Insteel Industries Annual Report 2013

Plain-text annual report

fonts used bitsumishi and turnpike 2013 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 products for concrete construction applications. We manufacture and market prestressed concrete strand (“pC strand”) and welded wire reinforcement, including engineered structural mesh, concrete pipe reinforcement and standard welded wire reinforcement. our products are sold primarily to manufacturers of concrete products that are used in nonresidential construction. Headquartered in Mount Airy, north Carolina, we operate nine manu facturing facilities located in the united States. Financial HigHligHts (dollars in thousands, except per share amounts) 2013 2012 2011 Operating results: net sales Gross profit % of net sales net earnings (loss) % of net sales per sHare Data: net earnings (loss): Basic diluted Cash dividends declared returns: $ 363,896 39,233 $ 363,303 22,458 $ 336,909 31,743 10.8% 6.2% $ 11,735 $ 1,809 $ 3.2% 0.5% 9.4% (387) (0.1%) $ 0.65 0.64 0.37 $ 0.10 0.10 0.12 $ (0.02) (0.02) 0.12 return on total capital(1) return on shareholders’ equity(2) 7.3% 7.6% 1.1% 1.2% (0.2%) (0.3%) 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 $ 15,440 212,649 — 161,056 $ 10 208,552 11,475 149,500 $ 10 216,530 14,156 148,474 $ 36,828 5,030 9,833 6,599 $ 13,144 8,066 9,762 2,121 $ (2,907) 7,937 9,573 2,112 (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 (Diluted) Return on Total Capital(1) $363.3 $363.9 $0.64 7.3% $336.9 $0.10 $(0.02) 1.1% (0.2%) 2011 2012 2013 2011 2012 2013 2011 2012 2013 Insteel IndustrIes 2013 AnnuAl report 1 375 350 325 300 275 250 0.7580 0.6024 0.4468 0.2912 0.1356 -0.0200 7.785 6.224 4.663 3.102 1.541 -0.020 we are the nation’s largest manufacturer of steel wire reinforcing products. 63% of net sales w Welded Wire reinforcement e i v r e v O s s e n i s u B 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 rein- forcement 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 rein- forcement in concrete pipe and box culverts for drainage and sewage systems, water treatment 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 control 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 2 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 relax- ation characteristics and increase the working range of the product. pc strand is used to impart compression forces into prestressed concrete elements and structures, which may be either pretensioned or posttensioned. pretensioned means that the strands are tensioned to their design load and anchored at the ends of a form. after the concrete has been placed and allowed to cure to sufficient strength, the load on the strand is transferred from the external anchors to the cured member, creating compression forces within the element, or “prestressing” it. posttensioned means that the strands are tensioned after the concrete has been placed and allowed to cure. Plant locations gallatin, tennessee sanderson, Florida customer segments precast prestress producers posttensioning suppliers end uses nonresidential construction residential construction ManuFacturing lOcatiOns welded wire reinforcement pc strand Insteel IndustrIes 2013 AnnuAl report 3 we are the nation’s largest manufacturer of steel wire reinforcing products. letter to shareholders 2013 marked a year of strategic progress for insteel on a number of fronts as we continued to position ourselves for an eventual recovery in our construction end-markets. We completed the expansion of our engineered structural mesh (“esm”) operations during the year with the start-up of two new production lines. We intensified our focus on the operating fun- damentals of our business, aggressively pursuing process improvements and closely managing our operating costs while continuing to meet our customers’ service and quality expectations. and we maintained our strong balance sheet and financial flexibility to capitalize on additional growth opportunities that may arise. financial results 2013 was another challenging year for the concrete reinforcing products industry. Demand remained at severely depressed levels as the construction sector continued to recover from a protracted recession at an exceedingly slow rate. the unusually harsh winter weather and excessive rainfall in many of our markets curtailed construction activity and the consumption of our products for extended periods of the year. Our overall capacity utilization rose marginally to 48% from 45% in 2012 with most of our manufacturing facilities continuing to operate on reduced schedules. net sales for 2013 rose slightly to $363.9 million from $363.3 million in 2012 as a 4.6% increase in shipments was largely offset by a 4.3% reduction in average selling prices. gross margins widened to 10.8% from 6.2% primarily due to higher spreads between selling prices and raw material costs together with the increase in shipments and lower unit conversion costs. net earnings for 2013 rose to the highest level in five years, increasing to $11.7 million, or $0.64 per diluted share from $1.8 million, or $0.10 per share in 2012. Operating activities generated $36.8 million of cash, which was used to fund $5.0 million of capital expenditures, repay $11.5 million of debt and pay $6.6 million of dividends, including a $4.5 million ($0.25 per share) special dividend. we ended the year debt-free with $15.4 million of cash and cash equivalents, and no borrowings outstanding on our $100 million revolving credit facility, providing us with ample liquidity to fund our operations and pursue additional growth opportunities. engineered structural mesh exPansion the expansion of our esM operations that was completed during the year enhances our manufacturing capabilities and provides us with additional capacity to satisfy the growth in demand for the product as it continues to gain increasing market acceptance serving as a replacement for hot-rolled rebar. For many applications, the substitution of esM can significantly lower our customers’ costs by eliminating the labor intensive placing and hand-tying associated with the use of rebar, compressing cycle times and reducing the amount of steel required to achieve the equivalent reinforcement due to its higher yield strength. 4 the esM expansion involved 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. the texas production line provides additional capacity to meet the growing requirements of the southwest market, which has recovered from the recession more rapidly than other regions of the country. it is also nearly twice as productive as older equipment using more conventional technology. the north carolina production line employs new technology that provides unparalleled flexibility, allowing us to manufacture a broader range of esM configurations in a highly cost-effective manner and reducing our conversion costs by eliminating the yield loss and offline processing previously required to produce certain products. when fully ramped up, we expect the two new lines will generate a combined $15 to $20 million of annualized revenues. considering our state-of-the-art manufacturing capabilities, our broad product offering and our national geographic footprint, we believe these additions have further strengthened our leadership position in the esM market. looking ahead as we move into 2014, we have emerged from the recession in a much stronger competitive position through our november 2010 acquisition of ivy steel & wire, previously the nation’s second largest producer of welded wire reinforcement (“wwr”) behind insteel, and the ensuing reconfiguration and expansion of our wwr operations. the ivy acquisition has solidified our market leadership positions across our product lines and broadened our geographic footprint, positioning insteel as the only wwr producer with a truly national market presence. it has also enhanced our product mix by increasing the proportion of higher value, engi- neered products and accelerated our efforts to broaden the acceptance of esM. under the reconfiguration program, 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 requirements of our markets. through these actions, we have solidified our low cost producer status, improved our customer service capabilities and better positioned us to capitalize on a more favorable market environment. Our nine world-class manufacturing facilities are capable of generating over $700 million of revenues—close to double the level of last year—with minimal incremental capital expenditures required, supporting substantial organic growth as our markets recover. we will also continue to pursue additional strategic acquisition opportunities in our core businesses that are synergistic and leverage off of our infrastructure and market leading positions. we believe that we have only seen the beginning of our return to value-creating results and that our best years are ahead of us. thanks to our employees, customers and shareholders for their continued trust, confidence and support. sincerely, h.o. Woltz iii cHairMan, presiDent anD cHieF executive OFFicer Insteel IndustrIes 2013 AnnuAl report 5 insteel = MarKet leaDersHip 6 Insteel IndustrIes 2013 AnnuAl report 7 Insteel is the nation’s largest manufacturer of pC strand and welded wire reinforcement, which are used for a wide range of concrete construction applications. We have ascended to market leadership positions across all our prod- uct lines through our intense customer focus, commitment to operational excellence and the strategic investments we have made in our people and infrastructure. our manufacturing facilities are located in close proximity to our customers and suppliers to augment our customer service capabilities and minimize our logistics costs. our broad product offering and national geographic footprint are unmatched in the industry, allowing us to bundle products that are used in combination for many concrete reinforcing applications and satisfy the requirements of larger multi-location customers. Prestressed concrete bridge beams consume significant quantities of PC strand and engineered structural mesh. The strand is initially positioned in its desired configuration by the precaster prior to the placement of concrete in the form. While PC strand is always used in prestressed bridge beams, precasters have the option of using rebar or engineered structural mesh to reinforce the shear and flange sections of the beam. The market is increasingly moving to engineered structural mesh due to its higher quality, decreased cycle time and lower cost. Insteel IndustrIes 2013 AnnuAl report 7 insteel = lOw cOst prODucer 8 Insteel IndustrIes 2013 AnnuAl report 9 Given the highly competitive nature of our industry, we are intensely focused on operating as the low cost producer. our nine world-class produc- tion facilities employ the latest advancements in equipment technology and manufacturing prac- tices to fulfill the requirements of our customers in a highly responsive and cost-effective man- ner. our operations are supported by highly sophisticated information systems, providing us with real-time data on our business processes and a broad range of performance metrics and decision-support tools. ultimately our low cost producer status is dependent upon our dedi- cated and skilled workforce, which sets the standard for our industry. We believe the pro- ductivity levels and conversion costs of our facilities compare favorably against any of our competitors— domestic or foreign. Precast concrete box culvert reinforcement is a growing application for engineered structural mesh. Insteel’s advanced manufacturing technology provides the capability to optimize reinforcement solutions for cus- tomers by varying steel areas to meet required design loads and avoid oversteeling to minimize cost. Insteel IndustrIes 2013 AnnuAl report 9 insteel = strategic grOwtH 10 Insteel IndustrIes 2013 AnnuAl report 11 We sell into attractive markets that offer consid- erable growth potential and a diverse customer base with minimal concentration. demographic trends and the ongoing deterioration in our nation’s infrastructure are expected to spur long-term growth in construction spending and demand for our products. With our strong bal- ance sheet and financial flexibility, we are ideally positioned to pursue additional growth opportu- nities in our core pC strand and welded wire reinforcement businesses. As our construction end-markets recover, our existing facilities are capable of ramping up to over $700 million of revenues with minimal incremental capital investment required. We will also continue to pursue additional acquisitions in a disciplined manner, focusing only on those opportunities that are synergistic and are at valuations allow- ing for future returns that meet the expectations of our shareholders. sales By enD use 90% nonresidential construction 10% residential construction The West 7th Street Bridge in Fort Worth, Texas was constructed using precast concrete elements reinforced with Insteel PC strand. Precast concrete girder bridges currently account for 95% of the newly constructed spans in Texas. The superstructure of the bridge con- sists of precast, posttensioned concrete arches; pre- cast, pretensioned concrete floor beams; precast, pretensioned concrete deck panels; and a cast-in-place concrete deck. Insteel IndustrIes 2013 AnnuAl report 11 selecteD Financial Data—Five-year HistOry (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: year enDeD (52 weeks) september 28, 2013 (52 weeks) september 29, 2012 (52 weeks) october 1, 2011 (52 weeks) october 2, 2010 (53 weeks) october 3, 2009 $ 363,896 39,233 10.8% $ 20,682 235 11,735 $ 3.2% — 11,735 $ 363,303 22,458 $ 336,909 31,743 $ 211,586 17,991 $ 230,236 (15,093) 6.2% 9.4% 8.5% (6.6%) $ 18,911 623 1,809 $ 19,608 958 (387) (0.1%) 0.5% — $ — $ 1,809 (387) $ 16,024 453 458 0.2% 15 473 $ 17,243 641 (20,940) (9.1%) $ (1,146) (22,086) $ $ 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 0.65 — 0.65 0.64 — 0.64 0.37 0.10 — 0.10 0.10 — 0.10 0.12 $ (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 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: 7.3% 7.6% 1.1% 1.2% (0.2%) (0.3%) 0.3% 0.3% (13.2%) (13.2%) $ 15,440 212,649 — 161,056 $ 10 208,552 11,475 149,500 $ 10 216,530 14,156 148,474 $ 45,935 182,505 — 147,876 $ 35,102 182,117 — 147,070 $ 36,828 5,030 9,833 — 6,599 $ 13,144 8,066 9,762 — 2,121 $ (2,907) 7,937 9,573 — 2,112 $ 12,879 1,493 7,009 — 2,108 $ 22,122 2,377 7,377 — 11,381 number of employees at year-end 687 682 725 421 438 (1) earnings (loss) from continuing operations/(average total debt + average shareholders’ equity). (2) earnings (loss) from continuing operations/average shareholders’ equity. 12 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 28, 2013 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 12(b) 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 12(g) OF THE ACT: Preferred Share Purchase Rights (attached to and trade with the Common Stock) Title of Class Indicate by check mark YES NO • if the registrant is a well-known seasoned issuer, as defi ned in Rule 405 of the Securities Act. • 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 30, 2013 (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 $272,849,494 based upon the closing sale price as reported on the NASDAQ Global Select Market. As of October 28, 2013, there were 18,184,912 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 2014 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 ITEM 6 Selected Financial Data ..........................................................................................................................................................................................................................................................................14 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 Financial Statements and Supplementary Data .....................................................................................................................................................................................23 ITEM 8 ITEM 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ....................47 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 10-K 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 and residential construction and the impact on demand for our products; • changes in the amount and duration of transportation funding provided by federal, state and local governments and the impact on spending for infrastructure construction and demand for our products; • the cyclical nature of the steel and building material industries; • 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 10-K 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 2013, 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 the markets we currently serve 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. On November 19, 2010, we, through our wholly-owned subsidiary, IWP, purchased certain 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; 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. 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 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 elements or structures are used in both nonresidential and residential construction. For 2013, 2012 and 2011, PC strand sales represented 37%, 37% and 38%, 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 INSTEEL INDUSTRIES, INC. - Form 10-K 5 PART I ITEM 1 Business 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 2013, 2012 and 2011, WWR sales represented 63%, 63% and 62%, respectively, of our consolidated net sales. Marketing and Distribution We market our products through sales representatives who are our employees. Our outside sales representatives sell multiple product lines in their respective territories, thereby reducing duplication of personnel and travel expenses as compared to the product line sales strategy previously utilized by the Company. Our sales representatives are trained in the technical applications of our products. We sell our products nationwide as well as into Canada, Mexico, and Central and South America, delivering our products primarily by truck, using common or contract carriers. Th e delivery method selected is dependent upon backhaul opportunities, comparative costs and customer service requirements. Customers We sell our products to a broad range of customers that includes manufacturers of concrete products, and to a lesser extent, distributors, rebar fabricators and contractors. In fi scal 2013, we estimate that approximately 70% of our net sales were to manufacturers of concrete products and 30% were to distributors, rebar fabricators and contractors. In many cases we are unable to identify the 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 2013, 2012 and 2011. 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 28, 2013 will be shipped prior to the end of the fi rst quarter of fi scal 2014. 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 and 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 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. 6 INSTEEL INDUSTRIES, INC. - Form 10-K PART I ITEM 1 Business 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 2013 and 2012 represented approximately 25% and 17%, respectively, of our total wire rod purchases. We believe that the substantial volume of our wire rod requirements, our strong fi nancial condition and our desirable mix of sizes and grades represents a competitive advantage by making us a more attractive customer to our suppliers relative to our competitors. 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. 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., Oklahoma Steel and Wire, and Gerdau Long Products North America, 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 competitive factor from the standpoint of manufacturing costs, quality and customer service capabilities. 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 28, 2013, we employed 687 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. 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 13 to the consolidated fi nancial statements. INSTEEL INDUSTRIES, INC. - Form 10-K 7 PART I ITEM 1A Risk Factors 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 2014 and 2015. 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 57 54 63 54 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, 57, 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, 54, 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, 63, 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, 54, 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 12, 2013 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, 2014. 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 10-K 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. In particular, the recent U.S. government partial shutdown presents a signifi cant risk. If the U.S. government budget process results in a prolonged shutdown, we may experience delayed orders, delayed payments, and declines in revenues, profi tability and cash fl ows. Additionally, we may experience related supply chain delays, disruptions or other problems associated with fi nancial constraints faced by our suppliers. Th ese conditions 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. PART I ITEM 1A Risk Factors In some cases, unanticipated downturns in demand can be 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. 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 2013. 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. INSTEEL INDUSTRIES, INC. - Form 10-K 9 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, which will have a signifi cant impact on employers, health care providers, insurers and others associated with the health care industry and is expected to increase our employee health care costs. Th is legislation requires certain large employers to off er health care benefi ts to full-time employees or face potential annual penalties. To avoid these penalties, employers must off er health benefi ts providing a minimum level of coverage and must limit the amount that employees are charged for the coverage. Although this new requirement has been delayed generally from January 2014 to January 2015, any signifi cant increases in the costs attributable to our self-insured health plans could adversely 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. 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 require substantial increases in 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 2013, our common stock traded as high as $19.37 and as low as $10.53. 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. 10 INSTEEL INDUSTRIES, INC. - Form 10-K 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 28, 2013, 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 to satisfy the current and projected needs for our existing products. ITEM 3 Legal Proceedings We are, from time to time, involved in various 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 10-K 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 23, 2013, there were 738 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 2013 and fi scal 2012: First Quarter Second Quarter Th ird Quarter Fourth Quarter $ Fiscal 2013 Fiscal 2012 High 12.67 $ 17.22 19.37 18.21 Low 10.53 $ 11.79 14.01 15.18 Cash Dividends 0.28 0.03 0.03 0.03 $ 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 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 restrictions on our ability to make dividend payments under the terms of our revolving credit facility. 12 INSTEEL INDUSTRIES, INC. - Form 10-K 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 28, 2013. Th e graph and table assume that $100 was invested on September 27, 2008 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 $ 180 160 140 120 100 80 60 40 20 0 9/27/08 10/3/09 10/2/10 10/1/11 9/29/12 9/28/13 Insteel Industries, Inc. Russell 2000 S&P Building Products Insteel Industries, Inc. Russell 2000 S&P Building Products $ 9/27/08 100.00 $ 100.00 100.00 10/3/09 84.19 $ 90.45 76.14 Fiscal Year Ended 10/2/10 65.33 $ 102.53 66.36 10/1/11 74.41 $ 98.91 43.94 9/29/12 87.61 $ 130.47 95.46 9/28/13 122.93 169.68 137.33 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. 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 28, 2013, there was $24.8 million remaining available for future share repurchases under this authorization. We did not repurchase any shares of our common stock during 2013 and 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 17 to the consolidated fi nancial statements. INSTEEL INDUSTRIES, INC. - Form 10-K 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 28, 2013 (52 weeks) September 29, 2012 (52 weeks) October 1, 2011 (52 weeks) October 2, 2010 (53 weeks) October 3, 2009 $ 363,896 $ 11,735 11,735 363,303 $ 1,809 1,809 336,909 $ (387) (387) 211,586 $ 458 473 230,236 (20,940) (22,086) 0.65 0.10 (0.02) 0.03 (1.20) 0.64 0.65 0.64 0.37 212,649 - 161,056 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 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 Our operations are entirely focused on the manufacture and marketing of concrete reinforcing products for the concrete construction industry. Our business strategy is focused on: (1) achieving leadership positions in our markets; (2) operating as the lowest cost producer; and (3) pursuing growth opportunities within our core businesses that further our penetration of the markets we currently serve or expand our geographic footprint. On November 19, 2010, we, through our wholly-owned subsidiary, IWP, purchased certain assets of Ivy for approximately $50.3 million, after giving eff ect to post-closing adjustments. 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; 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. 14 INSTEEL INDUSTRIES, INC. - Form 10-K 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 in the period in which it is 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. Th e eventual outcome of such matters and the potential losses that we may ultimately incur are subject to a high degree of uncertainty. We record expenses for litigation when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We estimate the probability of such losses based on the advice of legal counsel, the outcome of similar litigation, the status of the lawsuits and other factors. Due to the numerous factors that enter into these judgments and assumptions, it is reasonably likely that actual outcomes will 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 Accounting 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 options at the date of grant, which requires us to make assumptions such as expected term, volatility and forfeiture rates to determine the INSTEEL INDUSTRIES, INC. - Form 10-K 15 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 4.75%, 4% and 4.75% for 2013, 2012 and 2011, 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 2013, 2012 and 2011, 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 2014. 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 2013, 2012 and 2011, we made contributions totaling $307,000, $206,000 and $478,000, respectively, to the Delaware Plan. We currently expect net periodic pension costs for 2014 to be $12,000 for the Delaware Plan and $588,000 for the SERPs. Cash contributions to the plans during 2014 are expected to be $247,000 for the Delaware Plan and $290,000 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 28, 2013 by approximately $80,000 and have no impact on the expected net periodic pension cost for 2014. 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 28, 2013 by approximately $224,000 and $172,000, respectively, and the net periodic pension cost for 2014 by approximately $19,000. 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 2014 by approximately $5,000. 16 INSTEEL INDUSTRIES, INC. - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Recent Accounting Pronouncements Current Adoptions In June 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-05 “Comprehensive Income – Presentation of Comprehensive Income.” ASU No. 2011-05 changes the presentation of comprehensive income in the fi nancial statements for all periods reported and eliminates the option under the previous guidance that allowed for the presentation of other comprehensive income as part of the statement of shareholders’ equity. Th e update allows two options for the presentation of comprehensive income: (1) a single statement of comprehensive income, which includes all components of net income and other comprehensive income; or (2) a statement of income followed immediately by a statement of comprehensive income, which includes summarized net income and all components of other comprehensive income. Th e amendments in this update are eff ective retrospectively for annual reporting periods, and interim periods within those years, beginning after December 15, 2011. We adopted ASU No. 2011-05 in the fi rst quarter of fi scal 2013 and chose to present a single statement of comprehensive income for our interim reporting periods and separate statements of income and comprehensive income for our annual reporting periods. Th e adoption of ASU 2011-05 did not impact our consolidated fi nancial statements except for the change in presentation. Future Adoptions In February 2013, the FASB issued ASU No. 2013-02 “Reporting of Amounts Reclassifi ed Out of Accumulated Other Comprehensive Income.” ASU No. 2013-02 requires an entity to disaggregate the total change of each component of other comprehensive income either on the face of the income statement or as a separate disclosure in the notes. Th is update is eff ective for us beginning in the fi rst quarter of fi scal 2014. We do not expect the adoption of this update will have a material eff ect on our consolidated fi nancial statements. 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 expense (income), net Restructuring charges, net Gain on early extinguishment of debt Acquisition costs Bargain purchase gain Interest expense Interest income Eff ective income tax rate Net earnings (loss) “N/M” = not meaningful. 2013 Compared with 2012 September 28, 2013 363,896 39,233 10.8% 20,682 5.7% 333 - - - - 235 (14) 34.8% 11,735 $ $ $ $ Net Sales Net sales for 2013 were relatively fl at at $363.9 million compared with $363.3 million in 2012. Shipments for the year increased 4.6% while average selling prices decreased 4.3% from the prior year levels. Th e increase in shipments was primarily due to modest improvement in market conditions and demand for our products relative to the prior year. Th e decrease in average selling prices was driven by competitive pricing pressures. Sales for both years refl ect severely depressed volumes due to the continuation of recessionary conditions in our construction end-markets. Year Ended Change 0.2% $ 74.7% September 29, 2012 363,303 22,458 Change 7.8% $ (29.3%) 9.4% $ N/M $ (100.0%) (100.0%) - - (62.3%) (33.3%) 6.2% 18,911 5.2% (188) 832 (425) - - 623 (21) 33.6% (3.6%) $ (15.3%) $ (90.0%) N/M (100.0%) (100.0%) (35.0%) (44.7%) N/M $ 1,809 N/M $ October 1, 2011 336,909 31,743 9.4% 19,608 5.8% (222) 8,318 - 3,518 (500) 958 (38) N/M (387) Gross Proﬁ t Gross profi t increased 74.7% to $39.2 million, or 10.8% of net sales, in 2013 from $22.5 million, or 6.2% of net sales, in 2012. Th e year- over-year increase was primarily due to wider spreads between average selling prices and raw material costs relative to the prior year together with higher shipments. Gross profi t for both years was unfavorably impacted by depressed shipment volumes and elevated unit conversion costs largely driven by reduced operating schedules. INSTEEL INDUSTRIES, INC. - Form 10-K 17 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Selling, General and Administrative Expense Selling, general and administrative expense (“SG&A expense”) increased 9.4% to $20.7 million, or 5.7% of net sales, in 2013 from $18.9 million, or 5.2% of net sales, in 2012 primarily due to higher compensation expense ($1.5 million), a reduction in the gain on the settlement of life insurance policies ($460,000) and the relative year-over-year change in the cash surrender value of life insurance policies ($155,000). Th e increase in compensation expense was primarily driven by higher incentive plan expense due to our improved fi nancial results in the current year. Th e cash surrender value of life insurance policies increased $555,000 in the current year compared with $710,000 in the prior year due to the related changes in the value of the underlying investments. Th ese increases in SG&A expense were partially off set by lower bad debt expense ($551,000). 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. Restructuring Charges, Net Net restructuring charges of $832,000 were recorded in 2012 that 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. Other Expense (Income) Other expense for 2013 was $333,000 compared to $188,000 of other income in 2012. Th e other expense for the current year was primarily due to the net loss on the disposal of equipment. Interest Expense Interest expense decreased 62.3% to $235,000 in 2013 from $623,000 in 2012 primarily due to the reduction in average debt outstanding during 2013 and the lower interest rate on borrowings on the revolving credit facility relative to the secured subordinated promissory note associated with the Ivy Acquisition that was outstanding in the prior year prior to its prepayment in December 2011. Income Taxes Our eff ective income tax rate was 34.8% in 2013 compared with 33.6% in 2012 due to changes in permanent book versus tax diff erences. Net Earnings Net earnings were $11.7 million ($0.64 per diluted share) in 2013 compared to $1.8 million ($0.10 per share) in 2012 with the year- over-year change primarily due to the increase in gross profi t partially off set by higher SG&A expense. 2012 Compared with 2011 Net Sales Net sales increased 7.8% to $363.3 million in 2012 from $336.9 million in 2011. Shipments for 2012 increased 5.1% from 2011 and average selling prices increased 2.6%. 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 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 gain 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 2012 compared with a decrease of $265,000 in 2011 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 ($278,000) and bad debt expense ($142,000). Th e increase in employee benefi t 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. Restructuring Charges, Net Net restructuring charges decreased 90.0% to $832,000 in 2012 from $8.3 million in 2011 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 2011 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, 18 INSTEEL INDUSTRIES, INC. - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 2012 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 gain from the early extinguishment of debt partially off set by the decrease in gross profi t in 2012. Liquidity and Capital Resources SELECTED FINANCIAL DATA (Dollars in thousands) Net cash provided by (used for) operating activities Net cash 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) Operating Activities September 28, 2013 36,828 (6,294) (15,104) 15,440 83,791 - - 161,056 100% 161,056 $ $ $ $ $ $ Year Ended September 29, 2012 13,144 (8,191) (4,953) 10 79,065 11,475 7% 149,500 93% 160,975 October 1, 2011 (2,907) (41,389) (1,629) 10 75,789 14,156 9% 148,474 91% 162,630 $ $ $ Operating activities provided $36.8 million of cash in 2013 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 $9.7 million of cash due to a $7.0 million decrease in inventories, a $1.7 million increase in accounts payable and accrued expenses, and a $1.0 million decrease in accounts receivable. Th e decrease in inventories was primarily due to lower raw material purchases and unit costs. Th e increase in accounts payable and accrued expenses was largely related to changes in the mix of vendor payments and terms. Th e decrease in accounts receivable was primarily driven by a reduction in days sales outstanding. 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. INSTEEL INDUSTRIES, INC. - Form 10-K 19 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 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. 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 $6.3 million of cash in 2013, $8.2 million in 2012 and $41.4 million in 2011. Capital expenditures were $5.0 million in 2013, $8.1 million in 2012 and $7.9 million in 2011, and are expected to total less than $12.0 million in 2014. In connection with the acquisition of certain assets from Tatano Wire and Steel, Inc. in April 2013, an intangible asset was acquired for $1.9 million. Th ese uses of cash were partially off set by $0.6 million of proceeds from life insurance claims. In 2011, the Ivy acquisition used $37.3 million of cash, 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. 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 $15.1 million of cash in 2013, $5.0 million in 2012 and $1.6 million in 2011. Net repayments of debt amounted to $11.5 million in 2013 and $2.3 million in 2012. Cash dividend payments were $6.6 million in 2013 (a special cash dividend of $4.5 million and regular cash dividends totaling $2.1 million) and $2.1 million in 2012 and 2011. In 2013, these uses of cash were partially off set by $3.4 million of proceeds from the exercise of stock options. Cash Management Our cash is principally concentrated 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 28, 2013, there were no borrowings outstanding on the Credit Facility, $72.8 million of additional borrowing capacity was available and outstanding letters of credit totaled $1.5 million (see Note 7 to the consolidated fi nancial statements). During 2013, ordinary course borrowings on the Credit Facility were as high as $13.6 million. As of September 29, 2012, $11.5 million was outstanding on the Credit Facility. 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 20 INSTEEL INDUSTRIES, INC. - Form 10-K 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 the early extinguishment of debt in the 2012 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. PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Should we determine, at any time, that we required additional short- term liquidity, we would evaluate the alternative sources of fi nancing that were 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 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. During 2013, wire rod prices fl uctuated within a narrower range and infl ation did not have a material impact on our sales or earnings. Our ability to fully recover increases in wire rod prices over 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 28, 2013 are as follows: PAYMENTS DUE BY PERIOD $ (In thousands) Contractual obligations: Raw material purchase commitments(1) Supplemental employee retirement plan obligations Pension benefi t obligations Operating leases Trade letters of credit Commitment fee on unused portion of credit facility Other unconditional purchase obligations(2) TOTAL $ (1) Non-cancelable purchase commitments for raw materials. (2) Contractual commitments for capital expenditures. Outlook Total 62,875 $ 18,470 5,495 1,932 1,467 971 462 91,672 $ Less Th an 1 Year 62,875 $ 290 213 845 1,467 364 462 66,516 $ 1 - 3 Years - $ 581 419 725 - 607 - 2,332 $ 3 – 5 Years More Th an 5 Years - 16,952 4,452 288 - - - 21,692 - $ 647 411 74 - - - 1,132 $ As we look ahead to 2014, 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 volatility in raw material costs. Conditions in our construction end-markets appear to be improving following the steep decline in demand that we have experienced in recent years. We have yet to see, however, a pronounced recovery taking hold and expect growth in nonresidential construction, our primary demand driver, to remain modest 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 anticipated benefi ts from INSTEEL INDUSTRIES, INC. - Form 10-K 21 PART II ITEM 7A Quantitative and Qualitative Disclosures About Market Risk 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 pursue 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 2013 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 $23.8 million decrease in our annual pre-tax earnings (assuming there was not a corresponding change in our selling prices). Although we were debt-free as of September 28, 2013, future borrowings under our revolving credit facility are subject to a variable rate of interest and are sensitive to changes in interest rates. Foreign Exchange Exposure We have not typically hedged foreign currency exposures related to transactions denominated in currencies other than U.S. dollars, as such transactions have not been material historically. We will occasionally hedge 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 28, 2013. During 2013, 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. 22 INSTEEL INDUSTRIES, INC. - Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data ITEM 8 Financial Statements and Supplementary Data (a) Financial Statements Consolidated Statements of Operations for the years ended September 28, 2013, September 29, 2012 and October 1, 2011 .................... 24 Consolidated Statements of Comprehensive Income (Loss) for the years ended September 28, 2013, September 29, 2012 and October 1, 2011 .............................................................................................................................................. 25 Consolidated Balance Sheets as of September 28, 2013 and September 29, 2012 ....................................................................................................................................................... 26 Consolidated Statements of Shareholders’ Equity for the years ended September 28, 2013, September 29, 2012 and October 1, 2011 .......................................................................................................................................................................................................................................................................... 27 Consolidated Statements of Cash Flows for the years ended September 28, 2013, September 29, 2012 and October 1, 2011 .................... 28 Notes to Consolidated Financial Statements .................................................................................................................................................................................................................................................................... 29 Report of Independent Registered Public Accounting Firm – Consolidated Financial Statements ....................................................................................................... 46 Schedule II – Valuation and Qualifying Accounts for the years ended September 28, 2013, September 29, 2012 and October 1, 2011 .......................................................................................................................................................................................................................................................................... 47 Report of Independent Registered Public Accounting Firm – Internal Control Over Financial Reporting ............................................................................... 48 (b) Supplementary Data Selected quarterly fi nancial data for 2013 and 2012 is as follows: FINANCIAL INFORMATION BY QUARTER UNAUDITED (In thousands, except for per share and price data) 2013 Operating results: Net sales Gross profi t Net earnings Net earnings per share amounts: Basic Diluted (In thousands, except for per share and price data) 2012 Operating results: Net sales Gross profi t Net earnings (loss) Net earnings (loss) per share amounts: Basic and diluted December 29 March 30 June 29 September 28 Quarter Ended $ 85,887 $ 8,593 2,402 0.14 0.13 82,873 $ 11,051 3,714 0.21 0.20 Quarter Ended 96,946 $ 10,910 3,274 0.18 0.18 98,190 8,679 2,345 0.13 0.13 December 31 March 31 June 30 September 29 $ 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 INSTEEL INDUSTRIES, INC. - Form 10-K 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 Gross profi t Selling, general and administrative expense Gain from early extinguishment of debt Restructuring charges, net Acquisition costs Bargain purchase gain Other expense (income), net Interest expense Interest income Earnings before income taxes Income taxes NET EARNINGS (LOSS) Net earnings (loss) per share: Basic Diluted Cash dividends declared Weighted shares outstanding: Basic Diluted See accompanying notes to consolidated financial statements. September 28, 2013 September 29, 2012 October 1, 2011 Year Ended $ $ $ $ $ 363,896 $ 324,663 39,233 20,682 - - - - 333 235 (14) 17,997 6,262 11,735 $ 0.65 $ 0.64 $ 0.37 $ 17,948 18,353 363,303 $ 340,845 22,458 18,911 (425) 832 - - (188) 623 (21) 2,726 917 1,809 $ 0.10 $ 0.10 $ 0.12 $ 17,664 17,990 336,909 305,166 31,743 19,608 - 8,318 3,518 (500) (222) 958 (38) 101 488 (387 ) (0.02) (0.02) 0.12 17,562 17,562 24 INSTEEL INDUSTRIES, INC. - Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data Insteel Industries, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (Loss) (In thousands) Net earnings (loss) Other comprehensive income (loss): Adjustment to defi ned benefi t plan liability, net of income taxes of ($539), $261 and ($180) Comprehensive income (loss) See accompanying notes to consolidated financial statements. September 28, 2013 $ 11,735 $ $ 879 12,614 $ Year Ended September 29, 2012 1,809 $ (426) 1,383 $ October 1, 2011 (387) 294 (93) INSTEEL INDUSTRIES, INC. - Form 10-K 25 PART II ITEM 8 Financial Statements and Supplementary Data Insteel Industries, Inc. and Subsidiaries Consolidated Balance Sheets (In thousands ) 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 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: 2013, 18,185; 2012, 17,717 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 28, 2013 September 29, 2012 $ $ $ $ 15,440 $ 41,110 58,793 5,863 121,206 83,053 8,390 212,649 $ 30,561 $ 6,854 37,415 - 14,178 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 - - 18,185 55,452 88,981 (1,562) 161,056 $ 212,649 17,717 50,379 83,845 (2,441) 149,500 208,552 26 INSTEEL INDUSTRIES, INC. - Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data Insteel Industries, Inc. and Subsidiaries Consolidated Statements of Shareholders’ Equity Accumulated Other Comprehensive Income (Loss)(1) (2,309) $ 294 Common Stock Additional Paid-In Capital 45,950 Retained Earnings 86,656 $ $ $ Shares 17,579 Amount 17,579 8 (13) (13) 17,609 17,609 48,723 (130) 2,917 13 30 13 30 8 (30) $ (387) (2,112) 84,157 (In thousands) Balance at October 2, 2010 Net loss Other comprehensive income(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 Net earnings Other comprehensive loss(1) 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 Net earnings Other comprehensive income(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 units and stock options surrendered for withholding taxes payable Cash dividends declared BALANCE AT SEPTEMBER 28, 2013 (1) Activity within accumulated other comprehensive income (loss) is reported net of related income taxes: 2011 ($180), 2012 $261, 2013 ($539). See accompanying notes to consolidated financial statements. (2,121) 83,845 11,735 (6,599) $ 88,981 3,054 (97) 371 97 371 97 (10) (96) 12 96 12 96 1,809 2,208 2,161 (446) (705) 50,379 17,717 55,452 18,185 17,717 18,185 660 $ $ $ (2,015) (426) (2,441) 879 (1,562) $ Total Shareholders’ Equity 147,876 (387) 294 21 - 2,917 8 (143) (2,112) 148,474 1,809 (426) 2 - 2,208 (446) (2,121) 149,500 11,735 879 3,425 - 2,161 660 (705) (6,599) 161,056 INSTEEL INDUSTRIES, INC. - Form 10-K 27 PART II ITEM 8 Financial Statements and Supplementary Data Insteel Industries, Inc. and Subsidiaries Consolidated Statements of Cash Flows (In thousands) Cash Flows From Operating Activities: Net earnings (loss) Adjustments to reconcile net earnings (loss) to net cash provided by (used for) operating activities Depreciation and amortization Amortization of capitalized fi nancing costs Stock-based compensation expense Gain on early extinguishment of debt Asset impairment charges Excess tax 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 Cash Flows From Investing Activities: Capital expenditures Acquisition of intangible asset Increase in cash surrender value of life insurance policies Proceeds from life insurance claims Proceeds from sale of property, plant and equipment Proceeds from surrender of life insurance policies Proceeds from sale of assets held for sale Acquisition of business Net cash used for investing activities Cash Flows From Financing Activities: Proceeds from long-term debt Principal payments on long-term debt Cash dividends paid Cash received from exercise of stock options Excess tax benefi ts from stock-based compensation Payment of employee tax withholdings related to net share transactions Financing costs Other 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 units and stock options 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. 28 INSTEEL INDUSTRIES, INC. - Form 10-K September 28, 2013 September 29, 2012 October 1, 2011 Year Ended $ 11,735 $ 1,809 $ (387) 9,833 102 2,161 - - (660) 348 3,881 (45) (555) 1,028 6,981 1,645 374 25,093 36,828 (5,030) (1,887) (64) 577 107 3 - - (6,294) 4,602 (16,077) (6,599) 3,425 660 (705) - (410) (15,104) 15,430 10 15,440 $ 20 $ 2,667 432 705 - - 9,762 97 2,208 (425) (11) - (46) 835 (505) (750) (167) 10,600 (9,562) (701) 11,335 13,144 (8,066) - (467) - 305 37 - - (8,191) 91,150 (93,406) (2,121) 2 - (446) (172) 40 (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) (7,937) - (147) 1,063 518 19 2,403 (37,308) (41,389) 52,806 (52,150) (2,112) 21 8 (143) - (59) (1,629) (45,925) 45,935 10 356 (489) 384 143 13,500 500 P PART II ITEM 8 Financial Statements and Supplementary Data Insteel Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements Years Ended September 28, 2013, September 29, 2012 and October 1, 2011 NOTE 1 Description of Business Insteel Industries, Inc. (“Insteel” or “the Company”) is the nation’s largest manufacturer of steel wire reinforcing products for concrete construction applications. Insteel is the parent holding company for two wholly-owned subsidiaries, Insteel Wire Products Company (“IWP”), an operating subsidiary, and Intercontinental Metals Corporation, an inactive subsidiary. Th e Company manufactures and markets prestressed concrete 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. On November 19, 2010, the Company purchased certain assets and assumed certain 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 2013, 2012 and 2011 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 (“U.S.”) 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 principally concentrated 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 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 INSTEEL INDUSTRIES, INC. - Form 10-K 29 PART II ITEM 8 Financial Statements and Supplementary Data 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, which considers a range of assumptions including the expected term, volatility, dividend yield and risk-free interest rate. non-compete agreement was $163,000 in 2013 and $0 for 2012 and 2011. Amortization expense for the next fi ve years is $377,000 in 2014, $377,000 in 2015, $377,000 in 2016, $377,000 in 2017 and $215,000 in 2018. 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). Th e valuation of inventory includes the costs for material, labor and manufacturing overhead. Property, plant and equipment Property, plant and equipment are recorded at cost or fair market value in the case of the assets acquired 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 $9.7 million in 2013, $9.8 million in 2012 and $9.6 million in 2011 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 2013, 2012 or 2011. Other assets Other assets consist principally of capitalized fi nancing costs, the cash surrender value of life insurance policies and intangible assets. 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. Th e Company’s intangible assets consist of a non-compete agreement that is being amortized on a straight-line basis over a fi nite useful life of fi ve years. Amortization expense of the 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 in the period in which it is 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 2013 and 2012. 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. 30 INSTEEL INDUSTRIES, INC. - Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data NOTE 3 Recent Accounting Pronouncements Current Adoptions In June 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-05 “Comprehensive Income – Presentation of Comprehensive Income.” ASU No. 2011-05 changes the presentation of comprehensive income in the fi nancial statements for all periods reported and eliminates the option under the previous guidance that allowed for the presentation of other comprehensive income as part of the statement of shareholders’ equity. Th e update allows two options for the presentation of comprehensive income: (1) a single statement of comprehensive income, which includes all components of net income and other comprehensive income; or (2) a statement of income followed immediately by a statement of comprehensive income, which includes summarized net income and all components of other comprehensive income. Th e amendments in this update are eff ective retrospectively for annual reporting periods, and interim periods within those years, beginning after December 15, 2011. Th e Company adopted ASU No. 2011-05 in the fi rst quarter of 2013 and chose to present a single statement of comprehensive income for interim reporting periods and separate statements of income and comprehensive income for annual reporting periods. Th e adoption of ASU 2011-05 did not impact the Company’s consolidated fi nancial statements except for the change in presentation. Future Adoptions In February 2013, the FASB issued ASU No. 2013-02 “Reporting of Amounts Reclassifi ed Out of Accumulated Other Comprehensive Income.” ASU No. 2013-02 requires an entity to disaggregate the total change of each component of other comprehensive income either on the face of the income statement or as a separate disclosure in the notes. Th is update is eff ective for the Company beginning in the fi rst quarter of 2014. Th e Company does not expect the adoption of this update will have a material eff ect on its consolidated fi nancial statements. NOTE 4 Business Combination On November 19, 2010, the Company purchased certain assets and assumed certain 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. The 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; 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 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). INSTEEL INDUSTRIES, INC. - Form 10-K 31 PART II ITEM 8 Financial Statements and Supplementary Data Following the Ivy Acquisition, net sales of the Ivy facilities in 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 were 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 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 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 for the acquisition- related costs in the prior year. Th e pro forma information does not refl ect any operating effi ciencies or potential cost savings that 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 2010, nor is it intended to represent or be indicative of future results of operations. Th e pro forma combined results of operations for 2011 are as follows: (In thousands) Net sales Earnings before income taxes Net earnings $ Year Ended October 1, 2011 353,620 867 182 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. Th ese 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. Th e 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 2012 and 2011: (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 2012, all of the remaining restructuring liabilities were satisfi ed and the fi nal 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 disposal of certain machinery and equipment that were previously impaired. Facility closure costs in 2011 include a $1.6 million gain from the sale of the Wilmington, Delaware facility, which had been closed in May 2011. 32 INSTEEL INDUSTRIES, INC. - Form 10-K Acquisition costs During 2011, the Company recorded $3.5 million of acquisition-related costs associated with the Ivy Acquisition for advisory, accounting, legal and other professional fees. Th e Company did not incur any additional acquisition costs related to the Ivy Acquisition in 2012. PART II ITEM 8 Financial Statements and Supplementary Data NOTE 6 Fair Value Measurements Fair value is defi ned 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. Th e 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. 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 28, 2013 and September 29, 2012, 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) Current assets: Cash equivalents Other assets: Cash surrender value of life insurance policies TOTAL (In thousands) Other assets: Cash surrender value of life insurance policies TOTAL Cash equivalents, which include all highly liquid investments with original maturities of three months or less, are classifi ed as Level 1 of the fair value hierarchy. Th e carrying amount of the Company’s cash equivalents, which consist of investments in money market funds, approximates fair value due to their short maturities. Cash surrender value of life insurance policies are 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. NOTE 7 Long-Term Debt Total at September 28, 2013 Quoted Prices in Active Markets (Level 1) Observable Inputs (Level 2) $ $ $ $ 15,534 $ 15,534 $ 6,145 21,679 $ - 15,534 $ - 6,145 6,145 Total at September 29, 2012 Quoted Prices in Active Markets (Level 1) Observable Inputs (Level 2) 5,146 $ 5,146 $ - $ - $ 5,146 5,146 As of September 28, 2013 and September 29, 2012, the Company had no nonfi nancial assets that are required to be measured at fair value on a nonrecurring basis. 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 approximated 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. 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 28, 2013, no borrowings were outstanding on the Credit Facility, $72.8 million of borrowing capacity was available and outstanding letters of credit totaled $1.5 million. As of September 29, 2012, $11.5 million of borrowings were 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 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 INSTEEL INDUSTRIES, INC. - Form 10-K 33 PART II ITEM 8 Financial Statements and Supplementary Data 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 28, 2013, 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 Subordinated Note 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 28, 2013, 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 $102,000 in 2013, $97,000 in 2012 and $81,000 in 2011. Accumulated amortization of capitalized fi nancing costs was $4.3 million and $4.2 million as of September 28, 2013 and September 29, 2012, 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 2014 2015 2016 2017 2018 $ (In thousands) 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 the early extinguishment of debt in the consolidated statements of operations in 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 28, 2013, there were 587,000 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 benefi ts associated with stock options are as follows: (In thousands) Stock options: Compensation expense Excess tax benefi ts September 28, 2013 Year Ended September 29, 2012 October 1, 2011 $ 951 $ (660) 909 $ - 1,203 (8) Th e remaining unrecognized compensation cost related to unvested options at September 28, 2013 was $622,000, which is expected to be recognized over a weighted average period of 1.28 years. 34 INSTEEL INDUSTRIES, INC. - Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data 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 2013, 2012 and 2011 were $7.06, $5.20 and $5.31 per share, respectively, based on the following weighted-average assumptions: Expected term (in years) Risk-free interest rate Expected volatility Expected dividend yield September 28, 2013 Year Ended September 29, 2012 October 1, 2011 6.00 1.40% 47.32% 0.72% 6.00 1.17% 52.97% 1.06% 5.19 1.78% 55.15% 1.05% 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 2, 2010 Granted Exercised Forfeited Outstanding at October 1, 2011 Granted Exercised Outstanding at September 29, 2012 Granted Exercised OUTSTANDING AT SEPTEMBER 28, 2013 Vested and anticipated to vest in future at September 28, 2013 Exercisable at September 28, 2013 $ Options Outstanding 847 171 (13) (11) 994 178 (12) 1,160 131 (373) 918 913 626 Exercise Price Per Share Range 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 16.45-17.22 0.36-12.43 5.43-20.27 Weighted Average 10.63 11.49 1.60 11.15 10.89 11.44 0.18 11.09 16.84 9.27 12.65 12.64 12.10 Contractual Term - Weighted Average (in years) Aggregate Intrinsic Value (in thousands) $ 143 147 2,744 3,492 3,480 2,744 6.25 6.23 5.01 Th e 2013 stock option exercises included “net exercises,” pursuant to which the optionee received shares of common stock equal to the intrinsic value of the options (fair market value of common stock on the date of exercise less exercise price) reduced by any applicable withholding taxes. Restricted stock units 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 RSU grants and compensation expense are as follows: (In thousands) Restricted stock unit grants: Units Market value Compensation expense 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. September 28, 2013 Year Ended September 29, 2012 October 1, 2011 $ 73 1,225 $ 1,210 99 1,165 $ 1,299 119 1,441 1,548 Th e remaining unrecognized compensation cost related to unvested RSUs on September 28, 2013 was $985,000 which is expected to be recognized over a weighted average period of 1.53 years. INSTEEL INDUSTRIES, INC. - Form 10-K 35 PART II ITEM 8 Financial Statements and Supplementary Data Th e following table summarizes RSU activity: (Unit amounts in thousands) Balance, October 2, 2010 Granted Released Balance, October 1, 2011 Granted Released Balance, September 29, 2012 Granted Forfeited Released BALANCE, SEPTEMBER 28, 2013 Restricted stock awards Restricted Stock Units Outstanding 239 $ 119 (30) 328 99 (134) 293 73 (6) (139) 221 Weighted Average Grant Date Fair Value 9.23 12.08 9.39 10.25 11.77 10.30 10.74 16.77 10.72 10.00 13.20 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 2013, 2012 and 2011. Compensation expense for restricted stock is as follows: (In thousands) Compensation expense Th ere were no unvested restricted stock awards as of September 28, 2013. Year Ended October 1, 2011 166 $ During 2011, 67,693 shares of employee restricted stock awards vested with a fair value of $771,000. 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, a total of 12,633 shares were withheld to satisfy employees’ minimum tax obligations. Th e following table summarizes restricted stock activity: (Share amounts in thousands) Balance, October 2, 2010 Granted Released Balance, October 1, 2011 NOTE 9 Income Taxes Th e components of the provision for income taxes are as follows: (Dollars in thousands) Provision for income taxes: Current: Federal State Deferred: Federal State INCOME TAXES EFFECTIVE INCOME TAX RATE 36 INSTEEL INDUSTRIES, INC. - Form 10-K Restricted Stock Awards Outstanding 67 Weighted Average Grant Date Fair Value 13.37 - 13.37 - $ - (67) - September 28, 2013 September 29, 2012 October 1, 2011 Year Ended $ $ 2,124 $ 257 2,381 3,571 310 3,881 6,262 $ 34.8% 20 $ 62 82 781 54 835 917 $ 33.6% 207 72 279 (12) 221 209 488 483.2% PART II ITEM 8 Financial Statements and Supplementary Data Th e reconciliation between income taxes computed at the federal statutory rate and the provision for income taxes is as follows: (Dollars in thousands) Provision for income taxes at federal statutory rate Net eff ect of life insurance policies Qualifi ed production activities deduction Nondeductible stock option expense State income taxes, net of federal tax benefi t Valuation allowance Other, net PROVISION FOR INCOME TAXES September 28, 2013 Year Ended September 29, 2012 October 1, 2011 $ $ 6,299 (191) (165) (51) 479 51 (160) 6,262 35.0% $ (1.1) (0.9) (0.3) 2.7 0.3 (0.9) 34.8% $ 954 (400) - 161 94 (48) 156 917 35.0% $ (14.7) - 5.9 3.5 (1.8) 5.7 33.6% $ 35 (14) - 189 (20) 263 35 488 34.7% (13.9) - 187.1 (19.8) 260.4 34.7 483.2% Th e components of deferred tax assets and liabilities are as follows: (In thousands) Deferred tax assets: Defi ned benefi t plans Accrued expenses, asset reserves and state tax credits Stock-based compensation State net operating loss carryforwards Goodwill, amortizable for tax purposes Federal net operating loss carryforward Valuation allowance DEFERRED TAX ASSETS Deferred tax liabilities: Plant and equipment Prepaid insurance and other reserves DEFERRED TAX LIABILITIES NET DEFERRED TAX LIABILITY September 28, 2013 September 29, 2012 $ $ 3,245 $ 2,467 1,560 1,180 986 - (730) 8,708 (12,607) (650) (13,257) (4,549) $ 3,556 1,841 1,878 1,372 1,392 1,870 (679) 11,230 (10,637) (722) (11,359) (129) As of September 28, 2013, the Company recorded a current deferred tax asset (net of valuation allowance) of $2.7 million on its consolidated balance sheet in other current assets and a non-current deferred tax liability (net of valuation allowance) of $7.3 million in other liabilities. As of September 29, 2012, the Company recorded a current deferred tax asset (net of valuation allowance) of $4.0 million in other current assets and a non-current deferred tax liability (net of valuation allowance) of $4.1 million in other liabilities. Th e Company has $22.2 million of state operating loss carryforwards that begin to expire in 2017, but principally expire in 2017 – 2032. 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 2020. 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 U.S. (“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 28, 2013, the Company had recorded a valuation allowance of $730,000 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 $51,000 increase in the valuation allowance during 2013 is primarily due to the increase of certain state NOLs that are not expected to be utilized. As of September 28, 2013, the Company has no material, known tax exposures that require the establishment of contingency reserves for uncertain tax positions. A reconciliation of the beginning and ending balance of total unrecognized tax benefi ts for 2013 and 2012 is as follows: (In thousands) Balance at beginning of year Increase in tax positions of prior years Settlement of tax position in current year BALANCE AT END OF YEAR $ $ 2013 76 $ - (76) $ - 2012 67 9 - 76 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 $0 and $56,000, as of September 28, 2013 and September 29, 2012, 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 2013 and 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 2008 remain subject to examination together with certain state tax returns fi led by the Company subsequent to 2003. INSTEEL INDUSTRIES, INC. - Form 10-K 37 PART II ITEM 8 Financial Statements and Supplementary Data NOTE 10 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 $307,000, $206,000 and $477,000 to the Delaware Plan during 2013, 2012 and 2011, respectively, and expects to make contributions of $247,000 during 2014. 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 (gain) 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 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 gain Amortization of net loss TOTAL RECOGNIZED IN OTHER COMPREHENSIVE INCOME (LOSS) September 28, 2013 Year Ended September 29, 2012 October 1, 2011 $ $ $ $ $ $ $ $ $ $ $ $ 3,181 $ - 128 (134) - (202) 2,973 $ 1,739 $ 201 307 - (202) 2,045 $ (928) $ (928) $ (928) $ 706 (222) $ 1,138 $ $ 1,138 (192) $ (56) (248) $ 3,231 $ - 146 218 (218) (196) $ 3,181 1,660 $ 287 206 (218) (196) $ 1,739 (1,442) $ (1,442) $ (1,442) $ 859 (583) $ 1,386 $ $ 1,386 (31) $ (49) (80) $ 4,280 306 193 69 (1,423) (194) 3,231 3,017 10 477 (1,651) (193) 1,660 (1,571) (1,571) (1,571) 909 (662) 1,466 1,466 (206) (304) (510) Net periodic pension cost for the Delaware Plan includes the following components: (In thousands) Interest cost Expected return on plan assets Recognized net actuarial loss NET PERIODIC PENSION COST 38 INSTEEL INDUSTRIES, INC. - Form 10-K September 28, 2013 September 29, 2012 October 1, 2011 Year Ended $ $ 128 $ (142) 56 $ 42 146 $ (134) 49 $ 61 193 (211) 304 286 PART II ITEM 8 Financial Statements and Supplementary Data 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 2014 is $40,000. Th e projected benefi t payments under the Delaware Plan are as follows: Fiscal year(s) 2014 2015 2016 2017 2018 2019 - 2023 Th e assumptions used in the valuation of the Delaware Plan are as follows: Assumptions at year-end: Discount rate Rate of increase in compensation levels Expected long-term rate of return on assets $ (In thousands) 213 209 211 205 206 980 September 28, 2013 Measurement Date September 29, 2012 October 1, 2011 4.75% N/A 8.00% 4.00% N/A 8.00% 4.75% N/A 8.00% 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. 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 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: Large-cap equities Mid-cap equities Small-cap equities International equities Fixed income securities Cash and cash equivalents Target Allocation September 28, 2013 35.0% 8.0% 9.0% 8.0% 40.0% 0.0% September 28, 2013 Percentage of Plan Assets at Measurement Date September 29, 2012 October 1, 2011 37.7% 8.1% 8.5% 7.5% 36.1% 2.1% 39.3% 8.9% 5.6% 5.9% 37.2% 3.1% 38.6% 9.1% 6.1% 6.0% 39.3% 0.9% As of September 28, 2013, 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 28, 2013 and September 29, 2012 are as follows: (In thousands) Large-cap equities Mid-cap equities Small-cap equities International equities Fixed income securities Cash and cash equivalents TOTAL Total at September 28, 2013 Quoted Prices in Active Markets (Level 1) Observable Inputs (Level 2) $ $ 771 $ 165 174 153 739 43 2,045 $ 771 $ 165 174 153 739 - 2,002 $ - $ - - - - 43 43 $ Unobservable Inputs (Level 3) - - - - - - - INSTEEL INDUSTRIES, INC. - Form 10-K 39 PART II ITEM 8 Financial Statements and Supplementary Data (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 $ 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. 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 (gain) Distributions BENEFIT OBLIGATION AT END OF YEAR Change in plan assets: Actual employer contributions Actual distributions PLAN ASSETS AT FAIR VALUE AT END OF YEAR Reconciliation of funded status to net amount recognized: Funded status NET AMOUNT RECOGNIZED Amounts recognized in accumulated other comprehensive loss: Unrecognized net loss Unrecognized prior service cost NET AMOUNT RECOGNIZED Other changes in plan assets and benefi t obligations recognized in other comprehensive income (loss): Net loss (gain) Prior service costs Amortization of net loss $ $ $ $ $ $ $ $ $ TOTAL RECOGNIZED IN OTHER COMPREHENSIVE INCOME (LOSS) $ September 28, 2013 September 29, 2012 October 1, 2011 Year Ended 7,461 $ 242 287 (807) (245) $ 6,938 245 $ (245) $ - (6,938) $ (6,938) $ 1,380 $ - $ 1,380 (807) $ (227) (136) (1,170) $ 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 40 INSTEEL INDUSTRIES, INC. - Form 10-K Net periodic pension cost for the SERPs includes the following components: (In thousands) Service cost Interest cost Prior service cost Amortization of net loss NET PERIODIC PENSION COST PART II ITEM 8 Financial Statements and Supplementary Data September 28, 2013 September 29, 2012 Year Ended $ $ 242 $ 287 227 136 892 $ 217 $ 301 227 91 836 $ October 1, 2011 176 282 227 34 719 Th e estimated net loss that will be amortized from accumulated other comprehensive loss into net periodic pension cost during 2014 is $60,000. 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 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. Th e projected benefi t payments under the SERPs are as follows: Fiscal year(s) 2014 2015 2016 2017 2018 2019- 2023 $ (In thousands) 290 290 290 290 357 1,846 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 $28,000 in 2013, $62,000 in 2012 and $74,000 in 2011. Th e expense attributable to these SERPs was $15,000 in 2013, $15,000 in 2012 and $14,000 in 2011. September 28, 2013 Measurement Date September 29, 2012 October 1, 2011 4.75% 3.00% 4.00% 3.00% 4.75% 3.00% 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. During 2011 - 2013, 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 2011 - 2013, 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 $758,000 in 2013, $734,000 in 2012 and $604,000 in 2011. 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 $3.6 million in 2013, $3.4 million in 2012 and $3.3 million in 2011. Th e Company is primarily self-insured for each employee’s healthcare costs, carrying stop-loss insurance coverage for individual claims in excess of $175,000 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. INSTEEL INDUSTRIES, INC. - Form 10-K 41 PART II ITEM 8 Financial Statements and Supplementary Data NOTE 11 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 $1.2 million in 2013, $908,000 in 2012 and $1.5 million in 2011. Minimum rental commitments under all non- cancelable leases with an initial term in excess of one year are payable as follows: 2014, $845,000; 2015, $542,000; 2016, $183,000; 2017, $37,000; 2018 and beyond, $325,000. As of September 28, 2013, the Company had $62.9 million in non- cancelable purchase commitments for raw material extending as long as approximately 100 days and $0.5 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 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 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 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. 42 INSTEEL INDUSTRIES, INC. - Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data NOTE 12 Earnings (Loss) Per Share Th e computation of basic and diluted earnings per share attributable to common shareholders is as follows: (In thousands, except per share amounts) Net earnings (loss) Basic weighted average shares outstanding Dilutive eff ect of stock-based compensation Diluted weighted average shares outstanding Net earnings (loss) per share: Basic Diluted September 28, 2013 September 29, 2012 Year Ended $ $ 11,735 $ 17,948 405 18,353 0.65 $ 0.64 1,809 $ 17,664 326 17,990 0.10 $ 0.10 October 1, 2011 (387) 17,562 - 17,562 (0.02) (0.02) Options, restricted stock awards and RSUs representing 248,000 shares in 2013, 600,000 shares in 2012 and 582,000 shares in 2011 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. NOTE 13 Business Segment Information Th e Company’s 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 prestressed concrete strand. Based on the criteria specifi ed in ASC Topic 280, Segment Reporting, the Company has one reportable segment. Th e Company’s net sales and long-lived assets (consisting of net property, plant and equipment, the cash surrender value of life insurance policies and intangible asset) 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 by product line are as follows: (In thousands) Net sales: Welded wire reinforcement Prestressed concrete strand TOTAL September 28, 2013 September 29, 2012 October 1, 2011 Year Ended 357,890 $ 6,006 363,896 $ 90,922 $ - 90,922 $ 358,539 $ 4,764 363,303 $ 92,862 $ - 92,862 $ 329,168 7,741 336,909 93,490 - 93,490 September 28, 2013 September 29, 2012 October 1, 2011 Year Ended 227,957 $ 135,939 363,896 $ 230,049 $ 133,254 363,303 $ 208,741 128,168 336,909 $ $ $ $ $ $ Th ere were no customers that accounted for 10% or more of the Company’s net sales in 2013, 2012 and 2011. NOTE 14 Related Party Transactions Sales to a company affi liated with one of the Company’s directors amounted to $674,000 in 2013, $280,000 in 2012 and $475,000 in 2011. 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 2013 and 2012. INSTEEL INDUSTRIES, INC. - Form 10-K 43 PART II ITEM 8 Financial Statements and Supplementary Data NOTE 15 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 28, 2013 $ $ (1,562) $ (1,562) $ Year Ended September 29, 2012 (2,441) $ (2,441) $ October 1, 2011 (2,015) (2,015) NOTE 16 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 $ - and $486 Intangible asset, net of accumulated amortization of $163 and $ - 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: Salaries, wages and related expenses Property taxes Pension plan Customer rebates Worker s’ compensation Interest Other TOTAL Other liabilities: Deferred income taxes Deferred compensation TOTAL 44 INSTEEL INDUSTRIES, INC. - Form 10-K September 28, 2013 September 29, 2012 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 42,006 $ (896) $ 41,110 33,842 $ 3,074 21,877 $ 58,793 2,732 $ 1,332 1,799 $ 5,863 6,145 $ 1,724 171 350 $ 8,390 9,175 $ 42,258 129,861 210 181,504 (98,451) $ 83,053 2,790 $ 1,155 928 813 307 31 830 $ 6,854 7,281 $ 6,897 $ 14,178 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 1,342 1,233 1,442 716 327 29 788 5,877 4,087 7,487 11,574 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 17 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 18 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 19 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 (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 28, 2013, there was $24.8 million remaining available for future share repurchases under this authorization. During 2011, the Company repurchased $143,000 or 12,633 shares of its common stock through restricted stock net-share settlements. Th ere were no share repurchases during 2013 and 2012. INSTEEL INDUSTRIES, INC. - Form 10-K 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. (a North Carolina corporation) and subsidiaries as of September 28, 2013 and September 29, 2012 and the related consolidated statements of operations, consolidated statements of comprehensive income (loss), changes in shareholders’ equity, and cash fl ows for each of the three years in the period ended September 28, 2013. Our audits of the basic consolidated fi nancial statements included the fi nancial statement schedule listed in the index appearing under Item 8(b), Supplementary Data. 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 28, 2013 and September 29, 2012, and the results of their operations and their cash fl ows for each of the three years in the period ended September 28, 2013 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 28, 2013, based on criteria established in the 1992 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated October 29, 2013 expressed an unqualifi ed opinion. /s/ Grant Th ornton LLP Charlotte, North Carolina October 29, 2013 46 INSTEEL INDUSTRIES, INC. - Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data Schedule II - Valuation and Qualifying Accounts Years Ended September 28, 2013, September 29, 2012 and October 1, 2011 ALLOWANCE FOR DOUBTFUL ACCOUNTS (In thousands) Balance, beginning of year Amounts charged to earnings Write-off s, net of recoveries BALANCE, END OF YEAR Year Ended September 28, 2013 September 29, 2012 October 1, 2011 $ $ 1,123 $ (100) (127) $ 896 761 $ 449 (87) $ 1,123 2,296 307 (1,842) 761 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 28, 2013. 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 (1992). Based on this assessment, management concluded that our internal control over fi nancial reporting was eff ective as of September 28, 2013. During the quarter ended September 28, 2013, 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 28, 2013. Th e report appears below. INSTEEL INDUSTRIES, INC. - Form 10-K 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 the internal control over fi nancial reporting of Insteel Industries, Inc. (a North Carolina Corporation) and subsidiaries as of September 28, 2013, based on criteria established in the 1992 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Th e Company’s 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 the Company’s 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, the Company maintained, in all material respects, eff ective internal control over fi nancial reporting as of September 28, 2013, based on criteria established in the 1992 Internal Control—Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated fi nancial statements of the Company as of and for the year ended September 28, 2013, and our report dated October 29, 2013 expressed an unqualifi ed opinion on those fi nancial statements. /s/ Grant Th ornton LLP Charlotte, North Carolina October 29, 2013 48 INSTEEL INDUSTRIES, INC. - Form 10-K PART III ITEM 10 Directors, Executive Oﬃ cers and Corporate Governance 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 2014 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 2014 Annual Meeting of Shareholders and is incorporated herein by reference. INSTEEL INDUSTRIES, INC. - Form 10-K 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 2014 Annual Meeting of Shareholders and is incorporated herein by reference. EQUITY COMPENSATION PLAN INFORMATION September 28, 2013 (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 12.65 (c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Refl ected in Column (a)) (In thousands, except exercise price amount) Plan Category 587 (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 28, 2013, the securities shown are available for 918 $ 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 2014 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 2014 Annual Meeting of Shareholders and is incorporated herein by reference. 50 INSTEEL INDUSTRIES, INC. - Form 10-K 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 10-K 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: October 29, 2013 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on October 29, 2013 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 10-K PART IV ITEM 15 Exhibit Index to Annual Report on Form 10-K of Insteel Industries, Inc. Exhibit Index to Annual Report on Form 10-K of Insteel Industries, Inc. for Year Ended September 28, 2013 Exhibit Number Description 2.1 3.1 3.2 3.3 3.4 3.5 4.1 4.2 10.1 10.2 10.3* 10.4* 10.5* 10.6* 10.7* 10.8* 10.9* 10.10* 10.11* 10.12* 10.13* 10.14* 10.15* 10.16* 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). 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). 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). 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). 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). Relocation Proposal between the Company and James F. Petelle, dated August 23, 2006 (incorporated by reference to Exhibit 10.20.1 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 10-K 53 PART IV ITEM 15 Exhibit Index to Annual Report on Form 10-K of Insteel Industries, Inc. Exhibit Number Description 10.17* 10.18* 10.19* 10.20* 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). Form of Amendment to 2005 Equity Incentive Plan of Insteel Industries, Inc. dated August 20, 2013 List of Subsidiaries of Insteel Industries, Inc. at September 28, 2013. 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 28, 2013, fi led on October 31, 2013, formatted in XBRL (eXtensible Business Reporting Language) includes: (i) the Consolidated Statements of Operations for the years ended September 28, 2013, September 29, 2012 and October 1, 2011, (ii) the Consolidated Statements of Comprehensive Income (Loss) for the years ended September 28, 2013, September 29, 2012 and October 1, 2011, (iii) the Consolidated Balance Sheets as of September 28, 2013 and September 29, 2012, (iv) the Consolidated Statements of Cash Flows for the years ended September 28, 2013, September 29, 2012 and October 1, 2011, (v) the Consolidated Statements of Shareholders’ Equity as of September 28, 2013, September 29, 2012 and October 1, 2011 and (vi) the Notes to Consolidated Financial Statements. * Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate. Our SEC file number reference for documents filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended, is 1-9929. 54 INSTEEL INDUSTRIES, INC. - Form 10-K fonts used bitsumishi and turnpike . d e v r e s e r s t h g i r l l A © , n o i t a t r o p s n a r T f o t n e m t r a p e D sHareHolder InforMatIon corporate Headquarters 1373 Boggs Drive Mount Airy, north Carolina 27030 (336) 7862141 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 Wednesday, february 12, 2014 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 23, 2013, there were 738 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) 6272704 www.amstock.com Investor relations for information on the Company, additional cop ies of this report or other financial information, contact Michael C. Gazmarian, Vice president, Chief financial officer and treasurer, at the Company’s headquarters. You may also visit the Investors section on the Company’s web site at http://investor.insteel.com/. forWard-lookInG stateMents Any statements in this 2013 Annual Report that are not entirely historical in nature constitute forwardlooking statements within the meaning of the safe harbor provisions of the private Securities litigation Reform Act of 1995. for important information regarding forwardlooking statements, please read the “Cautionary note Regarding forwardlooking Statements” on page 4 of the Company’s Annual Report on form 10K for the year ended September 28, 2013, which is included as part of this 2013 Annual Report. CoR p oR A te InfoRMA tIon Board of dIrectors 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, LLC H.o. Woltz III(4) Chairman, President and Chief Executive Officer Insteel Industries, Inc. (1) (2) (3) (4) Member of the Audit Committee Member of the Executive Compensation Committee Member of the Nominating and Governance Committee 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 s a x e T e h t f o y s e t r u o c 0 1 e g a p n o o t o h P . l a n o i t a n r e t n I n i L . . Y T f o y s e t r u o c o t o h p r e v o C m o c . s r o n n o c - n a r r u c . w w w / . c n I , s r o n n o C & n a r r u C y b n g i s e d t r o p e r l a u n n A 1373 Boggs Drive Mount Airy, North Carolina 27030 www.insteel.comfonts used bitsumishi and turnpike

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