Insteel Industries Annual Report 2015

Plain-text annual report

fonts used bitsumishi and turnpike Reinforcing America 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 (“ESM”), 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 ten manufacturing facilities located in the United States. INSTEEL INDUSTRIES : : 2015 ANNUAL REPORT 01 Financial Highlights (Dollars in thousands, except per share amounts) 2015 2014 2013 OPERATING RESULTS: Net sales Gross profit % of net sales Net earnings % of net sales PER SHARE DATA: Net earnings: Basic Diluted Cash dividends declared RETURNS: Return on total capital(1) Return on shareholders’ equity(2) FINANCIAL POSITION: Cash and cash equivalents Total assets Total debt Shareholders’ equity CASH FLOWS: Net cash provided by operating activities Acquisition of business Capital expenditures Depreciation and amortization Cash dividends paid $ 447,504 58,333 $ 408,978 48,773 $ 363,896 39,233 13.0% 11.9% 10.8% $ 21,710 $ 16,641 $ 11,735 4.9% 4.1% 3.2% $ 1.18 1.15 0.12 $ 0.91 0.89 0.12 $ 0.65 0.64 0.37 11.5% 11.5% 9.8% 9.8% 7.3% 7.6% $ 33,258 260,239 — 200,215 $ 35,774 (480) 7,153 11,934 2,211 $ 3,050 256,795 — 178,883 $ 29,232 33,943 8,955 10,274 2,193 $ 15,440 212,649 — 161,056 $ 36,828 — 5,030 9,833 6,599 (1) Net earnings/(average total debt + average shareholders’ equity). (2) Net earnings/average shareholders’ equity. Business Overview Manufacturing Locations Welded Wire Reinforcement PC Strand 57%OF NET SALES Welded Wire Reinforcement Prefabricated reinforcement consisting of high-strength wires that are welded into specified patterns according to customer requirements, which may provide for alternative wire diameters, lengths and spac- ings. Wire intersections are electrically resistance-welded by computer-controlled continuous automatic welding lines that use pressure and heat to fuse longitudinal and cross wires in their proper position. ENGINEERED STRUCTURAL MESH Engineered made-to-order prod- uct that is used as the primary reinforcement in concrete ele- ments 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 Contractors END USES Nonresidential Construction CONCRETE PIPE REINFORCEMENT Engineered made-to-order prod- uct that is used as the primary reinforcement in concrete pipe and box culverts for drainage and sewage systems, water treatment facilities and other related applications. PLANT LOCATIONS Dayton, Texas 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 applica- tions 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 and Distributors END USES Nonresidential Construction Residential Construction INSTEEL INDUSTRIES : : 2015 ANNUAL REPORT 03 2015 Net Sales 62% Welded Wire Reinforcement 38% PC Strand Sales by End Use 85% Nonresidential Construction Sales by Customer Category 70% Concrete Product Manufacturers 15% Residential Construction 30% Distributors Rebar Fabricators Contractors 43%OF NET SALES Prestressed Concrete Strand High-strength seven-wire reinforcement consisting of six wires that are continuously wrapped around a center wire forming a strand, which is then heat-treated while under tension. Provides tensile strength and compression forces in concrete elements and structures, allowing for the use of longer, thinner and lighter spans or sections. May be used in either pretensioned or posttensioned applications to reinforce bridges, parking decks, buildings, other concrete structures and homes in regions that have expansive soil. PLANT LOCATIONS Gallatin, Tennessee Houston, Texas Sanderson, Florida CUSTOMER SEGMENTS Precast Prestress Producers Posttensioning Suppliers END USES Nonresidential Construction Residential Construction 8" SPACE 2'-0" SPACE 2'-0" SPACE BT-650 END =2'-4" BT-550 MID1 =5'-6" BT-550 MID2 = 28'-0" BT-550 MID2 = 28'-0" 2" 14@2" =2'-4" 6@11" = 5'-6" 8" SPACE 30@24" = 60'-0" SPANS 1-5 ELEVATION (ONLY BT-650 & BT-550 SHOWN FOR CLARITY) T U O B A L A C R T E M M Y S I 103 8"SPACE(SPAN 1) 2" SPACE (SPANS2-5) 131 Letter to Shareholders INSTEEL IS OPERATING FROM A POSITION OF TREMENDOUS STRENGTH AND SCALE. WE ENTER THE YEAR IN MARKET LEADERSHIP POSITIONS WITH THE BROADEST FOOTPRINT AND BEST OPERATIONS AND PEOPLE IN THE INDUSTRY. 2015 was a year of significant progress for Insteel as our markets continued to gradually recover from the protracted downturn in construction activity. We intensified our focus on the operating effectiveness of our facilities, pursuing further improvements in our processes and costs while meeting the service and quality expectations of our customers. We benefited from the increasing contri- butions provided by our recent acquisi- tions of the second largest producers in both of our product lines—the welded wire reinforcement business of Ivy Steel & Wire, Inc. (“Ivy”) in November 2010 and the PC strand business of American Spring Wire Corporation (“ASW”) in August 2014. We made strategic invest- ments in our facilities to drive our costs lower and enhance our manufacturing capabilities. And we continued to pursue further acquisitions in our core businesses that offered substantial synergy and value- creation potential for our shareholders. It was a year of positive momentum that we expect to carry forward into 2016. Financial Results Net sales for 2015 rose 9.4% from the prior year to a record high $447.5 million. Despite the improvement, we continued to operate well under prerecession levels considering that our pro-forma net sales exceeded $600 million in 2008 including the stand-alone revenues for the busi- nesses that we subsequently acquired. Shipments increased 10.0% primarily due to the additional revenue provided by the ASW acquisition while average selling prices remained relatively flat, declining 0.5%. Gross margins rose to 13.0% from 11.9% primarily due to higher spreads between selling prices and raw material costs and the increase in shipments, which were partially offset by higher unit conversion costs. With the cost of hot- rolled steel wire rod, our primary raw material, declining dramat ically through the third quarter, our margins were unfa- vorably impacted by the consumption of higher cost inventory purchased in prior periods. Our fourth quarter financial results reflected the full benefit of the lower costs, with gross margins improving to 18.0%. Net earnings for 2015 increased to their highest level in seven years, rising to $21.7 million, or $1.15 per diluted share from $16.6 million, or $0.89 per diluted share in 2014. million of dividend payments and the $1.5 million acquisition of an intangible asset from a competitor, and was primarily responsible for the $30.2 million increase in our cash balance. In May 2015, we com- pleted an amendment to our $100 million revolving credit facility that extended the maturity date to 2020 and reduced the applicable LIBOR margins and unused fee. We ended the year debt-free with $33.3 million of cash on hand and no borrowings outstanding on the credit facility. Follow- ing the end of the fiscal year, we declared a special cash dividend of $1.00 per share payable in January 2016 as a means of returning capital to our shareholders with- out compromising our financial flexibility. Reconfiguration of PC Strand Operations Following the acquisition and subsequent integration of ASW’s PC strand business, we completed an extensive evaluation of the alternative operating strategies for our newly combined facilities. This evaluation led to the development of a reconfiguration plan that would optimize our manufactur- ing footprint relative to the requirements of our markets while allowing us to achieve further reductions in our oper ating costs. We believe these actions will serve to strengthen our market leadership position and widen our cost advantage relative to our competitors. In March 2015, we completed the first phase of our plan with the closure of the Newnan, Georgia facility and the reassignment of its manufacturing to our other three PC strand facilities. The consolidation of the plants is expected to generate approximately $3 million of annualized cost savings. Under the second phase of our plan, we are upgrading and expanding the Houston, Texas facility, which involves the replace- ment of antiquated production lines with equipment previously located at the Newnan facility and the addition of a new state-of-the-art raw material cleaning pro- cess. These projects, which are expected to be completed over the course of fiscal 2016, will eliminate a high cost process that constrained the capacity of the plant and adversely impacted its yield and pro- ductivity. We expect these improvements will reduce our annualized operating costs by an additional $5 million beginning in fiscal 2017. Operating activities generated $35.8 million of cash, which was used to fund $7.2 million of capital expenditures, $2.2 As we approach the completion of the second phase, we plan on adding a third production line at the Houston facility INSTEEL INDUSTRIES : : 2015 ANNUAL REPORT 05 during fiscal 2017 to realign the plant’s capacity with the requirements of its mar- kets and achieve further improvements in its costs. The economies of scale that are attainable through ramping up the volume of the facility are considerable and will constitute a significant competitive advantage. Looking Ahead As we move into 2016, we expect further improvement in our markets driven by the ongoing recovery in nonresidential construction, our primary demand driver. The macro indicators for private nonresi- dential construction are pointing to con- tinued growth in the coming year and customer sentiment remains positive. The recent passage of a new five-year federal highway spending bill represents a significant improvement over the series of short-term extensions that have been passed by Congress since 2008 and should spur increased infrastructure construction in the coming years. State and local spend- ing has risen as budgets have gradually recovered from the recession and addi- tional funding has been generated from a range of sources, including fuel tax increases, new or increased fees, private- public partnerships and bond financings. Insteel is operating from a position of tremendous strength and scale. We enter the year in market leadership positions with the broadest footprint and best oper- ations and people in the industry. Our ten manufacturing facilities are strategically located in close proximity to the largest construction markets in the U.S. and our primary raw material suppliers. The sub- stantial investments we have made in our facilities, people and systems have allowed us to achieve costs and develop manufac- turing and customer service capabilities that are second to none. We are excited about our future as the opportunities for Insteel are greater than ever. Thanks to our employees, customers and shareholders for their continued trust, confidence and support. H.O. Woltz III Chairman, President and Chief Executive Officer INSTEEL INDUSTRIES : : 2015 ANNUAL REPORT 07 MARKET LEADERSHIP The use of precast, prestressed concrete products affords many advantages over other construction materials, including a longer service life, lower life cycle cost, compressed construction schedule and improved energy efficiency and sound control at a lower project cost. Our business strategy is centered on achieving and maintaining market leadership positions. We have become the nation’s largest manufacturer of PC strand and welded wire reinforcement through our intense customer focus and our ongoing commitment to operational excellence, supported by the substantial investments we have made in our people, facilities and systems. Our recent acquisitions of the second largest domestic producers of both our product lines have served to expand our market leadership positions, broaden our footprint and better position us to capitalize on the construction recovery. Our ten manufacturing facilities are strategically located in close proximity to the largest construction markets in the U.S. and our primary raw material suppliers. Our broad product offering and national market presence 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 customers. LOW COST PRODUCER INSTEEL INDUSTRIES : : 2015 ANNUAL REPORT 09 Highways and bridges are one of the largest end-use applications for our products. Prestressed concrete bridge beams consume significant quantities of PC strand and ESM. While PC strand is always used in prestressed bridge beams, precasters are increasingly selecting ESM over rebar to reinforce the shear and flange sections of the beam due to its higher quality, decreased cycle time and lower cost. A second component of our business strategy is to operate as the lowest cost producer in our industry, which is critical to achieving our financial objectives considering the highly competitive nature of our business. We believe that the scale of our plants and our equipment technology and manufacturing practices allow us to achieve productivity levels and conversion costs that compare favorably against any of our competitors—domestic or foreign. 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. Our cost structure is also favorably impacted by the greater economies of scale and purchasing leverage that are afforded through our market leadership position. Our ability to operate as the low cost producer is ultimately driven by our dedicated and skilled workforce, which sets the standard for our industry. STRATEGIC GROWTH A third component of our business strategy is to pursue growth opportunities in our core businesses that further our penetration of the markets we currently serve or expand our footprint. In response to the growing congestion, many airport authorities are pursuing expansion projects which consume significant quantities of our concrete reinforcing products. Runways and related infrastructure, including concrete pipe used for water drainage, are typically reinforced with welded wire reinforce- ment, while extensions over waterways or roads are frequently supported with pilings, beams and decking that are reinforced with PC strand and ESM. INSTEEL INDUSTRIES : : 2015 ANNUAL REPORT 11 Long-term demographic trends and the ongoing deterioration in our nation’s infrastructure are expected to spur continued growth in construction spending and demand for our products. Over the years, our growth has been achieved organically through greenfield investments and plant expansions as well as through acquisitions. Our existing facilities, which are capable of ramping up to over $700 million of revenues with minimal incremental capital investment, represent a substantial source of organic growth. Our strong balance sheet and financial flexi- bility ideally position us to pursue additional acquisitions on an opportunistic basis. As evidenced by our most recent transac- tions, we will be highly disciplined in focusing only on those opportunities that are synergistic and at valuations allowing for future returns that meet the expectations of our shareholders. Selected Financial Data— Ten-Year History Net Sales (In millions) $329.5 $447.5 $329.5 2006 $297.8 2007 $353.9 2008 $230.2 2009 $211.6 2010 $336.9 2011 $363.3 2012 $363.9 2013 $409.0 2014 $447.5 2015 Gross Proﬁt (Loss) (In millions) $70.9 Gross Margin 21.5% $58.3 13.0% $70.9 2006 $56.1 2007 $86.8 2008 ($15.1) 2009 $18.0 2010 $31.7 2011 $22.5 2012 $39.2 2013 $48.8 2014 $58.3 2015 21.5% 2006 18.8% 2007 24.5% 2008 (6.6%) 2009 8.5% 2010 9.4% 2011 6.2% 2012 10.8% 2013 11.9% 2014 13.0% 2015 Earnings (Loss) from Continuing Operations (Per diluted share) $1.86 Return on Total Capital 29.7% $1.15 11.5% $1.86 2006 $1.33 2007 $2.47 2008 ($1.20) 2009 $0.03 2010 ($0.02) 2011 $0.10 2012 $0.64 2013 $0.89 2014 $1.15 2015 29.7% 2006 18.2% 2007 27.9% 2008 (13.2%) 2009 0.3% 2010 (0.2%) 2011 1.1% 2012 7.3% 2013 9.8% 2014 11.5% 2015 500000 400000 300000 200000 100000 0 25 20 15 10 5 0 -5 -10 30 25 20 15 10 5 0 -5 -10 -15 100000 80000 60000 40000 20000 0 -20000 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 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 October 3, 2015 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 28, 2015 (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 $351,359,207 based upon the closing sale price as reported on the NASDAQ Global Select Market. As of October 29, 2015, there were 18,466,585 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 2016 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 the 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 ...........................................................................................................................21 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,” “appears,” “plans,” “intends,” “may,” “should,” “could” 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 and uncertainties are discussed herein under the caption “Risk Factors” and are updated from time to time in our ﬁ lings with the United States (“U.S.”) Securities and Exchange Commission (“SEC”). You should carefully review these risk factors. 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, except as may be required by law. 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; • 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; • credit market conditions and the relative availability of ﬁ nancing for us, our customers and the construction industry as a whole; • 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 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 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 2015, we estimate that approximately 85% of our sales were related to nonresidential construction and 15% 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 ten 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 August 15, 2014, we, through our wholly-owned subsidiary, IWP, purchased substantially all of the assets associated with the PC strand business of American Spring Wire Corporation (“ASW”) for a ﬁ nal adjusted purchase price of $33.5 million (the “ASW Acquisition”). ASW manufactured PC strand at facilities located in Houston, Texas and Newnan, Georgia (see Note 4 to the consolidated ﬁ nancial statements). We acquired, among other assets, the accounts receivable and inventories related to ASW’s PC strand business, production equipment at its facility in Houston, Texas and its production equipment and facility in Newnan, Georgia. We also entered into an agreement with ASW pursuant to which we lease the Houston facility with an option to purchase it in the future. Subsequent to the acquisition, we elected to consolidate our PC strand operations with the closure of the Newnan facility, which was completed in March 2015. Internet Access to Company Information Additional information about us and our ﬁ lings with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments thereto, are available at no cost on our web site at http://investor.insteel.com/sec.cfm and the SEC’s web site at www.sec.gov as soon as reasonably practicable after Products Our operations are entirely focused on the manufacture and marketing of steel wire reinforcing products for concrete construction applications. Th e Company’s concrete reinforcing products are comprised of two product lines: PC strand and WWR. Based on the criteria speciﬁ ed in Financial Accounting Standards Board (“FASB”) Accounting Standards Codiﬁ cation (“ASC”) Topic 280, Segment Reporting, the Company has one reportable segment. 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. 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 ﬁ scal years 2015, 2014 and 2013, PC strand sales represented 43%, 38% and 37%, respectively, of our net sales. INSTEEL INDUSTRIES, INC.  Form 10K 5 PART I ITEM 1 Business WWR is produced as either a standard or a specially engineered reinforcing product for use in nonresidential and residential construction. We produce a full range of WWR products, including ESM, CPR and SWWR. ESM is an engineered made-to-order product that is used as the primary reinforcement for concrete elements or structures, frequently serving as a replacement for hot-rolled rebar due to the cost advantages that it oﬀ ers. CPR is an engineered made-to-order product that is used as the primary reinforcement in concrete pipe, box culverts and precast manholes for drainage and sewage systems, water treatment facilities and other related applications. SWWR is a secondary reinforcing product that is produced in standard styles for crack control applications in residential and light nonresidential construction, including driveways, sidewalks and various slab-on- grade applications. For ﬁ scal years 2015, 2014 and 2013, WWR sales represented 57%, 62% and 63%, respectively, of our net sales. Marketing and Distribution We market our products through sales representatives who are our employees. Our outside sales representatives are trained in the technical applications of our products and sell multiple product lines in their respective territories. 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 2015, 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 2015, 2014 and 2013, and the Company is not dependent on a single customer, or a few customers, the loss of which would be expected to have a material adverse eﬀ ect. 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 October 3, 2015 will be shipped prior to the end of the ﬁ rst quarter of ﬁ scal 2016. 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 The 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 different grades and sizes of wire rod with varying specifications 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 2015 and 2014 represented approximately 29% and 30%, respectively, of our total wire rod purchases. We believe that the substantial volume of our wire rod requirements, our desirable mix of sizes and grades, and our strong ﬁ nancial condition 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 and magnitude 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 Co., Inc., 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 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 strong market positions, broad product oﬀ ering and geographic footprint, technologically advanced manufacturing facilities, low cost production capabilities and sophisticated information systems, we believe that we are well-positioned to compete favorably with other producers of our concrete reinforcing products. As of October 3, 2015, we employed 790 people. Th e Company has no contracts with labor unions and has not experienced any work stoppages. We believe that our relationship with our employees is good. Should we experience a disruption of production, we believe that our contingency plans 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 14 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. Although we expect to incur some environmental control facility costs during ﬁ scal years 2016 and 2017 in connection with our expansion of the Houston facility, we do not expect these capital expenditures to have a material eﬀ ect on our ﬁ nancial position or results of operations. 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 59 56 65 56 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, 59, 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., formerly a subsidiary of our Company, 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, 56, 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, 65, 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, 56, 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. From 1977 until 1992, Mr. Wagner served in various positions with Florida Wire and Cable, Inc., a manufacturer of PC strand and galvanized strand products that was later acquired by the Company in 2000. Th e executive oﬃ cers listed above were elected by our Board of Directors at its annual meeting held February 17, 2015 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 11, 2016. 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. Tightening in the credit markets could unfavorably impact demand for our products by reducing the availability of ﬁ nancing to our customers and the construction industry as a whole. Future prolonged periods of economic weakness or reduced availability of ﬁ nancing could have a material adverse impact on our business, results of operations, ﬁ nancial condition and cash ﬂ ows. Our business can be negatively impacted by reductions in the amount and duration of government funding for infrastructure projects that reduce the level of construction activity and demand for our products. Certain of our products are used in the construction of highways, bridges and other infrastructure projects that are funded by federal, state and local governments. Reductions in the amount of funding for such projects or the period for which it is provided could have a material adverse impact on our business, results of operations, ﬁ nancial condition and cash ﬂ ows. Our operations are subject to seasonal ﬂ uctuations that may impact our cash ﬂ ow. Our shipments are generally lower in the ﬁ rst and second ﬁ scal quarters primarily due to the unfavorable impact of winter weather conditions on construction activity and customer plant shutdowns associated with holidays. As a result, our cash ﬂ ow from operations may vary from quarter to quarter due to these seasonal factors. Demand for our products is highly variable and diﬃ cult to forecast due to our minimal backlog and the unanticipated changes that can occur in customer order patterns or inventory levels. Demand for our products is highly variable. Th e short lead times for customer orders and minimal backlog that characterize our business make it diﬃ cult to forecast the future level of demand for our products. In some cases, unanticipated downturns in demand 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 negative macroeconomic conditions and tightening in the credit markets. Negative macroeconomic conditions and 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. Furthermore, a reduction in the availability of credit may increase the risk of customers defaulting on their payment obligations to us. Th e 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 PART I ITEM 1A Risk Factors 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 2015. 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 our earnings 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. 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 domestic production capacity is insuﬃ cient to satisfy domestic demand in most market environments. 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 INSTEEL INDUSTRIES, INC.  Form 10K 9 PART I ITEM 1A Risk Factors transportation interruptions. For example, on January 21, 2014, a ﬁ re occurred at the Company’s Gallatin, Tennessee PC strand manufacturing facility, damaging a portion of the facility and requiring the temporary curtailment of operations until the necessary repairs were completed. 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 escalation 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. Th e Patient Protection and Aﬀ ordable Care and Education Reconciliation Act of 2010 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 like the Company 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 limit the amount that employees are charged for the coverage. Provisions of this law have become and will become eﬀ ective at various dates over the next several years and many of the regulations and guidance for the law have not been implemented. Due to the breadth and complexity of this law, the lack of implementing regulations and interpretive guidance and the phased-in nature of the requirement, we cannot predict the future eﬀ ect of this law on our results. Any signiﬁ cant increases in the costs attributable to our self-insured health and workers’ compensation 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 previously implemented numerous measures to oﬀ set the impact of increases 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 ﬁ nancial results could be adversely impacted by the impairment of goodwill. Our balance sheet includes intangible assets, including goodwill and other separately identiﬁ able assets primarily related to the ASW Acquisition. We may acquire additional intangible assets in connection with future acquisitions as part of our growth strategy. We are required to review goodwill for impairment on an annual basis, or more frequently if certain indicators of permanent impairment arise such as, among other things, a decline in our stock price and market capitalization and lower than projected operating results and cash ﬂ ows. If our review determined that goodwill had been impaired, the impaired portion would have to be written-oﬀ during that period which could have an adverse eﬀ ect on our business and ﬁ nancial results. 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 2015, our common stock traded as high as $24.85 and as low as $14.61. 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 ﬁ nancial results; changes in our business outlook and the expectations for the construction industry; changes in market valuations of companies in our industry; 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. PART I ITEM 4 Mine Safety Disclosures ITEM 2 Properties Insteel’s corporate headquarters and IWP’s sales and administrative oﬃ ces are located in Mount Airy, North Carolina. At October 3, 2015, we operated ten manufacturing facilities located in Dayton, Texas; Gallatin, Tennessee; Hazleton, Pennsylvania; Hickman, Kentucky; Houston, Texas; Jacksonville, Florida; Kingman, Arizona; Mount Airy, North Carolina; Sanderson, Florida; and St. Joseph, Missouri. We own all of our real estate except for the facility located in Houston, Texas, which we currently lease from ASW with an option to purchase in the future. 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 involved in 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 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 26, 2015, there were 716 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 dividends per share declared in ﬁ scal 2015 and 2014: First Quarter Second Quarter Th ird Quarter Fourth Quarter Fiscal 2015 Fiscal 2014 $ High 24.85 $ 24.44 22.85 19.79 Low 19.05 $ 18.60 18.15 14.61 Cash Dividends 0.03 0.03 0.03 0.03 $ High 23.18 $ 23.04 24.26 24.25 Low 15.45 $ 17.91 18.66 18.17 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 8 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 The 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 five years ended October 3, 2015. The graph and table assume that $100 was invested on October 2, 2010 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 fiscal year. Comparison of Five-Year Cumulative Return for Insteel Industries, Inc., the Russell 2000 Index and the S&P Building Products Index In $ 350 300 250 200 150 100 50 0 10/2/10 10/1/11 9/29/12 9/28/13 9/27/14 10/3/15 Insteel Industries, Inc. Russell 2000 S&P Building Products Insteel Industries, Inc. Russell 2000 S&P Building Products $ 10/2/10 100.00 $ 100.00 100.00 10/1/11 113.90 $ 96.47 66.21 Fiscal Year Ended 9/29/12 134.11 $ 127.25 143.86 9/28/13 188.18 $ 165.50 206.96 9/27/14 248.09 $ 172.01 237.79 10/3/15 191.62 174.15 287.95 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. The share repurchase authorization continues in effect until terminated by the Board of Directors. As of October 3, 2015, 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 fiscal 2015 and 2014. Rights Agreement On April 21, 2009, the Board of Directors adopted Amendment No. 1 to Rights Agreement, effective 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. The Rights Agreement also provides that one right will attach to each share of our common stock issued after May 17, 1999. Each right entitles the registered holder to purchase from us on certain dates described in the Rights Agreement one two-hundredths of a share (a “Unit”) of our Series A Junior Participating Preferred Stock at a purchase price of $46 per Unit, subject to adjustment as described in the Rights Agreement. For more information regarding our Rights Agreement, see Note 18 to the consolidated financial statements. 13 INSTEEL INDUSTRIES, INC. - Form 10-K PART II ITEM 6 Selected Financial Data ITEM 6 Selected Financial Data Financial Highlights $ (In thousands, except per share amounts) Net sales Net earnings (loss) Net earnings (loss) per share (basic) Net earnings (loss) per share (diluted) Cash dividends declared Total assets Total debt Shareholders’ equity (53 weeks) October 3, 2015 (52 weeks) September 27, 2014 Year Ended (52 weeks) September 28, 2013 (52 weeks) September 29, 2012 447,504 $ 21,710 1.18 1.15 0.12 260,239 - 200,215 408,978 $ 16,641 0.91 0.89 0.12 256,795 - 178,883 363,896 $ 11,735 0.65 0.64 0.37 212,649 - 161,056 363,303 $ 1,809 0.10 0.10 0.12 208,552 11,475 149,500 (52 weeks) October 1, 2011 336,909 (387) 0.02 0.02 0.12 216,530 14,156 148,474 As summarized more fully in Item 7 below, on August 15, 2014, we, through our wholly-owned subsidiary, IWP, purchased substantially all the assets associated with the PC strand business of ASW. Th is transaction may materially aﬀ ect the comparability of the information reﬂ ected in the selected ﬁ nancial data presented in this Item 6. 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 August 15, 2014, we, through our wholly-owned subsidiary, IWP, purchased substantially all of the assets associated with the PC strand business of ASW for a ﬁ nal adjusted purchase price of $33.5 million. ASW manufactured PC strand at facilities located in Houston, Texas and Newnan, Georgia (see Note 4 to the consolidated ﬁ nancial statements). We acquired, among other assets, the accounts receivable and inventories related to ASW’s PC strand business, the production equipment at its facility in Houston, Texas and its production equipment and facility in Newnan, Georgia. We also entered into an agreement pursuant to which we lease the Houston facility from ASW with an option to purchase it in the future. Subsequent to the acquisition, we elected to consolidate our PC strand operations with the closure of the Newnan facility, which was completed in March 2015. Critical Accounting Policies Our consolidated 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 consolidated ﬁ nancial statements. Th e preparation of our consolidated 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. 14 INSTEEL INDUSTRIES, INC.  Form 10K PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 and ﬁ nite-lived intangibles, 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 carrying value or fair value less selling cost when we have committed to a disposal plan, and are reported separately as assets held for sale on our 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. Goodwill. Goodwill is tested annually for impairment and whenever events or circumstances change that would make it more likely than not that an impairment may have occurred. We perform our annual impairment analysis as of the ﬁ rst day of the fourth quarter each ﬁ scal year, which involves comparing the current estimated fair value of the reporting unit to its recorded value, including goodwill. We perform a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. It may be necessary to perform a quantitative analysis where a discounted cash ﬂ ow model is used to determine the current estimated fair value of the reporting unit. Key assumptions used to determine the fair value of the reporting unit as part of our annual testing (and any required interim testing) include: (a) expected cash ﬂ ow for the ﬁ ve-year period following the testing date; (b) an estimated terminal value using a terminal year growth rate based on the growth prospects of the reporting unit; (c) a discount rate based on our estimated after-tax weighted average cost of capital; and (d) a probability-weighted scenario approach by which varying cash ﬂ ows are assigned to alternative scenarios based on their likelihood of occurrence. In developing these assumptions, we consider historical and anticipated future results, general economic and market conditions, the impact of planned business and operational strategies and all available information at the time the fair value of the reporting unit is estimated. We monitor our operating results throughout the year to determine if events or changes in circumstances warrant any interim impairment testing. Otherwise, goodwill will be subject to the required annual impairment test during our fourth quarter. Changes in the judgments and estimates underlying our analysis of goodwill for possible impairment, including the expected future operating cash ﬂ ows and discount rate, could reduce our estimated fair value in the future and result in an impairment of goodwill. Th ere was no goodwill impairment loss recognized in 2015. 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 our 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. We are involved in claims, lawsuits and other proceedings, which arise in the ordinary course of business. 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. INSTEEL INDUSTRIES, INC.  Form 10K 15 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Stock-based compensation. We account for stock-based compensation arrangements, including stock option grants and restricted stock units, in accordance with the provisions of 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 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 4.25% for 2015 and 2014, and 4.75% for 2013. 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 or beneﬁ t 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 ﬁ scal years 2015, 2014 and 2013, the assumed long-term rate of return utilized for the Delaware Plan assets was 8%. We currently expect to use the same assumed rate for the long-term return on plan assets in ﬁ scal 2016. In determining the appropriateness of this assumption, we considered the historical rate of return on 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 our 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 ﬁ scal years 2015, 2014 and 2013, we made contributions totaling $234,000, $240,000 and $307,000, respectively, to the Delaware Plan. We currently expect net periodic pension cost for ﬁ scal 2016 to be $32,000 for the Delaware Plan and $676,000 for the SERPs. Cash contributions to the plans during ﬁ scal 2016 are expected to be $246,000 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 October 3, 2015 by approximately $106,000 and have no impact on our expected net periodic pension cost for 2016. A 0.25% decrease in the assumed discount rate for our SERPs would have increased our projected and accumulated beneﬁ t obligations as of October 3, 2015 by approximately $245,000 and $199,000, respectively, and our expected net periodic pension cost for ﬁ scal 2016 by approximately $25,000. A 0.25% decrease in the assumed long-term rate of return on plan assets for the Delaware Plan would have increased our expected net periodic pension cost for ﬁ scal 2016 by approximately $6,000. 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 Th e nature and impact of recent accounting pronouncements is discussed in Note 3 to our consolidated ﬁ nancial statements and incorporated herein by reference. 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 Restructuring charges, net Acquisition costs Other expense (income), net Interest expense Interest income Eﬀ ective income tax rate Net earnings “N/M” = not meaningful. 2015 Compared with 2014 $ $ $ $ October 3, 2015 Change 447,504 58,333 13.0 % 25,824 5.8% 349 - (1,113) 320 (11) 34.1 % 21,710 $ 9.4 % 19.6 % 10.5 % $ (72.0%) $ (100.0%) (41.6%) 27.0 % 10.0 % 30.5 % $ Year Ended September 27, 2014 408,978 48,773 Change 12.4 % $ 24.3 % September 28, 2013 363,896 39,233 11.9 % 23,371 5.7 % 1,247 612 (1,907) 252 (10) 34.0 % 16,641 13.0 % $ 100.0% $ 100.0% N/M 7.2 % (28.6%) 10.8 % 20,682 5.7 % - - 333 235 (14) 34.8 % 41.8% $ 11,735 Net Sales Net sales increased 9.4% to $447.5 million in 2015 from $409.0 million in 2014. Shipments for the year increased 10.0% while average selling prices decreased 0.5% from the prior year levels. Th e increase in shipments was primarily driven by the additional business provided by the ASW Acquisition. Sales for both years reﬂ ect reduced volumes relative to prerecession levels in our construction end-markets. Gross Proﬁ t Gross proﬁ t increased 19.6% to $58.3 million, or 13.0% of net sales, in 2015 from $48.8 million, or 11.9% of net sales, in 2014. Th e year-over-year increase was primarily due to wider spreads between average selling prices and raw material costs ($11.4 million) and higher shipments ($5.3 million) partially oﬀ set by higher unit conversion costs ($7.0 million). Th e increase in spreads was driven by lower raw material costs ($13.2 million) and freight expense ($0.9 million) partially oﬀ set by lower average selling prices ($2.7 million). Gross proﬁ t for both years was unfavorably impacted by reduced shipment volumes and elevated unit conversion costs relative to prerecession levels largely driven by reduced operating schedules. Selling, General and Administrative Expense Selling, general and administrative expense (“SG&A expense”) increased 10.5% to $25.8 million, or 5.8% of net sales, in 2015 from $23.4 million, or 5.7% of net sales, in 2014 primarily due to increases in compensation expense ($650,000), amortization expense associated with intangible assets ($619,000) and employee beneﬁ t costs ($435,000) together with the relative year-over-year change in the cash surrender value of life insurance policies ($474,000). Th e increase in compensation expense was largely driven by higher incentive plan expense due to our improved ﬁ nancial results in the current year. Th e increase in amortization expense was primarily associated with the intangible assets that were acquired in connection with the ASW Acquisition. Th e increase in employee beneﬁ t costs was primarily due to higher employee health insurance and supplemental retirement plan expense. Th e cash surrender value of life insurance policies increased $39,000 in the current year period compared with $513,000 in the prior year period due to the changes in the value of the underlying investments. Restructuring Charges, Net Net restructuring charges of $0.3 million were incurred in 2015 compared with $1.2 million in 2014. Th e net restructuring charges for 2015 were related to the closure of the Newnan, Georgia PC strand facility that was acquired through the ASW Acquisition, including $0.6 million for facility closure costs, $0.5 million for impairment charges related to the decommissioning of equipment, $0.1 million for employee separation costs and $0.1 million for equipment relocation costs. Th ese charges were partially oﬀ set by a $0.9 million gain on the sale of the real estate and certain of the equipment associated with the Newnan facility. Th e net restructuring charges for 2014 were for employee separation costs associated with staﬃ ng reductions that were implemented in connection with the ASW Acquisition. Acquisition Costs Acquisition costs of $0.6 million were incurred in 2014 for legal, accounting and other professional fees related to the ASW Acquisition. Th e accounting requirements for business combinations require the expensing of acquisition costs in the period in which they are incurred. INSTEEL INDUSTRIES, INC.  Form 10K 17 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Other Expense (Income) Other income for 2015 was $1.1 million compared to $1.9 million in 2014. Th e other income for 2015 was primarily related to a $1.7 million net gain from insurance proceeds attributable to the replacement of property and equipment damaged in the ﬁ re at our Gallatin, Tennessee PC strand facility in 2014, partially oﬀ set by a $0.7 million charge related to the settlement of a customer dispute. Th e other income for 2014 was largely related to a net gain from insurance proceeds attributable to the replacement of property and equipment damaged in the Gallatin ﬁ re. Interest Expense Interest expense increased 27.0% to $320,000 in 2015 from $252,000 in 2014 primarily due to higher average debt outstanding during 2015. Selling, General and Administrative Expense SG&A expense increased 13.0% to $23.4 million, or 5.7% of net sales, in 2014 from $20.7 million, or 5.7% of net sales, in 2013 primarily due to increases in compensation expense ($1.7 million), employee beneﬁ t costs ($0.3 million), amortization expense associated with intangible assets ($0.3 million) and bad debt expense ($0.2 million). Th e increase in compensation expense was largely driven by higher incentive plan expense due to our improved ﬁ nancial results in 2014. Th e increase in employee beneﬁ t costs was primarily due to higher employee health insurance costs during 2014. Th e increase in amortization expense was related to the intangible assets that were acquired in connection with the ASW Acquisition. Th e increase in bad debt expense was due to an adjustment to the allowance for doubtful accounts driven by the increase in sales and accounts receivable. Income Taxes Our eﬀ ective income tax rate for 2015 was essentially unchanged at 34.1% compared with 34.0% in 2014. Restructuring Charges, Net Net restructuring charges of $1.2 million were incurred in 2014 for employee separation costs associated with staﬃ ng reductions that were implemented in connection with the ASW Acquisition. Net Earnings Net earnings increased to $21.7 million ($1.15 per diluted share) in 2015 from $16.6 million ($0.89 per diluted share) in 2014 primarily due to the increase in gross proﬁ t partially oﬀ set by higher SG&A expense. 2014 Compared with 2013 Net Sales Net sales increased 12.4% to $409.0 million in 2014 from $363.9 million in 2013. Shipments for the year increased 12.8% while average selling prices decreased 0.3% from the prior year levels. Th e increase in shipments was primarily due to improved market conditions and increased demand for our products relative to the prior year as well as the additional business provided by the ASW Acquisition for a portion of our fourth quarter. Sales for both years reﬂ ect reduced volumes relative to the prerecession levels in our construction end-markets. Gross Proﬁ t Gross proﬁ t increased 24.3% to $48.8 million, or 11.9% of net sales, in 2014 from $39.2 million, or 10.8% of net sales, in 2013. Th e year-over-year increase was primarily due to wider spreads between average selling prices and raw material costs ($6.8 million) and higher shipments ($5.4 million), partially oﬀ set by higher unit conversion costs ($1.2 million). Th e increase in spreads was driven by lower raw material costs ($8.5 million) partially oﬀ set by lower average selling prices ($1.4 million) and higher freight expense ($0.3 million). Gross proﬁ t for both years was unfavorably impacted by reduced shipment volumes and elevated unit conversion costs relative to prerecession levels largely driven by reduced operating schedules. Acquisition Costs Acquisition costs of $0.6 million were incurred in 2014 for legal, accounting and other professional fees related to the ASW Acquisition. Th e accounting requirements for business combinations require the expensing of acquisition costs in the period in which they are incurred. Other Expense (Income) Other income for 2014 was $1.9 million compared to $0.3 million of other expense in 2013. Th e other income for 2014 was primarily due to the net gain from insurance proceeds attributable to the replacement of property and equipment damaged in the Gallatin ﬁ re. Other expense for 2013 was primarily due to a net loss on the disposal of equipment. Interest Expense Interest expense increased 7.2% to $252,000 in 2014 from $235,000 in 2013 primarily due to higher average debt outstanding during 2014. Income Taxes Our eﬀ ective income tax rate was 34.0% in 2014 compared with 34.8% in 2013 due to changes in permanent book versus tax diﬀ erences. Net Earnings Net earnings increased to $16.6 million ($0.89 per diluted share) in 2014 from $11.7 million ($0.64 per diluted share) in 2013 primarily due to the increase in gross proﬁ t partially oﬀ set by higher SG&A expense together with the acquisition costs and restructuring charges associated with the ASW Acquisition. 18 INSTEEL INDUSTRIES, INC.  Form 10K PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations October 3, 2015 35,774 (3,039) 2,527) 33,258 105,532   200,215 100% 200,215 $ $ $ $ $ $ Year Ended September 27, 2014 29,232 $ (40,375) 1,247) 3,050 79,407 - - 178,883 $ 100% 178,883 $ September 28, 2013 36,828 (6,294) (15,104) 15,440 83,791 - - 161,056 100% 161,056 Liquidity and Capital Resources SELECTED FINANCIAL DATA (Dollars in thousands) Net cash provided by operating activities Net cash used for investing activities Net cash used for ﬁ nancing activities Cash and cash equivalents Net working capital Total debt Percentage of total capital Shareholders’ equity Percentage of total capital Total capital (total debt + shareholders’ equity) Operating Activities Operating activities provided $35.8 million of cash in 2015 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 $2.3 million of cash due to a $15.9 million decrease in inventories and a $4.3 million decrease in accounts receivable partially oﬀ set by a $17.9 million decrease in accounts payable and accrued expenses. Th e decrease in inventories and accounts payable and accrued expenses was primarily due to lower raw material purchases and unit costs. Th e decrease in accounts receivable was related to lower selling prices. Operating activities provided $29.2 million of cash in 2014 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 $2.4 million of cash due to a $21.3 million increase in accounts payable and accrued expenses partially oﬀ set by a $16.8 million increase in inventories and a $2.1 million increase in accounts receivable. Th e increases in accounts payable and accrued expenses and inventories were largely related to higher raw material purchases driven by the increase in sales. Th e increase in accounts receivable was primarily due to the increase in sales. Operating activities provided $36.8 million of cash in 2013 primarily from net earnings adjusted for non-cash items and a reduction in net working capital. 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. We may elect to adjust our operating activities as there are changes in the conditions in our construction end-markets, 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 $3.0 million of cash in 2015, $40.4 million in 2014 and $6.3 million in 2013. In 2015, $7.2 million of cash was used for capital expenditures and $1.5 million for the acquisition of an intangible asset from a competitor, which was partially oﬀ set by $3.5 million of proceeds from the sale of the real estate and certain of the equipment associated with the Newnan facility, $1.7 million of insurance proceeds related to the Gallatin ﬁ re and $0.5 million of post-closing adjustments associated with the ASW Acquisition. In 2014, $33.9 million of cash was used to fund the ASW Acquisition and $9.0 million for capital expenditures (including $4.5 million to replace property and equipment damaged in the ﬁ re at the Gallatin facility), which was partially oﬀ set by $2.7 million of insurance proceeds related to the Gallatin ﬁ re. In 2013, $5.0 million of cash was used for capital expenditures and $1.9 million for an intangible asset in connection with the acquisition of certain assets from Tatano Wire and Steel, Inc., which was partially oﬀ set by $0.6 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. INSTEEL INDUSTRIES, INC.  Form 10K 19 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Financing Activities Financing activities used $2.5 million of cash in 2015, $1.2 million in 2014 and $15.1 million in 2013. In 2015, $2.2 million of cash was used for dividend payments and $0.2 million for ﬁ nancing costs that were incurred in connection with the amendment of our revolving credit facility. In 2014, $2.2 million of cash was used for dividend payments, which was partially oﬀ set by $1.1 million of proceeds from the exercise of stock options. In 2013, $11.5 million of cash was used to repay debt and $6.6 million for dividend payments (including a special cash dividend of $4.5 million and regular cash dividends totaling $2.1 million), which was 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 $100.0 million 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. In May 2015, we amended the Credit Facility to, among other changes, extend the maturity date from June 2, 2016 to May 13, 2020. 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 October 3, 2015, no borrowings were outstanding on the Credit Facility, $80.3 million of borrowing capacity was available and outstanding letters of credit totaled $1.6 million (see Note 8 to the consolidated ﬁ nancial statements). During 2015, ordinary course borrowings on the Credit Facility were as high as $16.2 million. As of September 27, 2014, there were no borrowings outstanding on the Credit Facility. We believe that, in the absence of signiﬁ cant unanticipated cash demands, cash generated by operating activities will be suﬃ cient Impact of Inﬂ ation 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, should we experience future reductions in our operating cash ﬂ ows due to weakening conditions in our construction end-markets and reduced demand from our customers, we may need to curtail capital and operating expenditures, delay or restrict share repurchases, cease dividend payments and/or realign our working capital requirements. Should we determine, at any time, that we require additional short-term liquidity, we would evaluate the alternative sources of ﬁ nancing that 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. 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 2015, wire rod prices declined throughout most of the year due to reductions in the cost of scrap for wire rod producers which favorably impacted our margins after the higher cost inventory had been consumed. During 2014 and 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 was mitigated by competitive pricing pressures resulting from the reduced level of activity 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. 20 INSTEEL INDUSTRIES, INC.  Form 10K PART II ITEM 7A Quantitative and Qualitative Disclosures About Market Risk Contractual Obligations Our contractual obligations and commitments at October 3, 2015 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. $ $ Total 39,437 $ 18,223 6,463 2,701 1,629 1,406 1,182 71,041 $ Less Th an 1 Year 39,437 $ 290 217 1,285 1,629 301 1,182 44,341 $ $ 1 - 3 Years - 648 428 1,292 - 602 - 2,970 $ 3 - 5 Years - $ 560 428 124 - 503 - 1,615 $ More Th an 5 Years - 16,725 5,390 - - - - 22,115 Outlook As we look ahead to 2016, we expect further improvement in our ﬁ nancial results driven by the favorable conditions in our construction end-markets and reduced unit conversion costs at our facilities. Th e outlook for private nonresidential construction, our primary demand driver, remains positive and we expect the ongoing recovery will result in higher shipment volumes and operating levels. Th e prospects for infrastructure construction are less clear pending the enactment of a new multi-year federal transportation funding authorization, although increased spending at the state and local level should serve to mitigate the impact of continued delays in arriving at a longer-term funding solution. We 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 that our ﬁ nancial results will be favorably impacted by the realization of additional operating synergies associated with the ASW Acquisition and related reconﬁ guration of our PC strand operations. 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 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 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 INSTEEL INDUSTRIES, INC.  Form 10K 21 PART II ITEM 7A Quantitative and Qualitative Disclosures About Market Risk 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 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 2015 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 $27.3 million decrease in our annual pre-tax earnings (assuming there was not a corresponding change in our selling prices). Interest Rates Although we were debt-free as of October 3, 2015, 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 October 3, 2015. During 2015, 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 October 3, 2015, September 27, 2014 and September 28, 2013 ................................................................................................................................................................ 24 Consolidated Statements of Comprehensive Income for the years ended October 3, 2015, September 27, 2014 and September 28, 2013 ................................................................................................................................................................ 25 Consolidated Balance Sheets as of October 3, 2015 and September 27, 2014 ................................................................................................................ 26 Consolidated Statements of Shareholders’ Equity for the years ended October 3, 2015, September 27, 2014 and September 28, 2013 ................................................................................................................................................................ 27 Consolidated Statements of Cash Flows for the years ended October 3, 2015, September 27, 2014 and September 28, 2013 ................................................................................................................................................................ 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 October 3, 2015, September 27, 2014 and September 28, 2013 ................................................................................................................................................................ 47 Report of Independent Registered Public Accounting Firm – Internal Control Over Financial Reporting ...................................................................... 48 (b) Supplementary Data Selected quarterly ﬁ nancial data for 2015 and 2014 is as follows: FINANCIAL INFORMATION BY QUARTER UNAUDITED (In thousands, except for per share data) 2015 Operating results: Net sales Gross proﬁ t Net earnings Net earnings per share amounts: Basic Diluted (In thousands, except for per share data) 2014 Operating results: Net sales Gross proﬁ t Net earnings Net earnings per share amounts: Basic Diluted $ $ December 27 March 28 June 27 October 3 Quarter Ended $ 110,628 12,043 4,150 $ 101,767 8,702 2,544 $ 117,016 15,694 5,392 118,093 21,894 9,624 0.23 0.22 0.14 0.14 0.29 0.29 0.52 0.51 December 28 March 29 June 28 September 27 Quarter Ended $ 87,218 9,055 2,747 $ 91,436 11,606 3,522 $ 113,227 14,263 5,797 117,097 13,849 4,575 0.15 0.15 0.19 0.19 0.32 0.31 0.25 0.24 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 Restructuring charges, net Acquisition costs Other expense (income), net Interest expense Interest income Earnings before income taxes Income taxes NET EARNINGS Net earnings per share: Basic Diluted Cash dividends declared Weighted average shares outstanding: Basic Diluted See accompanying notes to consolidated financial statements. $ $ $ October 3, 2015 September 27, 2014 Year Ended 447,504 $ 389,171 58,333 25,824 349 - (1,113) 320 (11) 32,964 11,254 21,710 $ 1.18 $ 1.15 0.12 18,418 18,803 408,978 $ 360,205 48,773 23,371 1,247 612 (1,907) 252 (10) 25,208 8,567 16,641 $ 0.91 $ 0.89 0.12 18,257 18,665 September 28, 2013 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 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 (In thousands) Net earnings Other comprehensive income (loss): Adjustment to deﬁ ned beneﬁ t plan liability, net of income taxes of $218, $140 and ($539) COMPREHENSIVE INCOME See accompanying notes to consolidated financial statements. October 3, 2015 21,710 $ Year Ended September 27, 2014 16,641 $ September 28, 2013 11,735 (356) 21,354 $ (228) 16,413 $ 879 12,614 $ $ 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, except for per share amounts) ASSETS: Current assets: Cash and cash equivalents Accounts receivable, net Inventories Other current assets Total current assets Property, plant and equipment, net Intangibles, net Goodwill Other assets TOTAL ASSETS LIABILITIES AND SHAREHOLDERS’ EQUITY: Current liabilities: Accounts payable Accrued expenses Total current liabilities 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: 2015, 18,466; 2014, 18,377 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. October 3, 2015 September 27, 2014 $ $ $ $ 33,258 $ 46,782 66,009 5,309 151,358 84,178 10,220 6,965 7,518 260,239 $ 32,182 $ 13,644 45,826 14,198 - 18,466 60,967 122,928 (2,146) 200,215 260,239 $ 3,050 51,211 81,899 6,433 142,593 90,386 9,816 6,965 7,035 256,795 52,811 10,375 63,186 14,726  18,377 58,867 103,429 (1,790) 178,883 256,795 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 Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss)(1) $ 660 (705) 2,161 55,452 18,185 18,185 Shares 17,717 Amount $ 17,717 50,379 $ 371 97 129 63 371 97 3,054 (97) 83,845 $ 11,735 (6,599) 88,981 16,641 (In thousands) 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 Net earnings Other comprehensive loss(1) Stock options exercised Vesting of restricted stock units Compensation expense associated with stock- based plans Excess tax beneﬁ ts from stock-based compensation Restricted stock units and stock options surrendered for withholding taxes payable Cash dividends declared Balance at September 27, 2014 Net earnings Other comprehensive loss(1) Stock options exercised Vesting of restricted stock units Compensation expense associated with stock- based plans Excess tax beneﬁ ts from stock-based compensation Restricted stock units and stock options surrendered for withholding taxes payable Cash dividends declared BALANCE AT OCTOBER 3, 2015 (1) Activity within accumulated other comprehensive income (loss) is reported net of related income taxes: 2013 ($539), 2014 $140 and 2015 $218. See accompanying notes to consolidated financial statements. (2,193) 103,429 21,710 (2,211) 122,928 $ 1,000 (63) 176 (65) 129 63 60,967 $ $ 18,466 24 65 24 65 18,466 18,377 18,377 58,867 2,298 2,661 (478) (758) 575 169 $ (2,441) $ 879 (1,562) (228) (1,790) (356) (2,146) $ Total Shareholders’ Equity 149,500 11,735 879 3,425 - 2,161 660 (705) (6,599) 161,056 16,641 (228) 1,129 - 2,661 575 (758) (2,193) 178,883 21,710 (356) 200 - 2,298 169 (478) (2,211) 200,215 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 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation and amortization Amortization of capitalized ﬁ nancing costs Stock-based compensation expense Deferred income taxes Asset impairment charges Excess tax beneﬁ ts from stock-based compensation Loss (gain) on sale and disposition of property, plant and equipment Increase in cash surrender value of life insurance policies over premiums paid Gain from life insurance proceeds 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 operating activities Cash Flows From Investing Activities: Capital expenditures Acquisition of intangible asset Acquisition of business Proceeds from sale of assets held for sale Proceeds from ﬁ re loss insurance Proceeds from sale of property, plant and equipment Proceeds from surrender of life insurance policies Increase in cash surrender value of life insurance policies Proceeds from life insurance claims Net cash used for investing activities 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 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 Post-closing purchase price adjustment for business acquired See accompanying notes to consolidated financial statements. $ $ 28 INSTEEL INDUSTRIES, INC.  Form 10K October 3, 2015 September 27, 2014 September 28, 2013 Year Ended $ 21,710 $ 16,641 $ 11,735 11,934 89 2,298 333 543 (169) (2,652) (39) - 4,266 15,890 (17,861) (568) 14,064 35,774 (7,153) (1,460) 480 3,537 1,713 132 40 (328) - (3,039) 60,978 (60,978) (2,211) 200 169 (478) (207) - (2,527) 30,208 3,050 33,258 $ 10,274 102 2,661 41 - (575) (1,629) (512) - (2,084) (16,814) 21,333 (206) 12,591 29,232 (8,955) - (33,943) - 2,732 1 205 (415) - (40,375) 19,215 (19,215) (2,193) 1,129 575 (758) - - (1,247) (12,390) 15,440 3,050 $ 143 $ 7,805 30 $ 7,889 570 478 - 680 758 45 9,833 102 2,161 3,881 - (660) 348 (555) (45) 1,028 6,981 1,645 374 25,093 36,828 (5,030) (1,887) - - - 107 3 (64) 577 (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 - PART II ITEM 8 Financial Statements and Supplementary Data Insteel Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements Years Ended October 3, 2015, September 27, 2014 and September 28, 2013 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 (“PC strand”) and welded wire reinforcement (“WWR”), 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, rebar fabricators and contractors that are located nationwide as well as in Canada, Mexico, and Central and South America. On August 15, 2014, the Company, through its wholly-owned subsidiary, IWP, purchased substantially all of the assets associated with the PC strand business of American Spring Wire Corporation (“ASW”) (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 year 2015 was a 53-week ﬁ scal year, and ﬁ scal years 2014 and 2013 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.” and such accounting principles, “GAAP”) 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 its 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 on the fair value of the award on the date of the grant. Th e INSTEEL INDUSTRIES, INC.  Form 10K 29 PART II ITEM 8 Financial Statements and Supplementary Data 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. 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 through acquisitions, 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; and land improvements, 5 - 15 years. Depreciation expense was approximately $10.9 million in 2015, $9.8 million in 2014 and $9.7 million in 2013 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 2015, 2014 and 2013. Goodwill Goodwill is the excess of cost over the fair value of net assets of businesses acquired. Goodwill is not amortized but is tested annually for impairment and whenever events or circumstances change that would make it more likely than not that an impairment may have occurred. Th e Company performs its annual impairment analysis as of the ﬁ rst day of the fourth quarter each year. Th e evaluation of impairment involves comparing the current estimated fair value of the reporting unit to its recorded value, including goodwill. Th e Company performs a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. It may be necessary to perform a quantitative analysis where a discounted cash ﬂ ow model 30 INSTEEL INDUSTRIES, INC.  Form 10K is used to determine the current estimated fair value of the reporting unit. Key assumptions used to determine the fair value of the reporting unit as part of the Company’s annual testing (and any required interim testing) include: (a) expected cash ﬂ ow for the ﬁ ve-year period following the testing date; (b) an estimated terminal value using a terminal year growth rate based on the growth prospects of the reporting unit; (c) a discount rate based on the Company’s estimated after-tax weighted average cost of capital; and (d) a probability-weighted scenario approach by which varying cash ﬂ ows are assigned to alternative scenarios based on their likelihood of occurrence. In developing these assumptions, the Company considers historical and anticipated future results, general economic and market conditions, the impact of planned business and operational strategies and all available information at the time the fair value of the reporting unit is estimated. Assumptions in estimating future cash ﬂ ows are subject to a high degree of judgment and complexity. Changes in assumptions and estimates may aﬀ ect the fair value of goodwill and could result in impairment charges in future periods. Based on the results of the Company’s impairment analysis, no goodwill impairment losses were recognized in the consolidated statements of operations for 2015. Subsequent to the analysis, there have been no events or circumstances that indicate any potential impairment of the Company’s goodwill balance. Other assets Other assets consist principally of capitalized ﬁ nancing costs and the cash surrender value of life insurance policies. Capitalized ﬁ nancing costs are amortized using the straight-line method, which approximates the eﬀ ective interest method over the term of the related credit agreement, and reﬂ ected in interest expense in the consolidated statements of operations. Long-lived assets Long-lived assets include property, plant and equipment and identiﬁ able intangible assets with deﬁ nite useful lives. Finite-lived intangible assets are amortized over their estimated useful lives. Th e Company’s intangible assets consist of customer relationships, developed technology and know-how and non-competition agreements that are being amortized on a straight-line basis over their ﬁ nite useful lives (see Note 7 to the consolidated ﬁ nancial statements). 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 2015, the Company recorded $0.3 million of impairment charges related to long-lived assets resulting from the consolidation of its PC strand operations with the closure of its Newnan, Georgia facility (see Note 5 to the consolidated ﬁ nancial statements). Th ere were no impairment losses in 2014 and 2013. 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. PART II ITEM 8 Financial Statements and Supplementary Data Income taxes Earnings per share 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. 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. NOTE 3 Recent Accounting Pronouncements Future Adoptions In May 2014, the FASB issued ASU No. 2014-09 “Revenue from Contracts with Customers,” which will supersede nearly all existing revenue recognition guidance under GAAP. Accounting Standards Update (“ASU”) No. 2014-09 provides that an entity recognize revenue when it transfers promised goods or services to customers in an amount that reﬂ ects the consideration to which the entity expects to be entitled in exchange for those goods or services. Th is update also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash ﬂ ows arising from customer contracts, including signiﬁ cant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulﬁ ll a contract. ASU No. 2014-09 allows for either full retrospective or modiﬁ ed retrospective adoption and will become eﬀ ective for the Company in the ﬁ rst quarter of ﬁ scal 2019. Th e Company is evaluating the alternative transition methods and the potential eﬀ ects of the adoption of this update on its consolidated ﬁ nancial statements. In July 2015, the FASB issued ASU No. 2015-11 “Simplifying the Measurement of Inventory,” which requires that an entity measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. ASU No. 2015-11 will become eﬀ ective for the Company in the ﬁ rst quarter of ﬁ scal 2018. 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 August 15, 2014, the Company purchased substantially all of the assets associated with the PC strand business of ASW for a ﬁ nal adjusted purchase price of $33.5 million, net of post-closing adjustments of $480,000 (the “ASW Acquisition”). ASW manufactured PC strand at facilities located in Houston, Texas and Newnan, Georgia. Th e Company acquired, among other assets, the accounts receivable and inventories related to ASW’s PC strand business, the production equipment at its facility in Houston and its production equipment and facility in Newnan. Pursuant to an agreement with ASW, the Company is leasing the Houston facility from ASW with an option to purchase it in the future. In addition, the Company assumed certain of ASW’s accounts payable and accrued liabilities related to its PC strand business. 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 ASW Acquisition: (In thousands) Assets acquired: Accounts receivable Inventories Other current assets Property, plant and equipment Intangibles Total assets acquired Liabilities assumed: Accounts payable Accrued expenses Total liabilities assumed NET ASSETS ACQUIRED Purchase price GOODWILL $ $ $ $ $ 7,854 6,292 786 8,638 8,530 32,100 3,240 2,362 5,602 26,498 33,463 6,965 INSTEEL INDUSTRIES, INC.  Form 10K 31 PART II ITEM 8 Financial Statements and Supplementary Data In connection with the ASW Acquisition, the Company acquired intangible assets consisting of customer relationships, developed technology and know-how, and a non-competition agreement. Th e ASW 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 such costs are incurred (See Note 5 to the consolidated ﬁ nancial statements). Following the ASW Acquisition, net sales of the ASW facilities in 2014 were approximately $7.3 million. Th e actual amount of net sales speciﬁ cally attributable to the ASW Acquisition, however, cannot be quantiﬁ ed due to the actions that were taken by the Company to integrate ASW’s facilities with its existing operations, which involved the reassignment of business across locations. Th e Company has determined that the presentation of ASW’s earnings for 2014 is impractical due to the integration of ASW’s facilities into the Company following the ASW Acquisition. Th e following unaudited supplemental pro forma ﬁ nancial information reﬂ ects the combined results of operations of the Company had the ASW Acquisition occurred at the beginning of 2013. Th e pro forma information reﬂ ects certain adjustments related to the ASW Acquisition, including adjusted amortization and depreciation expense based on the fair value of the assets acquired, interest expense related to the borrowings on the Company’s revolving credit facility and an appropriate adjustment for the acquisition-related costs in the current year. Th e pro forma information does not reﬂ ect any operating eﬃ ciencies or potential cost savings that may result from the ASW 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 ASW Acquisition occurred at the beginning of 2013, nor is it intended to represent or be indicative of future results of operations. Th e pro forma combined results of operations for the comparative prior year periods are as follows: (In thousands) Net sales Earnings before income taxes Net earnings Years Ended September 27, 2014 September 28, 2013 $ 469,079 $ 27,225 18,928 431,553 20,447 12,406 NOTE 5 Restructuring Charges and Acquisition Costs Restructuring charges Subsequent to the ASW Acquisition, in 2014, the Company incurred employee separation costs for staﬃ ng reductions associated with the acquisition. In February 2015, the Company elected to consolidate its PC strand operations with the closure of the Newnan, Georgia facility that had been acquired through the ASW Acquisition, which was completed in March 2015. Following is a summary of the restructuring activities and associated costs that were incurred during 2015 and 2014: (In thousands) 2015 Liability as of September 27, 2014 Restructuring charges (recoveries) Cash payments Non-cash charges LIABILITY AS OF OCTOBER 3, 2015 2014 Restructuring charges Cash payments LIABILITY AS OF SEPTEMBER 27, 2014 Asset Impairment Charges Equipment Relocation Costs Severance and Other Employee Separation Costs Facility Closure Costs Gain on Sale of Property and Equipment $ $ $ $ - $ 543 - (543)  $ - $ -  $ - $ 79 (79) -  $ - $ -  $ 1,208 $ 75 (548) - 735 $ 1,247 $ (39) 1,208 $ - $ 547 (547) -  $ - $ -  $ - $ (895 - 895  $ - $ -  $ Total 1,208 349 1,174 352 735 1,247 39 1,208 As of October 3, 2015, the Company recorded restructuring liabilities amounting to $0.7 million on its consolidated balance sheet, including $0.5 million in accrued expenses and $0.2 million in other liabilities. As of September 27, 2014 the Company recorded restructuring liabilities amounting to $1.2 million on its consolidated balance sheet, including $0.5 million in accrued expenses and $0.7 million in other liabilities. Th e Company does not currently expect to incur any signiﬁ cant restructuring charges during 2016. Acquisition costs During 2014, the Company recorded $0.6 million of acquisition-related costs associated with the ASW Acquisition for legal, accounting and other professional fees. 32 INSTEEL INDUSTRIES, INC.  Form 10K 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 October 3, 2015 and September 27, 2014, 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: Total at October 3, 2015 Quoted Prices in Active Markets (Level 1) Observable Inputs (Level 2) 32,843 $ 32,843 $ - 7,194 40,037 $ - 32,843 $ 7,194 7,194 Total at September 27, 2014 Quoted Prices in Active Markets (Level 1) Observable Inputs (Level 2) 3,320 $ 3,320 $ - 6,867 10,187 $ - 3,320 $ 6,867 6,867 $ $ $ $ As of October 3, 2015 and September 27, 2014, the Company had no nonﬁ nancial assets that are required to be measured at fair value on a nonrecurring basis other than the assets and liabilities that were acquired from ASW at fair value (see Note 4 to the consolidated ﬁ nancial statements). 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. (In thousands) Current assets: Cash equivalents Other assets: Cash surrender value of life insurance policies TOTAL (In thousands) Current assets: Cash equivalents 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 Intangible Assets The primary components of the Company’s intangible assets and the related accumulated amortization are as follows: (In thousands) Year ended October 3, 2015: Customer relationships Developed technology and know-how Non-competition agreements TOTAL Weighted- Average Useful Life (Years) Gross Accumulated Amortization Net Book Value 20.0 20.0 4.8 $ $ 6,500 1,800 3,577 11,877 $ $ (369) (102) (1,186) (1,657) $ $ 6,131 1,698 2,391 10,220 INSTEEL INDUSTRIES, INC.  Form 10K 33 PART II ITEM 8 Financial Statements and Supplementary Data (In thousands) Year ended September 27, 2014: Customer relationships Developed technology and know-how Non-competition agreements TOTAL Weighted- Average Useful Life (Years) Gross Accumulated Amortization Net Book Value 20.0 20.0 4.8 $ $ 6,500 1,800 2,117 10,417 $ $ (38) 11 552 (601) $ $ 6,462 1,789 1,565 9,816 Amortization expense for intangibles was $1,056,000 in 2015, $438,000 in 2014 and $163,000 in 2013. Amortization expense for the next ﬁ ve years, assuming no change in estimated useful lives of identiﬁ ed intangible assets, is $1.2 million in 2016, $1.1 million in 2017, $918,000 in 2018, $705,000 in 2019 and $537,000 in 2020. NOTE 8 Long-Term Debt Revolving Credit Facility Th e Company has a $100.0 million 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. In May 2015, the Company amended the Credit Facility to, among other changes, extend the maturity date of the Credit Facility from June 2, 2016 to May 13, 2020. 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 October 3, 2015, no borrowings were outstanding on the Credit Facility, $80.3 million of borrowing capacity was available and outstanding letters of credit totaled $1.6 million. As of September 27, 2014, no 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 0.25% to 0.75% for index rate loans and 1.25% to 1.75% for LIBOR loans. In addition, the applicable interest rate margins would be increased by 2.00% upon the occurrence of certain events of default provided for under the terms of the Credit Facility. Based on the Company’s excess availability as of October 3, 2015, the applicable interest rate margins on the Credit Facility were 0.25% for index rate loans and 1.25% 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 $12.5 million. In addition, the terms of the Credit Facility restrict the Company’s ability to, among other things: engage in certain business combinations or divestitures; make investments in or loans to third parties, unless certain conditions are met with respect to such investments or loans; pay cash dividends or repurchase shares of the Company’s stock subject to certain minimum borrowing availability requirements; incur or assume indebtedness; issue securities; enter into certain transactions with aﬃ liates of the Company; or permit liens to encumber the Company’s property and assets. Th e terms of the Credit Facility also provide that an event of default will occur with respect to the Company upon the occurrence of, among other things: defaults or breaches under the loan documents, subject in certain cases to cure periods; defaults or breaches by the Company or any of its subsidiaries under any agreement resulting in the acceleration of amounts above certain thresholds or payment defaults above certain thresholds; certain events of bankruptcy or insolvency with respect to the Company; certain entries of judgment against the Company or any of its subsidiaries, which are not covered by insurance; or a change of control of the Company. As of October 3, 2015, 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 $89,000 in 2015, $102,000 in 2014 and $102,000 in 2013. Accumulated amortization of capitalized ﬁ nancing costs was $4.5 million and $4.4 million as of October 3, 2015 and September 27, 2014, 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 2016 2017 2018 2019 2020 $ In thousands 63 63 63 63 39 34 INSTEEL INDUSTRIES, INC.  Form 10K PART II ITEM 8 Financial Statements and Supplementary Data Th e 2015 Plan, which expires on February 17, 2025, replaces the 2005 Equity Incentive Plan of Insteel Industries, Inc., which expired on February 15, 2015. As of October 3, 2015, there were 711,000 shares of Company common stock available for future grants under the 2015 Plan, which is the Company’s only active equity incentive plan. NOTE 9 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 17, 2015, the shareholders of the Company approved the 2015 Equity Incentive Plan of Insteel Industries, Inc. (the “2015 Plan”), which authorizes up to 900,000 shares of Company common stock for future grants under the plan. 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 associated with stock options is as follows: (In thousands) Stock options: Compensation expense October 3, 2015 Year Ended September 27, 2014 September 28, 2013 $ 1,007 $ 1,139 $ 951 Th e remaining unrecognized compensation cost related to unvested options at October 3, 2015 was $363,000, which is expected to be recognized over a weighted average period of 1.49 years. Th e fair value of each option award granted is estimated on the date of grant using a Monte Carlo valuation model. Th e weighted-average estimated fair values of stock options granted during 2015, 2014 and 2013 were $7.10, $7.00 and $7.06 per share, respectively, based on the following weighted-average assumptions: Expected term (in years) Risk-free interest rate Expected volatility Expected dividend yield October 3, 2015 5.72 2.18% 37.99% 0.61% Year Ended September 27, 2014 5.08 0.38% 39.57% 0.60% September 28, 2013 6.00 1.40% 47.32% 0.72% 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 September 29, 2012 Granted Exercised Outstanding at September 28, 2013 Granted Exercised Outstanding at September 27, 2014 Granted Exercised Forfeited OUTSTANDING AT OCTOBER 3, 2015 Vested and anticipated to vest in future at October 3, 2015 Exercisable at October 3, 2015 Exercise Price Per Share Options Outstanding 1,160 131 (373) 918 136 (183) 871 134 (27) 55) 923 918 667 Range $ 0.36 - $20.27 16.45 - 17.22 0.36 - 12.43 5.43 - 20.27 19.08 - 20.50 5.43 - 20.27 6.89 - 20.50 18.05 - 21.96 6.89 - 11.15 9.16  21.96 7.55 - 21.96 $ Weighted Average 11.09 16.84 9.27 12.65 19.80 10.42 14.23 19.89 9.17 15.37 15.14 15.11 13.52 Contractual Term - Weighted Average (years) Aggregate Intrinsic Value (in thousands) $ 2,744 1,789 328 2,188 2,188 2,188 6.06 6.04 4.94 INSTEEL INDUSTRIES, INC.  Form 10K 35 PART II ITEM 8 Financial Statements and Supplementary Data Th e 2015, 2014 and 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 Restricted stock units (“RSUs”) granted under the Company’s equity incentive plans are valued based upon the fair market value on the date of the grant and provide for a dividend equivalent payment which is included in compensation expense. Th e vesting period for RSU grants and compensation expense are as follows: (In thousands) Restricted stock unit grants: Units Market value Compensation expense RSUs is generally one year from the date of grant for RSUs granted to directors and three years from the date of the grant for RSUs granted to employees. RSUs do not have voting rights. October 3, 2015 September 27, 2014 September 28, 2013 Year Ended $ 62 1,253 $ 1,291 64 1,252 $ 1,522 73 1,225 1,210 Th e remaining unrecognized compensation cost related to unvested RSUs on October 3, 2015 was $590,000 which is expected to be recognized over a weighted average period of 1.62 years. Th e following table summarizes RSU activity: (Unit amounts in thousands) Balance, September 29, 2012 Granted Forfeited Released Balance, September 28, 2013 Granted Released Balance, September 27, 2014 Granted Forfeited Released BALANCE, OCTOBER 3, 2015 NOTE 10 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 Units Outstanding Weighted Average Grant Date Fair Value 10.74 16.77 10.72 10.00 13.20 19.61 12.33 15.68 20.33 17.52 12.86 18.96 293 $ 73 6 (139) 221 64 (88) 197 62 (13) 89) 157 October 3, 2015 Year Ended September 27, 2014 September 28, 2013 $ $ 10,149 772 $ 10,921 222 111 333 $ 8,196 330 8,526 (323) 364 41 11,254 $ 34.1 % 8,567 $ 34.0% 2,124 257 2,381 3,571 310 3,881 6,262 34.8 % 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 Qualiﬁ ed production activities deduction Valuation allowance State income taxes, net of federal tax beneﬁ t Nondeductible stock option expense Other, net PROVISION FOR INCOME TAXES October 3, 2015 Year Ended September 27, 2014 September 28, 2013 $ $ 11,537 (1,005) (55) 612 28 137 11,254 35.0% $ (3.0 ) (0.2 ) 1.9 0.0 0.4 34.1 % $ 8,823 (755) (183) 577 30 75 8,567 35.0% $ (3.0 ) (0.7 ) 2.3 0.1 0.3 34.0 % $ 6,299 (165) 51 479 (51) (351) 6,262 35.0% (0.9 ) 0.3 2.7 (0.3 ) (2.0 ) 34.8 % Th e components of deferred tax assets and liabilities are as follows: (In thousands) Deferred tax assets: Deﬁ ned beneﬁ t plans Accrued expenses and asset reserves Stock-based compensation State net operating loss carryforwards and tax credits Goodwill, amortizable for tax purposes Valuation allowance DEFERRED TAX ASSETS Deferred tax liabilities: Plant and equipment Prepaid insurance and other reserves DEFERRED TAX LIABILITIES NET DEFERRED TAX LIABILITY October 3, 2015 September 27, 2014 3,755 $ 2,596 2,054 658 559 (492) 9,130 (12,285) (1,410) 13,695 4,565 $ 3,419 2,782 1,804 908 870 (547) 9,236 (12,654) (1,032) 13,686 4,450 $ $ As of October 3, 2015, the Company recorded a current deferred tax asset (net of valuation allowance) of $1.5 million on its consolidated balance sheet in other current assets and a non-current deferred tax liability (net of valuation allowance) of $6.1 million in other liabilities. As of September 27, 2014, the Company recorded a current deferred tax asset (net of valuation allowance) of $2.1 million in other current assets and a non-current deferred tax liability (net of valuation allowance) of $6.6 million in other liabilities. Th e Company has $9.3 million of state operating loss carryforwards that begin to expire in 2017, but principally expire between 2017 and 2031. Th e Company has also recorded deferred tax assets for various state tax credits of $178,000, which will begin to expire in 2016 and principally expire between 2016 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. 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 October 3, 2015, the Company had recorded a valuation allowance of $492,000 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 $55,000 decrease in the valuation allowance during 2015 is primarily due to reduced state income tax rates. As of October 3, 2015, the Company has no material, known tax exposures that require the establishment of contingency reserves for uncertain tax positions. Th e Company classiﬁ es interest and penalties related to unrecognized tax beneﬁ ts as part of income tax expense. Th ere were no interest and penalties related to unrecognized tax beneﬁ ts incurred during 2015, 2014 and 2013. 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 2010 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 11 Employee Beneﬁ t Plans Retirement plans Th e Company has one deﬁ ned beneﬁ t pension plan, the Insteel Wire Products Company Retirement Income Plan for Hourly Employees, Wilmington, Delaware (the “Delaware Plan”). Th e Delaware Plan provides beneﬁ ts for eligible employees based primarily upon years of service and compensation levels. Th e Company’s funding policy is to contribute amounts at least equal to those required by law. Th e Delaware Plan was frozen eﬀ ective September 30, 2008 whereby participants will no longer earn additional beneﬁ ts. Th e Company made contributions totaling $234,000, $240,000 and $307,000 to the Delaware Plan during 2015, 2014 and 2013, respectively, and expects to make contributions of $246,000 during 2016. Th e reconciliation of the projected beneﬁ t obligation, plan assets, funded status and amounts recognized in the Company’s consolidated balance sheets for the Delaware Plan is as follows: October 3, 2015 Year Ended September 27, 2014 September 28, 2013 (In thousands) Change in beneﬁ t obligation: Beneﬁ t obligation at beginning of year Interest cost Actuarial loss (gain) Distributions BENEFIT OBLIGATION AT END OF YEAR Change in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Distributions FAIR VALUE OF PLAN ASSETS AT END OF YEAR Reconciliation of funded status to net amount recognized: Funded status 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 loss (gain) Amortization of net loss $ $ $ $ $ $ $ $ $ $ $ TOTAL RECOGNIZED IN OTHER COMPREHENSIVE INCOME LOSS $ Net periodic pension cost for the Delaware Plan includes the following components: 3,078 $ 130 514 (259) 3,463 $ 2,253 $ (27) 234 (259) 2,201 $ (1,263) $ 1,263 $ (1,263) $ 1,197 66 $ 1,930 $ 1,930 $ 723 $ (53) 670 $ 2,973 $ 137 174 (206) 3,078 $ 2,045 $ 178 240 (210) 2,253 $ (825) $ 825 $ (825) $ 782 43 $ 1,261 $ 1,261 $ $ 165 (43) 122 $ 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 (In thousands) Interest cost Expected return on plan assets Amortization of net loss NET PERIODIC PENSION COST October 3, 2015 Year Ended September 27, 2014 September 28, 2013 $ $ 130 $ (181) 53 2 $ 137 $ (165) 43 15 $ 128 (142) 56 42 Th e estimated net loss that will be amortized from accumulated other comprehensive loss into net periodic pension cost during 2016 is $69,000. 38 INSTEEL INDUSTRIES, INC.  Form 10K Th e projected beneﬁ t payments under the Delaware Plan are as follows: Fiscal year(s) 2016 2017 2018 2019 2020 2021 - 2025 PART II ITEM 8 Financial Statements and Supplementary Data $ (In thousands) 217 212 216 215 213 1,055 Th e assumptions used in the valuation of the Delaware Plan are as follows: Assumptions at year-end: Discount rate Expected long-term rate of return on assets Th e assumed discount rate is established as of the Company’s ﬁ scal year-end measurement date. In establishing the discount rate, the Company reviews published market indices of high-quality debt securities, adjusted as appropriate for duration, and high-quality bond yield curves applicable to the expected beneﬁ t payments of the plan. To develop the expected long-term rate of return on assets 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 become due. Th e October 3, 2015 Measurement Date September 27, 2014 September 28, 2013 4.25% 8.00% 4.25% 8.00% 4.75% 8.00% 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 October 3, 2015 Percentage of Plan Assets at Measurement Date October 3, 2015 September 27, 2014 September 28, 2013 35.0% 8.0% 9.0% 8.0% 40.0% 0.0% 37.6% 7.7% 8.2% 8.8% 37.3% 0.4% 36.6% 7.4% 8.3% 8.8% 38.0% 0.9% 37.7% 8.1% 8.5% 7.5% 36.1% 2.1% As of October 3, 2015, 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 October 3, 2015 and September 27, 2014 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 October 3, 2015 Quoted Prices in Active Markets (Level 1) Observable Inputs (Level 2) 828 $ 169 181 195 820 8 2,201 $ 828 $ 169 181 195 820 - 2,193 $ - $ - - - - 8 8 $ 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 27, 2014 Quoted Prices in Active Markets (Level 1) Observable Inputs (Level 2) $ $ 825 $ 166 187 199 855 21 2,253 $ 825 $ 166 187 199 855 - 2,232 $ - $ - - - - 21 21 $ 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 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 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 $ October 3, 2015 Year Ended September 27, 2014 September 28, 2013 7,480 $ 287 323 21 (290) 7,821 $ 290 $ (290)  $ (7,821) $ 7,821 $ 1,531 $ 1,531 $ 21 $ - (117) 96 $ 6,938 $ 219 315 298 (290) 7,480 $ 290 $ (290)  $ (7,480) $ 7,480 $ 1,627 $ 1,627 $ 298 $ - (52) 246 $ 7,461 242 287 (807) (245) 6,938 245 (245)  (6,938) 6,938 1,380 1,380 (807) (227) (136) 1,170 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 October 3, 2015 287 $ 323 - 117 727 $ Year Ended September 27, 2014 219 $ 315 - 52 586 $ September 28, 2013 242 $ 287 227 136 892 $ Th e estimated net loss that will be amortized from accumulated other comprehensive loss into net periodic pension cost during 2016 is $85,000. 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 October 3, 2015 Measurement Date September 27, 2014 September 28, 2013 4.25% 3.00% 4.25% 3.00% 4.75% 3.00% Th e assumed discount rate is established as of the Company’s ﬁ scal year-end measurement date. In establishing the discount rate, the Company reviews published market indices of high-quality debt securities, adjusted as appropriate for duration, and high-quality bond yield curves applicable to the expected beneﬁ t payments of the plan. Th e SERPs expected rate of increase in compensation levels is based on the anticipated increases in annual compensation. Th e projected beneﬁ t payments under the SERPs are as follows: Fiscal year(s) 2016 2017 2018 2019 2020 2021 - 2025 $ (In thousands) 290 290 358 320 240 2,645 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 $25,000 in 2015 and in 2014, and $28,000 in 2013. Th e expense attributable to these SERPs was $23,000 in 2015, $16,000 in 2014 and $15,000 in 2013. 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 2013 to 2015, 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. The Plan allows for discretionary contributions to be made by the Company as determined by the Board of Directors. Such contributions to the Plan are allocated among eligible participants based on their compensation relative to the total compensation of all participants. During 2013 - 2015, the Company matched employee contributions up to 100% of the first 1% and 50% of the next 5% of eligible compensation that was contributed by employees. Company contributions to the Plan were $967,000 in 2015, $862,000 in 2014 and $758,000 in 2013. 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 $6.3 million in 2015, $4.6 million in 2014 and $3.6 million in 2013. 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 12 Commitments and Contingencies Insurance recoveries Legal proceedings On January 21, 2014, a ﬁ re occurred at the Company’s Gallatin, Tennessee PC strand manufacturing facility, damaging a portion of the facility and requiring the temporary curtailment of operations until the necessary repairs were completed. Th e Company reassigned a portion of its production requirements to its PC strand facility located in Sanderson, Florida, which was operating at a reduced utilization level. During the ﬁ rst quarter of 2015, the Company completed the remainder of the repairs and the Gallatin facility was fully operational. Th e Company maintained general liability, business interruption and replacement cost property insurance coverage on its facilities that was suﬃ cient to cover the losses incurred from the ﬁ re. Th e Company received $2.0 million and $6.7 million of insurance proceeds in 2015 and 2014, respectively, related to the expenses that were incurred and capital outlays that were required to replace property and equipment damaged in the ﬁ re. During 2015, the insurance proceeds attributable to the additional expenses incurred were recorded in cost of sales ($244,000) and SG&A expense ($69,000) on the consolidated statement of operations and comprehensive income. During 2014, the insurance proceeds attributable to the additional expenses were recorded in cost of sales ($3.9 million) and SG&A expense ($147,000) on the consolidated statement of operations. Th e insurance proceeds attributable to the property and equipment damaged in the ﬁ re were reported in cash ﬂ ows from investing activities and all other insurance proceeds received were reported in cash ﬂ ows from operating activities on the consolidated statement of cash ﬂ ows. Th e Company reached a ﬁ nal settlement with its insurance carrier on this claim during the third quarter of 2015. Leases and purchase commitments Th e Company leases a portion of its equipment and its facility in Houston, Texas under operating leases that expire at various dates through 2020. Under most lease agreements, the Company pays insurance, taxes and maintenance. Rental expense for operating leases was $1.8 million in 2015 and $1.2 million in 2014 and 2013. Minimum rental commitments under all non-cancelable leases with an initial term in excess of one year as of October 3, 2015 are payable as follows: 2016, $1.3 million; 2017, $941,000; 2018, $351,000; 2019, $74,000; 2020 and beyond, $50,000. As of October 3, 2015, the Company had $39.4 million in non- cancelable purchase commitments for raw material extending as long as approximately 100 days and $1.2 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. Customer dispute During 2015, the Company settled a dispute with a customer resulting in a $0.7 million charge that was recorded in other expense on the consolidated statement of operations and comprehensive income. Th e Company is involved in 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 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 automatically renew for successive one year terms 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 of the executive’s employment 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 a covered executive’s employment followed a change in control of the Company. Th e initial term of each agreement is two years, and the agreements automatically renew for successive one year terms 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. Th e compensation payable under the terms of these agreements diﬀ ers as between the Chief Executive Oﬃ cer and Chief Financial Oﬃ cer, on the one hand, and the other covered executives on the other hand. In the event of termination of the Chief Executive Oﬃ cer or the Chief Financial Oﬃ cer within two years of a change of control, the Chief Executive Oﬃ cer and Chief Financial Oﬃ cer (as applicable) 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. In the event of such a termination within two years of a change of control respecting the other key members of management, including the Company’s other two executive oﬃ cers, such terminated executives 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, with respect to any covered executive that is terminated within two years of a change of control, 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 13 Earnings 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 Basic weighted average shares outstanding Dilutive eﬀ ect of stock-based compensation Diluted weighted average shares outstanding Net earnings per share: Basic Diluted October 3, 2015 September 27, 2014 September 28, 2013 Year Ended $ $ 21,710 $ 18,418 385 18,803 1.18 $ 1.15 16,641 $ 18,257 408 18,665 0.91 $ 0.89 11,735 17,948 405 18,353 0.65 0.64 Options and RSUs representing 144,000 shares in 2015, 120,000 shares in 2014 and 248,000 shares in 2013 were antidilutive and were not included in the diluted EPS computation. NOTE 14 Business Segment Information Th e Company’s operations are entirely focused on the manufacture and marketing of steel wire reinforcing products for concrete construction applications. Th e Company’s concrete reinforcing products are comprised of two product lines: WWR and PC 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, goodwill and intangible assets) 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 October 3, 2015 September 27, 2014 September 28, 2013 Year Ended 444,475 $ 3,029 447,504 $ 402,675 $ 6,303 408,978 $ 108,557 $ 114,034 $ - - 108,557 $ 114,034 $ 357,890 6,006 363,896 90,922 - 90,922 October 3, 2015 September 27, 2014 September 28, 2013 Year Ended 255,219 $ 192,285 447,504 $ 255,294 $ 153,684 408,978 $ 227,957 135,939 363,896 $ $ $ $ $ $ Th ere were no customers that accounted for 10% or more of the Company’s net sales in 2015, 2014 and 2013. NOTE 15 Related Party Transactions Sales to a company aﬃ liated with one of the Company’s directors amounted to $361,000 in 2015, $459,000 in 2014 and $674,000 in 2013. INSTEEL INDUSTRIES, INC.  Form 10K 43 PART II ITEM 8 Financial Statements and Supplementary Data NOTE 16 Comprehensive Loss Th e accumulated other comprehensive loss was comprised of the adjustment to the deﬁ ned beneﬁ t plan liability as follows: (In thousands) Adjustment to deﬁ ned beneﬁ t plan liability, net of taxes TOTAL ACCUMULATED OTHER COMPREHENSIVE LOSS NOTE 17 Other Financial Data Balance sheet information: (In thousands) Accounts receivable, net: Accounts receivable Less allowance for doubtful accounts TOTAL Inventories: Raw materials Work in process Finished goods TOTAL Other current assets: Prepaid insurance Current deferred tax asset Other TOTAL Other assets: Cash surrender value of life insurance policies 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 Income taxes Customer rebates Property taxes Pension plan Restructuring liabilities Workers’ compensation Deferred revenues Interest Other TOTAL Other liabilities: Deferred compensation Deferred income taxes Other TOTAL 44 INSTEEL INDUSTRIES, INC.  Form 10K October 3, 2015 Year Ended September 27, 2014 $ $ (2,146) $ 2,146 $ September 28, 2013 (1,562) 1,562 (1,790) $ 1,790 $ October 3, 2015 September 27, 2014 47,420 $ (638) 46,782 $ 38,457 $ 2,968 24,584 66,009 $ 2,519 $ 1,492 1,298 5,309 $ 7,194 $ 227 97 7,518 $ 9,279 $ 43,016 142,662 1,715 196,672 (112,494) 84,178 $ 5,455 $ 2,187 1,760 1,507 1,263 505 294 105 - 568 13,644 $ 7,765 $ 6,057 376 14,198 $ 52,099 (888) 51,211 49,200 3,789 28,910 81,899 1,890 2,122 2,421 6,433 6,867 69 99 7,035 9,704 42,047 133,699 7,648 193,098 (102,712) 90,386 4,659 - 1,530 1,242 825 481 290 525 28 795 10,375 7,426 6,572 728 14,726 $ $ $ $ $ $ $ $ $ $ $ $ $ $ PART II ITEM 8 Financial Statements and Supplementary Data other securities of the Company) having a value equal to two times the purchase price or, at the discretion of the Board, upon exercise and without payment of the purchase price, common stock (or, in certain circumstances, cash, property or other securities of the Company) having a value equal to the diﬀ erence between the purchase price and the value of the consideration which a person exercising the right and paying the purchase price would receive. Rights that are or (under speciﬁ ed circumstances) were, beneﬁ cially owned by any acquiring person will be null and void. Th e purchase price payable and the number of Units of Preferred Stock or other securities or property issuable upon exercise of the rights are subject to adjustment from time to time. At any time after any person becomes an acquiring person, the Company may exchange all or part of the rights for shares of common stock at an exchange ratio of one share per right, as appropriately adjusted to reﬂ ect any stock dividend, stock split or similar transaction. In addition, each rights holder, other than an acquiring person, upon exercise of rights will have the right to receive shares of the common stock of the acquiring corporation having a value equal to two times the purchase price for such holder’s rights if the Company engages in a merger or other business combination where it is not the surviving entity or where it is the surviving entity and all or part of the Company’s common stock is exchanged for the stock or other securities of the other company, or if 50% or more of the Company’s assets or earning power is sold or transferred. Th e rights will expire on April 24, 2019, and may be redeemed by the Company at any time prior to the distribution date at a price of $0.005 per right. NOTE 18 Rights Agreement On April 26, 1999, the Company’s Board of Directors declared a dividend distribution of one right per share of the Company’s outstanding common stock as of May 17, 1999 pursuant to a Rights Agreement, dated as of April 27, 1999. Th e Rights Agreement also provides that one right will attach to each share of the Company’s common stock issued after May 17, 1999. On April 21, 2009, eﬀ ective April 25, 2009, the Company’s Board of Directors amended the Rights Agreement to, among other changes, extend the ﬁ nal expiration date and adjust the purchase price payable upon exercise of a right. Th e rights are not currently exercisable but trade with the Company’s common stock shares and become exercisable on the distribution date. Th e distribution date will occur upon the earliest of 10 business days following a public announcement that either a person or group of aﬃ liated or associated persons (an “acquiring person”) has acquired, or obtained the right to acquire, beneﬁ cial ownership of 20% or more (after adjustment for certain derivative transactions) of the outstanding shares of common stock (the “stock acquisition date”), or of a tender oﬀ er or exchange oﬀ er that would, if consummated, result in an acquiring person beneﬁ cially owning 20% or more of such outstanding shares of common stock, subject to certain limitations. Each right will entitle the holder, other than the acquiring person or group, to purchase one two-hundredths of a share (a “Unit”) of the Company’s Series A Junior Participating Preferred Stock (“Preferred Stock”) at a purchase price of $46 per Unit, subject to adjustment as described in the Rights Agreement (the “purchase price”). At the time speciﬁ ed, each holder of a right will have the right to receive in lieu of Preferred Stock, upon exercise and payment of the purchase price, common stock (or, in certain circumstances, cash, property or NOTE 19 Product Warranties Th e Company’s products are used in applications which are subject to inherent risks including performance deﬁ ciencies, personal injury, property damage, environmental contamination or loss of production. Th e Company warrants its products to meet certain speciﬁ cations, and actual or claimed deﬁ ciencies from these speciﬁ cations may give rise to claims. Th e Company does not maintain a reserve for warranties as the historical claims have been immaterial. Th e Company maintains product liability insurance coverage to minimize its exposure to such risks. NOTE 20 Share Repurchases On November 18, 2008, the Company’s Board of Directors approved a share repurchase authorization to buy back up to $25.0 million of the Company’s outstanding common stock (the “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 Authorization continues in eﬀ ect until terminated by the Board of Directors. As of October 3, 2015, there was $24.8 million remaining available for future share repurchases under the Authorization. Th ere were no share repurchases during 2015, 2014 and 2013. 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 (the “Company”) as of October 3, 2015 and September 27, 2014, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash ﬂ ows for each of the three years in the period ended October 3, 2015. Our audits of the basic consolidated ﬁ nancial statements included the ﬁ nancial statement schedule listed in the index appearing under Schedule II, as listed in the index at Item 8(a). 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 October 3, 2015 and September 27, 2014, and the results of their operations and their cash ﬂ ows for each of the three years in the period ended October 3, 2015 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 October 3, 2015, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated October 30, 2015 expressed an unqualiﬁ ed opinion. /s/ Grant Th ornton LLP Charlotte, North Carolina October 30, 2015 46 INSTEEL INDUSTRIES, INC.  Form 10K PART II ITEM 9A Controls and Procedures Schedule II - Valuation and Qualifying Accounts Years Ended October 3, 2015, September 27, 2014 And September 28, 2013 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 October 3, 2015 September 27, 2014 September 28, 2013 896 $ 79 (87) 888 $ 1,123 (100) (127) 896 888 $ 5 (255) 638 $ 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 October 3, 2015. Th is evaluation was conducted under the supervision and with the participation of management, including our principal executive oﬃ cer and our principal ﬁ nancial oﬃ cer. Based upon that evaluation, our principal executive oﬃ cer and our principal ﬁ nancial oﬃ cer concluded that our disclosure controls and procedures were eﬀ ective to ensure that information required to be disclosed in the reports that we ﬁ le or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods speciﬁ ed in the Commission’s rules and forms. Furthermore, we concluded that our disclosure controls and procedures were eﬀ ective to ensure that information is accumulated and communicated to management, including our principal executive oﬃ cer and our principal ﬁ nancial oﬃ cer, as appropriate to allow timely decisions regarding required disclosure. Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over ﬁ nancial reporting. Internal control over ﬁ nancial reporting is a process to provide reasonable assurance regarding the reliability of our ﬁ nancial reporting for external purposes in accordance with generally accepted accounting principles. Internal control over ﬁ nancial reporting includes: (1) maintaining records that in reasonable detail accurately and fairly reﬂ ect the transactions and dispositions of assets; (2) providing reasonable assurance that transactions are recorded as necessary for preparation of ﬁ nancial statements, and that receipts and expenditures are made in accordance with authorizations of management and directors; and (3) providing reasonable assurance that unauthorized acquisition, use or disposition of assets that could have a material eﬀ ect on ﬁ nancial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over ﬁ nancial reporting is not intended to provide absolute assurance that a misstatement of ﬁ nancial statements would be prevented or detected. Also, projections of any evaluation of eﬀ ectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the eﬀ ectiveness of our internal control over ﬁ nancial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework. Based on this assessment, management concluded that our internal control over ﬁ nancial reporting was eﬀ ective as of October 3, 2015. During the quarter ended October 3, 2015, 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 October 3, 2015, which 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 (the “Company”) as of October 3, 2015, based on criteria established in the 2013 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 October 3, 2015, based on criteria established in the 2013 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 October 3, 2015, and our report dated October 30, 2015 expressed an unqualiﬁ ed opinion on those ﬁ nancial statements. /s/ Grant Th ornton LLP Charlotte, North Carolina October 30, 2015 48 INSTEEL INDUSTRIES, INC.  Form 10K PART III ITEM 11 Executive Compensation ITEM 9B Other Information None. PART III ITEM 10 Directors, Executive Oﬃ cers and Corporate Governance Th e information called for by this item and not presented herein appears under the captions “Item Number One: Election of Directors”, “Security Ownership – Section 16(a) Beneﬁ cial Reporting Compliance” and “Corporate Governance Guidelines and Board Matters” in the Company’s Proxy Statement for the 2016 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 2016 Annual Meeting of Shareholders and is incorporated herein by reference. INSTEEL INDUSTRIES, INC.  Form 10K 49 PART III ITEM 14 Principal Accounting Fees and Services ITEM 12 Security Ownership of Certain Beneﬁ cial Owners and Management and Related Stockholder Matters Th e information called for by this item appears under the captions “Voting Securities” and “Security Ownership” in the Company’s Proxy Statement for the 2016 Annual Meeting of Shareholders and is incorporated herein by reference. 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 2016 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 2016 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 (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 30, 2015 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on October 30, 2015 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/ LOUIS E. HANNEN Louis E. Hannen /s/ CHARLES B. NEWSOME Charles B. Newsome /s/ GARY L. PECHOTA Gary L. Pechota /s/ JOSEPH A. RUTKOWSKI Joseph A. Rutkowski /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 October 3, 2015 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* Asset Purchase Agreement between Insteel Wire Products Company and American Spring Wire Corporation dated as of August 9, 2014 (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K ﬁ led on August 11, 2014). 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). Second Amendment to Second Amended and Restated Credit Agreement dated as of May 13, 2015, 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 10.3 to the Company’s Current Report on Form 8-K ﬁ led on May 14, 2015). 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). 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 for the ﬁ scal year ended October 1, 2011 ﬁ led on November 10, 2011). 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.  Form 10K 53 PART IV ITEM 15 Exhibit Index to Annual Report on Form 10-K of Insteel Industries, Inc. Exhibit Number Description 10.16* 10.17* 10.18* 21.1 23.1 31.1 31.2 32.1 32.2 101 * 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 (incorporated by reference to Exhibit 10.20 of the Company’s Annual Report on Form 10-K ﬁ led on October 29, 2013). 2015 Equity Incentive Plan of Insteel Industries, Inc. (incorporated by reference to Exhibit 99 ﬁ led with the Company’s Registration Statement on Form S-8, ﬁ led with the SEC on February 17, 2015 (File No. 333-202128)). List of Subsidiaries of Insteel Industries, Inc. at October 3, 2015. 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 October 3, 2015, ﬁ led on October 29, 2015, formatted in XBRL (eXtensible Business Reporting Language) includes: (i) the Consolidated Statements of Operations for the years ended October 3, 2015, September 27, 2014 and September 28, 2013, (ii) the Consolidated Statements of Comprehensive Income for the years ended October 3, 2015, September 27, 2014 and September 28, 2013, (iii) the Consolidated Balance Sheets as of October 3, 2015 and September 27, 2014, (iv) the Consolidated Statements of Cash Flows for the years ended October 3, 2015, September 27, 2014 and September 28, 2013, (v) the Consolidated Statements of Shareholders’ Equity as of October 3, 2015, September 27, 2014 and September 28, 2013 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 1-09929. 54 INSTEEL INDUSTRIES, INC.  Form 10K Investor Relations For information on the Company, additional copies 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 2015 Annual Report that are not entirely historical in nature constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. For important information regarding forward-looking state- ments, please read the “Cautionary Note Regarding Forward-Looking Statements” on page 4 of the Com- pany’s Annual Report on Form 10-K for the year ended October 3, 2015, which is included as part of this 2015 Annual Report. Corporate Information BOARD OF DIRECTORS EXECUTIVE OFFICERS 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 Joseph A. Rutkowski Principal Winyah Advisors 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) Member of the Audit Committee (2) Member of the Executive Compensation Committee (3) Member of the Nominating and Governance Committee (4) Member of the Executive Committee H.O. Woltz III Chairman, President and Chief Executive Officer Michael C. Gazmarian Vice President, Chief Financial Officer and Treasurer James F. Petelle Vice President—Administration and Secretary Richard T. Wagner Vice President and General Manager— Concrete Reinforcing Products Business Unit, Insteel Wire Products Company SHAREHOLDER INFORMATION Corporate Headquarters 1373 Boggs Drive Mount Airy, North Carolina 27030 (336) 786-2141 Independent Registered Public Accounting Firm Grant Thornton LLP Charlotte, North Carolina Annual Meeting Insteel shareholders are invited to attend our annual meeting, which will be held on Thursday, February 11, 2016 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 26, 2015, there were 716 shareholders of record. Shareholder Services For change of name, address or ownership of stock; to replace lost stock certificates; or to consolidate accounts, please contact: American Stock Transfer & Trust Company Operations Center 6201 15th Avenue Brooklyn, New York 11219 (866) 627-2704 www.amstock.com m o c . s r o n n o c - n a r r u c . w w w / . c n I , s r o n n o C & n a r r u C y b n g i s e D t r o p e R l a u n n A 1373 Boggs Drive Mount Airy, North Carolina 27030 www.insteel.com fonts used bitsumishi and turnpike

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