fonts used
bitsumishi and turnpike
2012 Annual Report
We are the nation’s largest
manufacturer of steel wire
reinforcing products.
Insteel Industries is the nation’s largest
manufacturer of steel wire reinforcing prod-
ucts for concrete construction applications.
We manufacture and market prestressed con-
crete strand (“PC strand”) and welded wire
reinforcement, including engineered struc-
tural mesh, concrete pipe reinforcement and
standard welded wire reinforcement. Our
products are sold primarily to manufacturers
of concrete products that are used in nonresi-
dential construction. Headquartered in Mount
Airy, North Carolina, we operate nine manu-
facturing facilities located in the United States.
Concrete barrier median project in
Texas that utilized Insteel engineered
structural mesh.
37% of net sales
Prestressed cOncrete strand
High-strength seven-wire reinforcement consisting of six cold-drawn wires that
are continuously wrapped around a center wire forming a strand, 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 ten-
sioned to their design load and anchored at the ends of a form. After the con-
crete 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, creat-
ing 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
Business Overview
63% of net sales
welded wire reinfOrcement
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.
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 • Hazleton, Pennsylvania • Jacksonville, Florida • Kingman, Arizona
• Mount Airy, North Carolina • St. Joseph, Missouri
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 treat-
ment facilities and other related applications.
Plant lOcatiOns
Dayton, Texas • Jacksonville, Florida • Kingman, Arizona • Mount Airy, North
Carolina • St. Joseph, Missouri
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 con-
trol applications in residential and light nonresidential construction, including
driveways, sidewalks and a wide range of slab-on-grade applications.
Plant lOcatiOns
Dayton, Texas • Hazleton, Pennsylvania • Hickman, Kentucky • Jacksonville,
Florida • Mount Airy, North Carolina
custOmer segments
Rebar Fabricators • Distributors
end uses
Nonresidential Construction • Residential Construction
FiN A N CiA l HiG HliG H T S
(Dollars in thousands, except per share amounts)
2012
2011
2010
Operating results:
net sales
gross profit
% of net sales
net earnings (loss)
% of net sales
per share Data:
$ 336,909
31,743
$ 211,586
17,991
$ 363,303
22,458
6.2%
$ 1,809
$
0.5%
9.4%
(387)
(0.1%)
$
$
8.5%
473
0.2%
0.03
0.12
net earnings (loss) (basic and diluted)
Cash dividends declared
$
0.10
0.12
$
(0.02)
0.12
returns:
return on total capital(1)
return on shareholders’ equity(2)
FinanCial pOsitiOn:
Cash and cash equivalents
total assets
total debt
shareholders’ equity
Cash FlOws:
net cash provided by (used for) operating activities
Capital expenditures
Depreciation and amortization
Cash dividends paid
1.1%
1.2%
(0.2%)
(0.3%)
0.3%
0.3%
$
10
208,552
11,475
149,500
$ 13,144
8,066
9,762
2,121
$
10
216,530
14,156
148,474
$ 45,935
182,505
—
147,876
$ (2,907)
7,937
9,573
2,112
$ 12,879
1,493
7,009
2,108
(1) net earnings (loss)/(average total debt + average shareholders’ equity).
(2) net earnings (loss)/average shareholders’ equity.
Net Sales
(in millions)
Net Earnings (Loss)
Per Share
Return on
Total Capital(1)
$363.3
$336.9
$211.6
$0.10
1.1%
$ 0.03
$ (0.02)
0.3%
(0.2%)
2010
2011
2012
2010
2011
2012
2010
2011
2012
p. 2 INStEEl INdUStRIES
400
350
300
250
200
150
100
50
0
0.08
0.06
0.04
0.02
0.00
-0.02
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
letter to shareholders
2012 marks the fifth consecutive year we begin our annual letter
to shareholders commenting on the challenging conditions in
the concrete reinforcing products industry. demand in our con-
struction end markets remained at historically depressed levels
during the year. our overall capacity utilization was 45%, reflect-
ing the continuation of reduced operating schedules across most
of our manufacturing facilities. Prices for hot-rolled steel wire
rod, our primary raw material, were highly volatile during the year
driven largely by similar fluctuations in steel scrap prices for our
suppliers, which had an adverse impact on margins.
despite the considerable challenges we have faced since 2008, we will likely look back
upon this period as one of the most consequential in our history. We have significantly
strengthened our market position and invested heavily in our people and facilities to
widen the performance gap between Insteel and its competitors. Our broad product
offering and customer service capabilities are unsurpassed in the industry. this progress
was achieved without compromising our strong balance sheet or constraining our
financial flexibility, positioning us for substantial organic growth as our markets
recover and the ability to consummate additional acquisition opportunities.
$700 MIllION
ANNUAlIzEd CAPACIty
9
WORld-ClASS
MANuFACTuRiNG FACiliTieS
<5%
ESM SHARE
oF DoMeSTiC
ReBAR MARKeT
we enter fiscal 2013 with market leadership positions across all of our
product lines and world-class facilities capable of generating more than
$700 million of annual revenues (at current selling prices), providing us
with the ability to almost double our business and leverage our infra-
structure without significant capital investment.
ReCoNFiGuRATioN oF WelDeD WiRe ReiNFoRCeMeNT oPeRATioNS
We completed the remainder of the reconfiguration of our welded wire reinforcement
operations during the year, which was undertaken following our acquisition of cer-
tain of the assets of Ivy Steel & Wire, Inc. (“Ivy”). Under this comprehensive pro-
gram, we consolidated and closed two facilities, relocated six production lines and
completed a building expansion in order to realign the capacities and product mix of
our newly combined operations with the anticipated requirements of our markets.
going forward, we believe the actions that we have taken will reduce our manufac-
turing and freight costs and better position us to meet the needs of our customers
as our markets recover.
FiNANCiAl ReSulTS
Net sales for 2012 rose 7.8% to $363.3 million from $336.9 million in 2011 on a 5.1%
increase in shipments and a 2.6% increase in average selling prices. the increase in
shipments was largely driven by the full year contribution of the Ivy facilities in 2012.
Gross margins narrowed to 6.2% from 9.4% primarily due to compressed spreads
between selling prices and raw material costs resulting from competitive pricing
pressures and the increased volatility in raw material costs. Net earnings for 2012
were $1.8 million ($0.10 per share) compared with a net loss of $387,000 ($0.02 per
share) in 2011. the year-over-year improvement in our results was primarily driven by
reductions in the restructuring charges and acquisition costs associated with the
Ivy acquisition.
Operating activities generated $13.1 million of cash, which was used primarily to
fund $8.1 million of capital expenditures, repay $2.3 million of debt and pay $2.1
million of dividends. We ended the year with $11.5 million of borrowings outstanding
on our $100.0 million revolving credit facility, providing us with ample liquidity to
fund our operations and pursue additional growth opportunities.
ENgINEEREd StRUCtURAl MESH ExPANSION
We are currently proceeding with the expansion of our engineered structural mesh
(“ESM”) business, which involves the addition of new production lines at the North
Carolina and texas facilities and the relocation of an existing production line to the
Missouri facility. We believe that ESM represents an attractive growth opportunity
for Insteel in view of the increasing market acceptance of the product as a replace-
ment for hot-rolled rebar. For many concrete reinforcing applications, eSM offers
substantial advantages relative to rebar by allowing customers to achieve signifi-
cant reductions in labor costs and cycle times in addition to requiring less steel to
p. 4 INStEEl INdUStRIES
provide the equivalent reinforcement due to its superior yield strength. With total
domestic consumption of eSM estimated to represent less than 5% of the rebar
volume that it could potentially replace, the product is still early in its life cycle and
its relative penetration of the rebar market. As the clear market leader for ESM, our
state-of-the-art operations, manufacturing capabilities and national geographic
footprint are unsurpassed in the industry.
the texas production line will provide us with additional capacity that will soon
be required to adequately serve the Southwest market as it continues to recover
from the recession at a more rapid rate than other regions of the country. It will also
be nearly twice as productive as older equipment employing more conventional
technology, which should favorably impact our conversion costs. the North Carolina
production line will manufacture specialty ESM products that are typically fabri-
cated from rebar using labor-intensive processes. this new technology will serve to
expand the range of the rebar replacement solutions we can offer customers and
enable us to enter an attractive segment of the market in addition to reducing yield
loss and eliminating the costs associated with offline fabrication activities. the two
new lines are expected to start up during the second quarter of fiscal 2013 and
generate a combined $15 to $20 million of annualized revenues when fully operational.
looKiNG AHeAD
We enter fiscal 2013 with market leadership positions across all of our product lines
and world-class facilities capable of generating more than $700 million of annual
revenues (at current selling prices), providing us with the ability to almost double
our business and leverage our infrastructure without significant capital investment.
With the reconfiguration activities behind us, we are committed to continue driving
costs out of our business and achieving further improvements in the productivity
and effectiveness of all our manufacturing, selling and administrative activities. Our
strong balance sheet and conservative capital structure provide us not only with
the liquidity required to support our future business, but also to fund our growth
initiatives. We will continue to pursue additional bolt-on acquisitions in our core
businesses that are synergistic and expand our market leadership position.
We appreciate the efforts of our employees and their ongoing commitment to satis-
fying the needs of our customers as effectively and efficiently as possible. Insteel is
ideally positioned to respond to the challenges and capitalize on the opportunities
that lie ahead. We look forward to reporting additional progress during the upcoming
year and thank you for your continued support.
Sincerely,
H.o. Woltz iii
Chairman, President and Chief Executive Officer
2012 ANNUAl REPORt p. 5
Sydney Lanier Bridge
project located in
Brunswick, Georgia
that used Insteel PC
strand for both precast
and posttensioned
reinforcing applications.
MARKeT leADeRSHiP
Insteel is the nation’s largest producer of PC strand and welded
wire reinforcement (“WWR”), which are used for a broad range
of concrete construction applications. Our nine manufacturing
facilities are strategically located in close proximity to our custom-
ers and suppliers, enhancing our customer service capabilities
and minimizing our logistics costs. our broad offering of con-
crete reinforcing products provides us with the ability to bundle
products that are used in combination for many construction
applications.
the Ivy acquisition in November 2010 enhanced our competitive
position in the Midwest, Northeast and Florida markets and pro-
vided us with better access to the West Coast market. It has also
made us the market leader in each of the three product families
within WWR—engineered structural mesh, concrete pipe rein-
forcement and standard welded wire reinforcement—and the only
WWR producer with a truly national market presence.
SAlES by ENd USE
90%
Nonresidential
Construction
10%
Residential
Construction
400
350
300
250
200
150
100
50
0
2012 ANNUAl REPORt p. 7
0.08
0.06
0.04
0.02
0.00
-0.02
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
Net Sales
(in millions)
Net Earnings (Loss)
Per Share
Return on
Total Capital(1)
$363.3
$336.9
$211.6
$0.10
1.1%
$ 0.03
$ (0.02)
0.3%
(0.2%)
2010
2011
2012
2010
2011
2012
2010
2011
2012
Flood control project in Nevada that utilizes nearly three
miles of concrete box culverts reinforced with Insteel
engineered structural mesh.
lOW COSt PROdUCER
A key element of our business strategy is to operate as the low
cost producer in our highly competitive industry. Our nine world-
class facilities employ the latest equipment technology and
advanced manufacturing practices to achieve production rates
and conversion costs that compare favorably against any of our
competitors—domestic or foreign. We also believe our highly
sophisticated information systems infrastructure is unmatched in
our industry, providing us with a broad range of performance
metrics and decision-support tools to continually monitor and fine
tune our processes.
Our ability to operate as the low cost producer is ultimately depen-
dent upon our highly dedicated and skilled workforce. We believe
the team that we have developed sets the standard for our indus-
try and is well equipped to meet the unique challenges that are
inherent to our highly competitive and cyclical business.
SAlES by CUStOMER CAtEgORy
70%
Concrete Product
Manufacturers
15%
Rebar Fabricators
15%
distributors
Return on
Total Capital(1)
Net Earnings (Loss)
Per Share
Net Sales
(in millions)
1.1%
$0.10
$363.3
$336.9
$211.6
0.3%
(0.2%)
$ 0.03
$ (0.02)
2012
2011
2010
2012
2011
2010
2012
2011
2010
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
2012 ANNUAl REPORt p. 9
0.08
0.06
0.04
0.02
0.00
-0.02
400
350
300
250
200
150
100
50
0
San Jose International Airport parking structure project
that used Insteel engineered structural mesh to reinforce
precast concrete components.
StRAtEgIC gROWtH
Our growth strategy is focused on opportunities in our core
welded wire reinforcement and PC strand businesses that further
our penetration of the markets we currently serve or expand our
geographic footprint. As our construction end-markets recover,
our existing facilities offer substantial growth potential without
significant capital investment considering that they operated at
less than half of their overall capacity during 2012. Our engineered
structural mesh business also represents an attractive organic
growth opportunity as acceptance of the product continues to
broaden. the two new production lines that are scheduled to
start up during the second quarter of fiscal 2013 are expected to
generate $15 to $20 million of annualized revenues when fully
operational. We will also continue to be disciplined in pursuing
additional acquisition opportunities that are highly synergistic
and meet our return on capital requirements while maintaining
our strong financial position.
The eight-level structure contains 3,817 precast concrete components and
is the largest precast concrete parking structure in the state of California,
providing spaces for 3,350 cars.
2012 ANNUAl REPORt p. 11
SeleC Te D FiN A N CiA l DATA — Fiv e-Y e A R HiS To RY
(Dollars in thousands, except 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:
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
returns:
return on total capital(1)
return on shareholders’ equity(2)
FinanCial pOsitiOn:
Cash and cash equivalents
total assets
total debt
shareholders’ equity
Cash FlOws:
net cash provided by (used for) operating activities
Capital expenditures
Depreciation and amortization
repurchases of common stock
Cash dividends paid
Other Data:
Year ended
(52 weeks)
september 29,
2012
(52 weeks)
October 1,
2011
(52 weeks)
October 2,
2010
(53 weeks)
October 3,
2009
(52 weeks)
september 27,
2008
$ 363,303
22,458
$ 336,909
31,743
$ 211,586
17,991
$ 230,236
(15,093)
$ 353,862
86,755
6.2%
9.4%
8.5%
(6.6%)
24.5%
$ 19,608
958
(387)
(0.1%)
— $
$ 16,024
453
458
0.2%
15
473
$ 17,243
641
(20,940)
(9.1%)
$ (1,146)
(22,086)
$ 18,623
594
43,717
$
12.4%
35
43,752
$ 18,911
623
1,809
$
$
0.5%
—
1,809
0.10
—
0.10
0.10
—
0.10
0.12
$
$
(387)
(0.02)
—
(0.02)
(0.02)
—
(0.02)
0.12
$
0.03
—
0.03
0.03
—
0.03
0.12
$
(1.20)
(0.07)
(1.27)
(1.20)
(0.07)
(1.27)
0.12
$
2.47
—
2.47
2.44
—
2.44
0.62
1.1%
1.2%
(0.2%)
(0.3%)
0.3%
0.3%
(13.2%)
(13.2%)
27.9%
27.9%
$
10
208,552
11,475
149,500
$ 13,144
8,066
9,762
—
2,121
$
10
216,530
14,156
148,474
$ 45,935
182,505
—
147,876
$ 35,102
182,117
—
147,070
$ 26,493
228,220
—
169,847
$ (2,907)
7,937
9,573
—
2,112
$ 12,879
1,493
7,009
—
2,108
$ 22,122
2,377
7,377
—
11,381
$ 36,749
9,456
7,271
8,691
2,141
number of employees at year-end
682
725
421
438
523
(1) earnings (loss) from continuing operations/(average total debt + average shareholders’ equity).
(2) earnings (loss) from continuing operations/average shareholders’ equity.
p. 12 INStEEl INdUStRIES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fi scal year ended September 29, 2012
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission fi le number 1-9929
INSTEEL INDUSTRIES, INC.
(Exact name of registrant as specifi ed in its charter)
North Carolina
(State or other jurisdiction of incorporation or organization)
56-0674867
(I.R.S. Employer Identifi cation No.)
1373 Boggs Drive, Mount Airy, North Carolina 27030
(Address of principal executive offi ces) (Zip Code)
(336) 786-2141
(Registrant’s telephone number, including area code )
SECURITIES REGISTERED PURSUANT TO SECTION 12b OF THE ACT:
Title of Each Class
Common Stock (No Par Value) (Preferred Share Purchase
Rights are attached to and trade with the Common Stock)
Name of Each Exchange on Which Registered
Th e NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
SECURITIES REGISTERED PURSUANT TO SECTION 12G OF THE ACT:
Preferred Share Purchase Rights (attached to and trade with the Common Stock)
Title of Class
Indicate by check mark
• if the registrant is a well-known seasoned issuer, as defi ned in Rule 405 of the Securities Act.
YES
NO
• if the registrant is not required to fi le reports pursuant to Section 13 or 15(d) of the Act.
• whether the registrant (1) has fi led all reports required to be fi led by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to fi le such reports), and (2) has been subject to such fi ling requirements for the past 90 days.
• whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such fi les).
• if disclosure of delinquent fi lers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in defi nitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K.
• whether the registrant is a large accelerated fi ler, an accelerated fi ler, a non-accelerated fi ler, or a smaller reporting company. See the defi nitions
of “large accelerated fi ler”, “accelerated fi ler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated fi ler
Accelerated fi ler
Non-accelerated fi ler
(Do not check if a smaller
reporting company)
Smaller reporting company
• whether the registrant is a shell company (as defi ned in Rule 12b-2 of the Act).
As of March 31, 2012 (the last business day of the registrant’s most recently completed second quarter), the aggregate market value of the
common stock held by non-affi liates of the registrant was $199,867,792 based upon the closing sale price as reported on the NASDAQ
Global Select Market. As of October 31, 2012, there were 17,719,095 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant’s proxy statement to be delivered to shareholders in connection with the 2013 Annual Meeting of
Shareholders are incorporated by reference as set forth in Part III hereof.
Table of Contents
Cautionary Note Regarding Forward-Looking Statements ..............................................................................................................................................................................................4
PART I
5
ITEM 1
Business .......................................................................................................................................................................................................................................................................................................................................5
ITEM 1A Risk Factors .........................................................................................................................................................................................................................................................................................................................8
ITEM 1B Unresolved Staff Comments .........................................................................................................................................................................................................................................................11
Properties ............................................................................................................................................................................................................................................................................................................................11
ITEM 2
ITEM 3
Legal Proceedings ...............................................................................................................................................................................................................................................................................................11
ITEM 4 Mine Safety Disclosures ........................................................................................................................................................................................................................................................................11
PART II
12
ITEM 5 Market for Registrant’s Common Equity, Related Shareholder Matters
and Issuer Purchases of Equity Securities ...........................................................................................................................................................................................................12
Selected Financial Data ..........................................................................................................................................................................................................................................................................14
ITEM 6
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations .......................14
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk ................................................................................................................................22
ITEM 8
Financial Statements and Supplementary Data .....................................................................................................................................................................................23
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ....................47
ITEM 9
ITEM 9A Controls and Procedures ......................................................................................................................................................................................................................................................................47
ITEM 9B Other Information ...........................................................................................................................................................................................................................................................................................49
PART III
49
ITEM 10 Directors, Executive Offi cers and Corporate Governance ................................................................................................................................................49
ITEM 11 Executive Compensation .....................................................................................................................................................................................................................................................................49
ITEM 12
Security Ownership of Certain Benefi cial Owners and Management
and Related Stockholder Matters........................................................................................................................................................................................................................................50
ITEM 13 Certain Relationships and Related Transactions, and Director Independence ........................................................................50
ITEM 14 Principal Accounting Fees and Services .................................................................................................................................................................................................................50
PART IV
51
ITEM 15 Exhibits, Financial Statement Schedules ..............................................................................................................................................................................................................51
SIGNATURES .........................................................................................................................................................................................................................................................................................................................................................52
EXHIBIT INDEX ............................................................................................................................................................................................................................................................................................................................................53
INSTEEL INDUSTRIES, INC. Form 10K 3
Cautionary Note Regarding Forward-Looking Statements
Th is report contains forward-looking statements within the meaning
of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, particularly in the “Business,” “Risk Factors”
and “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” sections of this report. When used in
this report, the words “believes,” “anticipates,” “expects,” “estimates,”
“intends,” “may,” “should” and similar expressions are intended to
identify forward-looking statements. Although we believe that our
plans, intentions and expectations refl ected 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
are discussed herein under the caption “Risk Factors” and are updated
from time to time in our fi lings with the U.S. Securities and Exchange
Commission (“SEC”). You should read these risk factors carefully.
All forward-looking statements attributable to us or persons acting on
our behalf are expressly qualifi ed 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
specifi cally decline any obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to refl ect
any future events or circumstances after the date of such statements
or to refl ect the occurrence of anticipated or unanticipated events.
It is not possible to anticipate and list all risks and uncertainties that
may aff ect our future operations or fi nancial 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 relative availability of fi nancing for
us, our customers and the construction industry as a whole;
• the continuation of reduced spending for nonresidential construction
and the impact on demand for our products;
• the severity and duration of the downturn in residential construction
and the impact on those portions of our business that are correlated
with the housing sector;
• changes in the amount and duration of transportation funding
provided by federal, state and local governments and the impact on
spending for infrastructure construction and demand for our products;
• the cyclical nature of the steel and building material industries;
• fl uctuations in the cost and availability of our primary raw material,
hot-rolled steel wire rod, from domestic and foreign suppliers;
• competitive pricing pressures and our ability to raise selling prices in
order to recover increases in wire rod costs;
• changes in United States (“U.S.”) or foreign trade policy aff ecting
imports or exports of steel wire rod or our products;
• unanticipated changes in customer demand, order patterns and
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;
• legal, environmental, economic or regulatory developments that
signifi cantly impact our operating costs;
• unanticipated plant outages, equipment failures or labor diffi culties;
• continued escalation in certain of our operating costs; and
• the risks and uncertainties discussed herein under the caption “Risk
Factors.”
4
INSTEEL INDUSTRIES, INC. Form 10K
PART I
ITEM 1 Business
PART I
ITEM 1 Business
General
Insteel Industries, Inc. (“we,” “us,” “our,” “the Company” or “Insteel”)
is the nation’s largest manufacturer of steel wire reinforcing products
for concrete construction applications. We manufacture and market
prestressed concrete strand (“PC strand”) and welded wire reinforcement
(“WWR”), including ESM, concrete pipe reinforcement (“CPR”)
and standard welded wire reinforcement (“SWWR”). Our products
are sold primarily to manufacturers of concrete products that are
used in nonresidential construction. For fi scal 2012, we estimate
that approximately 90% of our sales were related to nonresidential
construction and 10% were related to residential construction.
Insteel is the parent holding company for two wholly-owned subsidiaries,
Insteel Wire Products Company (“IWP”), an operating subsidiary, and
Intercontinental Metals Corporation, an inactive subsidiary. We were
incorporated in 1958 in the State of North Carolina.
Our business strategy is focused on: (1) achieving leadership positions
in our markets; (2) operating as the lowest cost producer; and (3)
pursuing growth opportunities in our core businesses that further
our penetration of current markets served or expand our geographic
footprint. Headquartered in Mount Airy, North Carolina, we operate
nine manufacturing facilities that are located in the U.S. in close
proximity to our customers. Our growth initiatives are focused on
organic opportunities as well as acquisitions in existing or related
markets that leverage our infrastructure and core competencies in the
manufacture and marketing of concrete reinforcing products.
Internet Access to Company Information
Additional information about us and our fi lings with the SEC, including
our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and any amendments thereto, are available
at no cost on our web site at http://investor.insteel.com/sec.cfm and the
SEC’s web site at www.sec.gov as soon as reasonably practicable after
Products
Our exit from the industrial wire business in June 2006 (see Note 10
to the consolidated fi nancial statements) was the last in a series of
divestitures which served to narrow our strategic and operational focus
to concrete reinforcing products. Th e results of operations for the
industrial wire business have been reported as discontinued operations
for all periods presented.
On November 19, 2010, we, through our wholly-owned subsidiary,
IWP, purchased certain of the assets of Ivy Steel and Wire, Inc. (“Ivy”)
for approximately $50.3 million, after giving eff ect to post-closing
adjustments (the “Ivy Acquisition”). Ivy was one of the nation’s largest
producers of WWR and wire products for concrete construction
applications (see Note 4 to the consolidated fi nancial statements).
Among other assets, we acquired Ivy’s production facilities located in
Arizona, Florida, Missouri and Pennsylvania; the production equipment
located at a leased facility in Texas; and certain related inventories.
We also entered into a short-term sublease with Ivy for the Texas facility.
Subsequent to the acquisition, we elected to consolidate certain of our
WWR operations in order to reduce our operating costs, which involved
the closure of facilities in Wilmington, Delaware and Houston, Texas.
Th ese actions were taken in response to the close proximity of Ivy’s
facilities in Hazleton, Pennsylvania and Houston, Texas to our existing
facilities in Wilmington, Delaware and Dayton, Texas.
we electronically fi le such material with, or furnish it to, the SEC.
Th e information available on our web site and the SEC’s web site is
not part of this report and shall not be deemed incorporated into any
of our SEC fi lings.
Our concrete reinforcing products consist of PC strand and WWR.
PC strand is a high strength seven-wire strand that is used to impart
compression forces into precast concrete elements and structures, which
may be either pretensioned or posttensioned, providing reinforcement
for bridges, parking decks, buildings and other concrete structures.
Pretensioned or “prestressed” concrete elements or structures are primarily
used in nonresidential construction while posttensioned concrete
INSTEEL INDUSTRIES, INC. Form 10K 5
PART I
ITEM 1 Business
elements or structures are used in both nonresidential and residential
construction. For 2012, 2011 and 2010, PC strand sales represented
37%, 38% and 48%, respectively, of our consolidated net sales.
WWR is produced as either a standard or a specially engineered
reinforcing product for use in nonresidential and residential construction.
We produce a full range of WWR products, including ESM, CPR and
SWWR. ESM is an engineered made-to-order product that is used as the
primary reinforcement for concrete elements or structures, frequently
serving as a replacement for hot-rolled rebar due to the cost advantages
that it off ers. CPR is an engineered made-to-order product that is used
as the primary reinforcement in concrete pipe, box culverts and precast
manholes for drainage and sewage systems, water treatment facilities and
other related applications. SWWR is a secondary reinforcing product
that is produced in standard styles for crack control applications in
residential and light nonresidential construction, including driveways,
sidewalks and various slab-on-grade applications. For 2012, 2011 and
2010, WWR sales represented 63%, 62% and 52%, respectively, of
our consolidated net sales.
Marketing and Distribution
We market our products through sales representatives who are our
employees. 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.
Th e delivery method selected is dependent upon backhaul opportunities,
comparative costs and scheduling requirements.
Customers
We sell our products to a broad range of customers that includes
manufacturers of concrete products, and to a lesser extent, distributors
and rebar fabricators. In fi scal 2012, we estimate that approximately 70%
of our net sales were to manufacturers of concrete products and 30%
were to distributors and rebar fabricators. In many cases we are unable
to identify the specifi c end use for our products as a high percentage
of our customers sell into both the nonresidential and residential
construction sectors. Th ere were no customers that represented 10%
or more of our net sales in fi scal years 2012, 2011 and 2010.
Backlog
Backlog is minimal for our business because of the relatively short lead times that are required by our customers. We believe that the majority of
our fi rm orders existing on September 29, 2012 will be shipped prior to the end of the fi rst quarter of fi scal 2013.
Product Warranties
Our products are used in applications which are subject to inherent risks
including performance defi ciencies, personal injury, property damage,
environmental contamination or loss of production. We warrant our
products to meet certain specifi cations and actual or claimed defi ciencies
from these specifi cations may give rise to claims, although we do not
maintain a reserve for warranties as the historical claims have been
immaterial. We maintain product liability insurance coverage to
minimize our exposure to such risks.
Seasonality and Cyclicality
Demand in our markets is both seasonal and cyclical, driven by the level
of construction activity, but can also be impacted by fl uctuations in
the inventory positions of our customers. From a seasonal standpoint,
the highest level of shipments within the year typically occurs when
weather conditions are the most conducive to construction activity.
As a result, shipments and profi tability are usually higher in the third
and fourth quarters of the fi scal year and lower in the fi rst and second
quarters. From a cyclical standpoint, the level of construction activity
tends to be correlated with general economic conditions although there
can be signifi cant diff erences between the relative performance of the
nonresidential versus residential construction sectors for extended periods.
Raw Materials
Th e primary raw material used to manufacture our products is hot-
rolled carbon steel wire rod, which we purchase from both domestic
and foreign suppliers. Wire rod can generally be characterized as a
commodity product. We purchase several diff erent grades and sizes of
wire rod with varying specifi cations based on the diameter, chemistry,
mechanical properties and metallurgical characteristics that are required
6
INSTEEL INDUSTRIES, INC. Form 10K
PART I
ITEM 1 Business
for our end products. High carbon grades of wire rod are required
for the production of PC strand while low carbon grades are used to
manufacture WWR.
Pricing for wire rod tends to fl uctuate based on both domestic and
global market conditions. In most economic environments, domestic
demand for wire rod exceeds domestic production capacity and imports
of wire rod are necessary to satisfy the supply requirements of the U.S.
market. Trade actions initiated by domestic wire rod producers can
signifi cantly impact the pricing and availability of imported wire rod,
which during fi scal years 2012 and 2011 represented approximately 17%
and 15%, respectively, of our total wire rod purchases. We believe that
the substantial volume and desirable mix of grades represented by our
wire rod requirements constitutes a competitive advantage by making us
a more attractive customer to our suppliers relative to our competitors.
have deemphasized the production of the less sophisticated, low carbon
grades of wire rod due to the more intense competitive conditions
that prevail in this market. As a result, we typically rely more heavily
on imports for supplies of lower grade wire rod. Historically, when
traditional off shore suppliers have withdrawn from the domestic
market following the fi ling of trade cases by the domestic industry,
new suppliers have fi lled the resulting gaps in supply.
Our ability to source wire rod from overseas suppliers is limited by
domestic content requirements generally referred to as “Buy America”
or “Buy American” laws that exist at both the federal and state levels.
Th ese laws generally require a domestic “melt and cast” standard for
purposes of compliance. Certain segments of the PC strand market and
the majority of our CPR and ESM products are certifi ed to customers
to be in compliance with the domestic content regulations.
Domestic wire rod producers have invested heavily in recent years to
improve their quality capabilities and augment their product mix by
increasing the proportion of higher value-added products. Th is evolution
toward higher value-added products has generally benefi ted us in our
sourcing of wire rod for PC strand as this grade is more metallurgically
and technically sophisticated. At the same time, domestic producers
Selling prices for our products tend to be correlated with changes
in wire rod prices. However, the timing of the relative price changes
varies depending upon market conditions and competitive factors.
Th e relative supply and demand conditions in our markets determine
whether our margins expand or contract during periods of rising or
falling wire rod prices.
Competition
We believe that we are the largest domestic producer of PC strand and
WWR. Th e markets in which our business is conducted are highly
competitive. Some of our competitors, such as Nucor Corporation,
Keystone Steel & Wire Co. and Gerdau Ameristeel Corporation,
are vertically integrated companies that produce both wire rod and
concrete reinforcing products and off er multiple product lines over
broad geographic areas. Other competitors are smaller independent
companies that off er limited competition in certain markets. Market
participants compete on the basis of price, quality and service.
Our primary competitors for WWR products are Nucor Corporation,
Gerdau Ameristeel Corporation, Engineered Wire Products, Inc.,
Davis Wire Corporation, Oklahoma Steel & Wire Co., Inc., Concrete
Reinforcements Inc. and Wire Mesh Corporation. Our primary
competitors for PC strand are American Spring Wire Corporation,
Sumiden Wire Products Corporation, Strand-Tech Martin, Inc. and
Wire Mesh Corporation. Import competition is also a signifi cant factor
in certain segments of the PC strand market.
In response to irrationally-priced import competition from off shore
PC strand suppliers, we have pursued trade cases when necessary as
a means of ensuring that foreign producers were complying with the
applicable trade laws and regulations. In 2003, we, together with a
coalition of domestic producers of PC strand, obtained a favorable
determination from the U.S. Department of Commerce (the “DOC”)
in response to the petitions we had fi led alleging that imports of PC
strand from Brazil, India, Korea, Mexico and Th ailand were being
Employees
“dumped” or sold in the U.S. at a price that was lower than fair value
and had injured the domestic PC strand industry. Th e DOC imposed
anti-dumping duties ranging from 12% up to 119%, which had the
eff ect of limiting the participation of these countries in the domestic
market. In 2010, we, together with a coalition of domestic producers
of PC strand, obtained favorable determinations from the DOC in
response to the petitions we had fi led alleging that imports of PC
strand from China were being “dumped” or sold in the U.S. at a price
that was lower than fair value and that subsidies were being provided
to Chinese PC strand producers by the Chinese government, both
of which had injured the domestic PC strand industry. Th e DOC
imposed fi nal countervailing duty margins ranging from 9% to 46%
and anti-dumping margins ranging from 43% to 194%, which had
the eff ect of limiting the continued participation of Chinese producers
in the domestic market.
Quality and service expectations of customers have risen substantially
over the years and are key factors that impact their selection of suppliers.
Technology has become a critical factor in remaining competitive from the
standpoint of conversion costs and quality. In view of our sophisticated
information systems, technologically advanced manufacturing facilities,
low cost production capabilities, strong market positions, and broad
product off ering and geographic reach, we believe that we are well-
positioned to compete favorably with other producers of our concrete
reinforcing products.
As of September 29, 2012, we employed 682 people. We have not
experienced any work stoppages and believe that our relationship with
our employees is good. However, should we experience a disruption of
production, we have contingency plans in place that we believe would
enable us to continue serving our customers, although there can be
no assurances that a work slowdown or stoppage would not adversely
impact our operating costs and overall fi nancial results.
INSTEEL INDUSTRIES, INC. Form 10K 7
PART I
ITEM 1A Risk Factors
Financial Information
For information with respect to revenue, operating profi tability and identifi able assets attributable to our business and geographic areas, see
the items referenced in Item 6, Selected Financial Data; Item 7, Management’s Discussion and Analysis of Financial Condition and Results of
Operations; and Note 14 to the consolidated fi nancial statements.
Environmental Matters
We believe that we are in compliance in all material respects with
applicable environmental laws and regulations. We have experienced no
material diffi culties in complying with legislative or regulatory standards
and believe that these standards have not materially impacted our fi nancial
position or results of operations. Although our future compliance
with additional environmental requirements could necessitate capital
outlays, we do not believe that these expenditures would ultimately
have a material adverse eff ect on our fi nancial position or results of
operations. We do not expect to incur material capital expenditures
for environmental control facilities during fi scal years 2013 and 2014.
Executive Offi cers of the Company
Our executive offi cers are as follows:
Name
H.O. Woltz III
Michael C. Gazmarian
James F. Petelle
Richard T. Wagner
Age
56
53
62
53
Position
President, Chief Executive Offi cer and Chairman of the Board
Vice President, Chief Financial Offi cer and Treasurer
Vice President - Administration and Secretary
Vice President and General Manager of IWP
H. O. Woltz III, 56, was elected Chief Executive Offi cer in 1991 and
has been employed by us and our subsidiaries in various capacities
since 1978. He was named President and Chief Operating Offi cer
in 1989. He served as our Vice President from 1988 to 1989 and as
President of Rappahannock Wire Company, formerly a subsidiary of
our Company, from 1981 to 1989. Mr. Woltz has been a Director since
1986 and also serves as President of Insteel Wire Products Company.
Mr. Woltz served as President of Florida Wire and Cable, Inc. until
its merger with Insteel Wire Products Company in 2002. Mr. Woltz
serves on the Executive Committee of our Board of Directors and was
elected Chairman of the Board in 2009.
Michael C. Gazmarian, 53, was elected Vice President, Chief Financial
Offi cer and Treasurer in February 2007. He had previously served as
Chief Financial Offi cer and Treasurer since 1994, the year he joined
us. Before joining us, Mr. Gazmarian had been employed by Guardian
Industries Corp., a privately-held manufacturer of glass, automotive and
building products, since 1986, serving in various fi nancial capacities.
James F. Petelle, 62, joined us in October 2006. He was elected
Vice President and Assistant Secretary on November 14, 2006 and
Vice President - Administration and Secretary on January 12, 2007.
He was previously employed by Andrew Corporation, a publicly-held
manufacturer of telecommunications infrastructure equipment, having
served as Secretary from 1990 to May 2006, and Vice President - Law
from 2000 to October 2006.
Richard T. Wagner, 53, joined us in 1992 and has served as Vice
President and General Manager of the Concrete Reinforcing Products
Business Unit of the Company’s subsidiary, Insteel Wire Products
Company, since 1998. In February 2007, Mr. Wagner was appointed
Vice President of the parent company, Insteel Industries, Inc. Prior
to 1992, Mr. Wagner served in various positions with Florida Wire
and Cable, Inc., a manufacturer of PC strand and galvanized strand
products, since 1977.
Th e executive offi cers listed above were elected by our Board of Directors
at its annual meeting held February 21, 2012 for a term that will expire
at the next annual meeting of the Board of Directors or until their
successors are elected and qualify. Th e next meeting at which offi cers
will be elected is expected to be February 12, 2013.
ITEM 1A Risk Factors
You should carefully consider all of the information set forth in this
annual report on Form 10-K, including the following risk factors,
before investing in any of our securities. Th e risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties that are currently unknown to us or that we currently
consider to be immaterial may also impair our business or adversely
aff ect our fi nancial condition and results of operations. We may amend
or supplement these risk factors from time to time by other future
reports and statements that we fi le with the SEC.
8
INSTEEL INDUSTRIES, INC. Form 10K
PART I
ITEM 1A Risk Factors
Our customers may be adversely aff ected by
the continued negative macroeconomic conditions
and tightening in the credit markets.
Current negative macroeconomic conditions and the tightening in
the credit markets could limit the ability of our customers to fund
their fi nancing requirements, thereby reducing their purchasing
volume with us. Further, the reduction in the availability of credit may
increase the risk of customers defaulting on their payment obligations
to us. Th e continuation or occurrence of these events could materially
and adversely impact our business, fi nancial condition and results of
operations.
Our fi nancial results can be negatively impacted by
the volatility in the cost and availability of our primary
raw material, hot-rolled carbon steel wire rod.
Th e primary raw material used to manufacture our products is hot-rolled
carbon steel wire rod, which we purchase from both domestic and foreign
suppliers. We do not use derivative commodity instruments to hedge
our exposure to changes in the price of wire rod as such instruments are
currently unavailable in the fi nancial markets. Beginning in fi scal 2004,
a tightening of supply in the rod market together with fl uctuations
in the raw material costs of rod producers resulted in increased price
volatility which has continued through fi scal 2012. In response to
the increased pricing volatility, wire rod producers have resorted to
increasing the frequency of price adjustments, typically on a monthly
basis as well as unilaterally changing the terms of prior commitments.
Although changes in our wire rod costs and selling prices tend to be
correlated, depending upon market conditions, there may be periods
during which we are unable to fully recover increased rod costs through
higher selling prices, which would reduce gross profi t and cash fl ow
from operations. Additionally, should raw material costs decline, our
fi nancial results may be negatively impacted if the selling prices for
our products decrease to an even greater degree and to the extent that
we are consuming higher cost material from inventory.
Our fi nancial results can also be signifi cantly impacted if raw material
supplies are inadequate to satisfy our purchasing requirements.
In addition, trade actions by domestic wire rod producers against off shore
suppliers can have a substantial impact on the availability and cost of
imported wire rod. Th e imposition of anti-dumping or countervailing
duty margins by the DOC against exporting countries can have the
eff ect of reducing or eliminating their activity in the domestic market,
which is of increasing signifi cance in view of the reductions in domestic
wire rod production capacity that have occurred in recent years. If we
were unable to obtain adequate and timely delivery of our raw material
requirements, we may be unable to manufacture suffi cient quantities
of our products or operate our manufacturing facilities in an effi cient
manner, which could result in lost sales and higher operating costs.
Our business is cyclical and can be negatively impacted
by prolonged economic downturns or reduced
availability of fi nancing in the credit markets that
reduce the level of construction activity and demand for
our products.
Demand for our concrete reinforcing products is cyclical in nature and
sensitive to changes in the economy and in the availability of fi nancing
in the credit markets. Our products are sold primarily to manufacturers
of concrete products for the construction industry and used for a broad
range of nonresidential and residential construction applications. Demand
in these markets is driven by the level of construction activity, which
tends to be correlated with conditions in the general economy as well as
other factors beyond our control. Th e tightening in the credit markets
that has persisted since fi scal 2009 could continue to unfavorably impact
demand for our products by reducing the availability of fi nancing to our
customers and the construction industry as a whole. Future prolonged
periods of economic weakness or reduced availability of fi nancing could
have a material adverse impact on our business, results of operations,
fi nancial condition and cash fl ows.
Our business can be negatively impacted by reductions
in the amount and duration of government funding
for infrastructure projects that reduce the level of
construction activity and demand for our products.
Certain of our products are used in the construction of highways,
bridges and other infrastructure projects that are funded by federal,
state and local governments. Reductions in the amount of funding
for such projects or the period for which it is provided could have a
material adverse impact on our business, results of operations, fi nancial
condition and cash fl ows.
Our operations are subject to seasonal fl uctuations
that may impact our cash fl ow.
Our shipments are generally lower in the fi rst and second quarters
primarily due to the reduced level of construction activity resulting from
winter weather conditions together with customer plant shutdowns
associated with holidays. As a result, our cash fl ow from operations
may vary from quarter to quarter due to these seasonal factors.
Demand for our products is highly variable and
diffi cult to forecast due to our minimal backlog and the
unanticipated changes that can occur in customer order
patterns or inventory levels.
Demand for our products is highly variable. Th e short lead times
for customer orders and minimal backlog that characterize our
business make it diffi cult to forecast the future level of demand for
our products. In some cases, unanticipated downturns in demand
have been exacerbated by inventory reduction measures pursued by
our customers. Th e combination of these factors may cause signifi cant
fl uctuations in our sales, profi tability and cash fl ows.
INSTEEL INDUSTRIES, INC. Form 10K 9
Our capital resources may not be adequate to
provide for our capital investment and maintenance
expenditures if we were to experience a substantial
downturn in our fi nancial performance.
Our operations are capital intensive and require substantial recurring
expenditures for the routine maintenance of our equipment and
facilities. Although we expect to fi nance our business requirements
through internally generated funds or from borrowings under our
$100.0 million revolving credit facility, we cannot provide any assurances
these resources will be suffi cient to support our business. A material
adverse change in our operations or fi nancial condition could limit our
ability to borrow funds under our credit facility, which could further
adversely impact our liquidity and fi nancial condition. Any signifi cant
future acquisitions could require additional fi nancing from external
sources that may not be available on favorable terms, which could
adversely impact our operations, growth plans, fi nancial condition
and results of operations.
Environmental compliance and remediation could
result in substantially increased capital investments and
operating costs.
Our business is subject to numerous federal, state and local laws and
regulations pertaining to the protection of the environment that could
result in substantially increased capital investments and operating costs.
Th ese laws and regulations, which are constantly evolving, are becoming
increasingly stringent and the ultimate impact of compliance is not
always clearly known or determinable because regulations under some
of these laws have not yet been promulgated or are undergoing revision.
Our stock price can be volatile, often in connection with
matters beyond our control.
Equity markets in the U.S. have been increasingly volatile in recent
years. During fi scal 2012, our common stock traded as high as $13.74
and as low as $8.93. Th ere are numerous factors that could cause
the price of our common stock to fl uctuate signifi cantly, including:
variations in our quarterly and annual operating results; changes in our
business outlook; changes in market valuations of companies in our
industry; changes in the expectations for nonresidential and residential
construction; and announcements by us, our competitors or industry
participants that may be perceived to impact us or our operations.
PART I
ITEM 1A Risk Factors
Foreign competition could adversely impact our
fi nancial results.
Our PC strand business is subject to off shore import competition
on an ongoing basis in that in most market environments, domestic
production capacity is insuffi cient to satisfy domestic demand. If we
are unable to purchase raw materials and achieve manufacturing costs
that are competitive with those of foreign producers, or if the margin
and return requirements of foreign producers are substantially lower,
our market share and profi t margins could be negatively impacted.
In response to irrationally-priced import competition from off shore
PC strand suppliers, we have pursued trade cases when necessary as
a means of ensuring that foreign producers were complying with the
applicable trade laws and regulations. Th ese trade cases have resulted
in the imposition of duties which have had the eff ect of limiting
the continued participation of certain countries in the domestic
market. Trade law enforcement is critical to our ability to maintain our
competitive position against foreign PC strand producers that engage
in unlawful trade practices.
Our manufacturing facilities are subject to unexpected
equipment failures, operational interruptions and
casualty losses.
Our manufacturing facilities are subject to risks that may limit our
ability to manufacture products, including unexpected equipment
failures and catastrophic losses due to other unanticipated events
such as fi res, explosions, accidents, adverse weather conditions and
transportation interruptions. Any such equipment failures or events can
subject us to material plant shutdowns, periods of reduced production
or unexpected downtime. Furthermore, the resolution of certain
operational interruptions may require signifi cant capital expenditures.
Although our insurance coverage could off set the losses or expenditures
relating to some of these events, our results of operations and cash fl ows
could be negatively impacted to the extent that such claims were not
covered or only partially covered by our insurance.
Our fi nancial results could be adversely impacted by
the continued escalation in certain of our operating costs.
Our employee benefi t costs, particularly our medical and workers’
compensation costs, have increased substantially in recent years and
are expected to continue to rise. In March 2010, Congress passed and
the President signed Th e Patient Protection and Aff ordable Care Act.
Th is legislation may have a signifi cant impact on health care providers,
insurers and others associated with the health care industry. If the
implementation of this legislation signifi cantly increases the costs
attributable to our self-insured health plans, it may negatively impact
our business, fi nancial condition and results of operations.
In addition, higher prices for natural gas, electricity, fuel and consumables
increase our manufacturing and distribution costs. Most of our sales
are made under terms whereby we incur the fuel costs and surcharges
associated with the delivery of products to our customers. Although
we have implemented numerous measures to off set the impact of
the ongoing escalation in these costs, there can be no assurance that
such actions will be eff ective. If we are unable to pass these additional
costs through by raising selling prices, our fi nancial results could be
adversely impacted.
10
INSTEEL INDUSTRIES, INC. Form 10K
ITEM 1B Unresolved Staff Comments
None.
ITEM 4 Mine Safety Disclosures
PART I
ITEM 2 Properties
Insteel’s corporate headquarters and IWP’s sales and administrative offi ces
are located in Mount Airy, North Carolina. At September 29, 2012,
we operated nine manufacturing facilities located in Dayton, Texas;
Gallatin, Tennessee; Hazleton, Pennsylvania; Hickman, Kentucky;
Jacksonville, Florida; Kingman, Arizona; Mount Airy, North Carolina;
Sanderson, Florida; and St. Joseph, Missouri.
We own all of our real estate. We believe that our properties are in good
operating condition and that our machinery and equipment have been
well maintained. We also believe that our manufacturing facilities are
suitable for their intended purposes and have capacities adequate for
the current and projected needs for our existing products.
ITEM 3 Legal Proceedings
On November 19, 2007, Dwyidag Systems International, Inc (“DSI”)
fi led a third-party lawsuit in the Ohio Court of Claims alleging that
certain epoxy-coated strand sold by us to DSI in 2002, and supplied
by DSI to the Ohio Department of Transportation (“ODOT”) for a
bridge project, was defective. Th e third-party action sought recovery
of any damages which could have been assessed against DSI in the
action fi led against it by ODOT, which allegedly could have been in
excess of $8.3 million, plus $2.7 million in damages allegedly incurred
by DSI. In 2009, the Ohio court granted our motion for summary
judgment as to the third-party claim against us on the grounds that
the statute of limitations had expired, but DSI fi led an interlocutory
appeal of that ruling. In addition, we previously fi led a lawsuit against
DSI in the North Carolina Superior Court in Surry County seeking
recovery of $1.4 million (plus interest) owed for other products sold
by us to DSI, which action was removed by DSI to the U.S. District
Court for the Middle District of North Carolina.
On October 7, 2010, we participated in a structured mediation with
ODOT and DSI which led to settlement of all of the above legal matters.
Th e parties dismissed the action in the Middle District of North Carolina
on December 23, 2010, and the Ohio Court of Claims action was
dismissed on January 21, 2011. Pursuant to the settlement agreement,
which was approved by the Ohio Court of Claims on January 5, 2011,
the parties released each other from all liability arising out of the sale
of strand for the bridge project. In connection with the settlement,
we reserved the remaining outstanding balance that we were owed
by DSI and agreed to make a cash payment of $600,000 to ODOT.
During fi scal 2011, we paid the $600,000 settlement to ODOT and
wrote off the DSI receivables against the previously established reserve.
Th e resolution of this matter has enabled us to restore our commercial
relationship with DSI that had existed prior to the initiation of the
legal proceedings. Our fi scal 2010 results refl ect a $1.5 million charge
relating to the net eff ect of the settlement.
We are also, from time to time, involved in various other lawsuits, claims,
investigations and proceedings, including commercial, environmental
and employment matters, which arise in the ordinary course of business.
We do not anticipate that the ultimate cost to resolve these other matters
will have a material adverse eff ect on our fi nancial position, results of
operations or cash fl ows.
ITEM 4 Mine Safety Disclosures
Not applicable.
INSTEEL INDUSTRIES, INC. Form 10K 11
PART II
ITEM 5 Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
PART II
ITEM 5 Market for Registrant’s Common Equity, Related
Shareholder Matters and Issuer Purchases
of Equity Securities
Our common stock is listed on the NASDAQ Global Select Market under the symbol “IIIN” and has been trading on NASDAQ since
September 28, 2004. As of October 24, 2012, there were 825 shareholders of record. Th e following table summarizes the high and low sales
prices as reported on the NASDAQ Global Select Market and the cash dividend per share declared in fi scal 2012 and fi scal 2011:
First Quarter
Second Quarter
Th ird Quarter
Fourth Quarter
$
Fiscal 2012
Fiscal 2011
High
11.25 $
13.74
12.38
12.24
Low
9.27 $
10.47
8.93
9.46
Cash Dividends
0.03
0.03
0.03
0.03
$
High
12.88 $
14.42
15.10
12.62
Low
8.22 $
11.24
11.58
8.80
Cash Dividends
0.03
0.03
0.03
0.03
We currently pay a quarterly cash dividend of $0.03 per share. While we
intend to pay regular quarterly cash dividends for the foreseeable
future, the declaration and payment of future dividends, if any, are
discretionary and will be subject to determination by the Board
of Directors each quarter after taking into account various factors,
including general business conditions and our fi nancial condition,
operating results, cash requirements and expansion plans. See Note 7
of the consolidated fi nancial statements for additional discussion with
respect to dividend payments.
12
INSTEEL INDUSTRIES, INC. Form 10K
PART II
ITEM 5 Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Stock Performance Graph
Th e line graph below compares the cumulative total shareholder
return on our common stock with the cumulative total return of the
Russell 2000 Index and the S&P Building Products Index for the fi ve
years ended September 29, 2012. Th e graph and table assume that $100
was invested on September 29, 2007 in each of our common stock,
the Russell 2000 Index and the S&P Building Products Index, and
that all dividends were reinvested. Cumulative total shareholder returns
for our common stock, the Russell 2000 Index and the S&P Building
Products Index are based on our fi scal year.
COMPARISON OF FIVE-YEAR CUMULATIVE RETURN FOR INSTEEL INDUSTRIES, INC.
The Russell 2000 Index, and the S&P Building Products Index
In $
120
100
80
60
40
20
0
9/29/07
9/27/08
10/3/09
10/2/10
10/1/11
9/29/12
Insteel Industries, Inc.
Russell 2000
S&P Building Products
Insteel Industries, Inc.
Russell 2000
S&P Building Products
$
9/29/07
100.00 $
100.00
100.00
9/27/08
95.26 $
85.52
103.37
Fiscal Year Ended
10/3/09
80.20 $
77.35
78.70
10/2/10
10/1/11
62.23 $
87.68
68.59
70.88 $
84.58
45.41
9/29/12
83.46
111.57
98.68
Issuer Purchases of Equity Securities
On November 18, 2008, our Board of Directors approved a share
repurchase authorization to buy back up to $25.0 million of our
outstanding common stock in the open market or in privately negotiated
transactions. Repurchases may be made from time to time in the open
market or in privately negotiated transactions subject to market conditions,
applicable legal requirements and other factors. We are not obligated to
acquire any particular amount of common stock and may commence
or suspend the program at any time at our discretion without prior
notice. Th e share repurchase authorization continues in eff ect until
terminated by the Board of Directors. As of September 29, 2012, there was
$24.8 million remaining available for future share repurchases under this
authorization. During 2011, we repurchased $143,000 or 12,633 shares
of our common stock through restricted stock net-share settlements.
We did not repurchase any shares of our common stock during 2012.
Rights Agreement
On April 21, 2009, the Board of Directors adopted Amendment No. 1
to Rights Agreement, eff ective April 25, 2009, amending the Rights
Agreement dated as of April 27, 1999 between us and American Stock
Transfer & Trust Company, LLC, successor to First Union National Bank.
Amendment No. 1 and the Rights Agreement are hereinafter collectively
referred to as the “Rights Agreement.” In connection with adopting the
Rights Agreement, on April 26, 1999, the Board of Directors declared a
dividend distribution of one right per share of our outstanding common
stock as of May 17, 1999. Th e Rights Agreement also provides that
one right will attach to each share of our common stock issued after
May 17, 1999. Each right entitles the registered holder to purchase from
us on certain dates described in the Rights Agreement one two-hundredths
of a share (a “Unit”) of our Series A Junior Participating Preferred Stock
at a purchase price of $46 per Unit, subject to adjustment as described
in the Rights Agreement. For more information regarding our Rights
Agreement, see Note 18 to the consolidated fi nancial statements.
INSTEEL INDUSTRIES, INC. Form 10K 13
PART II
ITEM 6 Selected Financial Data
ITEM 6 Selected Financial Data
Financial Highlights
(In thousands, except per share amounts)
Net sales
Earnings (loss) from continuing operations
Net earnings (loss)
Earnings (loss) per share from continuing
operations (basic)
Earnings (loss) per share from continuing
operations (diluted)
Net earnings (loss) per share (basic)
Net earnings (loss) per share (diluted)
Cash dividends declared
Total assets
Total debt
Shareholders’ equity
Year Ended
(52 weeks)
September 29, 2012
(52 weeks)
October 1, 2011
(52 weeks)
October 2, 2010
$
363,303 $
1,809
1,809
336,909 $
(387)
(387)
211,586 $
458
473
(53 weeks)
October 3, 2009
230,236
(20,940)
(22,086)
$
(52 weeks)
September 27, 2008
353,862
43,717
43,752
0.10
(0.02)
0.03
(1.20)
0.10
0.10
0.10
0.12
208,552
11,475
149,500
(0.02)
(0.02)
(0.02)
0.12
216,530
14,156
148,474
0.03
0.03
0.03
0.12
182,505
-
147,876
(1.20)
(1.27)
(1.27)
0.12
182,117
-
147,070
2.47
2.44
2.47
2.44
0.62
228,220
-
169,847
In the fi rst quarter of fi scal 2010, we adopted and retrospectively applied new accounting guidance related to the calculation of earnings per share
which resulted in the following reductions in basic and diluted earnings per share:
Continuing operations
Net earnings
$
2009
Basic
- $
-
Diluted
-
-
$
2008
Basic
(0.02) $
(0.02)
Diluted
(0.03)
(0.03)
ITEM 7 Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Th e matters discussed in this section include forward-looking statements that are subject to numerous risks. You should carefully read
the “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” in this Form 10-K.
Overview
Following our exit from the industrial wire business (see Note 10 to the
consolidated fi nancial statements), our operations are entirely focused
on the manufacture and marketing of concrete reinforcing products
for the concrete construction industry. Th e 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) pursuing growth opportunities within
our core businesses that further our penetration of current markets
served or expand our geographic footprint.
On November 19, 2010, we, through our wholly-owned subsidiary, IWP,
purchased certain of the assets of Ivy for approximately $50.3 million,
after giving eff ect to post-closing adjustments. Ivy was one of the nation’s
14
INSTEEL INDUSTRIES, INC. Form 10K
largest producers of WWR and wire products for concrete construction
applications (see Note 4 to the consolidated fi nancial statements).
Among other assets, we acquired Ivy’s production facilities located in
Arizona, Florida, Missouri and Pennsylvania; the production equipment
located at a leased facility in Texas; and certain related inventories. We
also entered into a short-term sublease with Ivy for the Texas facility.
Subsequent to the acquisition, we elected to consolidate certain of our
WWR operations in order to reduce our operating costs, which involved
the closure of facilities in Wilmington, Delaware and Houston, Texas.
Th ese actions were taken in response to the close proximity of Ivy’s
facilities in Hazleton, Pennsylvania and Houston, Texas to our existing
facilities in Wilmington, Delaware and Dayton, Texas.
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies
Our fi nancial statements have been prepared in accordance with
accounting principles generally accepted in the United States (“GAAP”).
Our discussion and analysis of our fi nancial condition and results of
operations are based on these fi nancial statements. Th e preparation of
our fi nancial statements requires the application of these accounting
principles in addition to certain estimates and judgments based on
current available information, actuarial estimates, historical results
and other assumptions believed to be reasonable. Actual results could
diff er 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 fi nancial
condition and results of operations and that require judgments,
assumptions and estimates.
Revenue recognition. We recognize revenue from product sales when
products are shipped and risk of loss and title has passed to the customer.
Sales taxes collected from customers are 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. Our cash is concentrated
primarily at one fi nancial institution, which at times exceeds federally
insured limits. We are exposed to credit risk in the event of default
by institutions in which our cash and cash equivalents are held and
by customers to the extent of the amounts recorded on the balance
sheet. We invest excess cash primarily in money market funds, which
are highly liquid securities that bear minimal risk.
Most of our accounts receivable are due from customers that are
located in the U.S. and we generally require no collateral depending
upon the creditworthiness of the account. We provide an allowance
for doubtful accounts based upon our assessment of the credit risk of
specifi c customers, historical trends and other information. Th ere 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. Signifi cant management judgments and estimates are used in
establishing the allowances. Th ese judgments and estimates consider such
factors as customers’ fi nancial position, cash fl ows and payment history
as well as current and expected business conditions. It is reasonably
likely that actual collections will diff er from our estimates, which may
result in increases or decreases in the allowances. Adjustments to the
allowances may also be required if there are signifi cant changes in the
fi nancial condition of our customers.
Inventory valuation. We periodically evaluate the carrying value
of our inventory. Th is 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 future market conditions. Because of the subjective nature
of these judgments and estimates, it is reasonably likely that actual
outcomes will diff er from our estimates. Adjustments to these reserves
may be required if actual market conditions for our products are
substantially diff erent than the assumptions underlying our estimates.
Long-lived assets. We review long-lived assets, which consist principally
of property, plant and equipment, for impairment whenever events or
changes in circumstances indicate that the carrying value of the asset
may not be fully recoverable. Recoverability of long-lived assets to be
held and used is measured based on the future net undiscounted cash
fl ows expected to be generated by the related asset or asset group. If it is
determined that an impairment loss has been incurred, the impairment
loss is recognized during the period incurred and is calculated based
on the diff erence between the carrying value and the present value of
estimated future net cash fl ows or comparable market values. Assets to
be disposed of by sale are recorded at the lower of the carrying value or
fair value less cost to sell when we have committed to a disposal plan,
and are reported separately as assets held for sale on our consolidated
balance sheet. Unforeseen events and changes in circumstances and
market conditions could negatively aff ect the value of assets and result
in an impairment charge.
Self-insurance. We are self-insured for certain losses relating to medical
and workers’ compensation claims. Self-insurance claims fi led 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. Th ese estimates are subject to a high degree of
variability based upon future infl ation rates, litigation trends, changes
in benefi t 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 outcomes
will diff er from our estimates. We monitor our potential exposure to
these contingencies on a regular basis and may adjust our estimates
as additional information becomes available or as there are signifi cant
developments.
Stock-based compensation. We account for stock-based compensation
arrangements, including stock option grants, restricted stock awards and
restricted stock units, in accordance with the provisions of Financial
Standards Board (“FASB”) Accounting Standards Codifi cation (“ASC”)
Topic 718, Compensation — Stock Compensation. Under these
provisions, compensation cost is recognized based on the fair value
of equity awards on the date of grant. Th e compensation cost is then
amortized on a straight-line basis over the vesting period. We use the
Monte Carlo valuation model to determine the fair value of stock
INSTEEL INDUSTRIES, INC. Form 10K 15
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
options at the date of grant. Th is model requires us to make assumptions
such as expected term, volatility and forfeiture rates that determine
the stock options’ fair value. Th ese assumptions are based on historical
information and judgment regarding market factors and trends. If actual
results diff er from our assumptions and judgments used in estimating
these factors, future adjustments to these estimates may be required.
Assumptions for employee benefi t plans. We account for our defi ned
employee benefi t 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 –
Retirement Benefi ts. 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 discount
rate and the assumed long-term rate of return on plan assets.
Th e discount rates we utilize for determining net periodic pension
costs and the related benefi t 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 refl ect current interest rates on such long-term bonds. Th e discount
rates are used to determine the actuarial present value of the benefi t
obligations as of the valuation date as well as the interest component
of the net periodic pension cost for the following year. Th e discount
rate for the Delaware Plan and SERPs was 4%, 4.75% and 5.25% for
2012, 2011 and 2010, respectively.
Th e 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 benefi t payments inherent in the projected benefi t 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. Th e amount
of net periodic 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 regularly review our actual asset allocation and, when appropriate,
rebalance the investments in the plan to more accurately refl ect the
targeted allocation.
For 2012, 2011 and 2010, 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 2013. In determining the appropriateness of this 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.
Th e projected benefi t obligations and net periodic pension cost for the
SERPs are based in part on expected increases in future compensation
levels. Our assumption for the expected increase in future compensation
levels is based upon our average historical experience and management’s
intentions regarding future compensation increases, which generally
approximates average long-term infl ation 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 diff erent pension costs over diff erent periods and materially
diff erent asset and liability amounts in our consolidated fi nancial
statements. A reduction in the assumed discount rate generally results in
an actuarial loss, as the actuarially-determined present value of estimated
future benefi t payments will increase. Conversely, an increase in the
assumed discount rate generally results in an actuarial 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 diff er 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 benefi t 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 benefi ts are still being earned
by active employees) or the average remaining life expectancy of the
inactive participants (for plans for which benefi ts are not still being
earned by active employees). However, any actuarial gains generated in
future periods reduce the negative amortization eff ect of any cumulative
unamortized actuarial losses, while any actuarial losses generated in
future periods reduce the favorable amortization eff ect of any cumulative
unamortized actuarial gains.
Th e 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. Th e funding
requirements for the Delaware Plan are based upon applicable regulations,
and will generally diff er from the amount of pension cost recognized
under ASC Topic 715 for fi nancial reporting purposes. During 2012
and 2011, we made contributions totaling $206,000 and $478,000,
respectively, to the Delaware Plan. No contributions were required to
be made to the Delaware Plan during 2010.
We currently expect net periodic pension costs for 2013 to be $28,000
for the Delaware Plan and $916,000 for the SERPs. Cash contributions
to the plans during 2013 are expected to be $362,000 for the Delaware
Plan and $244,000 for the SERPs.
A 0.25% decrease in the assumed discount rate for the Delaware Plan
would have increased our projected and accumulated benefi t obligations
as of September 29, 2012 by approximately $101,000 and have no impact
on the expected net periodic pension cost for 2013. A 0.25% decrease
in the assumed discount rate for our SERPs would have increased our
projected and accumulated benefi t obligations as of September 29, 2012
by approximately $266,000 and $195,000, respectively, and the net
periodic pension cost for 2013 by approximately $23,000.
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 2013 by approximately $4,000.
16
INSTEEL INDUSTRIES, INC. Form 10K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Recent Accounting Pronouncements
Future Adoptions
In June 2011, the FASB issued an update that amends the guidance provided in ASC Topic 220, Comprehensive Income, by requiring that all
nonowner changes in shareholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but
consecutive statements. Th is update becomes eff ective for us in the fi rst quarter of fi scal 2013.
Results of Operations
STATEMENTS OF OPERATIONS SELECTED DATA
$
$
$
$
(Dollars in thousands)
Net sales
Gross profi t
Percentage of net sales
Selling, general and administrative expense
Percentage of net sales
Other income, net
Restructuring charges, net
Gain on early extinguishment of debt
Acquisition costs
Bargain purchase gain
Legal settlement
Interest expense
Interest income
Eff ective income tax rate
Earnings (loss) from continuing operations
Earnings from discontinued operations
Net earnings (loss)
”N/M” = not meaningful.
2012 Compared with 2011
September 29, 2012
363,303
22,458
Change
7.8% $
(29.3%)
Year Ended
October 1, 2011
336,909
31,743
Change
59.2% $
76.4%
October 2, 2010
211,586
17,991
6.2%
18,911
5.2%
(188)
832
(425)
-
-
-
623
(21)
33.6%
1,809
-
1,809
(3.6%) $
(15.3%) $
(90.0%)
N/M
(100.0%)
(100.0%)
N/M
(35.0%)
(44.7%)
$
N/M
N/M
N/M
9.4%
19,608
5.8%
(222)
8,318
-
3,518
(500)
-
958
(38)
N/M
(387)
-
(387)
22.4% $
(23.7%) $
N/M
N/M
N/M
N/M
(100.0%)
111.5%
(62.7%)
$
N/M
N/M
N/M
8.5%
16,024
7.6%
(291)
-
-
-
-
1,487
453
(102)
N/M
458
15
473
Net Sales
Net sales increased 7.8% to $363.3 million in 2012 from $336.9 million
in 2011. Shipments for the year increased 5.1% and average selling prices
increased 2.6% from the prior year levels. Th e increase in shipments
was primarily due to the full year contribution of the Ivy facilities in
2012. Th e increase in average selling prices was driven by price increases
that were implemented to recover higher raw material costs. Sales for
both years refl ect severely depressed volumes due to the continuation
of recessionary conditions in our construction end-markets.
Gross Profi t
Gross profi t decreased 29.3% to $22.5 million, or 6.2% of net sales,
in 2012 from $31.7 million, or 9.4% of net sales, in 2011. Th e year-
over-year decline was primarily due to the narrowing of spreads between
selling prices and raw material costs resulting from competitive pricing
pressures. Gross profi t for both years was unfavorably impacted by
depressed shipment volumes and elevated unit conversion costs largely
driven by reduced operating schedules.
Selling, General and Administrative Expense
Selling, general and administrative expense (“SG&A expense”) decreased
3.6% to $18.9 million, or 5.2% of net sales, in 2012 from $19.6 million,
or 5.8% of net sales, in 2011 primarily due to the relative year-over-year
changes in the cash surrender value of life insurance policies ($975,000),
an increase in the net gains on the settlement of life insurance policies
($148,000) and a reduction in consulting and professional services
expense ($276,000). Th e cash surrender value of life insurance policies
increased $710,000 in the current year compared with a decrease of
$265,000 in the prior year due to the related changes in the value
of the underlying investments. Th ese reductions in SG&A expense
were partially off set by higher employee benefi t costs ($278,000) and
bad debt expense ($142,000). Th e increase in employee benefi t costs
expense was primarily related to an increase in supplemental retirement
plan expense.
Gain on Early Extinguishment of Debt
A gain on the early extinguishment of debt of $425,000 was recorded
in 2012 for the discount on our prepayment of the remaining balance
outstanding on the subordinated note that was issued in connection
with the Ivy Acquisition.
INSTEEL INDUSTRIES, INC. Form 10K 17
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Restructuring Charges, Net
Net restructuring charges decreased 90.0% to $832,000 in 2012 from
$8.3 million in 2011. Th e year-over-year decrease is primarily due to
reduced restructuring activities associated with the Ivy Acquisition
during 2012. Net restructuring charges for 2012 included $744,000 for
equipment relocation costs and $139,000 for facility closure costs less
$11,000 of net proceeds from the sale of decommissioned equipment
and a $40,000 adjustment related to the remaining employee separation
costs associated with plant closures and other staffi ng reductions.
Net restructuring charges of $8.3 million in the prior year included
$3.8 million for impairment charges related to plant closures and the
decommissioning of equipment, $2.3 million for employee separation
costs associated with plant closures and other staffi ng reductions,
$1.2 million for equipment relocation costs, $533,000 for the future
lease obligations associated with the closed Houston, Texas facility and
$464,000 for facility closure costs. Th e plant closure costs were incurred
in connection with the consolidation of our Texas and Northeast
operations, which involved the closure of facilities in Houston, Texas
and Wilmington, Delaware, and the absorption of the business by other
Insteel facilities. Th e plant closure costs are net of a $1.6 million gain on
the sale of the Wilmington, Delaware facility. Th e employee separation
costs were related to the staffi ng reductions that were implemented
across our sales, administration and manufacturing support functions
to address the redundancies resulting from the Ivy Acquisition and in
connection with the plant closures.
Acquisition Costs
Acquisition costs of $3.5 million were incurred in 2011 for the advisory,
accounting, legal and other professional fees directly related to the Ivy
Acquisition. Th e accounting requirements for business combinations
require the expensing of acquisition costs in the period in which they
are incurred. We did not incur any additional acquisition costs related
to the Ivy Acquisition in 2012.
Bargain Purchase Gain
A bargain purchase gain of $500,000 was recorded in 2011 based on the
excess of the fair value of the net assets acquired in the Ivy Acquisition
over the purchase price.
Interest Expense
Interest expense decreased 35.0% to $623,000 in 2012 from $958,000
in 2011 primarily due to the lower interest rate on borrowings on the
revolving credit facility in the current year period relative to the secured
subordinated promissory note associated with the Ivy Acquisition that
was outstanding in the prior year and prepaid in December 2011.
Income Taxes
Our eff ective income tax rate was 33.6% in 2012 due to changes in
permanent book versus tax diff erences largely related to non-taxable
life insurance proceeds, which were partially off set by non-deductible
stock-based compensation expense. Th e eff ective income tax rate in
2011 was distorted by the impact of changes in permanent book
versus tax diff erences largely related to non-deductible stock-based
compensation expense and the establishment of a valuation allowance
against certain state net operating losses and tax credits that we do not
expect to realize.
Net Earnings (Loss)
Net earnings were $1.8 million ($0.10 per share) in 2012 compared with
a net loss of $387,000 ($0.02 per share) in 2011 with the year-over-year
change primarily due to reductions in the restructuring charges and
acquisition costs incurred in connection with the Ivy Acquisition and
the current year gain from the early extinguishment of debt partially
off set by the decrease in gross profi t.
2011 Compared with 2010
Net Sales
Net sales increased 59.2% to $336.9 million in 2011 from $211.6 million
in 2010. Shipments for 2011 increased 33.7% and average selling
prices increased 17.7% from the prior year levels. Th e increase in
shipments was primarily due to the addition of the Ivy facilities in 2011.
Th e increase in average selling prices was driven by price increases
that were implemented during 2011 to recover higher raw material
costs. Sales for both years refl ect severely depressed volumes due to the
continuation of recessionary conditions in our construction end-markets.
Gross Profi t
Gross profi t increased to $31.7 million, or 9.4% of net sales, in 2011
from $18.0 million, or 8.5% of net sales, in 2010. Th e year-over-
year increase was primarily due to the addition of the Ivy facilities in
2011. Gross profi t for 2011 benefi ted from higher spreads between
selling prices and raw material costs partially off set by the sale of the
higher cost inventory acquired from Ivy that was valued at fair value
in accordance with purchase accounting requirements. Gross profi t
for 2010 includes a $1.9 million charge for inventory write-downs to
reduce the carrying value of inventory to the lower of cost or market.
Gross profi t for both years was unfavorably impacted by depressed
shipment volumes and elevated unit conversion costs largely driven
by reduced operating schedules.
Selling, General and Administrative Expense
SG&A expense increased 22.4% to $19.6 million, or 5.8% of net sales,
in 2011 from $16.0 million, or 7.6% of net sales, in 2010 primarily
due to staffi ng additions ($1.3 million) and other transition-related
costs ($151,000) largely related to the Ivy Acquisition, the relative year-
over-year changes in the cash surrender value of life insurance policies
($595,000) and increases in stock-based compensation ($638,000),
employee benefi t costs ($312,000), travel expense ($239,000) and
professional services costs ($167,000). Th e cash surrender value of
life insurance policies decreased $265,000 in 2011 compared with an
increase of $330,000 in 2010 due to the related changes in the value of
the underlying investments. Th e increase in stock-based compensation
expense was largely due to the full vesting of awards for plan participants
that became retirement eligible in 2011. Th e increase in employee
benefi t costs was primarily related to higher employee medical expense
during 2011. Th ese increases in SG&A expense were partially off set by
a net gain on the settlement of life insurance policies ($357,000) and
a reduction in legal expenses ($393,000) primarily due to the 2010
costs associated with the PC strand trade cases.
18
INSTEEL INDUSTRIES, INC. Form 10K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Restructuring Charges, Net
Net restructuring charges of $8.3 million were recorded in 2011,
including $3.8 million for impairment charges related to plant closures
and the decommissioning of equipment, $2.3 million for employee
separation costs associated with plant closures and other staffi ng
reductions, $1.2 million for equipment relocation costs, $533,000
for the future lease obligations associated with the closed Houston,
Texas facility and $464,000 for facility closure costs. Th e plant closure
costs were incurred in connection with the consolidation of our Texas
and Northeast operations, which involved the closure of facilities
in Houston, Texas and Wilmington, Delaware, and the absorption
of the business by other Insteel facilities. Th e plant closure costs are
net of a $1.6 million gain on the sale of the Wilmington, Delaware
facility. Th e employee separation costs were related to the staffi ng
reductions that were implemented across our sales, administration and
manufacturing support functions to address the redundancies resulting
from the Ivy Acquisition and in connection with the plant closures.
Acquisition Costs
Acquisition costs of $3.5 million were incurred in 2011 for the advisory,
accounting, legal and other professional fees directly related to the
Ivy Acquisition. Th e accounting requirements for business combinations
require the expensing of acquisition costs in the period in which they
are incurred.
Bargain Purchase Gain
A bargain purchase gain of $500,000 was recorded in 2011 based on the
excess of the fair value of the net assets acquired in the Ivy Acquisition
over the purchase price.
Interest Expense
Interest expense increased 111.5% to $958,000 in 2011 from $453,000
in 2010 primarily due to the interest on the secured subordinated
promissory note associated with the Ivy Acquisition, which was partially
off set by lower amortization of capitalized fi nancing costs.
Income Taxes
Our eff ective income tax rate on continuing operations in 2011 was
distorted by the impact of changes in permanent book versus tax
diff erences largely related to non-deductible stock-based compensation
expense and the establishment of a valuation allowance against certain
state net operating losses and tax credits that we do not expect to realize.
Our eff ective income tax rate was (9.0%) in 2010, which refl ects the
favorable impact of a $500,000 increase in a tax refund as the result
of changes in the federal tax regulations regarding the carryback of net
operating losses partially off set by $200,000 of net reserves recorded
pertaining to known tax exposures in accordance with ASC 740 together
with changes in permanent book versus tax diff erences largely related
to lower non-deductible life insurance expense.
Earnings (Loss) From Continuing Operations
Th e loss from continuing operations was $387,000 ($0.02 per share) in
2011 compared with earnings of $458,000 ($0.03 per share) in 2010
with the year-over-year change primarily due to the restructuring charges
and acquisition costs incurred in connection with the Ivy Acquisition
and higher SG&A expense partially off set by the increase in gross profi t
and the bargain purchase gain.
Earnings From Discontinued Operations
Earnings from discontinued operations were $15,000 in 2010, which
had no eff ect on earnings per share, and were primarily related to the
gain on the sale of the real estate associated with the industrial wire
business partially off set by facility-related costs incurred prior to the
sale and income tax expense.
Net Earnings (Loss)
Th e net loss was $387,000 ($0.02 per share) in 2011 compared
with net earnings of $473,000 ($0.03 per share) in 2010 with the
year-over-year change primarily due to the restructuring charges and
acquisition costs incurred in connection with the Ivy Acquisition and
higher SG&A expense partially off set by the increase in gross profi t
and the bargain purchase gain.
Liquidity and Capital Resources
SELECTED FINANCIAL DATA
(Dollars in thousands)
Net cash provided by (used for) operating activities
Net cash provided by (used for) investing activities
Net cash used for fi nancing activities
Cash and cash equivalents
Working capital
Total debt
Percentage of total capital
Shareholders’ equity
Percentage of total capital
Total capital (total debt + shareholders’ equity)
September 29, 2012
13,144
(8,191)
(4,953)
10
79,065
11,475
7%
149,500
93%
160,975
$
$
$
$
$
$
Year Ended
October 1, 2011
(2,907)
(41,389)
(1,629)
10
75,789
14,156
9%
148,474
91%
162,630
$
$
$
October 2, 2010
12,879
420
(2,466)
45,935
91,927
-
-
147,876
100%
147,876
INSTEEL INDUSTRIES, INC. Form 10K 19
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Operating Activities
Operating activities provided $13.1 million of cash in 2012 primarily
from net earnings adjusted for non-cash items and a reduction in the
net working capital components of accounts receivable, inventories,
and accounts payable and accrued expenses. Net working capital
provided $0.9 million of cash as a $10.6 million decrease in inventories
was partially off set by a $9.6 million decrease in accounts payable and
accrued expenses, and a $0.2 million increase in accounts receivable.
Th e changes in inventories and accounts payable and accrued expenses
were primarily due to lower raw material purchases and unit costs.
Operating activities used $2.9 million of cash in 2011 due to an increase
in net working capital, which was partially off set by non-cash items
added back to the net loss. Net working capital used $16.4 million
of cash due to a $17.0 million increase in accounts receivable and an
$11.9 million increase in inventories partially off set by a $12.4 million
increase in accounts payable and accrued expenses. Th e increase in
accounts receivable was primarily related to the incremental sales
associated with the Ivy Acquisition. Th e changes in inventories and
accounts payable and accrued expenses were due to higher raw material
purchases and unit costs.
Operating activities provided $12.9 million of cash in 2010 primarily due
to the receipt of a $13.3 million income tax refund associated with the
carryback of net operating losses in the prior year and net earnings adjusted
for non-cash items partially off set by an increase in net working capital.
Net working capital used $13.9 million of cash due to a $7.7 million
increase in inventories, a $3.7 million increase in accounts receivable
and a $2.5 million increase in accounts payable and accrued expenses.
Th e increases in inventories and accounts receivable were primarily due
to higher raw material costs and selling prices. Th e increase in accounts
payable and accrued expenses was due to changes in the mix of vendor
payments and related terms.
Depreciation and amortization expense was $9.8 million in 2012,
$9.6 million in 2011 and $7.0 million in 2010. Th e increase in depreciation
and amortization expense from 2010 to 2011 and 2012 was primarily
associated with the assets that were acquired in the Ivy Acquisition.
We may elect to make additional adjustments in our operating activities
should the current recessionary conditions in our construction end
markets persist, which could materially impact our cash requirements.
While a downturn in the level of construction activity aff ects sales to
our customers, it generally reduces our working capital requirements.
Investing Activities
Investing activities used $8.2 million of cash in 2012 and $41.4 million
in 2011 while providing $0.4 million in 2010. Capital expenditures
were $8.1 million in 2012, $7.9 million in 2011 and $1.5 million in
2010, and are expected to total less than $12.0 million in 2013. Th e Ivy
acquisition used $37.3 million of cash in 2011, which was partially
off set by $2.4 million of proceeds from the sale of the Wilmington,
Delaware facility and $1.1 million of proceeds from life insurance claims.
Investing activities of discontinued operations provided $2.4 million of
cash in 2010 from the proceeds on the sale of the real estate associated
with our discontinued industrial wire business. Our investing activities
are largely discretionary, providing us with the ability to signifi cantly
curtail outlays should future business conditions warrant that such
actions be taken.
Financing Activities
Financing activities used $5.0 million of cash in 2012, $1.6 million in 2011 and $2.5 million in 2010. Cash dividend payments were $2.1 million
in 2012, 2011 and 2010. Net debt repayments used $2.3 million of cash in 2012 and fi nancing costs incurred in connection with the amendment
of our credit facility used $0.2 million.
Cash Management
Our cash is concentrated primarily at one fi nancial institution, which at times exceeds federally insured limits. We invest excess cash primarily
in money market funds, which are highly liquid securities that bear minimal risk.
Credit Facility
We have a revolving credit facility (the “Credit Facility”) that is used
to supplement our operating cash fl ow and fund our working capital,
capital expenditure, general corporate and growth requirements.
On February 6, 2012, we entered into an amendment agreement that,
among other changes, increased the commitment amount of the Credit
Facility from $75.0 million to $100.0 million and extended the maturity
date from June 2, 2015 to June 2, 2016. As of September 29, 2012,
$11.5 million was outstanding on the Credit Facility, $67.2 million
of additional borrowing capacity was available and outstanding letters
of credit totaled $1.3 million (see Note 7 to the consolidated fi nancial
statements). During the year, ordinary course borrowings on the Credit
Facility were as high as $20.3 million. As of October 1, 2011, $656,000
was outstanding on the Credit Facility.
20
INSTEEL INDUSTRIES, INC. Form 10K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
As part of the consideration for the Ivy Acquisition (See Note 4 to the
consolidated fi nancial statements), we entered into a $13.5 million secured
subordinated promissory note (the “Note”) payable to Ivy over fi ve years.
Th e Note required semi-annual interest payments in arrears, and annual
principal payments payable on November 19 of each year during the period
2011 - 2015. Th e Note yielded interest on the unpaid principal balance
at a fi xed rate of 6.0% per annum and was collateralized by certain of the
real property and equipment acquired from Ivy. On December 12, 2011,
the Company prepaid the remaining balance that was outstanding on
the Note for $12.4 million, which represented a discount of $425,000
that was recorded as a gain from early extinguishment of debt in the
consolidated statements of operations.
We believe that, in the absence of signifi cant unanticipated cash demands,
cash generated by operating activities will be suffi cient to satisfy our
expected requirements for working capital, capital expenditures,
dividends, and share repurchases, if any. We also expect to have access
to the amounts available under our Credit Facility. However, further
deterioration of market conditions in the construction sector could
result in additional reductions in demand from our customers, which
would likely reduce our operating cash fl ows. Under such circumstances,
we may need to curtail capital and operating expenditures, delay or
restrict share repurchases, cease dividend payments and/or realign our
working capital requirements.
Should we determine, at any time, that we require additional short-
term liquidity, we would evaluate the alternative sources of fi nancing
that are potentially available to provide such funding. Th ere can be no
assurance that any such fi nancing, 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, fl exible capital structure and
borrowing capacity available to us under our Credit Facility position us
to meet our anticipated liquidity requirements for the foreseeable future.
Impact of Infl ation
We are subject to infl ationary risks arising from fl uctuations 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 off set them through various cost reduction and productivity
improvement initiatives. However, our ability to raise our selling prices
depends on market conditions and competitive dynamics, and there
may be periods during which we are unable to fully recover increases
in our costs. During 2010 and 2011, wire rod prices rose due to the
escalation in the cost of scrap and other raw materials for wire rod
producers and increased demand from non-construction applications.
After initially rising in the fi rst half of 2012, wire rod prices declined
during the latter part of the year due to reductions in the cost of scrap
for wire rod producers and weakening demand. Our ability to fully
recover higher wire rod prices during this period has been mitigated
by competitive pricing pressures resulting from the continuation of
recessionary conditions in our construction end-markets. Th e timing
and magnitude of any future increases in the prices for wire rod and
the impact on selling prices for our products is uncertain at this time.
Off -Balance Sheet Arrangements
We do not have any material transactions, arrangements, obligations
(including contingent obligations), or other relationships with
unconsolidated entities or other persons, as defi ned by Item 303(a)
(4) of Regulation S-K of the SEC, that have or are reasonably likely
to have a material current or future impact on our fi nancial condition,
results of operations, liquidity, capital expenditures, capital resources
or signifi cant components of revenues or expenses.
Contractual Obligations
Our contractual obligations and commitments at September 29, 2012 are as follows:
PAYMENTS DUE BY PERIOD
$
(In thousands)
Contractual obligations:
Raw material purchase commitments(1)
Supplemental employee retirement plan obligations
Borrowings on revolving credit facility
Pension benefi t obligations
Operating leases
Trade letters of credit
Commitment fee on unused portion of credit facility
Unrecognized tax benefi t obligations
Other unconditional purchase obligations(2)
$
TOTAL
(1) Non-cancelable purchase commitments for raw materials.
(2) Contractual commitments for capital expenditures.
Total
34,594 $
19,191
11,475
5,913
2,146
1,294
1,232
76
3,954
79,875 $
Less Th an 1 Year
34,594 $
244
-
211
813
1,294
336
61
3,954
41,507 $
1 - 3 Years
- $
487
-
416
924
-
672
15
-
2,514 $
3 – 5 Years More Th an 5 Years
-
17,841
-
4,870
319
-
-
-
-
23,030
- $
619
11,475
416
90
-
224
-
-
12,824 $
INSTEEL INDUSTRIES, INC. Form 10K 21
PART II
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk
Outlook
As we look ahead to 2013, our visibility remains limited due to the
heightened degree of uncertainty regarding the prospects for a recovery
in the economy and employment market, the availability of fi nancing
in the credit markets and the increased volatility in raw material costs.
Conditions in our construction end-markets appear to have stabilized
following the steep decline in demand that we have experienced in
recent years. However, we have yet to see signs of a pronounced recovery
taking hold in our markets and believe that construction activity is likely
to continue trending at depressed levels pending a more substantive
upturn in the economy.
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 eff ectiveness of all of our manufacturing, selling
and administrative activities. We expect the contributions from the
Ivy Acquisition to increase during the year through the realization
of additional operational synergies and the reconfi guration of our
combined WWR operations, which was completed in 2012. As market
conditions improve, we also expect gradually increasing contributions
from the substantial investments we have made in our facilities in the
form of reduced operating costs and additional capacity to support
future growth (see “Cautionary Note Regarding Forward-Looking
Statements” and “Risk Factors”). In addition, we will continue to
evaluate further potential acquisitions in our existing businesses that
expand our penetration of markets we currently serve or expand our
geographic footprint.
ITEM 7A Quantitative and Qualitative Disclosures
About Market Risk
Our cash fl ows and earnings are subject to fl uctuations resulting from
changes in commodity prices, interest rates and foreign exchange rates.
We manage our exposure to these market risks through internally
established policies and procedures and, when deemed appropriate,
through the use of derivative fi nancial instruments. We do not use
fi nancial 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 signifi cant fl uctuations in the cost and availability of
our primary raw material, hot-rolled steel wire rod, which we purchase
from both domestic and foreign suppliers. We negotiate quantities and
pricing for both domestic and foreign wire rod purchases for varying
periods (most recently monthly for domestic suppliers), depending
upon market conditions, to manage our exposure to price fl uctuations
and to ensure adequate availability of material consistent with our
requirements. We do not use derivative commodity instruments to
hedge our exposure to changes in prices as such instruments are not
currently available for wire rod. Our ability to acquire wire rod from
foreign sources on favorable terms is impacted by fl uctuations in foreign
currency exchange rates, foreign taxes, duties, tariff s and other trade
actions. Although changes in wire rod costs and our selling prices may
Interest Rates
be correlated over extended periods of time, depending upon market
conditions and competitive dynamics, there may be periods during
which we are unable to fully recover increased wire rod costs through
higher selling prices, which would reduce our gross profi t and cash
fl ow from operations. Additionally, should wire rod costs decline, our
fi nancial results may be negatively impacted if the selling prices for
our products decrease to an even greater degree and to the extent that
we are consuming higher cost material from inventory. Based on our
2012 shipments and average wire rod cost refl ected in cost of sales,
a 10% increase in the price of steel wire rod would have resulted in
a $25.7 million decrease in our annual pre-tax earnings (assuming there
was not a corresponding change in our selling prices).
Borrowings under our revolving credit facility are subject to a variable rate of interest and are sensitive to changes in interest rates. Based on
our interest rate exposure and the outstanding borrowings on our revolving credit facility as of September 29, 2012, a 25 basis point change in
interest rates would have an estimated $29,000 impact on our pre-tax earnings over a one-year period.
22
INSTEEL INDUSTRIES, INC. Form 10K
PART II
ITEM 8 Financial Statements and Supplementary Data
Foreign Exchange Exposure
We have not typically hedged foreign currency exposures related to
transactions denominated in currencies other than U.S. dollars, as such
transactions have not been material historically. We will occasionally
hedge fi rm commitments for certain equipment purchases that are
denominated in foreign currencies. Th e decision to hedge any such
transactions is made by us on a case-by-case basis. Th ere were no
forward contracts outstanding as of September 29, 2012. During
fi scal 2012, a 10% increase or decrease in the value of the U.S. dollar
relative to foreign currencies to which we are typically exposed would
not have had a material impact on our fi nancial position, results of
operations or cash fl ows.
ITEM 8 Financial Statements and Supplementary Data
(a) Financial Statements
Consolidated Statements of Operations for the years ended September 29, 2012, October 1, 2011 and October 2, 2010 ................................24
Consolidated Balance Sheets as of September 29, 2012 and October 1, 2011 ............................................................................................................................................................25
Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss)
for the years ended September 29, 2012, October 1, 2011 and October 2, 2010 ...................................................................................................................................................26
Consolidated Statements of Cash Flows for the years ended September 29, 2012, October 1, 2011 and October 2, 2010 ...............................27
Notes to Consolidated Financial Statements .................................................................................................................................................................................................................................................................28
Report of Independent Registered Public Accounting Firm – Consolidated Financial Statements ................................................................................................46
Schedule II – Valuation and Qualifying Accounts for the years ended September 29, 2012,
October 1, 2011 and October 2, 2010 ..................................................................................................................................................................................................................................................................................47
Report of Independent Registered Public Accounting Firm – Internal Control Over Financial Reporting .......................................................................48
(b) Supplementary Data
Selected quarterly fi nancial data for 2012 and 2011 is as follows:
FINANCIAL INFORMATION BY QUARTER UNAUDITED
(In thousands, except for per share and price data)
2012
Operating results:
Net sales
Gross profi t
Net earnings (loss)
Per share amounts:
Basic and diluted:
Net earnings (loss)
(In thousands, except for per share and price data)
2011
Operating results:
Net sales
Gross profi t (loss)
Net earnings (loss)
Per share amounts:
Basic:
Net earnings (loss)
Diluted:
Net earnings (loss)
$
$
December 31
March 31
June 30
September 29
Quarter Ended
84,811
$
4,659
(180)
87,029 $
5,494
262
93,598 $
6,404
894
97,865
5,901
833
(0.01)
0.01
0.05
0.05
January 1
Quarter Ended
April 2
July 2
October 1
52,306
$
(135)
(7,628)
86,933 $
11,603
2,619
98,579 $
12,529
3,650
(0.44)
(0.44)
0.15
0.15
0.21
0.20
99,091
7,746
972
0.06
0.05
INSTEEL INDUSTRIES, INC. Form 10K 23
PART II
ITEM 8 Financial Statements and Supplementary Data
Insteel Industries, Inc. and Subsidiaries
Consolidated Statements of Operations
$
(In thousands, except for per share amounts)
Net sales
Cost of sales
Inventory write-downs
Gross profi t
Selling, general and administrative expense
Gain from early extinguishment of debt
Restructuring charges, net
Acquisition costs
Bargain purchase gain
Other income, net
Legal settlement
Interest expense
Interest income
Earnings from continuing operations before income taxes
Income taxes
Earnings (loss) from continuing operations
Earnings from discontinued operations net of of income taxes of $ - , $ - and $217
$
NET EARNINGS (LOSS)
Per share amounts:
Basic and 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.
$
$
$
September 29, 2012
Year Ended
October 1, 2011
October 2, 2010
363,303 $
340,845
-
22,458
18,911
(425)
832
-
-
(188)
-
623
(21)
2,726
917
1,809
-
$
1,809
0.10 $
-
0.10 $
0.12 $
336,909 $
305,166
-
31,743
19,608
-
8,318
3,518
(500)
(222)
-
958
(38)
101
488
(387)
-
(387) $
(0.02) $
-
(0.02) $
0.12 $
17,664
17,990
17,562
17,562
211,586
191,262
2,333
17,991
16,024
-
-
-
-
(291)
1,487
453
(102)
420
(38)
458
15
473
0.03
-
0.03
0.12
17,466
17,564
24
INSTEEL INDUSTRIES, INC. Form 10K
PART II
ITEM 8 Financial Statements and Supplementary Data
Insteel Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except for per share amounts)
ASSETS:
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Other current assets
Total current assets
Property, plant and equipment, net
Other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities:
Accounts payable
Accrued expenses
Current portion of long-term debt
TOTAL CURRENT LIABILITIES
Long-term debt
Other liabilities
Commitments and contingencies
Shareholders’ equity:
Preferred stock, no par value; Authorized shares: 1,000; None issued
Common stock, $1 stated value; Authorized shares: 50,000; Issued and outstanding shares: 2012, 17,717;
2011, 17,609
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
See accompanying notes to consolidated financial statements.
September 29, 2012
October 1, 2011
$
$
$
$
10 $
42,138
65,774
7,146
115,068
87,716
5,768
$
208,552
30,126 $
5,877
-
36,003
11,475
11,574
10
41,971
76,374
4,093
122,448
89,484
4,598
216,530
38,607
7,377
675
46,659
13,481
7,916
-
-
17,717
50,379
83,845
(2,441)
149,500
$
208,552
17,609
48,723
84,157
(2,015)
148,474
216,530
INSTEEL INDUSTRIES, INC. Form 10K 25
PART II
ITEM 8 Financial Statements and Supplementary Data
Insteel Industries, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
and Comprehensive Income (Loss)
Common Stock
Shares
17,525
Amount
17,525
$
Additional
Paid-In Capital
43,774
$
Retained
Earnings
88,291
$
$
Accumulated
Other Comprehensive
Income (Loss)(1)
(2,520) $
Total
Shareholders’
Equity
147,070
(In thousands)
Balance at October 3, 2009
Comprehensive income:
Net earnings
Adjustment to defi ned benefi t plan liability(1)
Comprehensive income(1)
Stock options exercised
Vesting of restricted stock units
Compensation expense associated
with stock-based plans
Excess tax defi ciencies
from stock-based compensation
Restricted stock surrendered
for withholding taxes payable
Cash dividends declared
Balance at October 2, 2010
Comprehensive loss:
Net loss
Adjustment to defi ned benefi t plan liability(1)
Comprehensive loss(1)
Stock options exercised
Vesting of restricted stock units
Compensation expense associated with stock-
based plans
Excess tax benefi ts
from stock-based compensation
Restricted stock surrendered
for withholding taxes payable
Cash dividends declared
Balance at October 1, 2011
Comprehensive income:
Net earnings
Adjustment to defi ned benefi t plan liability(1)
Comprehensive income(1)
473
211
26
37
26
37
(9)
(9)
114
(37)
2,258
(89)
(70)
17,579
17,579
45,950
13
30
13
30
8
(30)
2,917
8
(13)
(13)
(130)
17,609
17,609
48,723
(2,108)
86,656
(387)
(2,112)
84,157
1,809
(2,309)
294
(2,015)
(426)
12
96
12
96
Stock options exercised
Vesting of restricted stock units
Compensation expense associated with stock-
based plans
Restricted stock surrendered
for withholding taxes payable
Cash dividends declared
BALANCE AT SEPTEMBER 29, 2012
(1) Activity within accumulated other comprehensive income (loss) is reported net of related income taxes: 2010 ($130), 2011 ($180), 2012 $261.
See accompanying notes to consolidated financial statements.
(2,121)
$
83,845
(10)
(96)
2,208
(446)
50,379
17,717
17,717
$
$
$
(2,441) $
26
INSTEEL INDUSTRIES, INC. Form 10K
473
211
684
140
-
2,258
(89)
(79)
(2,108)
147,876
(387)
294
(93)
21
-
2,917
8
(143)
(2,112)
148,474
1,809
(426)
1,383
2
-
2,208
(446)
(2,121)
149,500
Insteel Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
PART II
ITEM 8 Financial Statements and Supplementary Data
(In thousands)
Cash Flows From Operating Activities:
Net earnings (loss)
Earnings from discontinued operations
Earnings (loss) from continuing operations
Adjustments to reconcile earnings (loss) from continuing operations to net cash
provided by (used for) operating activities of continuing operations:
Depreciation and amortization
Amortization of capitalized fi nancing costs
Stock-based compensation expense
Gain on early extinguishment of debt
Asset impairment charges
Inventory write-downs
Excess tax defi ciencies (benefi ts) from stock-based compensation
Loss (gain) on sale of property, plant and equipment
Deferred income taxes
Gain from life insurance proceeds
Increase in cash surrender value of life insurance policies over premiums paid
Net changes in assets and liabilities (net of assets and liabilities acquired):
Accounts receivable, net
Inventories
Accounts payable and accrued expenses
Other changes
Total adjustments
Net cash provided by (used for) operating activities - continuing operations
Net cash used for operating activities - discontinued operations
Net cash provided by (used for) operating activities
Cash Flows From Investing Activities:
Capital expenditures
Increase in cash surrender value of life insurance policies
Proceeds from surrender of life insurance policies
Proceeds from sale of property, plant and equipment
Proceeds from sale of assets held for sale
Proceeds from life insurance claims
Acquisition of business
Net cash used for investing activities - continuing operations
Net cash provided by investing activities - discontinued operations
Net cash provided by (used for) investing activities
Cash Flows From Financing Activities:
Proceeds from long-term debt
Principal payments on long-term debt
Cash dividends paid
Financing costs
Cash received from exercise of stock options
Excess tax benefi ts (defi ciencies) from stock-based compensation
Other
Net cash used for fi nancing activities - continuing operations
Net cash used for fi nancing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental Disclosures of Cash Flow Information:
Cash paid (refunded) during the period for:
Interest
Income taxes, net
Non-cash investing and fi nancing activities:
Purchases of property, plant and equipment in accounts payable
Restricted stock surrendered for withholding taxes payable
Note payable issued as consideration for business acquired
Post-closing purchase price adjustment for business acquired
See accompanying notes to consolidated financial statements.
September 29, 2012
Year Ended
October 1, 2011
October 2, 2010
$
1,809 $
-
1,809
(387) $
-
(387)
9,762
97
2,208
(425)
(11)
-
-
(46)
835
(505)
(750)
(167)
10,600
(9,562)
(701)
11,335
13,144
-
13,144
(8,066)
(467)
37
305
-
-
-
(8,191)
-
(8,191)
91,150
(93,406)
(2,121)
(172)
2
-
(406)
(4,953)
(4,953)
-
10
10 $
753 $
176
176
446
-
-
9,573
81
2,917
-
3,825
-
(8)
(1,618)
209
(357)
-
(17,001)
(11,870)
12,439
(710)
(2,520)
(2,907)
-
(2,907)
(7,937)
(147)
19
518
2,403
1,063
(37,308)
(41,389)
-
(41,389)
52,806
(52,150)
(2,112)
-
21
8
(202)
(1,629)
(1,629)
(45,925)
45,935
10 $
356 $
(489)
384
143
13,500
500
$
$
473
(15)
458
7,009
363
2,258
-
-
2,333
89
39
(1,121)
-
(330)
(3,687)
(7,710)
(2,489)
15,825
12,579
13,037
(158)
12,879
(1,493)
(456)
-
11
-
-
-
(1,938)
2,358
420
338
(338)
(2,108)
(409)
140
(89)
-
(2,466)
(2,466)
10,833
35,102
45,935
90
189
15
79
-
-
INSTEEL INDUSTRIES, INC. Form 10K 27
PART II
ITEM 8 Financial Statements and Supplementary Data
Insteel Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended September 29, 2012, October 1, 2011 and October 2, 2010
NOTE 1 Description of Business
Insteel Industries, Inc. (“Insteel” or “the Company”) is one of the nation’s
largest manufacturers of steel wire reinforcing products for concrete
construction applications. Insteel is the parent holding company for two
wholly-owned subsidiaries, Insteel Wire Products Company (“IWP”),
an operating subsidiary, and Intercontinental Metals Corporation, an
inactive subsidiary. Th e Company manufactures and markets PC strand
and welded wire reinforcement, including engineered structural mesh,
concrete pipe reinforcement and standard welded wire reinforcement.
Th e Company’s products are primarily sold to manufacturers of concrete
products and, to a lesser extent, distributors and rebar fabricators 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 operational focus to concrete reinforcing products
(see Note 10 to the consolidated fi nancial statements). Th e results
of operations for the industrial wire business have been reported as
discontinued operations for all periods presented.
On November 19, 2010, the Company purchased certain of the assets
and assumed certain of the liabilities of Ivy Steel and Wire, Inc. (“Ivy”)
(see Note 4 to the consolidated fi nancial statements).
Th e Company has evaluated all subsequent events that occurred after
the balance sheet date through the time of fi ling this Annual Report
on Form 10-K and concluded there were no events or transactions
occurring during this period that required additional recognition or
disclosure in its fi nancial statements.
NOTE 2 Summary of Signifi cant Accounting Policies
Fiscal year
Concentration of credit risk
Th e Company’s fi scal year is the 52 or 53 weeks ending on the Saturday
closest to September 30. Fiscal years 2012, 2011 and 2010 were 52-
week fi scal years. All references to years relate to fi scal years rather
than calendar years.
Principles of consolidation
Th e consolidated fi nancial statements include the accounts of the
Company and its subsidiaries. All signifi cant intercompany balances
and transactions have been eliminated.
Use of estimates
Th e preparation of fi nancial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that aff ect the amounts reported in
the fi nancial statements and accompanying notes. Th ere is no assurance
that actual results will not diff er from these estimates.
Cash equivalents
Th e Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
Financial instruments that subject the Company to concentrations of
credit risk consist principally of cash and cash equivalents and trade
accounts receivable. Th e Company’s cash is concentrated primarily
at one fi nancial institution, which at times exceeds federally insured
limits. Th e Company is 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.
Th e Company invests excess cash primarily in money market funds,
which are highly liquid securities.
Th e majority of the Company’s accounts receivable are due from
customers that are located in the United States (“U.S.”) and the Company
generally requires no collateral depending upon the creditworthiness of
the account. Th e Company provides an allowance for doubtful accounts
based upon its assessment of the credit risk of specifi c customers,
historical trends and other information. Th e Company writes off
accounts receivable when they become uncollectible. Th ere is no
disproportionate concentration of credit risk.
Stock-based compensation
Th e Company accounts for stock-based compensation in accordance
with the fair value recognition provisions of Financial Accounting
Standards Board (“FASB”) Accounting Standards Codifi cation (“ASC”)
Topic 718, Compensation – Stock Compensation, which requires stock-
based compensation expense to be recognized in net earnings based
28
INSTEEL INDUSTRIES, INC. Form 10K
on the fair value of the award on the date of the grant. Th e Company
determines the fair value of stock options issued by using a Monte
Carlo valuation model at the grant date. Th e Monte Carlo valuation
model considers a range of assumptions including the expected term,
volatility, dividend yield and risk-free interest rate.
Revenue recognition
Th e Company recognizes revenue from product sales when products
are shipped and risk of loss and title has passed to the customer. Sales
taxes collected from customers are recorded on a net basis and are thus
excluded from revenue.
Shipping and handling costs
Th e Company includes all of the outbound freight, shipping and
handling costs associated with the shipment of products to customers
in cost of sales. Any amounts paid by customers to the Company for
shipping and handling are recorded in net sales on the consolidated
statements of operations.
Inventories
Inventories are valued at the lower of weighted average cost (which
approximates computation on a fi rst-in, fi rst-out basis) or market
(net realizable value or replacement cost). Costs utilized for inventory
valuation purposes include material, labor and manufacturing overhead.
Property, plant and equipment
Property, plant and equipment are recorded at cost or fair market value
in the case of the assets acquired from Ivy, or otherwise at reduced
values to the extent there have been asset impairment write-downs.
Expenditures for maintenance and repairs are charged directly to expense
when incurred, while major improvements are capitalized. Depreciation
is computed for fi nancial reporting purposes principally by use of the
straight-line method over the following estimated useful lives: machinery
and equipment, 3 - 15 years; buildings, 10 - 30 years; land improvements,
5 - 15 years. Depreciation expense was approximately $9.8 million in
2012, $9.6 million in 2011 and $7.0 million in 2010 and refl ected in
cost of sales and selling, general and administrative expense (“SG&A
expense”) in the consolidated statements of operations. Capitalized
software is amortized over the shorter of the estimated useful life or
5 years and refl ected in SG&A expense in the consolidated statements
of operations. No interest costs were capitalized in 2012, 2011 or 2010.
Other assets
Other assets consist principally of capitalized fi nancing costs and the
cash surrender value of life insurance policies. Capitalized fi nancing costs
are amortized using the straight-line method, which approximates the
eff ective interest method over the term of the related credit agreement, and
refl ected in interest expense in the consolidated statements of operations.
PART II
ITEM 8 Financial Statements and Supplementary Data
Long-lived assets
Long-lived assets include property, plant and equipment and identifi able
intangible assets with defi nite useful lives. Th e Company assesses
the impairment of long-lived assets whenever events or changes
in circumstances 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 fl ows expected to be generated by the related
asset or asset group. If it is determined that an impairment loss has
occurred, the loss is recognized during the period incurred and is
calculated as the diff erence between the carrying value and the present
value of estimated future net cash fl ows or comparable market values.
During 2011, the Company recorded a $3.8 million impairment charge
resulting from the consolidation of its northeast and Texas operations
and overall integration of the purchased Ivy facilities (see Note 5 to
the consolidated fi nancial statements). Th ere were no impairment
losses in 2012 and 2010.
Fair value of fi nancial instruments
Th e carrying amounts for cash and cash equivalents, accounts receivable,
and accounts payable and accrued expenses approximate fair value
because of their short maturities. Th e carrying amount of long-term debt
outstanding under the Company’s revolving credit facility approximates
its estimated fair value. Th e estimated fair value of long-term debt is
primarily based upon quoted market prices as well as borrowing rates
currently available to the Company for bank loans with similar terms
and maturities.
Income taxes
Income taxes are based on pretax fi nancial accounting income. Deferred
tax assets and liabilities are recognized for the expected tax consequences
of temporary diff erences between the tax bases of assets and liabilities
and their reported amounts. Th e 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 realized.
Earnings per share
Basic earnings per share (“EPS”) are computed by dividing earnings
available to common shareholders by the weighted average number of
shares of common stock outstanding during the period. Diluted EPS are
computed by dividing earnings available to common shareholders by
the weighted average number of shares of common stock and other
dilutive equity securities outstanding during the period. Securities that
have the eff ect of increasing EPS are considered to be antidilutive and
are not included in the computation of diluted EPS.
INSTEEL INDUSTRIES, INC. Form 10K 29
PART II
ITEM 8 Financial Statements and Supplementary Data
NOTE 3 Recent Accounting Pronouncements
Future Adoptions
In June 2011, the FASB issued an update that amends the guidance provided in ASC Topic 220, Comprehensive Income, by requiring that all
nonowner changes in shareholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but
consecutive statements. Th is update becomes eff ective for the Company in the fi rst quarter of fi scal 2013.
NOTE 4 Business Combination
On November 19, 2010, the Company purchased certain of the assets
and assumed certain of the liabilities of Ivy for a preliminary purchase
price of approximately $51.1 million, consisting of $37.6 million
of cash and a $13.5 million secured subordinated promissory note
payable to Ivy (see Note 7 to the consolidated fi nancial statements)
(the “Ivy Acquisition”). Subsequent to the date of the Ivy Acquisition,
the Company recorded $780,000 of post-closing adjustments which
reduced the fi nal adjusted purchase price to $50.3 million.
Ivy was one of the nation’s largest producers of welded wire reinforcement
and wire products for concrete construction applications. Th e Company
believes the addition of Ivy’s facilities has enhanced Insteel’s
competitiveness in its Northeast, Midwest and Florida markets, in
addition to providing a platform to serve the West Coast markets more
eff ectively. Th e assets purchased included Ivy’s production facilities in
Arizona, Florida, Missouri and Pennsylvania; the production equipment
at a leased facility in Texas; and certain related inventories. In addition,
the Company assumed certain of Ivy’s accounts payable and employee
benefi t obligations.
Following is a summary of the Company’s fi nal allocation of the adjusted purchase price to the fair values of the assets acquired and liabilities
assumed as of the date of the Ivy Acquisition:
(In thousands)
Assets acquired:
Inventories
Property, plant and equipment
TOTAL ASSETS ACQUIRED
Liabilities assumed:
Accounts payable
Accrued expenses
TOTAL LIABILITIES ASSUMED
Net assets acquired
Purchase price
Bargain purchase gain
$
$
$
$
20,585
37,211
57,796
6,263
725
6,988
50,808
50,308
500
Accounting standards require that when the fair value of the net assets
acquired exceeds the purchase price, resulting in a bargain purchase gain,
the acquirer must reassess the reasonableness of the values assigned to all
of the assets acquired, liabilities assumed and consideration transferred.
Th e Company performed such a reassessment and concluded that the
values assigned for the Ivy Acquisition were reasonable. Consequently,
the Company recorded a $500,000 bargain purchase gain on the Ivy
Acquisition in fi scal 2011.
Th e Ivy Acquisition was accounted for as a business purchase pursuant
to ASC Topic 805, Business Combinations. Acquisition and integration
costs are not included as components of consideration transferred, but
are recorded as expenses in the period in which the costs are incurred
(See Note 5 to the consolidated fi nancial statements).
Following the Ivy Acquisition, net sales of the Ivy facilities for the year
ended October 1, 2011 were approximately $83.4 million. Th e actual
amount of net sales specifi cally attributable to the Ivy Acquisition,
however, cannot be quantifi ed due to the integration actions that
have been taken by the Company involving the transfer of business
between the former Ivy facilities and the Company’s existing facilities.
Th e Company has determined that the presentation of Ivy’s earnings for
the year ended October 1, 2011 is impractical due to the integration
of Ivy’s operations into the Company following the Ivy Acquisition.
Th e following unaudited supplemental pro forma fi nancial information
refl ects the combined results of operations of the Company had the Ivy
Acquisition occurred at the beginning of fi scal 2010. Th e pro forma
information refl ects certain adjustments related to the Ivy Acquisition,
including adjusted depreciation expense based on the fair value of the
assets acquired, interest expense related to the secured subordinated
promissory note and an appropriate adjustment in the prior year for the
acquisition-related costs. Th e pro forma information does not refl ect
any operating effi ciencies or potential cost savings which may result
from the Ivy Acquisition. Accordingly, this pro forma information is for
illustrative purposes and is not intended to represent or be indicative
of the actual results of operations of the combined company that may
have been achieved had the Ivy Acquisition occurred at the beginning
of fi scal 2010, nor is it intended to represent or be indicative of future
results of operations.
30
INSTEEL INDUSTRIES, INC. Form 10K
Part II
ITEm 8 Financial Statements and Supplementary Data
The pro forma combined results of operations for the prior year periods are as follows:
(In thousands)
Net sales
Earnings (loss) from continuing operations before income taxes
Net earnings (loss)
Years Ended
October 1, 2011
October 2, 2010
$
353,620 $
867
182
310,957
(18,881)
(11,448)
NoTE 5 Restructuring Charges and Acquisition Costs
Restructuring charges
Subsequent to the Ivy Acquisition, the Company elected to consolidate
certain of its welded wire reinforcement operations in order to reduce its
operating costs, which involved the closure of facilities in Wilmington,
Delaware and Houston, Texas. These actions were taken in response
to the close proximity of Ivy’s facilities in Hazleton, Pennsylvania and
Houston, Texas to the Company’s existing facilities in Wilmington,
Delaware and Dayton, Texas. The Houston plant closure was completed
in December 2010 and the Wilmington plant closure was completed
in May 2011.
Following is a summary of the restructuring activities and associated costs that were incurred during the current and prior year periods:
(In thousands)
2012
Liability as of October 1, 2011
Restructuring charges, net
Cash payments
Non-cash charges
LIabILItY aS OF SEPtEmbEr 29, 2012
2011
Liability as of October 2, 2010
Restructuring charges
Gain on sale of assets held for sale
Restructuring charges, net
Cash payments
Non-cash charges
LIabILItY aS OF OctObEr 1, 2011
$
$
$
$
Severance and
other employee
separation costs
asset
impairment
charges
Facility
closure costs
Equipment
relocation costs
65 $
(40)
(25)
-
$
-
- $
2,263
-
2,263
(2,198)
-
$
65
- $
(11)
-
11
$
-
- $
3,825
-
3,825
-
(3,825)
$
-
77 $
139
(216)
-
$
-
- $
2,606
(1,609)
997
(920)
-
$
77
112 $
744
(856)
-
$
-
- $
1,233
-
1,233
(1,121)
-
$
112
total
254
832
(1,097)
11
-
-
9,927
(1,609)
8,318
(4,239)
(3,825)
254
During the year ended September 29, 2012, all of the remaining restructuring liabilities were satisfied and the final proceeds were received from
the sale of previously impaired machinery and equipment, which have been included in asset impairment charges.
Asset impairment charges include the proceeds received from the
scrapping of certain machinery and equipment that were previously
impaired. Facility closure costs for the prior year include a $1.6 million
gain from the sale of the Wilmington, Delaware facility, which had
been closed in May 2011. As of October 1, 2011, the Company
had recorded restructuring liabilities amounting to $254,000 on its
consolidated balance sheet, including $112,000 in accounts payable
and $142,000 in accrued expenses.
Acquisition costs
For the year ended October 1, 2011, the Company recorded $3.5 million of acquisition-related costs associated with the Ivy Acquisition for
advisory, accounting, legal and other professional fees. The Company did not incur any additional acquisition costs related to the Ivy Acquisition
in fiscal 2012.
NoTE 6 Fair Value measurements
Fair value is defined as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The authoritative guidance for
fair value measurements establishes a three-level fair value hierarchy
that encourages an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
INSTEEL INDUSTRIES, INC. - Form 10-K 31
PART II
ITEM 8 Financial Statements and Supplementary Data
Th e three levels of inputs used to measure fair value are as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than quoted prices included in Level 1,
such as quoted prices for similar assets and liabilities in active markets.
Level 3 - Unobservable inputs that are supported by little or no market
activity and that are signifi cant to the fair value of the assets or liabilities,
including certain pricing models, discounted cash fl ow methodologies
and similar techniques that use signifi cant unobservable inputs.
As of September 29, 2012 and October 1, 2011, the Company held fi nancial assets that are required to be measured at fair value on a recurring
basis. Th e fi nancial assets held by the Company and the fair value hierarchy used to determine their fair values are as follows:
(In thousands)
Other assets:
Cash surrender value of life insurance policies
TOTAL
(In thousands)
Other assets:
Cash surrender value of life insurance policies
TOTAL
Total at
September 29, 2012
Quoted Prices
in Active Markets
(Level 1)
Observable
Inputs
(Level 2)
$
$
$
$
5,146 $
5,146 $
- $
- $
5,146
5,146
Total at
October 1, 2011
Quoted Prices
in Active Markets
(Level 1)
Observable
Inputs
(Level 2)
4,006 $
4,006 $
- $
- $
4,006
4,006
Cash surrender value of life insurance policies are classifi ed as Level 2.
Th e fair value of the life insurance policies was determined by the
underwriting insurance company’s valuation models and represents
the guaranteed value the Company would receive upon surrender of
these policies as of the reporting date.
As of September 29, 2012 and October 1, 2011, the Company had no
nonfi nancial assets that are required to be measured at fair value on a
nonrecurring basis other than the assets and liabilities acquired from
Ivy (see Note 4 to the consolidated fi nancial statements) that were
acquired at fair value in the prior year. Th e carrying amounts of accounts
receivable, accounts payable and accrued expenses approximates fair
value due to the short-term maturities of these fi nancial instruments.
As of September 29, 2012, the carrying amount of long-term debt
outstanding under the Company’s revolving credit facility approximates
its estimated fair value. Th e estimated fair value of long-term debt
is primarily based upon quoted market prices as well as borrowing
rates currently available to the Company for bank loans with similar
terms and maturities. As of October 1, 2011, the carrying amount of
the $13.5 million secured subordinated promissory note payable to
Ivy approximated fair value based on comparable debt with similar
terms, conditions and proximity to the issuance date, which would be
considered a level 2 input.
NOTE 7 Long-Term Debt
Revolving Credit Facility
Th e Company has a revolving credit facility (the “Credit Facility”) that
is used to supplement its operating cash fl ow and fund its working
capital, capital expenditure, general corporate and growth requirements.
On February 6, 2012, the Company and each of its wholly-owned
subsidiaries entered into an amendment agreement that, among other
changes, increased the commitment amount of the Credit Facility
from $75.0 million to $100.0 million and extended the maturity date
from June 2, 2015 to June 2, 2016. Advances under the Credit Facility
are limited to the lesser of the revolving loan commitment amount
(currently $100.0 million) or a borrowing base amount that is calculated
based upon a percentage of eligible receivables and inventories. As of
September 29, 2012, $11.5 million of borrowings were outstanding
on the Credit Facility, $67.2 million of additional borrowing capacity
was available and outstanding letters of credit totaled $1.3 million. As
of October 1, 2011, $656,000 was outstanding on the Credit Facility.
Interest rates on the Credit Facility are based upon (1) an index rate that
is established at the highest of the prime rate, 0.50% plus the federal
funds rate or the LIBOR rate plus the excess of the then-applicable
margin for LIBOR loans over the then-applicable margin for index
32
INSTEEL INDUSTRIES, INC. Form 10K
rate loans, or (2) at the election of the Company, a LIBOR rate, plus
in either case, an applicable interest rate margin. Th e applicable interest
rate margins are adjusted on a quarterly basis based upon the amount
of excess availability on the Credit Facility within the range of 0.50% -
1.25% for index rate loans and 1.50% - 2.50% for LIBOR loans.
In addition, the applicable interest rate margins would be increased
by 2.00% upon the occurrence of certain events of default provided
for under the terms of the Credit Facility. Based on the Company’s
excess availability as of September 29, 2012, the applicable interest
rate margins on the Credit Facility were 0.50% for index rate loans
and 1.50% for LIBOR loans.
Th e Company’s ability to borrow available amounts under the Credit
Facility will be restricted or eliminated in the event of certain covenant
breaches, events of default or if the Company is unable to make certain
representations and warranties provided for under the terms of the
Credit Facility. Th e Company is required to maintain a fi xed charge
coverage ratio of not less than 1.10 at the end of each fi scal quarter for
the twelve-month period then ended when the amount of liquidity on
the Credit Facility is less than $13.5 million. In addition, the terms
of the Credit Facility restrict the Company’s ability to, among other
things: engage in certain business combinations or divestitures; make
investments in or loans to third parties, unless certain conditions are
met with respect to such investments or loans; pay cash dividends or
repurchase shares of the Company’s stock subject to certain minimum
borrowing availability requirements; incur or assume indebtedness;
issue securities; enter into certain transactions with affi liates of the
Company; or permit liens to encumber the Company’s property and
assets. Th e terms of the Credit Facility also provide that an event of
default will occur with respect to the Company upon the occurrence
of, among other things: defaults or breaches under the loan documents,
subject in certain cases to cure periods; defaults or breaches by the
Company or any of its subsidiaries under any agreement resulting in the
acceleration of amounts above certain thresholds or payment defaults
above certain thresholds; certain events of bankruptcy or insolvency
with respect to the Company; certain entries of judgment against the
Company or any of its subsidiaries, which are not covered by insurance;
or a change of control of the Company. As of September 29, 2012,
Subordinated Note
PART II
ITEM 8 Financial Statements and Supplementary Data
the Company was in compliance with all of the fi nancial and negative
covenants under the Credit Facility and there have not been any events
of default.
Amortization of capitalized fi nancing costs associated with the credit
facility was $97,000 in 2012, $81,000 in 2011 and $363,000 in 2010.
Accumulated amortization of capitalized fi nancing costs was $4.2 million
and $4.1 million as of September 29, 2012 and October 1, 2011,
respectively. Th e Company expects the amortization of capitalized
fi nancing costs to approximate the following amounts for the next
fi ve fi scal years:
Fiscal year
2013
2014
2015
2016
2017
$
(In thousands)
102
102
102
69
-
As part of the consideration for the Ivy Acquisition, on
November 19, 2010 (see Note 4 to the consolidated financial
statements) the Company entered into a $13.5 million secured
subordinated promissory note (the “Note”) payable to Ivy over fi ve
years. Th e Note required semi-annual interest payments in arrears,
and annual principal payments payable on November 19 of each
year during the period 2011 - 2015. Th e Note yielded interest on
the unpaid principal balance at a fi xed rate of 6.0% per annum and
was collateralized by certain of the real property and equipment
acquired from Ivy. On December 12, 2011, the Company prepaid the
remaining balance that was outstanding on the Note for $12.4 million,
which represented a discount of $425,000 that was recorded as a gain
from early extinguishment of debt in the consolidated statements of
operations in fi scal 2012.
NOTE 8 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. Eff ective February 21, 2012, the Company’s 2005 Equity Incentive Plan was amended to increase the number of shares
available for future grants by 900,000 shares. As of September 29, 2012, there were 786,000 shares available for future grants under the plans.
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 defi ciencies
(benefi ts) associated with stock options are as follows:
(In thousands)
Stock options:
Compensation expense
Excess tax defi ciencies (benefi ts)
September 29, 2012
Year Ended
October 1, 2011
October 2, 2010
$
909 $
-
1,203 $
(8)
958
89
Th e remaining unrecognized compensation cost related to unvested options at September 29, 2012 was $618,000, which is expected to be
recognized over a weighted average period of 1.5 years.
Th e fair value of each option award granted is estimated on the date of grant using a Monte Carlo valuation model. Th e weighted-average
estimated fair values of stock options granted during 2012, 2011 and 2010 were $5.20, $5.31 and $4.54 per share, respectively, based on the
following weighted-average assumptions:
Expected term (in years)
Risk-free interest rate
Expected volatility
Expected dividend yield
September 29, 2012
Year Ended
October 1, 2011
October 2, 2010
6.00
1.17%
52.97%
1.06%
5.19
1.78%
55.15%
1.05%
5.74
2.28%
61.12%
1.31%
INSTEEL INDUSTRIES, INC. Form 10K 33
PART II
ITEM 8 Financial Statements and Supplementary Data
Th e assumptions utilized in the Monte Carlo valuation model are
evaluated and revised, as necessary, to refl ect market conditions and
actual historical experience. Th e risk-free interest rate for periods
within the contractual life of the option was based on the U.S. Treasury
yield curve in eff ect at the time of the grant. Th e dividend yield was
calculated based on the Company’s annual dividend as of the option
grant date. Th e 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. Th e 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.
Th e following table summarizes stock option activity:
(Share amounts in thousands)
Outstanding at October 3, 2009
Granted
Exercised
Outstanding at October 2, 2010
Granted
Exercised
Forfeited
Outstanding at October 1, 2011
Granted
Exercised
OUTSTANDING AT SEPTEMBER 29, 2012
Vested and anticipated to vest in future at September 29, 2012
Exercisable at September 29, 2012
Restricted stock awards
$
Options
Outstanding
673
200
(26)
847
171
(13)
(11)
994
178
(12)
1,160
1,147
802
Exercise Price Per Share
Range
0.18-$20.27 $
9.16-9.39
4.19-11.15
0.18-20.27
10.72-12.43
1.06-7.55
11.15-11.15
0.18-20.27
10.23-13.06
0.18-0.18
0.36-20.27
Weighted
Average
10.83
9.27
5.41
10.63
11.49
1.60
11.15
10.89
11.44
0.18
11.09
11.09
11.10
Contractual Term -
Weighted Average
(years)
Aggregate
Intrinsic Value
(in thousands)
$
146
143
147
1,919
1,904
1,540
6.63
6.61
5.59
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.
Th ere were no restricted stock grants in 2012, 2011 and 2010. Amortization expense for restricted stock is as follows:
(In thousands)
Amortization expense
Th ere were no unvested restricted stock awards as of September 29, 2012.
Year Ended
October 1, 2011
$
166 $
October 2, 2010
470
During 2011 and 2010, 67,693 and 48,141 shares, respectively, of
employee restricted stock awards vested with a fair value of $771,000
and $439,000, 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 Company will withhold shares with
a value equivalent to the employees’ minimum tax obligation. During
2011 and 2010, a total of 12,633 and 8,486 shares, respectively, were
withheld to satisfy employees’ minimum tax obligations.
Th e following table summarizes restricted stock activity:
(Share amounts in thousands)
Balance, October 3, 2009
Granted
Released
Balance, October 2, 2010
Granted
Released
Balance, October 1, 2011
Restricted stock units
Restricted
Stock Awards
Outstanding
115
$
-
(48)
67
-
(67)
-
Weighted Average
Grant Date
Fair Value
15.50
-
18.53
13.37
-
13.37
-
On January 21, 2009, the Executive Compensation Committee of the Board of Directors approved a change in the equity compensation program
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. Th e vesting period for RSUs is generally one to three years from the date of the grant. RSUs do not have voting rights.
34
INSTEEL INDUSTRIES, INC. Form 10K
RSU grants and amortization expense are as follows:
(In thousands)
Restricted stock unit grants:
Units
Market value
Amortization expense
PART II
ITEM 8 Financial Statements and Supplementary Data
September 29, 2012 October 1, 2011
October 2, 2010
Year Ended
$
99
1,165 $
1,299
119
1,441 $
1,548
140
1,298
830
Th e remaining unrecognized compensation cost related to unvested RSUs on September 29, 2012 was $970,000 which is expected to be recognized
over a weighted average period of 1.75 years.
Th e following table summarizes RSU activity:
(Unit amounts in thousands)
Balance, October 3, 2009
Granted
Released
Balance, October 2, 2010
Granted
Released
Balance, October 1, 2011
Granted
Released
BALANCE, SEPTEMBER 29, 2012
NOTE 9
Income Taxes
Restricted
Stock Units
Outstanding
136
$
140
(37)
239
119
(30)
328
99
(134)
293
Weighted Average
Grant Date
Fair Value
8.71
9.29
7.55
9.23
12.08
9.39
10.25
11.77
10.30
10.74
Th e 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
September 29, 2012
Year Ended
October 1, 2011
October 2, 2010
$
$
$
$
20
62
82
781
54
835
917
33.6%
$
$
207
72
279
(12)
221
209
488
483.2%
668
415
1,083
(880)
(241)
(1,121)
(38)
(9.0%)
Th e reconciliation between income taxes computed at the federal statutory rate and the provision for income taxes on continuing operations is as follows:
$
(Dollars in thousands)
Provision for income taxes at federal statutory rate
Net eff ect of life insurance policies
Valuation allowance
Nondeductible stock option expense
State income taxes, net of federal tax benefi t
Revisions to estimates based on fi ling of fi nal tax return
Qualifi ed production activities deduction
Additional refund due to tax law change
Other, net
Provision for income taxes
$
September 29, 2012
954
(400)
(48)
161
94
5
-
-
151
917
35.0% $
(14.7)
(1.8)
5.9
3.5
0.2
-
-
5.5
33.6% $
Year Ended
October 1, 2011
35
(14)
263
189
(20)
(5)
-
-
40
488
34.7% $
(13.9)
260.4
187.1
(19.8)
(4.9)
-
-
39.6
483.2% $
October 2, 2010
147
(83)
(142)
180
180
(24)
(30)
(502)
236
(38)
35.0%
(19.8)
(33.9)
42.9
42.9
(5.7)
(7.1)
(119.5)
56.2
(9.0%)
INSTEEL INDUSTRIES, INC. Form 10K 35
PART II
ITEM 8 Financial Statements and Supplementary Data
Th e components of deferred tax assets and liabilities are as follows:
(In thousands)
Deferred tax assets:
Defi ned benefi t plans
Stock-based compensation
Federal net operating loss carryforward
Accrued expenses, asset reserves and state tax credits
Goodwill, amortizable for tax purposes
State net operating loss carryforwards
Valuation allowance
DEFERRED TAX ASSETS
Deferred tax liabilities:
Plant and equipment
Other reserves
DEFERRED TAX LIABILITIES
NET DEFERRED TAX (LIABILITY) ASSET
September 29, 2012
October 1, 2011
$
$
3,556 $
1,878
1,870
1,841
1,392
1,372
(679)
11,230
(10,637)
(722)
(11,359)
(129) $
3,105
1,683
679
1,625
1,812
1,368
(727)
9,545
(9,078)
(22)
(9,100)
445
As of September 29, 2012, the Company recorded a current deferred
tax asset (net of valuation allowance) of $4.0 million on its consolidated
balance sheet in other current assets and a non-current deferred tax
liability (net of valuation allowance) of $4.1 million in other liabilities.
As of October 1, 2011, the Company recorded a current deferred tax
asset (net of valuation allowance) of $2.1 million in other current assets
and a non-current deferred tax liability (net of valuation allowance)
of $1.7 million in other liabilities. Th e Company has $26.5 million
of state operating loss carryforwards that begin to expire in 2017, but
principally expire in 2017 – 2031. Th e Company has $5.3 million of
federal operating loss carryforwards that expire in 2031. Th e Company
has also recorded deferred tax assets for various state tax credits of
$261,000, which will begin to expire in 2014 and principally expire
between 2014 and 2019.
Th e realization of the Company’s deferred tax assets is entirely dependent
upon the Company’s ability to generate future taxable income in
applicable jurisdictions. Accounting principles generally accepted in
the United States (“GAAP”) requires that the Company periodically
assess 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 they will be fully utilized. As of September 29, 2012, the
Company had recorded a valuation allowance of $679,000 pertaining
to various state NOLs and tax credits that were not expected to be
utilized. Th e 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 carryforwards against which an allowance
had previously been provided or determine that such utilization is
more likely than not. Th e $48,000 decrease in the valuation allowance
during fi scal 2012 is primarily due to the use of certain state NOLs that
previously had a valuation allowance and a change in the Company’s
expectations regarding the future realization of deferred tax assets
related to certain state tax credits.
Th e Company has established contingency reserves for material,
known tax exposures based on management’s judgment as to the
estimated liabilities that would be incurred in connection with the
resolution of these matters. As of September 29, 2012, the Company
had approximately $76,000 of gross unrecognized tax benefi ts classifi ed
in accrued expenses, of which $61,000, if recognized, would reduce
its income tax expense in future periods. As of October 1, 2011, the
Company had approximately $34,000 of gross unrecognized tax benefi ts
classifi ed in accrued expenses and $33,000 of gross unrecognized tax
benefi ts classifi ed as other liabilities on its consolidated balance sheet,
of which $55,000, if recognized, would reduce its income tax expense
in future periods. Th e Company anticipates the gross unrecognized
tax benefi ts of $61,000 will be resolved during the next twelve months
and otherwise does not expect its unrecognized tax benefi ts to change
signifi cantly over that time.
A reconciliation of the beginning and ending balance of total unrecognized tax benefi ts for 2012 and 2011 is as follows:
(In thousands)
Balance at beginning of year
Increase in tax positions of prior years
Increase in tax position for current year
Settlement of tax position in current year
BALANCE AT END OF YEAR
$
$
2012
67 $
9
-
-
76 $
2011
762
8
4
(707)
67
Th e Company classifi es interest and penalties related to unrecognized
tax benefi ts as part of income tax expense. Th e accrued interest and
penalties related to unrecognized tax benefi ts was $56,000 and $50,000,
as of September 29, 2012 and October 1, 2011, respectively. Th ere was
$6,000 of expense incurred during 2012 related to interest and penalties.
Th e Company did not record any expense related to interest and
penalties during 2011.
Th e Company fi les U.S. federal income tax returns as well as state and
local income tax returns in various jurisdictions. Federal and various
state tax returns fi led by the Company subsequent to fi scal year 2008
remain subject to examination together with certain state tax returns
fi led by the Company subsequent to fi scal year 2003.
36
INSTEEL INDUSTRIES, INC. Form 10K
PART II
ITEM 8 Financial Statements and Supplementary Data
Th e results of operations and related non-recurring closure costs associated
with the industrial wire business have been reported as discontinued
operations for all prior periods presented. Additionally, the assets and
liabilities of the discontinued operations have been segregated in the
accompanying consolidated balance sheets.
Year Ended
October 2, 2010
$
$
232
(217)
15
NOTE 10 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 commercial
and industrial applications. Th e Company’s decision was based on the
weakening in the business outlook for the facility and the expected
continuation of diffi cult market conditions and reduced operating levels.
Manufacturing activities at the Virginia facility ceased in June 2006
and the Company liquidated the remaining assets of the business
in 2010 when it sold the real estate associated with the business for
$2.5 million, resulting in a $478,000 gain.
Th e results of discontinued operations are as follows:
(In thousands)
Earnings before income taxes
Income taxes
Net earnings
NOTE 11 Employee Benefi t Plans
Retirement plans
Th e Company has one defi ned benefi t pension plan, the Insteel Wire
Products Company Retirement Income Plan for Hourly Employees,
Wilmington, Delaware (“the Delaware Plan”). Th e Delaware Plan
provides benefi ts for eligible employees based primarily upon years
of service and compensation levels. Th e Company’s funding policy
is to contribute amounts at least equal to those required by law.
Th e Delaware Plan was frozen eff ective September 30, 2008 whereby
participants will no longer earn additional benefi ts. In February 2011,
as part of the planned closure of the Wilmington, Delaware facility,
the Company amended the Delaware Plan granting certain participants
additional service credit. Th e amendment resulted in a one-time charge
of $306,000 that was recorded during 2011 within restructuring charges
on the consolidated statements of operations. Th e Company made
contributions totaling $206,000 and $477,000 to the Delaware Plan
during 2012 and 2011, respectively, and expects to make contributions
of $362,000 during 2013.
Th e reconciliation of the projected benefi t 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 benefi t obligation:
Benefi t obligation at beginning of year
Amendments
Interest cost
Actuarial loss
Settlement
Distributions
BENEFIT OBLIGATION AT END OF YEAR
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Settlement
Distributions
FAIR VALUE OF PLAN ASSETS AT END OF YEAR
Reconciliation of funded status to net amount recognized:
Funded status
NET AMOUNT RECOGNIZED
September 29, 2012
Year Ended
October 1, 2011
October 2, 2010
$
$
$
$
$
$
3,231 $
-
146
218
(218)
(196)
$
3,181
1,660 $
287
206
(218)
(196)
$
1,739
(1,442) $
(1,442) $
4,280 $
306
193
69
(1,423)
(194)
$
3,231
3,017 $
10
477
(1,651)
(193)
$
1,660
(1,571) $
(1,571) $
4,289
-
211
182
-
(402)
4,280
3,053
366
-
-
(402)
3,017
(1,263)
(1,263)
INSTEEL INDUSTRIES, INC. Form 10K 37
PART II
ITEM 8 Financial Statements and Supplementary Data
(In thousands)
Amounts recognized on the consolidated balance sheet:
Accrued benefi t liability
Accumulated other comprehensive loss (net of tax)
NET AMOUNT RECOGNIZED
Amounts recognized in accumulated other comprehensive loss:
Unrecognized net loss
NET AMOUNT RECOGNIZED
Other changes in plan assets and benefi t obligations recognized in other
comprehensive income (loss):
Net loss (gain)
Amortization of net loss
$
$
$
$
$
TOTAL RECOGNIZED IN OTHER COMPREHENSIVE INCOME (LOSS) $
Net periodic pension cost for the Delaware Plan includes the following components:
September 29, 2012
Year Ended
October 1, 2011
October 2, 2010
(1,442) $
859
(583) $
1,386 $
$
1,386
(31) $
(49)
(80) $
(1,571) $
909
(662) $
1,466 $
$
1,466
(206) $
(304)
(510) $
(1,263)
1,225
(38)
1,975
1,975
16
(195)
(179)
(In thousands)
Interest cost
Expected return on plan assets
Recognized net actuarial loss
NET PERIODIC PENSION COST
September 29, 2012
Year Ended
October 1, 2011
October 2, 2010
$
$
146 $
(134)
49
61 $
193 $
(211)
304
286 $
211
(200)
195
206
Th e Company incurred settlement losses of $95,000 and $704,000 during 2012 and 2011, respectively, for lump-sum distributions to plan
participants. Th e estimated net loss that will be amortized from accumulated other comprehensive loss into net periodic pension cost during
2013 is $49,000.
Th e projected benefi t payments under the Delaware Plan are as follows:
Fiscal year(s)
2013
2014
2015
2016
2017
2018 - 2022
Th e assumptions used in the valuation of the Delaware Plan are as follows:
$
(In thousands)
211
210
206
211
205
996
Assumptions at year-end:
Discount rate
Rate of increase in compensation levels
Expected long-term rate of return on assets
Th e assumed discount rate is established as of the Company’s fi scal
year-end measurement date. In establishing the discount rate, the
Company reviews published market indices of high-quality debt
securities, adjusted as appropriate for duration, and high-quality bond
yield curves applicable to the expected benefi t payments of the plan.
To develop the expected long-term rate of return on asset assumption,
the Company considers the historical returns and the future expectations
of returns for each asset class, as well as the target asset allocation of
the Delaware Plan portfolio.
Th e fundamental goal underlying the investment policy for the Delaware
Plan is to ensure that its assets are invested in a prudent manner to meet
the obligations of the plan as such obligations come due. Th e primary
investment objectives include providing a total return that will promote
38
INSTEEL INDUSTRIES, INC. Form 10K
September 29, 2012
Measurement Date
October 1, 2011
October 2, 2010
4.00%
N/A
8.00%
4.75%
N/A
8.00%
5.25%
N/A
8.00%
the goal of benefi t security by attaining an appropriate ratio of plan
assets to plan obligations, diversifying investments across and within
asset classes, minimizing the impact of losses in single investments and
adhering to investment practices that comply with applicable laws and
regulations. Th e investment strategy for equities emphasizes U.S. large
cap equities with the portfolio’s performance measured against the
S&P 500 index or other applicable indices. Th e investment strategy
for fi xed 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.
Th e Delaware Plan has a long-term target asset mix of 60% equities and 40% fi xed income. Th e asset allocation for the Delaware Plan is as follows:
PART II
ITEM 8 Financial Statements and Supplementary Data
Large-cap equities
Mid-cap equities
Small-cap equities
International equities
Fixed income securities
Cash and cash equivalents
Target Allocation
September 29, 2012
35.0%
8.0%
9.0%
8.0%
40.0%
0.0%
Percentage of Plan Assets at Measurement Date
October 1, 2011
October 2, 2010
September 29, 2012
39.3%
8.9%
5.6%
5.9%
37.2%
3.1%
38.6%
9.1%
6.1%
6.0%
39.3%
0.9%
26.1%
9.0%
8.7%
16.8%
38.1%
1.3%
As of September 29, 2012, the Delaware Plan’s assets include equity
securities, fi xed income securities and cash and cash equivalents, and
were required to be measured at fair value. Th e Company uses a three-
tier hierarchy, which prioritizes the inputs used in measuring fair value,
defi ned as follows: Level 1 - observable inputs such as quoted prices
in active markets for identical assets and liabilities; Level 2 - inputs
other than quoted prices in active markets that are either directly or
indirectly observable; and Level 3 - unobservable inputs in which
little or no market data exists, thereby requiring the development of
valuation assumptions. Th e fair values of the Delaware Plan’s assets as
of September 29, 2012 and October 1, 2011 are as follows:
(In thousands)
Large-cap equities
Mid-cap equities
Small-cap equities
International equities
Fixed income securities
Cash and cash equivalents
TOTAL
(In thousands)
Large-cap equities
Mid-cap equities
Small-cap equities
International equities
Fixed income securities
Cash and cash equivalents
TOTAL
Total at
September 29, 2012
Quoted Prices
in Active Markets
(Level 1)
Observable
Inputs
(Level 2)
684 $
155
98
103
646
53
1,739 $
684 $
155
98
103
646
-
1,686 $
- $
-
-
-
-
53
53 $
Total at
October 1, 2011
Quoted Prices
in Active Markets
(Level 1)
Observable
Inputs
(Level 2)
641 $
151
101
100
652
15
1,660 $
641 $
151
101
100
652
-
1,645 $
- $
-
-
-
-
15
15 $
$
$
$
$
Unobservable
Inputs
(Level 3)
-
-
-
-
-
-
-
Unobservable
Inputs
(Level 3)
-
-
-
-
-
-
-
Equity securities are primarily direct investments in the stock of publicly-
traded companies that are valued based on the closing price reported
in an active market on which the individual securities are traded.
Fixed income securities are government and corporate debt securities
that are valued based on the closing price reported in an active market
on which the individual securities are traded.
Cash and cash equivalents are money market funds that are valued based
on the net asset value as determined by the fund each business day.
Supplemental employee retirement plan
Th e Company has Retirement Security Agreements (each, a “SERP”)
with certain of its employees (each, a “Participant”). Under the SERPs,
if the Participant remains in continuous service with the Company for
a period of at least 30 years, the Company will pay to the Participant
a supplemental retirement benefi t for the 15-year period following
the Participant’s retirement equal to 50% of the Participant’s highest
average annual base salary for fi ve 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
benefi t 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 benefi ts
to existing Participants.
INSTEEL INDUSTRIES, INC. Form 10K 39
PART II
ITEM 8 Financial Statements and Supplementary Data
Th e reconciliation of the projected benefi t obligation, plan assets, funded status of the plan and amounts recognized for the SERPs in the
Company’s consolidated balance sheets is as follows:
(In thousands)
Change in benefi t obligation:
Benefi t obligation at beginning of year
Service cost
Interest cost
Actuarial loss
Distributions
BENEFIT OBLIGATION AT END OF YEAR
Change in plan assets:
Actual employer contributions
Actual distributions
PLAN ASSETS AT FAIR VALUE AT END OF YEAR
Reconciliation of funded status to net amount recognized:
Funded status
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 benefi t obligations recognized in other
comprehensive income (loss):
Net loss
Prior service costs
Amortization of net loss
$
$
$
$
$
$
$
$
$
TOTAL RECOGNIZED IN OTHER COMPREHENSIVE INCOME (LOSS)
$
Net periodic pension cost for the SERPs includes the following components:
September 29, 2012
Year Ended
October 1, 2011
October 2, 2010
6,102 $
217
301
1,085
(244)
$
7,461
244 $
(244)
$
-
(7,461) $
(7,461) $
2,324 $
227
$
2,551
1,085 $
(227)
(91)
$
767
5,590 $
176
282
297
(243)
$
6,102
244 $
(244)
$
-
(6,102) $
(6,102) $
1,330 $
454
$
1,784
297 $
(227)
(34)
$
36
5,218
165
278
95
(166)
5,590
166
(166)
-
(5,590)
(5,590)
1,067
681
1,748
95
(227)
(30)
(162)
(In thousands)
Service cost
Interest cost
Prior service cost
Amortization of net loss
NET PERIODIC PENSION COST
September 29, 2012
October 1, 2011
Year Ended
$
$
217 $
301
227
91
836 $
176 $
282
227
34
719 $
October 2, 2010
165
278
227
31
701
Th e estimated net loss and prior service costs that will be amortized from accumulated other comprehensive loss into net periodic pension cost
during 2013 are $138,000 and $227,000, respectively.
Th e assumptions used in the valuation of the SERPs are as follows:
Assumptions at year-end:
Discount rate
Rate of increase in compensation levels
September 29, 2012
October 1, 2011
October 2, 2010
Measurement Date
4.00%
3.00%
4.75%
3.00%
5.25%
3.00%
Th e assumed discount rate is established as of the Company’s fi scal
year-end measurement date. In establishing the discount rate, the
Company reviews published market indices of high-quality debt
securities, adjusted as appropriate for duration, and high-quality bond
yield curves applicable to the expected benefi t payments of the plan.
Th e SERPs expected rate of increase in compensation levels is based
on the anticipated increases in annual compensation.
40
INSTEEL INDUSTRIES, INC. Form 10K
PART II
ITEM 8 Financial Statements and Supplementary Data
During 2010 - 2012, employees were permitted to contribute up to
75% of their annual compensation to the Plan, limited to a maximum
annual amount as set periodically by the Internal Revenue Code. Th e 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. During 2010 -
2012, the Company matched employee contributions up to 100% of
the fi rst 1% and 50% of the next 5% of eligible compensation that
was contributed by employees. Company contributions to the Plan
were $734,000 in 2012, $604,000 in 2011 and $439,000 in 2010.
Voluntary Employee Benefi ciary Associations
(“VEBA”)
Th e 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 $3.4 million in 2012, $3.3 million in
2011 and $2.2 million in 2010. Th e Company is primarily self-insured
for each employee’s healthcare costs, carrying stop-loss insurance
coverage for individual claims in excess of $150,000 per benefi t plan
year. Th e Company’s self-insurance liabilities are based on the total
estimated costs of claims fi led and claims incurred but not reported,
less amounts paid against such claims. Management reviews current
and historical claims data in developing its estimates.
Th e projected benefi t payments under the SERPs are as follows:
Fiscal year(s)
2013
2014
2015
2016
2017
2018- 2022
$
(In thousands)
244
244
244
294
325
1,536
As noted above, the SERPs were revised in 2005 to add Participants and
increase benefi ts to certain existing Participants. However, for certain
Participants the Company still maintains the benefi ts of the respective
SERPs that were in eff ect prior to the 2005 changes, which entitles them
to fi xed cash benefi ts upon retirement at age 65, payable annually for
15 years. Th ese SERPs are supported by life insurance policies on the
Participants purchased and owned by the Company. Th e cash benefi ts
paid under these SERPs were $62,000 in 2012, $74,000 in 2011 and
$74,000 in 2010. Th e expense attributable to these SERPs was $15,000
in 2012, $14,000 in 2011 and $13,000 in 2010.
Retirement savings plan
In 1996, the Company adopted the Retirement Savings Plan of Insteel
Industries, Inc. (“the Plan”) to provide retirement benefi ts and stock
ownership for its employees. Th e Plan is an amendment and restatement
of the Company’s Employee Stock Ownership Plan. 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.
NOTE 12 Commitments and Contingencies
Leases and purchase commitments
Th e Company leases a portion of its equipment under operating leases
that expire at various dates through 2017. Under most lease agreements,
the Company pays insurance, taxes and maintenance. Rental expense
for operating leases was $908,000 in 2012, $1.5 million in 2011 and
$889,000 in 2010. Minimum rental commitments under all non-
cancelable leases with an initial term in excess of one year are payable
as follows: 2013, $813,000; 2014, $607,000; 2015, $317,000; 2016,
$45,000; 2017 and beyond, $364,000.
As of September 29, 2012, the Company had $34.6 million in non-
cancelable purchase commitments for raw material extending as long as
approximately 100 days and $4.0 million of contractual commitments
for the purchase of certain equipment that had not been fulfi lled and
are not refl ected in the consolidated fi nancial statements.
Legal proceedings
On November 19, 2007, Dwyidag Systems International, Inc (“DSI”)
fi led a third-party lawsuit in the Ohio Court of Claims alleging that
certain epoxy-coated strand sold by the Company to DSI in 2002,
and supplied by DSI to the Ohio Department of Transportation
(“ODOT”) for a bridge project, was defective. Th e third-party action
sought recovery of any damages which could have been assessed against
DSI in the action fi led against it by ODOT, which allegedly could have
been in excess of $8.3 million, plus $2.7 million in damages allegedly
incurred by DSI. In 2009, the Ohio court granted the Company’s
motion for summary judgment as to the third-party claim against it
on the grounds that the statute of limitations had expired, but DSI
fi led an interlocutory appeal of that ruling. In addition, the Company
previously fi led a lawsuit against DSI in the North Carolina Superior
Court in Surry County seeking recovery of $1.4 million (plus interest)
owed for other products sold by the Company to DSI, which action
was removed by DSI to the U.S. District Court for the Middle District
of North Carolina.
On October 7, 2010, the Company participated in a structured
mediation with ODOT and DSI which led to settlement of all of the
above legal matters. Th e parties dismissed the action in the Middle
District of North Carolina on December 23, 2010, and the Ohio Court
of Claims action was dismissed on January 21, 2011. Pursuant to the
settlement agreement, which was approved by the Ohio Court of Claims
on January 5, 2011, the parties released each other from all liability
arising out of the sale of strand for the bridge project. In connection
with the settlement, the Company reserved the remaining outstanding
balance that it was owed by DSI and agreed to make a cash payment
of $600,000 to ODOT. During fi scal 2011, the Company paid the
$600,000 settlement to ODOT and wrote off the DSI receivables
against the previously established reserve. Th e resolution of this matter
INSTEEL INDUSTRIES, INC. Form 10K 41
PART II
ITEM 8 Financial Statements and Supplementary Data
has enabled the Company to restore its commercial relationship with
DSI that had existed prior to the initiation of the legal proceedings.
Th e Company’s fi scal 2010 results refl ect a $1.5 million charge relating
to the net eff ect of the settlement.
Th e Company is also involved in various other lawsuits, claims,
investigations and proceedings, including commercial, environmental
and employment matters, which arise in the ordinary course of business.
Th e Company does not expect that the ultimate cost to resolve these
other matters will have a material adverse eff ect on its fi nancial position,
results of operations or cash fl ows.
Severance and change of control agreements
Th e Company has entered into severance agreements with its Chief
Executive Offi cer and Chief Financial Offi cer that provide certain
termination benefi ts to these executives in the event that an executive’s
employment with the Company is terminated without cause. Th e initial
term of each agreement is two years and the agreements provide for an
automatic renewal of one year unless the Company or the executive
provides notice of termination as specifi ed in the agreement. Under the
terms of these agreements, in the event of termination without cause,
the executives would receive termination benefi ts equal to one and
one-half times the executive’s annual base salary in eff ect on the
termination date and the continuation of health and welfare benefi ts
for eighteen months. In addition, all of the executive’s stock options
and restricted stock would vest immediately and outplacement services
would be provided.
Th e Company has also entered into change in control agreements
with key members of management, including its executive offi cers,
which specify the terms of separation in the event that termination of
employment followed a change in control of the Company. Th e initial
term of each agreement is two years and the agreements provide
for an automatic renewal of one year unless the Company or the
executive provides notice of termination as specifi ed in the agreement.
Th e agreements do not provide assurances 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 control. Under the
terms of these agreements, in the event of termination within two
years of a change of control, the Chief Executive Offi cer and Chief
Financial Offi cer would receive severance benefi ts equal to two times
base compensation, two times the average bonus for the prior three
years and the continuation of health and welfare benefi ts for two years.
Th e other key members of management, including the Company’s other
two executive offi cers, would receive severance benefi ts equal to one
times base compensation, one times the average bonus for the prior
three years and the continuation of health and welfare benefi ts for one
year. In addition, all of the executive’s stock options and restricted stock
would vest immediately and outplacement services would be provided.
NOTE 13 Earnings Per Share
Eff ective October 4, 2009, the Company adopted certain provisions of ASC Topic 260, Earnings Per Share, which requires unvested share-based
payment awards that contain non-forfeitable rights to dividends (whether paid or unpaid) to be treated as participating securities and included
in the computation of basic earnings per share. Th e Company’s participating securities are its unvested restricted stock awards (“RSAs”).
Th e computation of basic and diluted earnings per share attributable to common shareholders is as follows:
(In thousands, except per share amounts)
Earnings (loss) from continuing operations
Less allocation to participating securities
Available to Insteel common shareholders
Earnings from discontinued operations net of income taxes
Less allocation to participating securities
Available to Insteel common shareholders
Net earnings (loss)
Less allocation to participating securities
Available to Insteel common shareholders
Basic weighted average shares outstanding
Dilutive eff ect of stock-based compensation
Diluted weighted average shares outstanding
Per share basic and diluted:
Earnings (loss) from continuing operations
Loss from discontinued operations
NET EARNINGS (LOSS)
September 29, 2012
Year Ended
October 1, 2011
October 2, 2010
1,809 $
-
1,809 $
- $
-
- $
1,809 $
-
1,809 $
17,664
326
17,990
0.10 $
-
0.10 $
(387) $
-
(387) $
- $
-
- $
(387) $
-
(387) $
17,562
-
17,562
(0.02) $
-
(0.02) $
458
(2)
456
15
-
15
473
(2)
471
17,466
98
17,564
0.03
-
0.03
$
$
$
$
$
$
$
$
Options, restricted stock awards and RSUs representing 600,000 shares in 2012, 582,000 shares in 2011 and 577,000 shares in 2010 were
antidilutive and were not included in the diluted EPS computation. Options and restricted stock awards representing 223,000 shares were not
included in the diluted EPS calculation in 2011 due to the net losses that were incurred.
42
INSTEEL INDUSTRIES, INC. Form 10K
PART II
ITEM 8 Financial Statements and Supplementary Data
NOTE 14 Business Segment Information
Following the Company’s exit from the industrial wire business (see
Note 10 to the consolidated fi nancial statements), its operations are
entirely focused on the manufacture and marketing of concrete reinforcing
products for the concrete construction industry. Th e Company’s concrete
reinforcing products consist of welded wire reinforcement and PC strand.
Based on the criteria specifi ed in ASC Topic 280, Segment Reporting,
the Company has one reportable segment. Th e results of operations
for the industrial wire business have been reported as discontinued
operations for all periods presented.
Th e Company’s net sales and long-lived assets (consisting of net property, plant and equipment and the cash surrender value of life insurance
policies) for continuing operations by geographic region are as follows:
(In thousands)
Net sales:
United States
Foreign
TOTAL
Long-lived assets:
United States
Foreign
TOTAL
Th e Company’s net sales for continuing operations by product line are as follows:
(In thousands)
Net sales:
Welded wire reinforcement
PC strand
TOTAL
September 29, 2012 October 1, 2011 October 2, 2010
Year Ended
358,539 $
4,764
363,303 $
92,862 $
-
92,862 $
329,168 $
7,741
336,909 $
93,490 $
-
93,490 $
205,444
6,142
211,586
63,178
-
63,178
September 29, 2012 October 1, 2011 October 2, 2010
Year Ended
230,049 $
133,254
363,303 $
208,741 $
128,168
336,909 $
109,551
102,035
211,586
$
$
$
$
$
$
Th ere were no customers that accounted for 10% or more of the Company’s net sales in 2012, 2011 and 2010.
NOTE 15 Related Party Transactions
Sales to a company affi liated with one of the Company’s directors amounted to $280,000 in 2012, $475,000 in 2011 and $423,000 in 2010.
Purchases from a company affi liated with one of the Company’s directors amounted to $6,000 in 2011. Th ere were no such related party purchases
in 2012 and 2010.
NOTE 16 Comprehensive Loss
Th e accumulated other comprehensive loss was comprised of the adjustment to the defi ned benefi t plan liability as follows:
(In thousands)
Adjustment to defi ned benefi t plan liability, net of taxes
TOTAL ACCUMULATED OTHER COMPREHENSIVE LOSS
September 29, 2012
Year Ended
October 1, 2011
$
$
(2,441) $
(2,441) $
(2,015) $
(2,015) $
October 2, 2010
(2,309)
(2,309)
INSTEEL INDUSTRIES, INC. Form 10K 43
PART II
ITEM 8 Financial Statements and Supplementary Data
NOTE 17 Other Financial Data
Balance sheet information:
(In thousands)
Accounts receivable, net:
Accounts receivable
Less allowance for doubtful accounts
TOTAL
Inventories, net:
Raw materials
Work in process
Finished goods
TOTAL
Other current assets:
Current deferred tax asset
Prepaid insurance
Other
TOTAL
Other assets:
Cash surrender value of life insurance policies, net of loans of $486 and $446
Capitalized fi nancing 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
Interest
Deferred revenues
Restructuring liabilities
Other
TOTAL
Other liabilities:
Deferred compensation
Deferred income taxes
Other
TOTAL
44
INSTEEL INDUSTRIES, INC. Form 10K
September 29, 2012
October 1, 2011
43,261 $
(1,123)
$
42,138
38,911 $
3,634
23,229
$
65,774
3,958 $
1,755 $
1,433
$
7,146
5,146 $
274
348
$
5,768
9,131 $
41,585
121,321
5,270
177,307
(89,591)
$
87,716
1,442 $
1,342
1,233
716
327
29
-
-
788
$
5,877
7,487 $
4,087
-
$
11,574
42,732
(761)
41,971
40,536
3,771
32,067
76,374
2,156
716
1,221
4,093
4,006
218
374
4,598
8,586
40,773
118,518
2,078
169,955
(80,471)
89,484
1,571
1,656
1,234
791
333
387
387
142
876
7,377
6,149
1,711
56
7,916
$
$
$
$
$
$
$
$
$
$
$
$
$
$
PART II
ITEM 8 Financial Statements and Supplementary Data
other securities of the Company) having a value equal to two times
the purchase price or, at the discretion of the Board, upon exercise and
without payment of the purchase price, common stock (or, in certain
circumstances, cash, property or other securities of the Company)
having a value equal to the diff erence between the purchase price and
the value of the consideration which a person exercising the right and
paying the purchase price would receive. Rights that are or (under
specifi ed circumstances) were, benefi cially owned by any acquiring person
will be null and void. Th e purchase price payable and the number of
Units of Preferred Stock or other securities or property issuable upon
exercise of the rights are subject to adjustment from time to time. At
any time after any person becomes an acquiring person, 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
refl ect 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.
Th e 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.
NOTE 18 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
common stock as of May 17, 1999 pursuant to a Rights Agreement,
dated as of April 27, 1999. Th e 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, eff ective April 25, 2009,
the Company’s Board of Directors amended the Rights Agreement to,
among other changes, extend the fi nal expiration date and adjust the
purchase price payable upon exercise of a right.
Th e rights are not currently exercisable but trade with the Company’s
common stock shares and become exercisable on the distribution date.
Th e distribution date will occur upon the earliest of 10 business days
following a public announcement that either a person or group of
affi liated or associated persons (an “acquiring person”) has acquired,
or obtained the right to acquire, benefi cial 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 off er
or exchange off er that would, if consummated, result in an acquiring
person benefi cially 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 specifi ed, 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
NOTE 19 Product Warranties
Th e Company’s products are used in applications which are subject
to inherent risks including performance defi ciencies, personal injury,
property damage, environmental contamination or loss of production.
Th e Company warrants its products to meet certain specifi cations and
actual or claimed defi ciencies from these specifi cations may give rise to
claims. Th e Company does not maintain a reserve for warranties as the
historical claims have been immaterial. Th e Company maintains product
liability insurance coverage to minimize its exposure to such risks.
NOTE 20 Share Repurchases
On November 18, 2008, the Company’s Board of Directors approved
a share repurchase authorization to buy back up to $25.0 million of
the Company’s outstanding common stock in the open market or in
privately negotiated transactions (the “New Authorization”). Repurchases
may be made from time to time in the open market or in privately
negotiated transactions subject to market conditions, applicable legal
requirements and other factors. Th e Company is not obligated to
acquire any particular amount of common stock and may commence
or suspend the program at any time at its discretion without prior
notice. Th e New Authorization continues in eff ect until terminated
by the Board of Directors. As of September 29, 2012, there was
$24.8 million remaining available for future share repurchases under
this authorization. During 2011 and 2010, the Company repurchased
$143,000 or 12,633 shares and $79,000 or 8,486 shares, respectively,
of its common stock through restricted stock net-share settlements.
Th ere were no share repurchases during 2012.
INSTEEL INDUSTRIES, INC. Form 10K 45
PART II
ITEM 8 Financial Statements and Supplementary Data
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 subsidiaries (a North Carolina corporation) as of
September 29, 2012 and October 1, 2011, and the related consolidated
statements of operations, shareholders’ equity and comprehensive
income (loss) and cash fl ows for each of the three years in the period
ended September 29, 2012. Our audits of the basic fi nancial statements
included the fi nancial statement schedule listed in the index appearing
under Schedule II – Valuation and Qualifying Accounts . Th ese fi nancial
statements and fi nancial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion
on these fi nancial statements and fi nancial statement schedule based
on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Th ose standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the fi nancial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the fi nancial statements.
An audit also includes assessing the accounting principles used and
signifi cant estimates made by management, as well as evaluating the
overall fi nancial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated fi nancial statements referred to
above present fairly, in all material respects, the fi nancial position of
Insteel Industries, Inc. and subsidiaries as of September 29, 2012 and
October 1, 2011, and the results of their operations and their cash fl ows
for each of the three years in the period ended September 29, 2012
in conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the related fi nancial
statement schedule, when considered in relation to the basic consolidated
fi nancial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the Company’s
internal control over fi nancial reporting as of September 29, 2012,
based on criteria established in Internal Control--Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and our report dated November 1, 2012 expressed
an unqualifi ed opinion.
/s/ Grant Th ornton LLP
Charlotte, North Carolina
November 1, 2012
46
INSTEEL INDUSTRIES, INC. Form 10K
PART II
ITEM 9A Controls and Procedures
Schedule II - Valuation and Qualifying Accounts
Years Ended September 29, 2012, October 1, 2011
and October 2, 2010
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(In thousands)
Balance, beginning of year
Amounts charged to earnings
Write-off s, net of recoveries
BALANCE, END OF YEAR
September 29, 2012
Year Ended
October 1, 2011
October 2, 2010
$
$
761 $
449
(87)
$
1,123
2,296 $
307
(1,842)
$
761
1,057
1,426
(187)
2,296
ITEM 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
None.
ITEM 9A Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have conducted an evaluation of the eff ectiveness of our disclosure
controls and procedures as of September 29, 2012. Th is evaluation
was conducted under the supervision and with the participation
of management, including our principal executive offi cer and our
principal fi nancial offi cer. Based upon that evaluation, our principal
executive offi cer and our principal fi nancial offi cer concluded that
our disclosure controls and procedures were eff ective to ensure that
information required to be disclosed in the reports that we fi le or
submit under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), is recorded, processed, summarized and reported
within the time periods specifi ed in the Commission’s rules and
forms. Furthermore, we concluded that our disclosure controls and
procedures were eff ective to ensure that information is accumulated
and communicated to management, including our principal executive
offi cer and our principal fi nancial offi cer, as appropriate to allow timely
decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over fi nancial reporting. Internal control over fi nancial
reporting is a process to provide reasonable assurance regarding the
reliability of our fi nancial reporting for external purposes in accordance
with generally accepted accounting principles. Internal control over
fi nancial reporting includes: (1) maintaining records that in reasonable
detail accurately and fairly refl ect the transactions and dispositions of
assets; (2) providing reasonable assurance that transactions are recorded
as necessary for preparation of fi nancial statements, and that receipts and
expenditures are made in accordance with authorizations of management
and directors; and (3) providing reasonable assurance that unauthorized
acquisition, use or disposition of assets that could have a material eff ect
on fi nancial statements would be prevented or detected on a timely basis.
Because of its inherent limitations, internal control over fi nancial reporting
is not intended to provide absolute assurance that a misstatement of
fi nancial statements would be prevented or detected. Also, projections of
any evaluation of eff ectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Management assessed the eff ectiveness of our internal control over
fi nancial 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 fi nancial reporting was eff ective
as of September 29, 2012. During the quarter ended September 29, 2012,
there were no changes in our internal control over fi nancial reporting that
have materially aff ected, or are reasonably likely to materially aff ect, our
internal control over fi nancial reporting.
Our independent registered public accounting fi rm has issued an audit
report on the eff ectiveness of our internal control over fi nancial reporting
as of September 29, 2012. Th e report appears below.
INSTEEL INDUSTRIES, INC. Form 10K 47
PART II
ITEM 9A Controls and Procedures
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 subsidiaries’ (a North
Carolina corporation) internal control over fi nancial reporting as
of September 29, 2012, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Insteel
Industries, Inc. and subsidiaries’ management is responsible for
maintaining eff ective internal control over fi nancial reporting and
for its assessment of the eff ectiveness of internal control over fi nancial
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 subsidiaries’ internal control
over fi nancial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Th ose standards
require that we plan and perform the audit to obtain reasonable assurance
about whether eff ective internal control over fi nancial reporting was
maintained in all material respects. Our audit included obtaining an
understanding of internal control over fi nancial reporting, assessing the
risk that a material weakness exists, testing and evaluating the design
and operating eff ectiveness 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 fi nancial reporting is a process
designed to provide reasonable assurance regarding the reliability of
fi nancial reporting and the preparation of fi nancial statements for
external purposes in accordance with generally accepted accounting
principles. A company’s internal control over fi nancial reporting includes
those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly refl ect the
transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to
permit preparation of fi nancial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have
a material eff ect on the fi nancial statements.
Because of its inherent limitations, internal control over fi nancial
reporting may not prevent or detect misstatements. Also, projections
of any evaluation of eff ectiveness to future periods are subject to
the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, Insteel Industries, Inc. and subsidiaries maintained,
in all material respects, eff ective internal control over fi nancial reporting
as of September 29, 2012, 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 Oversight Board (United States), the
consolidated balance sheets of Insteel Industries, Inc. and subsidiaries as
of September 29, 2012 and October 1, 2011 and the related consolidated
statements of operations, shareholders’ equity and comprehensive
income (loss) and cash fl ows for each of the three years in the period
ended September 29, 2012, and our report dated November 1, 2012,
expressed an unqualifi ed opinion.
/s/ Grant Th ornton LLP
Charlotte, North Carolina
November 1, 2012
48
INSTEEL INDUSTRIES, INC. Form 10K
PART III
ITEM 11 Executive Compensation
ITEM 9B Other Information
None.
PART III
ITEM 10 Directors, Executive Offi cers and Corporate
Governance
Th e information called for by this item and not presented herein appears under the captions “Item Number One: Election of Directors”, “Security
Ownership – Section 16(a) Benefi cial Reporting Compliance” and “Corporate Governance Guidelines and Board Matters” in the Company’s
Proxy Statement for the 2013 Annual Meeting of Shareholders and is incorporated herein by reference. Information on executive offi cers appears
under the caption “Executive Offi cers of the Company” in Item 1 of this report.
We have adopted a Code of Business Conduct that applies to all directors, offi cers and employees which is available on our web site at http://
investor.insteel.com/documents.com. To the extent permissible under applicable law (the rules of the SEC or NASDAQ listing standards), we intend
to satisfy the disclosure requirement under Item 5.05 of Form 8-K by posting on our web site any amendment or waiver to a provision of our
Code of Business Conduct that requires disclosure under applicable law (the rules of the SEC or NASDAQ listing standards). Th e Company’s
web site does not constitute part of this Annual Report on Form 10-K.
ITEM 11 Executive Compensation
Th e information called for by this item appears under the captions “Executive Compensation”, “Compensation Committee Interlocks and
Insider Participation” and “Director Compensation” in the Company’s Proxy Statement for the 2013 Annual Meeting of Shareholders and is
incorporated herein by reference.
INSTEEL INDUSTRIES, INC. Form 10K 49
PART III
ITEM 12 Security Ownership of Certain Benefi cial Owners and Management and Related Stockholder Matters
ITEM 12 Security Ownership of Certain Benefi cial Owners
and Management and Related Stockholder Matters
Th e information called for by this item and not presented herein appears under the captions “Voting Securities” and “Security Ownership” in
the Company’s Proxy Statement for the 2013 Annual Meeting of Shareholders and is incorporated herein by reference.
EQUITY COMPENSATION PLAN INFORMATION
SEPTEMBER 29, 2012
(a)
Number of Securities
to be Issued
Upon Exercise of
Outstanding Options,
Warrants and Rights
(b)
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
11.09
(c)
Number of Securities Remaining Available
for Future Issuance Under Equity
Compensation Plans (Excluding Securities
Refl ected in Column (a))
Plan Category
(In thousands, except exercise price amount)
786(1)
Equity compensation plans approved by security holders
(1) In addition to being available for future issuance upon the exercise of stock options that may be granted after September 29, 2012, the securities shown are available for
1,160 $
future issuance in the form of restricted stock, restricted stock units and other stock-based awards made under our 2005 Equity Incentive Plan, as amended.
We do not have any equity compensation plans that have not been approved by shareholders.
ITEM 13 Certain Relationships and Related Transactions,
and Director Independence
Th e information called for by this item appears under the captions “Certain Relationships and Related Person Transactions” and “Corporate
Governance Guidelines and Board Matters” in the Company’s Proxy Statement for the 2013 Annual Meeting of Shareholders and is incorporated
herein by reference.
ITEM 14 Principal Accounting Fees and Services
Th e information called for by this item appears under the caption “Item Number Four: Ratifi cation of the Appointment of Grant Th ornton LLP”
in the Company’s Proxy Statement for the 2013 Annual Meeting of Shareholders and is incorporated herein by reference.
50
INSTEEL INDUSTRIES, INC. Form 10K
PART IV
ITEM 15 Exhibits, Financial Statement Schedules
PART IV
ITEM 15 Exhibits, Financial Statement Schedules
(a)(1) Financial Statements
Th e fi nancial statements as set forth under Item 8 are fi led as part of this report.
(a)(2) Financial Statement Schedules
Supplemental Schedule II - Valuation and Qualifying Accounts appears on page 47 of this report.
All other schedules have been omitted because they are either not required or not applicable.
(a)(3) Exhibits
Th e list of exhibits fi led as part of this annual report is set forth on the Exhibit Index immediately preceding such exhibits and is
incorporated herein by reference.
(b) Exhibits
See Exhibit Index on pages 53 and 54.
(c) Financial Statement Schedules
See Item 15(a)(2) above.
INSTEEL INDUSTRIES, INC. Form 10K 51
PART IV
ITEM 15 Signatures
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
INSTEEL INDUSTRIES, INC.
By:
Registrant
/S/ MICHAEL C. GAZMARIAN
Michael C. Gazmarian
Vice President, Chief Financial Offi cer and Treasurer
Date: November 1, 2012
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on November 1, 2012 below by the following
persons on behalf of the registrant and in the capacities indicated:
Name and Signature
/s/ H. O. WOLTZ III
H. O. Woltz III
/s/ MICHAEL C. GAZMARIAN
Michael C. Gazmarian
/s/ SCOT R. JAFROODI
Scot R. Jafroodi
/s/ DUNCAN S. GAGE
Duncan S. Gage
/s/ LOUIS E. HANNEN
Louis E. Hannen
/s/ CHARLES B. NEWSOME
Charles B. Newsome
/s/ GARY L. PECHOTA
Gary L. Pechota
/s/ W. ALLEN ROGERS II
W. Allen Rogers II
/s/ C. RICHARD VAUGHN
C. Richard Vaughn
Position(s)
President, Chief Executive Offi cer and Chairman of the Board (Principal Executive Offi cer)
Vice President, Chief Financial Offi cer and Treasurer (Principal Financial Offi cer)
Chief Accounting Offi cer and Corporate Controller (Principal Accounting Offi cer)
Director
Director
Director
Director
Director
Director
52
INSTEEL INDUSTRIES, INC. Form 10K
ITEM 15 Exhibit Index to Annual Report on Form 10-K of Insteel Industries, Inc
PART IV
Exhibit Index to Annual Report on Form 10-K of Insteel
Industries, Inc. for Year Ended September 29, 2012
Exhibit
Number Description
3.1
3.2
3.3
3.4
3.5
4.1
4.2
10.1
10.4
10.5*
10.9*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.20*
Restated Articles of Incorporation for the Company (incorporated by reference to Exhibit 3.1 of the Company’s Registration Statement
on Form S-1 fi led on May 2, 1985).
Articles of Amendment to the Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of the Company’s
Current Report on Form 8-K dated May 3, 1988).
Articles of Amendment to the Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of the Company’s
Quarterly Report on Form 10-Q for the quarter ended April 3, 1999 fi led on May 14, 1999).
Articles of Amendment to the Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of the Company’s
Quarterly Report on Form 10-Q for the quarter ended April 3, 2010 fi led on April 26, 2010).
Bylaws of the Company (as last amended February 8, 2011) (incorporated by reference to Exhibit 3.2 of the Company’s Current Report
on Form 8-K fi led on February 9, 2011).
Rights Agreement dated April 27, 1999 by and between the Company and First Union National Bank, as Rights Agent (incorporated
by reference to Exhibit 99.1 of the Company’s Registration Statement on Form 8-A fi led on May 7, 1999).
Amendment No. 1 to the Rights Agreement dated as of April 25, 2009, between the Company and American Stock Transfer & Trust
Company, LLC (as Successor Rights Agent to First Union National Bank) (incorporated by reference to Exhibit 4.2 of the Company’s Current
Report on Form 8-K fi led on April 27, 2009).
First Amendment to Second Amended and Restated Credit Agreement dated as of February 6, 2012, among Insteel Wire Products Company,
as Borrower; Insteel Industries, Inc. as a Credit Party; Intercontinental Metals Corporation, as a Credit Party; and General Electric Capital
Corporation, as Agent and Lender (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K fi led on
February 6, 2012).
Second Amended and Restated Credit Agreement dated as of June 2, 2010, among Insteel Wire Products Company, as Borrower; Insteel
Industries, Inc., as a Credit Party; Intercontinental Metals Corporation, as a Credit Party; and General Electric Capital Corporation, as Agent
and Lender (incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q fi led on April 26, 2011).
1994 Employee Stock Option Plan of Insteel Industries, Inc. (as amended and restated eff ective February 1, 2000) (incorporated by reference
to Exhibit 99 of the Company’s Registration Statement on Form S-8 fi led on February 23, 2000).
1994 Director Stock Option Plan of the Company (as Amended and Restated Eff ective as of April 28, 1998) (incorporated by reference
to Exhibit 10.12 of the Company’s Annual Report on Form 10-K for the year ended October 3, 1998 fi led on December 3, 1998).
Insteel Industries, Inc. Return on Capital Incentive Compensation Plan (as amended eff ective September 18, 2007) (incorporated by reference
to Exhibit 10.1 of the Company’s Current Report on Form 8-K fi led on September 21, 2007).
Form of Amended and Restated Change in Control Severance Agreements between the Company and each of H.O. Woltz III and Michael
C. Gazmarian, respectively, each dated November 14, 2006; each agreement is substantially identical to the form in all material respects
(incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K fi led on November 16, 2006).
Form of Amended and Restated Severance Agreements with H.O. Woltz III and Michael C. Gazmarian dated November 14, 2006 (each
agreement is substantially identical to the form in all material respects) (incorporated by reference to Exhibit 99.6 of the Company’s Current
Report on Form 8-K fi led on November 16, 2006).
Change in Control Severance Agreement between the Company and James F. Petelle dated November 14, 2006 (incorporated by reference
to Exhibit 99.3 of the Company’s Current Report on Form 8-K fi led on November 16, 2006).
Insteel Industries, Inc. Director Compensation Plan (incorporated by reference to Exhibit 10.30 of the Company’s Annual Report
on Form 10-K for the year ended September 30, 1997 fi led on December 10, 1997).
Amended and Restated Retirement Security Agreement by and between the Company and H.O. Woltz III dated September 19, 2007
(incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K fi led on September 21, 2007).
Form of Retirement Security Agreement between the Company and each of Michael C. Gazmarian, James F. Petelle and Richard T. Wagner,
respectively, dated September 19, 2007; each agreement is substantially identical to the form in all material respects (incorporated by reference
to Exhibit 10.3 of the Company’s Current Report on Form 8-K fi led on September 21, 2007).
Letter of Employment between the Company and James F. Petelle, dated August 23, 2006 (incorporated by reference to Exhibit 99.7
of the Company’s Current Report on Form 8-K fi led on November 16, 2006).
10.20.1* Relocation Proposal between the Company and James F. Petelle, dated August 23, 2006 (incorporated by reference to Exhibit 10.20.1
10.20.2*
10.21*
10.22*
of the Company’s Annual Report on Form 10-K for the year ended October 3, 2009 fi led on November 9, 2009).
Addendum to Relocation Proposal between the Company and James F. Petelle, dated September 18, 2009 (incorporated by reference
to Exhibit 10.20.2 of the Company’s Annual Report on Form 10-K for the year ended October 3, 2009 fi led on November 9, 2009).
Amended and Restated Change in Control Severance Agreement between the Company and Richard T. Wagner dated November 14, 2006
(incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K fi led on February 15, 2007).
2005 Equity Incentive Plan of Insteel Industries, Inc., as amended on November 8, 2011 (incorporated by reference to Exhibit 10.22
to the Company’s Annual Report on Form 10-K fi led on November 10, 2011).
INSTEEL INDUSTRIES, INC. Form 10K 53
PART IV
ITEM 15 Exhibit Index to Annual Report on Form 10-K of Insteel Industries, Inc
Exhibit
Number Description
10.23*
10.24*
10.25*
10.26
21.1
23.1
31.1
31.2
32.1
32.2
101**
Summary of amendments to the Insteel Industries, Inc. Director Compensation Plan (incorporated by reference to exhibit 10.23
of the Company’s Annual Report on Form 10-K for the fi scal year ended September 27, 2008 fi led on November 18, 2008).
Form of Notice of Grant of Restricted Stock Units and Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.1
of the Company’s Current Report on Form 8-K fi led on January 23, 2009).
Insteel Industries, Inc. Return on Capital Incentive Compensation Plan (as amended and restated eff ective August 12, 2008)
(incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K fi led on February 13, 2009).
Asset Purchase Agreement between Insteel Wire Products Company and Ivy Steel & Wire, Inc. dated as of November 19, 2010
(incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K fi led on November 22, 2010).
List of Subsidiaries of Insteel Industries, Inc. at September 29, 2012.
Consent of Independent Registered Public Accounting Firm.
Certifi cation of the Chief Executive Offi cer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
Certifi cation of the Chief Financial Offi cer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
Certifi cation of the Chief Executive Offi cer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Certifi cation of the Chief Financial Offi cer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Th e following fi nancial information from our Annual Report on Form 10-K for the fi scal year ended September 29, 2012, fi led on
November 1, 2012, formatted in XBRL (eXtensible Business Reporting Language) includes: (i) the Consolidated Statements of Operations for
the years ended September 29, 2012, October 1, 2011 and October 2, 2010, (ii) the Consolidated Balance Sheets as of September 29, 2012
and October 1, 2011, (iii) the Consolidated Statements of Cash Flows for the years ended September 29, 2012, October 1, 2011 and
October 2, 2010, (iv) the Consolidated Statements of Shareholders’ Equity as of September 29, 2012, October 1, 2011 and October 2, 2010
and (v) the Notes to Consolidated Financial Statements.
* Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate.
** The XBRL-related information has been furnished electronically herewith. This exhibit, regardless of whether it is an exhibit to a document incorporated by reference into
any of our filings and except to the extent specifically stated otherwise, is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12
of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject
to liability under these sections.
Our SEC file number reference for documents filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended, is 1-9929.
54
INSTEEL INDUSTRIES, INC. Form 10K
CoRP oR AT e iNFoRM AT ioN
fonts used
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BOard Of directOrs
sharehOlder infOrmatiOn
duncan S. gage(1,2)
Retired President and Chief Executive Officer
Giant Cement Holding, Inc.
louis E. Hannen(1,2)
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(1,3,4)
Principal
Ewing Capital Partners, LLC
C. Richard vaughn(2,3,4)
Retired Chairman and Chief Executive Officer
John S. Clark Company, 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
Corporate Headquarters
1373 boggs drive
Mount Airy, North Carolina 27030
(336) 786-2141
Independent Registered Public
Accounting Firm
grant thornton llP
Charlotte, North Carolina
Annual Meeting
Insteel shareholders are invited to attend
our annual meeting, which will be held on
Tuesday, February 12, 2013 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. As of october 24, 2012,
there were 825 shareholders of record.
Shareholder Services
For change of name, address or ownership
of stock; to replace lost stock certificates;
or to consolidate accounts, please contact:
American Stock transfer &
trust Company
Operations Center
6201 15th Avenue
brooklyn, New york 11219
(866) 627-2704
www.amstock.com
Investor Relations
For information on the Company, additional
copies of this report or other financial infor-
mation, contact Michael C. Gazmarian,
vice President, Chief Financial officer and
treasurer, at the Company’s headquarters.
you may also visit the Investors section on
the Company’s web site at http://investor.
insteel.com/.
fOrward-lOOking statements
Any statements in this 2012 Annual Report
that are not entirely historical in nature con-
stitute forward-looking statements within
the meaning of the safe harbor provisions of
the Private Securities litigation Reform Act
of 1995. For important information regarding
forward-looking statements, please read
the “Cautionary Note Regarding Forward-
looking Statements” on page 4 of the
Company’s Annual Report on Form 10-K
for the year ended September 29, 2012,
which is included as part of this 2012
Annual Report.
1373 boggs drive
Mount Airy, North Carolina 27030
www.insteel.comfonts used
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