability as of October 3, 2009, the applicable interest
rate margins were 0.00% for the base rate and 1.25%
for the LIBOR rate on the revolver.
The Company’s ability to borrow available
amounts under the revolving credit facility will
be restricted or eliminated in the event of certain
covenant breaches, events of default or if the Com-
pany is unable to make certain representations and
warranties.
Financial Covenants
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
availability 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 October 3, 2009, 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 invest-
ments or loans; pay cash dividends or repurchase
shares of the Company’s stock subject to certain mini-
mum borrowing availability requirements; incur or
assume indebtedness; issue securities; enter into cer-
tain transactions with affiliates of the Company; or
permit liens to encumber the Company’s property
and assets. As of October 3, 2009, the Company was in
compliance 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 $508,000
in 2009 and $498,000 in 2008 and 2007, respectively.
Accumulated amortization of capitalized financing
costs was $3.6 million and $3.1 million as of October
3, 2009 and September 27, 2008, respectively. The
Company expects the amortization of capitalized
financing costs to approximate the following amounts
for the next five fiscal years:
Fiscal year
(In thousands)
2010
2011
2012
2013
2014
$336
—
—
—
—
(6) stOCk-Based COmPensatiOn
Under the Company’s equity incentive plans,
employees and directors may be granted stock
options, restricted stock, restricted stock units and
performance awards. As of October 3, 2009 there
34
were 739,000 shares available for future grants under
the plans.
respectively, based on the following weighted-
average assumptions:
Stock option awards. Under the Company’s equity
incentive plans, employees and directors may be
granted options to purchase shares of common stock
at the fair market value on the date of the grant.
Options granted under these plans generally vest
over three years and expire ten years from the date of
the grant. Compensation expense and excess tax ben-
efits associated with stock options are as follows:
(In thousands)
Stock options:
Compensation
expense
Excess tax deficien-
cies (benefits)
Year Ended
October 3,
2009
September 27,
2008
September 29,
2007
$937
32
$898
$ 513
(31)
(122)
The remaining unrecognized compensation cost
related to unvested options at October 3, 2009 was
$939,000 which is expected to be recognized over a
weighted average period of 1.53 years.
The fair value of each option award granted is
estimated on the date of grant using a Monte Carlo
valuation model. The weighted-average estimated
fair values of stock options granted during 2009,
2008 and 2007 were $5.43, $6.00 and $8.69 per share,
Year Ended
October 3,
2009
September 27,
2008
September 29,
2007
4.92
2.64%
74.53%
4.03
2.65%
66.62%
3.16
4.70%
65.84%
Expected term (in
years)
Risk-free interest rate
Expected volatility
Expected dividend
yield
1.31%
1.01%
0.65%
The assumptions utilized in the Monte Carlo val-
uation model are evaluated and revised, as necessary,
to reflect market conditions 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 dividend as of the option grant
date. The expected volatility 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.
The following table summarizes stock option activity:
(Share amounts in thousands)
Outstanding at September 30, 2006
Granted
Exercised
Forfeited
Outstanding at September 29, 2007
Granted
Exercised
Outstanding at September 27, 2008
Granted
Exercised
Forfeited
Outstanding at October 3, 2009
Vested and anticipated to vest in future
at October 3, 2009
Exercisable at October 3, 2009
Options
Outstanding
282
79
(23)
(2)
336
219
(24)
531
171
(20)
(9)
673
657
331
Exercise Price Per Share
Range
$ 0.18–$20.26
17.11– 20.27
4.56– 15.64
20.26– 20.26
0.18– 20.27
11.15– 16.69
3.19– 9.12
0.18– 20.27
7.55– 11.60
3.28– 3.28
15.64– 20.27
0.18– 20.27
Weighted
Average
$ 7.37
18.54
7.12
20.26
9.95
12.37
4.96
11.17
9.27
3.28
18.07
10.83
10.81
10.38
Contractual
Term—
Weighted
Average
Aggregate
Intrinsic Value
(in thousands)
$ 228
148
120
7.43 years
1,575
7.40 years
5.85 years
1,554
1,114
INSTEEL INDUSTRIES, INC. // 2009 annual report
35
notes to consoliDateD financial stateMents (continued)
Years Ended October 3, 2009, September 27, 2008 and September 29, 2007
Restricted stock units. On January 21, 2009, the Executive
Compensation Committee of the Board of Directors
approved a change in the equity compensation pro-
gram such that awards of restricted stock units
(“RSUs”) to employees and directors would be made
in lieu of awards of restricted stock. RSUs granted
under these plans are valued based upon the fair
market value on the date of the grant and provide for
a dividend equivalent payment which is included in
compensation expense. The vesting period for RSUs
is generally one to three years from the date of the
grant. RSUs do not have voting rights. RSU grants
and amortization expense are as follows:
(In thousands)
Restricted stock
unit grants:
Units
Market value
Amortization expense
Year Ended
October 3,
2009
September 27,
2008
September 29,
2007
136
$1,185
343
—
$—
—
—
$—
—
The remaining unrecognized compensation cost
related to unvested RSUs on October 3, 2009 was
$801,000 which is expected to be recognized over a
weighted average period of 2.13 years.
The following table summarizes RSU activity:
(Unit amounts in thousands)
Balance, September 30, 2006
Granted
Released
Balance, September 29, 2007
Granted
Released
Balance, September 27, 2008
Granted
Released
Balance, October 3, 2009
Restricted
Stock Units
Outstanding
Weighted
Average
Grant Date
Fair Value
—
—
—
—
—
—
—
136
—
136
$ —
—
—
—
—
—
—
8.71
—
8.71
Restricted stock awards. Under the Company’s equity
incentive plans, employees and directors may be
granted restricted stock awards which are valued
based upon the fair market value on the date of the
grant. Restricted stock granted under these plans
generally vests one to three years from the date of the
grant. Restricted stock grants and amortization
expense for restricted stock are as follows:
(In thousands)
Restricted stock
grants:
Shares
Market value
Amortization expense
Year Ended
October 3,
2009
September 27,
2008
September 29,
2007
—
$ —
756
93
$1,185
861
67
$1,215
745
The remaining unrecognized compensation cost
related to unvested restricted stock awards at October
3, 2009 was $579,000 which is expected to be recog-
nized over a weighted average period of 1.42 years.
For the years ended October 3, 2009 and Sep-
tember 27, 2008, 25,254 and 44,533 shares, respectively,
of employee restricted stock awards vested with a
fair value of $238,000 and $489,000, respectively.
Upon vesting, employees have the option of remitting
payment for the minimum tax obligation to the
Company or net-share settling such that the Com-
pany will withhold shares with a value equivalent to
the employees’ minimum tax obligation. During 2009
and 2008, a total of 2,497 and 6,870 shares, respec-
tively, were withheld to satisfy employees’ minimum
tax obligations. No shares vested during 2007.
The following table summarizes restricted stock
activity:
(Share amounts in thousands)
Balance, September 30, 2006
Granted
Released
Balance, September 29, 2007
Granted
Released
Balance, September 27, 2008
Granted
Released
Balance, October 3, 2009
Restricted
Stock Awards
Outstanding
103
67
(28)
142
93
(70)
165
—
(50)
115
Weighted
Average
Grant Date
Fair Value
$12.27
18.18
12.51
15.00
12.77
11.68
15.16
—
14.40
15.50
36
(7) 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
Income taxes
Effective income tax rate
Year Ended
October 3,
2009
September 27,
2008
September 29,
2007
$(12,708)
(47)
(12,755)
1,686
(689)
997
$21,720
2,253
23,973
440
44
484
$10,801
1,209
12,010
1,821
182
2,003
$(11,758)
$24,457
$14,013
36.0%
35.9%
36.6%
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)
Year Ended
October 3,
2009
September 27,
2008
September 29,
2007
Provision for income taxes at federal statutory rate
State income taxes, net of federal tax benefit
Qualified production activities deduction
Stock option expense benefit
Revisions to estimates based on filing of final tax return
Other, net
$(11,444)
(479)
—
203
33
(71)
35.0%
1.5
—
(0.6)
(0.1)
0.2
$23,861
1,886
(1,322)
240
293
(501)
35.0% $13,403
904
2.8
(374)
(1.9)
126
0.3
(32)
0.4
(14)
(0.7)
35.0%
2.4
(1.0)
0.3
(0.1)
(0.0)
Provision for income taxes
$(11,758)
36.0%
$24,457
35.9% $14,013
36.6%
The components of deferred tax assets and liabil-
ities are as follows:
(In thousands)
Deferred tax assets:
October 3,
2009
September 27,
2008
Accrued expenses, asset reserves
and state tax credits
State net operating loss
carryforwards
Goodwill, amortizable for tax
purposes
Defined benefit plans
Stock-based compensation
Valuation allowance
Gross deferred tax assets
Deferred tax liabilities:
Plant and equipment
Other reserves
Gross deferred tax liabilities
$ 3,048
$ 3,524
1,419
602
1,690
1,545
465
(602)
7,565
(5,161)
(361)
(5,522)
2,004
1,156
328
(602)
7,012
(4,489)
(445)
(4,934)
Net deferred tax asset
$ 2,043
$ 2,078
The Company has recorded the following amounts
for deferred taxes on its consolidated balance sheet
as of October 3, 2009: a current deferred tax asset (net
of valuation allowance) of $1.7 million in prepaid
expenses and other, and a non-current deferred tax
asset (net of valuation allowance) of $375,000 in other
assets. As of September 27, 2008, the Company
recorded a current deferred tax asset (net of valuation
allowance) of $2.5 million in prepaid expenses and
other, and a non-current deferred tax liability (net of
valuation allowance) of $435,000 in other liabilities.
The Company has $28.4 million of gross state operat-
ing loss carryforwards that begin to expire in 2013,
but principally expire in 2018–2029.
The realization of the Company’s deferred tax
assets is entirely dependent upon the Company’s
ability to generate future taxable income in appli-
cable jurisdictions. GAAP requires that the Company
periodically assess the need to establish a valuation
allowance against its deferred tax assets to the extent
INSTEEL INDUSTRIES, INC. // 2009 annual report
37
notes to consoliDateD financial stateMents (continued)
Years Ended October 3, 2009, September 27, 2008 and September 29, 2007
the Company no longer believes it is more likely than
not that they will be fully utilized. As of October 3,
2009, the Company had recorded a valuation allow-
ance of $602,000 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 car-
ryforwards against which an allowance had been
provided or determine that such utilization is more
likely than not.
The Company adopted certain provisions of ASC
Topic 740 (previously reported as “FIN No. 48”) effec-
tive September 30, 2007. The cumulative effect of
adopting these provisions was a $256,000 increase
in tax reserves and a corresponding decrease in the
Company’s retained earnings balance as of September
30, 2007.
As of October 3, 2009, the Company had no
unrecognized tax benefits. As of September 27, 2008,
the Company had approximately $48,000 of gross
unrecognized tax benefits classified as other liabili-
ties on its consolidated balance sheet. The reduction
in gross unrecognized tax benefits was due to the
lapse of the statute of limitations for outstanding tax
issues. We do not anticipate any unrecognized bene-
fits in the next 12 months that would result in a mate-
rial change in our financial position.
A reconciliation of the beginning and ending
balance of total unrecognized tax benefits for 2009 is
as follows:
(Dollars in thousands)
Balance at September 27, 2008
Increase in tax positions of prior years
Reductions for tax positions of prior years
Lapse of statute of limitations
Balance at October 3, 2009
$ 48
—
—
(48)
$ —
The Company classifies interest and penalties as
part of income tax expense. The Company did not
have any accrued interest and penalties related to
unrecognized tax benefits as of October 3, 2009 com-
pared to $15,000 as of September 27, 2008. The reduc-
tion in accrued interest and penalties is due to the
settlement of outstanding tax issues. For the year
ended October 3, 2009, the Company recorded $36,000
of expense related to interest and penalties.
The Company files U.S. federal income tax returns
as well as state and local income tax returns in
various jurisdictions. Federal and various state tax
returns filed by the Company subsequent to tax year
2004 remain subject to examination together with
certain state tax returns filed by the Company subse-
quent to tax year 2002. The Company’s 2007 tax year
is currently under examination by the U.S. Internal
Revenue Service.
(8) 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 continuation
of difficult market conditions and reduced operating
levels. Manufacturing activities at the Virginia facil-
ity ceased in June 2006 and the Company is currently
in the process of liquidating the remaining assets of
the business.
The results of operations 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 discontinued operations
have been segregated in the accompanying consoli-
dated balance sheets.
The Company reviews its assets for impairment
whenever events or changes in circumstances indi-
cate that the carrying amount of an asset may not be
recoverable. During 2009, the recessionary conditions
in the economy together with the deterioration in
the commercial real estate market have significantly
reduced the valuation of commercial properties. In
recognition of these developments, the Company
recorded a pre-tax impairment charge of $1.8 million
during the year ended October 3, 2009 to write down
the carrying value of the real estate associated with
the industrial wire business.
The results of discontinued operations are as
follows:
(In thousands)
Earnings (loss) before
income taxes
Income taxes
Net earnings (loss)
Year Ended
October 3,
2009
September 27,
2008
September 29,
2007
$(1,875)
729
$(1,146)
$ 58
(23)
$ 35
$(199)
77
$(122)
38
Assets and liabilities of discontinued operations
are as follows:
(In thousands)
Assets:
Other assets
Total assets
Liabilities:
Current liabilities:
Accounts payable
Accrued expenses
Total current liabilities
Other liabilities
October 3,
2009
September 27,
2008
$1,880
$1,880
$3,635
$3,635
$ 2
217
219
183
$ 1
187
188
217
Total liabilities
$ 402
$ 405
As of October 3, 2009 and September 27, 2008
there was approximately $217,000 and $251,000,
respectively, 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.
(9) emPlOyee Benefit Plans
On September 29, 2007, the Company adopted the
recognition and disclosure provisions of FASB ASC
Topic 715, Compensation—Retirement Benefits. ASC
Topic 715 requires that an employer recognize the
overfunded or underfunded status of a defined
benefit postretirement plan on its balance sheet and
changes in the funded status through other compre-
hensive income in the year in which the changes
occur. As a result of adopting the recognition and dis-
closure provisions of ASC Topic 715, the Company
recorded a $2.1 million reduction in shareholders’
equity, net of tax, as of September 29, 2007. The
Company adopted the measurement date provisions
of ASC Topic 715 in the current fiscal year. As the
Company already measured plan assets and benefit
obligations as of its fiscal year-end, the adoption of
the measurement date provision of ASC Topic 715 did
not have an impact on its consolidated financial
statements.
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 employ-
ees based primarily upon years of service and com-
pensation levels. The Company’s funding policy is
to contribute amounts at least equal to those required
by law. The Company did not make any contributions
to the Delaware Plan in 2009 and it does not expect
to make any contributions in 2010. The Delaware
Plan was frozen effective September 30, 2008 whereby
participants will no longer earn additional benefits.
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 Delaware Plan 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
Distributions
Fair value of plan assets at end of year
Year Ended
October 3,
2009
September 27,
2008
September 29,
2007
$ 4,377
—
250
150
(488)
$ 4,289
$ 3,764
(223)
(488)
$ 3,053
$4,435
65
257
(171)
(209)
$4,377
$4,421
(448)
(209)
$3,764
$4,527
78
269
203
(642)
$4,435
$4,527
536
(642)
$4,421
(continued)
INSTEEL INDUSTRIES, INC. // 2009 annual report
39
notes to consoliDateD financial stateMents (continued)
Years Ended October 3, 2009, September 27, 2008 and September 29, 2007
(In thousands)
Reconciliation of funded status to net amount recognized:
Funded status
Net amount recognized
Amounts recognized in the consolidated balance sheet:
Accrued benefit liability
Accumulated other comprehensive loss (net of tax)
Net amount recognized
Amounts recognized in accumulated other comprehensive loss:
Unrecognized net loss
Unrecognized prior service cost
Net amount recognized
Other changes in plan assets and benefit obligations recognized in
other comprehensive income (loss):
Net loss (gain)
Amortization of prior service cost
Total recognized in other comprehensive income (loss)
Year Ended
October 3,
2009
September 27,
2008
September 29,
2007
$(1,236)
$(1,236)
$(1,236)
1,336
$ 100
$ 2,155
—
$ 2,155
$ 396
—
$ 396
$ (613)
$ (613)
$ (613)
1,091
$ 478
$1,759
—
$1,759
$ 426
(1)
$ 425
$ (14)
$ (14)
$ (14)
827
$ 813
$1,333
1
$1,334
$ (143)
(1)
$ (144)
Net periodic pension cost for the Delaware Plan
The assumptions used in the valuation of the
includes the following components:
Delaware Plan are as follows:
(In thousands)
Service cost
Interest cost
Expected return
on plan assets
Amortization of
prior service cost
Recognized net
actuarial loss
Net periodic
pension cost
Year Ended
October 3,
2009
September 27,
2008
September 29,
2007
$ —
250
$ 65
257
$ 78
269
(262)
(325)
(324)
—
113
1
67
1
134
$ 101
$ 65
$ 158
The Company incurred settlement losses of
$126,000 and $109,000 during the year ended October
3, 2009 and September 27, 2008, respectively, for lump-
sum distributions to plan participants.
The estimated net loss that will be amortized
from accumulated other comprehensive income into
net periodic pension cost over the next fiscal year is
$189,000.
Measurement Date
October 3,
2009
September 27,
2008
September 29,
2007
Assumptions at
year-end:
Discount rate
Rate of increase
in compensa-
tion levels
Expected long-
term rate of
return on assets
5.50%
7.00%
6.50%
N/A
N/A
N/A
8.00%
8.00%
8.00%
The projected benefit payments under the Del-
aware Plan are as follows:
Fiscal year(s)
2010
2011
2012
2013
2014
2015–2019
(In thousands)
$ 399
297
197
268
201
1,474
40
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 perfor-
mance measured against the S&P 500 index or other
applicable indices. The investment strategy for fixed
income investments is focused on maintaining an
overall portfolio with a minimum credit rating of
A-1 as well as a minimum rating of any security at
the time of purchase of Baa/BBB by Moody’s or
Standard & Poor’s, if rated. The 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 Delaware Plan’s net periodic pen-
sion cost.
Supplemental employee retirement plan. The Company
has Retirement Security Agreements (each, a “SERP”)
with certain of its employees (each, a “Participant”).
Under the SERPs, if the Participant remains in con-
tinuous service with the Company for a period of
at least 30 years, the Company will pay to the Par-
ticipant 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 revised the SERPs to add Participants
and increase benefits to existing Participants.
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 SERPs 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:
Actual employer contributions
Actual distributions
Plan assets at fair value at end of year
Reconciliation of funded status to net amount recognized:
Funded status
Net amount recognized
Amounts recognized in accumulated other comprehensive loss:
Unrecognized net loss
Unrecognized prior service cost
Net amount recognized
Other changes in plan assets and benefit obligations recognized in
other comprehensive income (loss):
Net loss (gain)
Prior service costs
Total recognized in other comprehensive income (loss)
Year Ended
October 3,
2009
September 27,
2008
September 29,
2007
$ 4,121
123
279
855
(160)
$ 5,218
$ 160
(160)
$ —
$(5,218)
$(5,218)
$ 1,002
908
$ 1,910
$ 855
(227)
$ 628
$ 4,192
155
266
(352)
(140)
$ 4,121
$ 140
(140)
$ —
$(4,121)
$(4,121)
$ 147
1,135
$ 1,282
$ (363)
(438)
$ (801)
$ 3,868
163
230
11
(80)
$ 4,192
$ 80
(80)
$ —
$(4,192)
$(4,192)
$ —
2,083
$ 2,083
$ 1
(227)
$ (226)
INSTEEL INDUSTRIES, INC. // 2009 annual report
41
notes to consoliDateD financial stateMents (continued)
Years Ended October 3, 2009, September 27, 2008 and September 29, 2007
Net periodic pension cost for the SERPs includes
the following components:
(In thousands)
Service cost
Interest cost
Prior service cost
Recognized net
actuarial loss
Net periodic
pension cost
Year Ended
October 3,
2009
September 27,
2008
September 29,
2007
$123
278
227
—
$154
266
227
12
$163
230
227
10
$628
$659
$630
The estimated prior service costs that will be
amortized from accumulated other comprehensive
income into net periodic pension cost over the next
fiscal year is $33,000.
The assumptions used in the valuation of the
SERPs are as follows:
Measurement Date
October 3,
2009
September 27,
2008
September 29,
2007
Assumptions at
year-end:
Discount rate
Rate of increase
in compensa-
tion levels
5.50%
7.00%
6.25%
3.00%
3.00%
3.00%
The projected benefit payments under the SERPs
are as follows:
Fiscal year(s)
2010
2011
2012
2013
2014
2015–2019
(In thousands)
$ 155
244
244
244
244
1,486
As noted above, the SERPs were revised in 2005
to add Participants and increase benefits to certain
existing Participants. However, for certain Participants
the Company still maintains the benefits of the
respective SERPs that were in effect prior to the 2005
changes, which entitles them to fixed cash benefits
upon retirement at age 65, payable annually for 15
years. These SERPs are supported by life insurance
policies on the Participants purchased and owned by
the Company. The cash benefits paid under these
SERPs were $76,000 in 2009, $74,000 in 2008 and
2007, respectively. The expense attributable to these
SERPs was $12,000 in 2009 and 2008, respectively, and
$11,000 in 2007.
Retirement savings plan. In 1996, the Company adopted
the Retirement Savings Plan of Insteel Industries, Inc.
(“the Plan”) to provide retirement benefits and stock
ownership for its employees. The Plan is an amend-
ment 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.
In 2009 employees could contribute up to 75% of
their annual compensation to the Plan, limited to a
maximum annual amount as set periodically by the
Internal Revenue Code. In 2008 and 2007 employees
could contribute up to 15% of their annual compen-
sation to the Plan, limited to a maximum annual
amount as set periodically by the Internal Revenue
Code. The Plan allows for discretionary contributions
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 2009, the Company matched employee
contributions up to 100% of the first 1% and 50% of
the next 5% of eligible compensation that was contrib-
uted by employees. In 2008 and 2007, the Company
matched employee contributions up to 50% of the
first 7% of eligible compensation that was contrib-
uted by employees. Company contributions to the
Plan were $465,000 in 2009, $407,000 in 2008 and
$402,000 in 2007.
Voluntary Employee Beneficiary Associations (“VEBA”). The
Company has a VEBA under which both employees
and the Company may make contributions to pay for
medical costs. Company contributions to the VEBA
were $2.9 million in 2009, $1.7 million in 2008 and $2.4
million in 2007. The Company is primarily self-
insured for employees’ healthcare costs, carrying
stop-loss insurance coverage for individual claims in
excess of $150,000 per benefit plan year. 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 his-
torical claims data in developing its estimates.
42
(10) COmmitments and COntingenCies
Leases and purchase commitments. The Company leases
a portion of its equipment under operating leases that
expire at various dates through 2012. Under most
lease agreements, the Company pays insurance, taxes
and maintenance. Rental expense for operating leases
was $939,000 in 2009, $977,000 in 2008 and $920,000
in 2007. Minimum rental commitments under all non-
cancelable leases with an initial term in excess of one
year are payable as follows: 2010, $615,000; 2011,
$412,000; 2012, $96,000; 2013, $34,000; 2014 and
beyond, $438,000.
As of October 3, 2009, the Company had $28.4
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 consoli-
dated financial statements and amounted to $298,000
as of October 3, 2009.
Legal proceedings. On November 19, 2007, Dywidag
Systems International, Inc. (“DSI”) filed a third-party
lawsuit in the Ohio Court of Claims alleging that cer-
tain 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 filed against it 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 against DSI in the
North Carolina Superior Court in Surry County on
July 25, 2007 seeking recovery of $1.4 million (plus
interest) owed for other products sold by the Company
to DSI and a judgment declaring that it had no liabil-
ity to DSI arising out of the ODOT bridge project. The
Company’s North Carolina lawsuit was subsequently
removed by DSI to the U.S. District Court for the
Middle District of North Carolina and on July 28,
2009, the federal district court denied the Company’s
motion to remand the matter to the Surry County
Court. The parties continue to contest the appropriate
jurisdiction in which this litigation should proceed.
With regard to DSI’s third-party action, the Company
filed a motion for summary judgment in the Ohio
Court of Claims lawsuit on June 25, 2009 and discov-
ery has commenced on a limited basis. The Company
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 has
concluded that a loss is not yet probable with respect
to this matter, and therefore no liability has been
recorded. In the event the ultimate resolution of the
case is unfavorable, the Company has estimated that
the potential loss could range up to $11.0 million.
The Company also is involved in various other
lawsuits, claims, investigations and proceedings,
including commercial, environmental and employ-
ment matters, which arise in the ordinary course of
business. The Company does not expect that the ulti-
mate cost to resolve these other matters will have a
material adverse effect on its financial position,
results of operations or cash flows.
Severance and change of control agreements. The Com-
pany 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 employ-
ment 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 pro-
vides notice of termination as specified in the agree-
ment. 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 out-
placement services would be provided.
The Company has also entered into change in
control agreements with key members of manage-
ment, including its executive officers, which specify
the terms of separation in the event that termination
of employment 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 execu-
tive provides notice of termination as specified in the
agreement. The agreements do not provide assur-
ances of continued employment, nor do they specify
the terms of an executive’s termination should the
termination occur in the absence of a change in con-
trol. Under the terms of these agreements, in the
INSTEEL INDUSTRIES, INC. // 2009 annual report
43
notes to consoliDateD financial stateMents (continued)
Years Ended October 3, 2009, September 27, 2008 and September 29, 2007
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 con-
tinuation 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 continuation of health and
welfare benefits for one year. In addition, all of the
executive’s stock options and restricted stock would
vest immediately and outplacement services would
be provided.
(11) earnings Per share
The reconciliation of basic and diluted earnings per share (“EPS”) is as follows:
(In thousands, except for per share amounts)
Earnings (loss) from continuing operations
Earnings (loss) from discontinued operations
Net earnings (loss)
Weighted average shares outstanding:
Weighted average shares outstanding (basic)
Dilutive effect of stock-based compensation
Weighted average shares outstanding (diluted)
Per share (basic):
Earnings (loss) from continuing operations
Earnings (loss) from discontinued operations
Net earnings (loss)
Per share (diluted):
Earnings (loss) from continuing operations
Earnings (loss) from discontinued operations
Net earnings (loss)
Year Ended
October 3,
2009
September 27,
2008
September 29,
2007
$(20,940)
(1,146)
$(22,086)
17,380
—
17,380
$ (1.20)
(0.07)
$ (1.27)
$ (1.20)
(0.07)
$ (1.27)
$43,717
35
$43,752
17,547
165
17,712
$ 2.49
—
$ 2.49
$ 2.47
—
$ 2.47
$24,284
(122)
$24,162
18,142
172
18,314
$ 1.34
(0.01)
$ 1.33
$ 1.33
(0.01)
$ 1.32
Options and restricted stock awards represent-
ing 668,000 shares in 2009, 180,000 shares in 2008 and
67,000 shares in 2007 were antidilutive and were not
included in the diluted EPS computation. Options
and restricted stock awards representing 130,000
shares were not included in the diluted EPS calcula-
tion in 2009 due to the net loss that was incurred.
(12) Business segment infOrmatiOn
Following the Company’s exit from the indus-
trial wire business (see Note 8 to the consolidated
financial statements), the Company’s operations are
entirely focused on the manufacture and marketing
of concrete reinforcing products for the concrete con-
struction industry. The Company’s concrete reinforc-
ing products consist of welded wire reinforcement
and PC Strand. Based on the criteria specified in
FASB ASC Topic 280, Segment Reporting, the Com-
pany has one reportable segment. The results of oper-
ations for the industrial wire business have been
reported as discontinued operations for all periods
presented.
44
The Company’s net sales and long-lived assets
for continuing operations by geographic region are
as follows:
(15) Other finanCial data
Balance sheet information:
Year Ended
(In thousands)
(In thousands)
Net sales:
United States
Foreign
October 3,
2009
September 27,
2008
September 29,
2007
$ 225,286
4,950
$337,801
16,061
$287,202
10,604
Total
$ 230,236
$353,862
$297,806
Long-lived assets:
United States
Foreign
$ 67,943
—
$ 73,043
—
$ 71,514
—
Accounts receivable, net:
Accounts receivable
Less allowance for doubtful
accounts
Total
Inventories:
Raw materials
Work in process
Finished goods
Total
$ 67,943
$ 73,043
$ 71,514
Total
The Company’s net sales for continuing opera-
tions by product line are as follows:
(In thousands)
Net sales:
Welded wire
reinforcement
PC strand
Year Ended
October 3,
2009
September 27,
2008
September 29,
2007
$122,942
107,294
$193,307
160,555
$167,896
129,910
Total
$230,236
$353,862
$297,806
There were no customers that accounted for
10% or more of the Company’s net sales in 2009, 2008
or 2007.
(13) related Party transaCtiOns
Sales to a company affiliated with one of the
Company’s directors amounted to $585,000 in 2009,
$1.0 million in 2008 and $967,000 in 2007. Purchases
from another company affiliated with one of the
Company’s directors amounted to $5,800 in 2008
and $418,000 in 2007. There were no such purchases
in 2009.
(14) COmPrehensive lOss
The components of accumulated other compre-
hensive loss are as follows:
Prepaid expenses and other:
Income taxes receivable
Current deferred tax asset
Capitalized financing costs, net
Other
Total
Other assets:
Cash surrender value of life
insurance policies
Non-current deferred tax assets
Capitalized financing costs, net
Other
Total
Property, plant and equipment, net:
Land and land improvements
Buildings
Machinery and equipment
Construction in progress
Less accumulated depreciation
Total
Accrued expenses:
Pension plan
Salaries, wages and related
expenses
Property taxes
Customer rebates
Worker’s compensation
Sales allowance reserves
Cash dividends
Income taxes
(In thousands)
Adjustment to defined
benefit plan liability
Total accumulated
other compre-
hensive loss
October 3,
2009
September 27,
2008
September 29,
2007
Other
Total
$(2,520)
$(1,885)
$(2,119)
Other liabilities:
Deferred compensation
Deferred income taxes
Deferred revenues
$(2,520)
$(1,885)
$(2,119)
Total
October 3,
2009
September 27,
2008
$ 22,340
$ 50,487
(1,057)
(906)
$ 21,283
$ 49,581
$ 17,649
1,780
19,113
$ 30,793
3,161
37,266
$ 38,542
$ 71,220
$ 13,049
1,668
336
1,671
$ —
2,513
—
609
$ 16,724
$ 3,122
$ 3,739
375
—
268
$ 3,938
—
844
282
$ 4,382
$ 5,064
$ 5,571
32,437
96,411
695
$ 5,631
31,819
96,638
2,195
135,114
(70,910)
136,283
(67,178)
$ 64,204
$ 69,105
$ 1,236
$ 613
1,228
1,023
752
378
236
—
—
362
4,128
794
840
673
1,493
9,279
10,861
400
$ 5,215
$ 29,081
$ 5,465
—
—
$ 4,476
435
395
$ 5,465
$ 5,306
INSTEEL INDUSTRIES, INC. // 2009 annual report
45
notes to consoliDateD financial stateMents (continued)
Years Ended October 3, 2009, September 27, 2008 and September 29, 2007
(16) rights agreement
On April 26, 1999, the Company’s Board of
Directors declared a dividend distribution of one
right per share of the Company’s outstanding com-
mon stock as of May 17, 1999 pursuant to a Rights
Agreement, dated as of April 27, 1999. The Rights
Agreement also provides that one right will attach to
each share of the Company’s common stock issued
after May 17, 1999. On April 21, 2009, effective April
25, 2009, the Company’s Board of Directors amended
the Rights Agreement to, among other changes,
extend the final expiration date and adjust the pur-
chase price payable upon exercise of a right.
The rights are not currently exercisable but trade
with the Company’s common stock shares and
become exercisable on the distribution date. The dis-
tribution date will occur upon the earliest of 10 busi-
ness days following a public announcement that
either a person or group of affiliated or associated
persons (an “acquiring person”) has acquired, or
obtained the right to acquire, beneficial ownership of
20% or more (after adjustment for certain derivative
transactions) of the outstanding shares of common
stock (the “stock acquisition date”), or of a tender
offer or exchange offer that would, if consummated,
result in an acquiring person beneficially owning
20% or more of such outstanding shares of common
stock, subject to certain limitations.
Each right will entitle the holder, other than
the acquiring person or group, to purchase one two-
hundredths of a share (a “Unit”) of the Company’s
Series A Junior Participating Preferred Stock
(“Preferred Stock”) at a purchase price of $46 per
Unit, subject to adjustment as described in the Rights
Agreement (the “purchase price”). At the time speci-
fied each holder of a right will have the right to
receive in lieu of Preferred Stock, upon exercise and
payment of the purchase price, common stock (or, in
certain circumstances, cash, property or other securi-
ties of the Company) having a value equal to two
times the purchase price or, at the discretion of the
Board, upon exercise and without payment of the
purchase price, common stock (or, in certain circum-
stances, cash, property or other securities of the
Company) having a value equal to the difference
between the purchase price and the value of the con-
sideration which a person exercising the right and
paying the purchase price would receive. Rights that
are or (under specified circumstances) were, benefi-
cially owned by any acquiring person will be null
and void. The purchase price payable, and the num-
ber of Units of Preferred Stock or other securities or
property issuable upon exercise of the rights are sub-
ject to adjustment from time to time. At any time after
any person becomes an acquiring person, the
Company may exchange all or part of the rights for
shares of common stock at an exchange ratio of one
share per right, as appropriately adjusted to reflect
any stock dividend, stock split or similar transaction.
In addition, each rights holder, other than an
acquiring person, upon exercise of rights will have
the right to receive shares of the common stock of
the acquiring corporation having a value equal to two
times the purchase price for such holder’s rights if
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.
The rights will expire on April 24, 2019, and may
be redeemed by the Company at any time prior to the
distribution date at a price of $0.005 per right.
(17) PrOduCt warranties
The Company’s products are used in applications
which are subject to inherent risks including per-
formance deficiencies, personal injury, property
damage, environmental contamination or loss of pro-
duction. The Company warrants its products to meet
certain specifications and actual or claimed deficien-
cies from these specifications may give rise to claims.
The Company does not maintain a reserve for war-
ranties as the historical claims have been immaterial.
The Company maintains product liability insurance
coverage to minimize its exposure to such risks.
46
(18) share rePurChases
On November 18, 2008, the Company’s board of
directors approved a new share repurchase authori-
zation to buy back up to $25.0 million of the Com-
pany’s outstanding common stock in the open market
or in privately negotiated transactions (the “New
Authorization”). The New Authorization replaces the
previous authorization to repurchase up to $25.0 mil-
lion of the Company’s common stock which was
to expire on December 5, 2008. Repurchases may be
made from time to time in the open market or in
privately negotiated transactions subject to market
conditions, applicable legal requirements and other
factors. The Company is not obligated to acquire any
particular amount of common stock and the program
may be commenced or suspended at any time at the
Company’s discretion without prior notice. The New
Authorization continues in effect until terminated
by the Board of Directors. During the year ended
October 3, 2009, the Company repurchased $24,000 or
2,497 shares of its common stock through restricted
stock net-share settlements. During the year ended
September 27, 2008, the Company repurchased 913,268
shares or $8.7 million of its common stock, which
included 6,870 shares or $76,000 through restricted
stock net-share settlements.
INSTEEL INDUSTRIES, INC. // 2009 annual report
47
stocK pRice anD DiViDenD Data
The common stock of Insteel Industries, Inc. is traded on the NASDAQ Global Select Market under the sym-
bol IIIN. The following table summarizes the quarterly high and low sales prices as reported on the NASDAQ
Global Select Market and the cash dividend per share declared for the periods indicated:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2009
Fiscal 2008
High
Low
$14.72
12.47
9.26
12.58
$7.00
4.76
6.24
7.53
Cash
Dividends
$0.03
0.03
0.03
0.03
High
Low
$16.35
12.45
19.14
20.17
$10.00
7.36
9.96
13.77
Cash
Dividends
$0.03
0.03
0.03
0.53
While we intend to pay regular quarterly cash dividends for the foreseeable future, the declaration and pay-
ment of future dividends, if any, are discretionary and will be subject to determination by the board of directors
each quarter after taking into account various factors, including general business conditions and our financial
condition, operating results, cash requirements and expansion plans. See Note 5 of the consolidated financial
statements for additional discussion with respect to dividend payments.
suppleMentaRy QuaRteRly financial Data (unauDiteD)
(In thousands, except for
per share amounts)
October 3,
2009
June 27,
2009
March 28,
2009
December 27,
2008
September 27,
2008
June 28,
2008
March 29,
2008
December 29,
2007
Quarter Ended
$61,070
9,047
$56,963
1,176
$ 50,404
(21,040)
$61,799
(4,276)
$106,290
29,463
$104,332
30,885
$77,260
15,787
$65,980
10,620
2,778
(1,737)
(16,382)
(5,599)
15,646
16,948
6,892
4,231
(1,085)
1,693
(12)
(1,749)
(13)
(16,395)
(36)
(5,635)
37
15,683
(21)
16,927
26
6,918
(7)
4,224
0.16
(0.10)
(0.94)
(0.33)
0.90
0.98
0.40
0.23
(0.06)
0.10
—
(0.10)
—
(0.94)
—
(0.33)
—
0.90
—
0.98
—
0.40
—
0.23
0.16
(0.10)
(0.94)
(0.33)
0.89
0.97
0.39
0.23
(0.06)
0.10
—
(0.10)
—
(0.94)
—
(0.33)
—
0.89
—
0.97
—
0.39
—
0.23
Operating results:
Net sales
Gross profit (loss)
Earnings (loss) from
continuing operations
Earnings (loss) from
discontinued
operations
Net earnings (loss)
Per share data:
Basic:
Earnings (loss) from
continuing
operations
Earnings (loss) from
discontinued
operations
Net earnings (loss)
Diluted:
Earnings (loss) from
continuing
operations
Earnings (loss) from
discontinued
operations
Net earnings (loss)
48
300
250
200
150
100
50
0
stocK peRfoRMance gRapH
The following graph compares the total returns (including the reinvestment of dividends) of the Company,
the Russell 2000 and the S&P Building Products Index. The graph assumes $100 invested on October 2, 2004 in
the Company’s stock and September 30, 2004 in each of the indices. Total returns for the indices are calculated
on a month-end basis.
Insteel Industries, Inc.
Russell 2000
S&P Building Products
$300
250
200
150
100
50
0
October 2, 2004
October 1, 2005
September 30, 2006
September 29, 2007
September 27, 2008
October 3, 2009
(In dollars)
Insteel Industries, Inc.
Russell 2000
S&P Building Products
October 2,
2004
October 1,
2005
September 30,
2006
September 29,
2007
September 27,
2008
October 3,
2009
100.00
100.00
100.00
106.13
117.95
101.18
277.96
129.66
92.96
216.19
145.65
93.64
205.94
124.56
96.79
173.38
112.67
73.70
INSTEEL INDUSTRIES, INC. // 2009 annual report
49
selecteD financial Data—fiVe-yeaR HistoRy
(In thousands, except for per share amounts)
Operating Results:
Net sales
Gross profit (loss)
% of net sales
Selling, general and administrative expense
Interest expense
Earnings (loss) from continuing operations
% of net sales
Earnings (loss) from discontinued operations
Net earnings (loss)
Per Share Data:
Per share (basic):
Year Ended
(53 weeks)
October 3,
2009
(52 weeks)
September 27,
2008
(52 weeks)
September 29,
2007
(52 weeks)
September 30,
2006
(52 weeks)
October 1,
2005
$230,236
(15,093)
$353,862
86,755
$297,806
56,061
$329,507
70,871
$309,320
57,898
(6.6%)
24.5%
18.8%
21.5%
18.7%
$ 17,243
641
(20,940)
(9.1%)
$ (1,146)
(22,086)
$ 18,623
594
43,717
$
12.4%
35
43,752
$ 17,583
592
24,284
$ 16,996
669
34,377
8.2%
10.4%
$
(122)
24,162
$ (1,337)
33,040
$ 16,175
3,427
24,499
$
7.9%
546
25,045
Earnings (loss) from continuing operations
Earnings (loss) from discontinued operations
Net earnings (loss)
$
Per share (diluted):
Earnings (loss) from continuing operations
Earnings (loss) from discontinued operations
Net earnings (loss)
Cash dividends declared
(1.20)
(0.07)
(1.27)
(1.20)
(0.07)
(1.27)
0.12
$
2.49
—
2.49
2.47
—
2.47
0.62
$
1.34
(0.01)
1.33
1.33
(0.01)
1.32
0.12
$
1.88
(0.08)
1.80
1.86
(0.07)
1.79
0.12
$
1.31
0.03
1.34
1.29
0.03
1.32
0.06
Returns:
Return on total capital(1)
Return on shareholders’ equity(2)
Financial Position:
Cash and cash equivalents
Total assets
Total long-term debt
Shareholders’ equity
Cash Flows:
(13.2%)
(13.2%)
27.9%
27.9%
18.2%
18.2%
29.7%
31.3%
23.9%
40.7%
$ 35,102
182,117
—
147,070
$ 26,493
228,220
—
169,847
$ 8,703
173,529
—
143,850
$ 10,689
166,596
—
122,438
$ 1,371
138,276
11,860
97,036
Net cash provided by operating activities of
continuing operations
Capital expenditures
Depreciation and amortization
Repurchases of common stock
Cash dividends paid
Other Data:
Number of employees at year-end
$ 22,092
2,377
7,377
—
11,381
$ 36,808
9,456
7,271
8,691
2,141
$ 17,065
17,013
5,711
—
2,176
$ 42,650
18,959
4,578
8,529
2,222
$ 41,830
6,302
4,139
—
566
438
523
559
621
655
(1) Earnings from continuing operations/(average total long-term debt + average shareholders’ equity).
(2) Earnings from continuing operations/(average shareholders’ equity).
50
Corporate Information
Board of directors
Louis e. Hannen(1)
Retired Senior Vice President
Wheat, First Securities, Inc.
charles B. Newsome(2,3)
Executive Vice President
Johnson Concrete Company
Gary L. Pechota(1,3)
President and Chief Executive Officer
DT-Trak Consulting, Inc.
W. allen rogers ii(1,3)
Principal
Ewing Capital Partners, LLC
William J. shields(2)
Retired Chairman and
Chief Executive Officer
Co-Steel, Inc.
c. richard Vaughn(2,4)
Chairman and Chief Executive Officer
John S. Clark Company, Inc.
Howard o. Woltz, Jr.(4)
Chairman Emeritus
Insteel Industries, Inc.
H.o. Woltz iii(4)
Chairman, 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 Nominating and
Governance Committee
(4) Member of the Executive Committee
executiVe officers
H.o. Woltz iii
Chairman, 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—
Concrete Reinforcing Products Business Unit,
Insteel Wire Products Company
sHareHoLder iNforMatioN
corporate Headquarters
1373 Boggs Drive
Mount Airy, North Carolina 27030-2148
(336) 786-2141
independent registered Public
accounting Firm
Grant Thornton LLP
Greensboro, North Carolina
annual meeting
Insteel shareholders are invited to attend
our annual meeting, which will be held on
Tuesday, February 9, 2010 at 9:00 a.m. ET
at the Cross Creek Country Club,
1129 Greenhill Road,
Mount Airy, North Carolina 27030
common stock
The common stock of Insteel Industries,
Inc. is traded on the NASDAQ Global
Select Market under the symbol IIIN.
At November 6, 2009, there were 1,076
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
Plaza Level
New York, New York 10038
(866) 627-2704
www.amstock.com
investor relations
For information on the Company, addi-
tional copies of this report, Form 10-K
or other financial information, contact
Michael C. Gazmarian, Vice President,
Chief Financial Officer and Treasurer,
at the Company’s headquarters. You
may also visit the Investor Information
section on the Company’s web site at
http://investor.insteel.com/.
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Insteel IndustrIes, Inc.
1373 Boggs Drive, Mount Air y, Nor th Carolina 27030-2148
phone ( 336 ) 786-2141
www.insteel.com