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
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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
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1373 Boggs Drive
Mount Airy, North Carolina 27030
www.insteel.comfonts used
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