2017 ANNUAL REPORT
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Insteel Industries is the nation’s
largest manufacturer of steel wire
reinforcing products for concrete
construction applications.
89.75" (2x)
87.25" (2x)
82.5" (2x)
76.25" (2x)
65.5" (2x)
49.75" (2x)
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61.5" (2x)
61"
Ø 1 0 0 "
Ø 9 6 "
11"
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We manufacture and market prestressed concrete strand (“PC strand”) and welded wire
TDOT MH-3 - 84" Ø Flat Top w 24" Ø OC Opening
V1xV2 D31/D31 84"(+6", +2.875") x 8’-0"(7", 7")
reinforcement, including engineered structural mesh, concrete pipe reinforcement and
standard welded wire reinforcement. Our products are sold primarily to manufacturers of
V1 = 6" oh- 8@6"- 2@3"- 5@6"- 2.875" oh
concrete products that are used in nonresidential construction. Headquartered in Mount
V2 = 7" oh- 3@6"- 2@3"- 2@6"- 2@5"- 2@6"- 2@3"- 3@6"- 7" oh
Airy, North Carolina, we operate ten manufacturing facilities located in the United States.
Information provided herein is for quoting of welded wire reinforcement, based on customer information furnished to Insteel. Customer is responsible for confirming that Insteel information quoted is compliant with the
project design intent and geometry for the purpose requested. Customer shall review and approve all configurations, sheet styles, and quantities prior to order placement. The Engineer of Record or Governing
Authority shall be engaged in the process by the Customer as required to ensure suitability of use.
This drawing was prepared by Insteel and remains the exclusive property of Insteel, subject only to a license to the named customer to use it for the named project, inlcuding any required submittals to the Engineer of
Record or other governing agencies whose approval is required. This drawing is not to be furnished or distributed to other parties without Insteel’s prior written approval.
DRAWING TITLE:
PREPARED FOR:
TDOT MH-3 - 84" Ø Flat Top w 24" Ø OC Opening
1373 Boggs Drive
Mount Airy, North Carolina 27030
PROJECT:
Tel. 800-334-9504
Forterra - Nashville
Drawn By:
Date:
Dwg #:
Carrie Bowen
1 June 2017
053117cb-7
FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share amounts)
2017
2016
2015
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
Capital expenditures
Depreciation and amortization
Cash dividends paid
(1) Net earnings/(average total debt + average shareholders’ equity).
(2) Net earnings/average shareholders’ equity.
$388,871
59,781
15.4%
$22,548
5.8%
$418,547
85,188
20.4%
$37,245
8.9%
$447,504
58,333
13.0%
$21,710
4.9%
$1.19
1.17
1.37
$1.99
1.95
1.12
10.1%
10.1%
17.5%
17.5%
$32,105
283,073
-
223,376
$20,303
20,575
11,649
26,011
$58,873
292,892
-
224,566
$54,536
12,977
11,544
20,859
$1.18
1.15
0.12
11.5%
11.5%
$33,258
260,239
-
200,215
$35,774
7,153
11,934
2,211
Net Sales
(In millions)
$447.5
$418.5
$388.8
Gross Margin
13.0%
20.4%
15.4%
2015
2016
2017
2015
2016
2017
Net Earnings
Per Share (Diluted)
$1.15
$1.95
17.5%
Return on Total Capital
$1.17
11.5%
10.1%
2015
2016
2017
2015
2016
2017
1
2017 ANNUAL REPORT | INSTEEL INDUSTRIES|
BUSINESS OVERVIEW
62% OF NET SALES
Welded Wire Reinforcement
Manufacturing Locations
Welded Wire Reinforcement
Prestressed Concrete Strand
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 spacings. 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 product that
is used as the primary reinforcement in
concrete elements or structures, frequently
serving as a replacement for hot-rolled rebar.
Plant Locations
Dayton, TX | Hazleton, PA |
Jacksonville, FL | Kingman, AZ |
Mount Airy, NC | St. Joseph, MO
Customer Segments
Precast and Prestressed Producers |
Rebar Fabricators | Distributors |
Contractors
End Uses
Nonresidential Construction
CONCRETE PIPE
REINFORCEMENT
Engineered made-to-order product that
is used as the primary reinforcement in
concrete pipe and box culverts for drainage
and sewage systems, water treatment
facilities and other related applications.
Plant Locations
Dayton, TX | Jacksonville, FL |
Kingman, AZ | Mount Airy, NC |
St. Joseph, MO
Customer Segments
Concrete Pipe and Precast Producers
End Uses
Nonresidential Construction |
Residential Construction
STANDARD WELDED WIRE
REINFORCEMENT
Secondary reinforcing product that is
produced in standard styles for crack
control applications in residential
and light nonresidential construction,
including driveways, sidewalks
and a wide range of slab-on-grade
applications.
Plant Locations
Dayton, TX | Hazleton, PA | Hickman, KY |
Jacksonville, FL | Mount Airy, NC
Customer Segments
Rebar Fabricators | Distributors
End Uses
Nonresidential Construction |
Residential Construction
38% 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 concrete slabs for new homes in regions that
have expansive soil.
Plant Locations
Gallatin, TN | Houston, TX | Sanderson, FL
Customer Segments
Precast Prestress Producers |
Posttensioning Suppliers
End Uses
Nonresidential Construction |
Residential Construction
2
2017 ANNUAL REPORT | INSTEEL INDUSTRIES| (cid:31)
T
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(cid:31)
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2 1/4"
10 Sp.
@ 2.75"
2'-3 1/2"
4 5/8"
WWR-V END = 36'-8 1/8"
L/2 = 55'-11"
38 @ 6" = 19'-0"
15 Sp. @ 12" = 15'-0"
(HALF) WWR-V MID = 18'-6"
18.5 Sp. @ 12" = 18'-6"
6 5/8"
WWR-V ELEVATION
VIEW
WWR-T PLAN VIEW
I
T
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G
E
H
M
A
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B
"
6
-
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4
=
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E
G
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A
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F
P
O
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"
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4
=
H
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4'-1"
F401 BARS
REMAIN REBAR,
BY OTHERS
1'-5 1/2"
"
2
/
1
4
-
'
2
"
6
-
'
4
WWR-V
"
2
2"
1'-2"
.
R
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C
"
2
"
5
"
3
"
3
"
7
"
2
/
1
5
16 @ 6"
[38 - D31.0 WIRES]
6"
21 @ 6"
[37 - D20.0 WIRES]
[19 - D20.0 WIRES]
WWR-T END = 37'-0"
(37 Sp. @ 12")
8"
(HALF) WWR-T MID = 18'-0"
(18 Sp. @ 12")
LETTER TO SHAREHOLDERS
The substantial investments we have made in our
facilities, people and systems have enabled us to
achieve costs and develop manufacturing and
customer service capabilities that are second to none.
4 3/4"
3'-9"
2"
8 1/4"
9 7/8"
9 7/8"
8 1/4"
2"
WWR-T
2"CLR
"
6
During 2017, we made considerable progress strengthening our market leadership and low cost producer positions and executing
our strategy for long-term growth. We strengthened our manufacturing capabilities with the completion of the expansion of our
Houston, Texas PC strand facility and start-up of a new engineered structural mesh (“ESM”) production line at our St. Joseph,
Missouri facility. We expanded our lean manufacturing initiatives across our operations to achieve further improvements in
our productivity and costs. We maintained the financial flexibility to make additional strategic investments in our facilities and
pursue additional growth opportunities that may arise. And we continued to return capital to our shareholders in a prudent and
disciplined manner.
3"
D20.0 @ 12" MAX
WWR-T DETAIL
(4) D20.0
(6) D31.0
"
2
/
1
"
4
SUMMARY OF WELDED WIRE REINFORCEMENT:
FINANCIAL RESULTS
WWR-V END:
V1xV2 D20.0xD31.0/D20.0
48.375"(+0.5",+0.5") x 36'-10.125"(1",1") 4/BEAM = 36 REQ'D
Insteel’s financial results for 2017 fell short of our expectations
due to a slowdown in new project activity together with adverse
weather conditions, particularly during the second half of
the year which is typically our strongest period. The market
weakness led to increased pricing pressure and lower utilization
levels at our facilities.
2" CLR
"
8
/
3
"
8
/
3
4
-
'
3
1
-
'
4
Net sales for 2017 fell 7.1% from a year ago to $388.9 million
on the drop-off in shipments as average selling prices were
essentially unchanged. Gross margin narrowed 500 basis
points to 15.4% due to lower spreads between selling prices
and raw material costs, and to a lesser extent, the decrease in
shipments and higher unit manufacturing costs on the lower
production volume. The spread compression was driven by
escalating raw material costs which we were unable to recover
2 1/4"
"
4
in our markets due to the softening in demand. As a result, net
earnings fell to $22.5 million, or $1.17 per diluted share, from
$37.2 million, or $1.95 per diluted share, in 2016.
WWR-T END:
WWR-V MID:
WWR-T MID:
D31.0 or D20.0
Operating activities generated $20.3 million of cash, which was
used together with a portion of our beginning cash balance to
fund $26 million of dividend payments (a special cash dividend
of $1.25 per share and regular quarterly cash dividends totaling
$0.12 per share) and $20.6 million of capital expenditures. We
ended the year debt-free with $32.1 million of cash on hand
and no borrowings outstanding on our $100 million revolving
credit facility. Following the end of the fiscal year, we declared
a special cash dividend of $1.00 per share payable in January
2018, marking the third consecutive year in which a special
dividend has been paid.
3'-4"
"
2
/
1
TYPICAL WWR SECTION
WWR-V DETAIL
V1x12 D20.0xD20.0
48.375"(+0.5",+0.5") x 37'-2"(1",1")
2/BEAM = 18 REQ'D
V3x12 D31.0xD20.0
41"(+2",+2") x 37'-2"(1",1")
2/BEAM = 18 REQ'D
V3x12 D31.0xD20.0
41"(+2",+2") x 36'-2"(1",1")
1/BEAM = 9 REQ'D
V1 = 0.5"oh - 4" - 40.375" - 4" - 0.5"oh
V2 = 1"oh (D31.0) - 10@2.75"(D31.0) - 4.625"(D31.0) - 16@6"(D31.0) - 22@6"(D20.0) - 15@12"(D20.0) - 1"oh
V3 = 2"oh - 8.25" - 9.875" - 4.75" - 9.875" - 8.25" - 2"oh
Information provided herein is for quoting of welded wire reinforcement, based on customer information furnished to Insteel. Customer is responsible for confirming that Insteel information quoted is compliant with the
project design intent and geometry for the purpose requested. Customer shall review and approve all configurations, sheet styles, and quantities prior to order placement. The Engineer of Record or Governing
Authority shall be engaged in the process by the Customer as required to ensure suitability of use.
This drawing was prepared by Insteel and remains the exclusive property of Insteel, subject only to a license to the named customer to use it for the named project, inlcuding any required submittals to the Engineer of
Record or other governing agencies whose approval is required. This drawing is not to be furnished or distributed to other parties without Insteel's prior written approval.
1373 Boggs Drive
Mount Airy, North Carolina 27030
Tel. 800-334-9504
3
DRAWING TITLE:
PREPARED FOR:
PROJECT:
Ohio 54" Beam Welded Wire Reinforcement
Prestress Services
L14354 - Scioto County - Portsmouth Bridge No. 12
Drawn By:
VC
Date:
Dwg #:
19 July 2016
VC-WWR1R1
2017 ANNUAL REPORT | INSTEEL INDUSTRIES|
CAPITAL EXPENDITURE PROGRAM
LOOKING AHEAD
The completion of the Houston and St. Joseph projects
represent significant milestones in the execution of our capital
expenditure program. The Houston expansion involved the
replacement of antiquated production lines and the addition
of a new raw material cleaning process to bring the plant’s
costs in line with the world-class levels of our other two strand
facilities. The new ESM production line at our St. Joseph facility
also replaces older equipment to reduce our costs and provide
additional capacity to service the Midwest market.
2018 will be another ambitious year focused on strategic
investments that enhance our market and cost leadership
positions. Capital outlays are expected to total up to $21 million
largely related to the addition of another new ESM production line
and ancillary equipment at our Mount Airy, North Carolina facility,
the purchase of the leased Houston facility and further upgrades
to our manufacturing technology and information systems.
In the coming years we plan on making additional investments
in our ESM capabilities, employing the latest technology to
provide unparalleled flexibility and manufacture a broader
range of design configurations in a highly cost-effective
manner. With the completion of the Houston expansion behind
us, we are also evaluating the appropriate timing for adding a
third strand production line at the facility to capitalize on the
additional growth that is anticipated for the Texas market and
further reduce our costs through the economies of scale that
could be realized.
ORTIZ ENGINEERED PRODUCTS ACQUISITION
Following the end of the fiscal year, in November 2017, we
purchased certain of the assets of Ortiz Engineered Products,
Inc. (“OEP”), a provider of value-engineered reinforcing
solutions for the concrete construction industry. OEP’s focus on
the conversion of projects designed with conventional rebar to
welded wire reinforcement represents a close strategic fit with
our ongoing efforts to broaden the acceptance of ESM. For many
applications, the substitution of ESM for rebar can significantly
reduce the total installed cost of a project and accelerate the
construction timeline. The addition of OEP’s engineering
and project management capabilities should accelerate our
penetration of the cast-in-place segment of the rebar market in
which ESM is supplied directly to a job site as required under the
contractor’s project schedule. Our newly combined sales and
engineering group will be focused on leveraging the substantial
investments we have made across our six ESM manufacturing
facilities. With total domestic consumption of ESM estimated to
represent less than 5% of the rebar volume it could potentially
replace, the product is still early in its life cycle and represents
an attractive growth opportunity for Insteel.
As we move into 2018, we expect improved conditions in our
markets following the unusually weak demand we’ve recently
experienced. Infrastructure construction should benefit from
the anticipated funding increases at the state and local level
as various measures, including fuel tax increases, bond
financings and the redirection of other tax revenues, begin
to have a more pronounced impact. The outlook for federal
infrastructure funding remains unclear at this time due to the
political dynamics in Washington, although we remain hopeful
the Trump Administration’s support for increased infrastructure
investment ultimately translates into a meaningful, long-term
funding package. The leading indicators and forecasts for
nonresidential building construction are signaling modest
growth in the coming year with the continued expansion in
the economy. The outlook for the housing-related portion of
our business remains favorable with another year of strong
growth anticipated for residential construction, which has
yet to return to prerecession levels. We also expect to benefit
from the incremental business that has been deferred due to
the adverse weather during the second half of 2017. Longer
term, the recent hurricanes could spur additional demand
for our products to the extent that infrastructure repair work
is required in the regions that were affected or if new flood
mitigation projects are pursued as preventative measures
against future storms.
We enter the year in strong market leadership positions with
the broadest footprint and the best operations and people in
the industry. The substantial investments we have made in
our facilities, people and systems have enabled us to achieve
costs and develop manufacturing and customer service
capabilities that are second to none. We will continue to focus
on the operational fundamentals of our business, aggressively
pursuing additional improvements in our productivity and costs
and leveraging the competitive advantages that are available to
us. 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 footprint.
We look forward to reporting additional progress during the
upcoming year and continue to believe that our best years
lie ahead of us. Thanks to our employees, customers and
shareholders for their continued trust, confidence and support.
H.O. Woltz III
Chairman, President and
Chief Executive Officer
4
2017 ANNUAL REPORT | INSTEEL INDUSTRIES| UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 1-9929
INSTEEL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
North Carolina
(State or other jurisdiction of incorporation or organization)
56-0674867
(I.R.S. Employer Identification No.)
1373 Boggs Drive, Mount Airy, North Carolina 27030
(Address of principal executive offices) (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
The 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 defined in Rule 405 of the Securities Act.
•• if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
•• whether the registrant (1) has filed all reports required to be filed 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 file such reports), and (2) has been subject to such filing 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 files).
•• if disclosure of delinquent filers 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 definitive 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 filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller
reporting company)
Smaller reporting company
Emerging growth company
•• If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
•• whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
As of April 1, 2017 (the last business day of the registrant’s most recently completed second quarter), the aggregate market value of the
common stock held by non-affiliates of the registrant was $579,089,435 based upon the closing sale price as reported on the NASDAQ
Global Select Market. As of October 26, 2017, there were 19,041,046 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 2018 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 10
ITEM 2
Properties 10
ITEM 3
Legal Proceedings 11
ITEM 4 Mine Safety Disclosures 11
Executive Officers of the Company 11
PART II
12
ITEM 5 Market for Registrant’s Common Equity, Related Shareholder Matters
and Issuer Purchases of Equity Securities 12
ITEM 6
Selected Financial Data 14
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 14
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk 21
ITEM 8
Financial Statements and Supplementary Data 22
ITEM 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 45
ITEM 9A Controls and Procedures 45
ITEM 9B Other Information 47
PART III
47
ITEM 10 Directors, Executive Officers and Corporate Governance 47
ITEM 11 Executive Compensation 47
ITEM 12
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters48
ITEM 13 Certain Relationships and Related Transactions, and Director Independence 48
ITEM 14 Principal Accounting Fees and Services 48
PART IV
49
ITEM 15 Exhibits, Financial Statement Schedules 49
ITEM 16 Form 10-K Summary 49
EXHIBIT INDEX 50
SIGNATURES 52
3
INSTEEL INDUSTRIES, INC. - Form 10-K Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements within the meaning
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 reflected in or suggested by such forward-looking
statements are reasonable, they are subject to a number of risks and
uncertainties, and we can provide no assurances that such plans,
intentions or expectations will be implemented or achieved. Many of
these risks and uncertainties are discussed in the “Risk Factors” section
of this report and are updated from time to time in our filings with the
United States (“U.S.”) Securities and Exchange Commission (“SEC”).
All forward-looking statements attributable to us or persons acting on
our behalf are expressly qualified in their entirety by these cautionary
statements. All forward-looking statements speak only to the respective
dates on which such statements are made and we do not undertake
and specifically decline any obligation to publicly release the results of
any revisions to these forward-looking statements that may be made
to reflect any future events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated
events, except as may be required by law.
It is not possible to anticipate and list all risks and uncertainties that
may affect our future operations or financial performance; however,
they include, but are not limited to, the following:
•• general economic and competitive conditions in the markets in
which we operate;
•• changes in the spending levels 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 financing for
us, our customers and the construction industry as a whole;
•• fluctuations in the cost and availability of our primary raw material,
hot-rolled carbon steel wire rod, from domestic and foreign suppliers;
•• competitive pricing pressures and our ability to raise selling prices in
order to recover increases in raw material or operating costs;
•• changes in U.S. or foreign trade policy affecting imports or exports
of steel wire rod or our products;
•• unanticipated changes in customer demand, order patterns and
inventory levels;
•• the impact of fluctuations in demand and 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
significantly impact our operating costs;
•• unanticipated plant outages, equipment failures or labor difficulties; and
•• the risks and uncertainties discussed herein under the caption “Risk
Factors.”
4
INSTEEL INDUSTRIES, INC. - Form 10-K 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 fiscal 2017, 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.
Products
Our operations are entirely focused on the manufacture and marketing
of steel wire reinforcing products for concrete construction applications.
Our concrete reinforcing products consist of two product lines: PC
strand and WWR. Based on the criteria specified in Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
Topic 280, Segment Reporting, we have one reportable segment. Our
net sales and long-lived assets by geographic region are discussed in
Note 13 to our consolidated financial statements and incorporated
herein by reference.
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. Its
high tensile strength allows for the casting of longer spans and thinner
sections. 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 fiscal years 2017, 2016 and 2015, PC strand
sales represented 38%, 39% and 43%, respectively, of our net sales.
PART I
Our business strategy is focused on: (1) achieving leadership positions in
our markets; (2) operating as the lowest cost producer in our industry;
and (3) pursuing growth opportunities in our core businesses that
further our penetration of the markets we currently serve or expand our
footprint. Headquartered in Mount Airy, North Carolina, we operate ten
manufacturing facilities that are all located in the U.S. in close proximity
to our customers and raw material suppliers. Our growth strategy is
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.
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 lower cost reinforcing solution than hot-rolled rebar. 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 fiscal years 2017, 2016
and 2015, WWR sales represented 62%, 61% and 57%, respectively,
of our net sales.
5
INSTEEL INDUSTRIES, INC. - Form 10-K PART I
ITEM 1 Business
Marketing and Distribution
We market our products through sales representatives who are our
employees. Our outside sales representatives are trained on the technical
applications for our products and sell multiple product lines in their
respective territories. We sell our products nationwide across the U.S.
and, to a much lesser extent, into Canada, Mexico, and Central and
South America, delivering them primarily by truck, using common
or contract carriers. The 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 fiscal 2017, 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 specific end use for our
products as most of our customers sell products that are used for both
nonresidential and residential construction, and the same products
can be used for different end uses. We did not have any customers
that represented 10% or more of our net sales in fiscal years 2017,
2016 and 2015, and are not dependent upon a single customer or a
few customers, the loss of which would have a material adverse effect
on our business.
Backlog
Backlog for our business is minimal due to the relatively short lead times that are required by our customers. We believe that the majority of our
firm orders as of the end of fiscal 2017 will be shipped during the first quarter of fiscal 2018.
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 fluctuations in
the inventory positions of our customers. From a seasonal standpoint,
shipments typically reach their highest level of the year when weather
conditions are the most conducive to construction activity. As a result,
assuming normal seasonal weather patterns, shipments and profitability
are usually higher in the third and fourth quarters of the fiscal year
and lower in the first and second quarters. From a cyclical standpoint,
construction activity and demand for our products is generally correlated
with general economic conditions, although there can be significant
differences between the relative strength of nonresidential and residential
construction 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
products. High carbon grades of wire rod are required for the production
of PC strand while low carbon grades are used to manufacture WWR.
Wire rod prices tend to fluctuate based on changes in scrap and other
metallic prices for steel producers together with 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
significantly impact the pricing and availability of imported wire rod,
which during fiscal years 2017 and 2016 represented approximately
27% and 30%, respectively, of our total wire rod purchases. We believe
that our substantial wire rod requirements, desirable mix of sizes and
grades, and strong financial condition represent a competitive advantage
by making us a relatively more attractive customer to our suppliers.
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.
These laws generally prescribe 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 certified 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. Ultimately the relative supply - demand balance in our markets
and competitive dynamics determine whether our margins expand or
contract during periods of rising or falling wire rod prices.
6
INSTEEL INDUSTRIES, INC. - Form 10-K PART I
ITEM 1 Business
were being “dumped” or sold in the U.S. at a price that was lower than
fair value and had injured the domestic PC strand industry. The DOC
ruled in our favor and imposed anti-dumping duties ranging from
12% up to 119%, which had the effect of limiting the participation
of these countries in the domestic market. In 2010, we joined together
with a coalition of domestic PC strand producers and filed petitions
with the DOC 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. The DOC ruled in our favor and
imposed final countervailing duty margins ranging from 9% to 46%
and anti-dumping margins ranging from 43% to 194%, which had
the effect 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 offering and national
footprint, technologically advanced manufacturing facilities, low-cost
production capabilities, sophisticated information systems and financial
strength and flexibility, we believe that we are well-positioned to compete
favorably with other producers of our concrete reinforcing products.
Competition
We are the nation’s largest manufacturer of steel wire reinforcing
products for concrete construction applications. Our markets are
highly competitive based on price, quality and service. Some of our
competitors, such as Nucor Corporation, Keystone Consolidated
Industries, Inc. (“Keystone”), Oklahoma Steel and Wire, and Gerdau
Long Products North America, are vertically integrated companies that
produce both wire rod and concrete reinforcing products and offer
multiple product lines over broad geographic areas. Other competitors
are smaller independent companies that offer limited competition in
certain markets. Our primary competitors for WWR products are
Nucor Corporation, Gerdau Ameristeel Corporation, Engineered Wire
Products, Inc. (a subsidiary of Keystone), 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, Keystone and Wire Mesh
Corporation. Import competition is also a significant factor in certain
segments of the PC strand market that are not subject to “Buy America”
requirements.
In response to irrationally-priced import competition from offshore
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 joined together
with a coalition of domestic PC strand producers and filed petitions
with the U.S. Department of Commerce (the “DOC”) alleging that
imports of PC strand from Brazil, India, Korea, Mexico and Thailand
Employees
As of September 30, 2017, we had 803 employees, none of which were represented by labor unions. In the event of production disruptions, 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 financial results.
Product Warranties
Our products are used in applications that are subject to inherent risks,
including performance deficiencies, personal injury, property damage,
environmental contamination or loss of production. We warrant our
products to meet certain specifications. Although actual or claimed
deficiencies from these specifications may give rise to claims, 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.
Environmental Matters
We believe that we are in compliance in all material respects with
applicable environmental laws and regulations. We have experienced
no material difficulties in complying with legislative or regulatory
standards and believe that these standards have not materially impacted
our financial position or results of operations. Although our future
compliance with additional environmental requirements could necessitate
capital outlays, we do not believe these expenditures would ultimately
have a material adverse effect on our financial position or results of
operations. We do not expect to incur material capital expenditures
for environmental control facilities during fiscal 2018.
7
INSTEEL INDUSTRIES, INC. - Form 10-K PART I
ITEM 1A Risk Factors
Available Information
Our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and any amendments to these reports, are
available at no cost on our web site at https://insteelgcs.gcs-web.com/
financial-information/sec-filings and the SEC’s web site at www.sec.gov
as soon as reasonably practicable after we file these reports electronically
with, or furnish them to, the SEC. The information available on our
web site and the SEC’s web site is not incorporated into this report or
any of our filings with the SEC.
ITEM 1A Risk Factors
An investment in our common stock involves risks and uncertainties.
You should carefully consider the following risk factors, in addition
to the other information contained in this annual report on Form
10-K, before deciding whether an investment in our common stock is
suitable for you. The risk factors described below are not the only ones
we face. There may be other risks and uncertainties that are currently
unknown to us or that we currently consider to be immaterial that
could adversely affect our business, results of operations, financial
condition and cash flows.
Our business is cyclical and can be negatively impacted
by prolonged economic downturns or tightening in the
financial markets that reduce the level of construction
activity and demand for our products.
Demand for our products is cyclical in nature and sensitive to changes
in the economy and in the financial markets. Our products are sold
primarily to manufacturers of concrete products that are used for a
broad range of nonresidential and residential construction applications.
Demand for our products 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 financial
markets could adversely impact demand for our products by reducing
the availability of financing to our customers and the construction
industry as a whole and increasing the risk of payment defaults on
our outstanding customer balances. Future prolonged periods of
economic weakness or reduced availability of financing could have a
material adverse impact on our business, results of operations, financial
condition and cash flows.
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, financial
condition and cash flows.
Our operations are subject to seasonal fluctuations that
may impact our cash flows.
Our shipments are typically lower in the first and second fiscal quarters
due to the unfavorable impact of winter weather on construction
activity during these periods and customer plant shutdowns associated
with holidays. As a result, our cash flows may fluctuate from quarter
to quarter due to these seasonal factors.
Demand for our products is highly variable and
difficult to forecast due to our minimal backlog and
unanticipated changes that can occur in customer order
patterns or inventory levels.
Demand for our products is highly variable. The short lead times for
customer orders and minimal backlog that characterize our business
make it difficult to forecast the future level of demand for our products.
In some cases, unanticipated softening in demand can be exacerbated
by inventory reduction measures pursued by our customers, which may
cause significant fluctuations in our sales, profitability and cash flows.
Our financial results can be negatively impacted by the
volatility in the cost and availability of our primary
raw material, hot-rolled carbon steel wire rod.
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. 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 financial markets. Beginning
in fiscal 2004, a tightening of supply in the rod market together with
fluctuations in the raw material costs of rod producers resulted in
increased price volatility which has continued through fiscal 2017. In
response, 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, we may be unable to fully recover increased rod costs through
higher selling prices during weaker market environments, which would
reduce our earnings and cash flows. Additionally, when raw material
costs decline, our financial results may be negatively impacted if the
selling prices for our products decrease to an even greater extent and
if we are consuming higher cost material from inventory.
8
INSTEEL INDUSTRIES, INC. - Form 10-K Our financial results can also be significantly impacted if raw material
supplies are inadequate to satisfy our purchasing requirements. In
addition, trade actions by domestic wire rod producers against offshore
suppliers can have a considerable impact on the availability and cost of
imported wire rod. The imposition of anti-dumping or countervailing
duty margins by the DOC against exporting countries can have the
effect of reducing or eliminating their activity in the domestic market,
which is of increasing significance 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 sufficient quantities
of our products or operate our manufacturing facilities in an efficient
manner, which could result in lost sales and higher operating costs.
Foreign competition could adversely impact our
financial results.
Our PC strand business is subject to offshore import competition on
an ongoing basis in that domestic production capacity is insufficient
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 profit margins could be negatively impacted.
In response to irrationally-priced import competition from offshore
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. These trade cases have resulted
in the imposition of duties which have had the effect 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 and sell our products, including unexpected
equipment failures, operational interruptions and catastrophic losses
due to other unanticipated events such as fires, explosions, accidents,
adverse weather conditions and transportation interruptions. For
example, during fiscal 2017, operations at our Texas and Florida
plants were temporarily curtailed due to flooding and power outages
related to hurricanes Harvey and Irma. 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 significant capital
expenditures. Although our insurance coverage could offset the losses or
expenditures relating to some of these events, our results of operations
and cash flows could be negatively impacted to the extent that such
claims were not covered or only partially covered by our insurance.
PART I
ITEM 1A Risk Factors
We are increasingly dependent on information
technology systems that are susceptible to certain risks,
including cybersecurity breaches and data leaks, which
could adversely impact our business.
Our increasing reliance on technology systems and infrastructure
heightens our potential vulnerability to system failure and malfunction,
breakdowns due to natural disasters, human error, unauthorized access,
power loss and other unforeseen events. Data privacy breaches by
employees and others with or without authorized access to our systems
poses risks that sensitive data may be permanently lost or leaked to the
public or other unauthorized persons. With the growing use and rapid
evolution of technology, not limited to cloud-based computing and
mobile devices, there are additional risks of unintentional data leaks.
There is also the risk of the theft of confidential information, intentional
vandalism, industrial espionage and a variety of cyber-attacks that
could compromise our internal technology system and infrastructure
or result in data leaks in-house or at our third-party providers and
business partners. Failures of technology or related systems, or an
improper release of confidential information, could adversely impact
our business or subject us to unexpected liabilities.
Our financial results could be adversely impacted by the
escalation of our operating costs.
Consistent with the experience of other employers, our medical and
workers’ compensation costs have increased substantially in recent
years and are expected to continue to rise. The Patient Protection
and Affordable Care Act (“ACA”) will have a significant impact on
employers, health care providers, insurers and others associated with
the health care industry and increase our employee health care costs.
This legislation requires certain large employers like us to offer health
care benefits to full-time employees or face potential annual penalties.
To avoid these penalties, employers must offer health benefits providing
a minimum level of coverage and limit the amount that employees are
charged for the coverage. Although certain provisions of the ACA were
waived in January 2017, others are anticipated to become effective at
various dates over the next several years and many of the regulations
and guidance pertaining to the law have not been implemented. Due
to the breadth and complexity of the ACA, the lack of implementing
regulations and interpretive guidance and the phased-in nature of the
requirement, we cannot predict the future effect of this law on our results.
Any significant increases in the costs attributable to our self-insured
health and workers’ compensation plans could adversely impact our
business, results of operations, financial condition and cash flows.
In addition, increasing prices for natural gas, electricity, fuel and
consumables would adversely affect our manufacturing and distribution
costs. For most of our business, we incur the fuel costs and surcharges
associated with the delivery of products to our customers. Although
we have previously implemented numerous measures to offset the
impact of increases in these costs, there can be no assurance that such
actions will be effective. If we are unable to pass these additional costs
through by raising our selling prices, our financial results could be
adversely impacted.
9
INSTEEL INDUSTRIES, INC. - Form 10-K PART I
ITEM 2 Properties
Our financial results could be adversely impacted by the
impairment of goodwill.
Our balance sheet includes intangible assets, including goodwill and
other separately identifiable assets related to prior acquisitions, and
we may acquire additional intangible assets in connection with future
acquisitions. 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 or a reduction in our projected operating
results and cash flows. If our review indicates that goodwill has been
impaired, the impaired portion would have to be written-off during
that period which could have an adverse effect on our business and
financial 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 financial performance.
Our operations are capital intensive and require substantial recurring
expenditures for the routine maintenance of our equipment and
facilities. Although we expect to finance 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 sufficient to support our business. A material
adverse change in our operations or financial condition could limit
our ability to borrow funds under our credit facility, which could
further adversely impact our liquidity and financial condition. Any
significant future acquisitions could require additional financing from
external sources that may not be available on favorable terms, which
could adversely impact our operations, growth, financial 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.
These 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 fiscal 2017, our common stock traded as high as $42.81
and as low as $22.50. There are numerous factors that could cause
the price of our common stock to fluctuate significantly, including:
variations in our financial results; changes in our business outlook
and 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 our financial results.
ITEM 1B Unresolved Staff Comments
None.
ITEM 2 Properties
Our corporate headquarters and IWP’s sales and administrative offices
are located in Mount Airy, North Carolina. At September 30, 2017,
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, however the facility located in Houston
was leased until October 2, 2017 when we exercised the $4.9 million
purchase option under the lease. 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 demand for our products.
10
INSTEEL INDUSTRIES, INC. - Form 10-K PART I
ITEM 4 Mine Safety Disclosures
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 effect on our
financial position, results of operations or cash flows.
ITEM 4 Mine Safety Disclosures
Not applicable.
Executive Officers of the Company
Our executive officers are as follows:
Name
H.O. Woltz III
Michael C. Gazmarian
James F. Petelle
Richard T. Wagner
Age
61
58
67
58
Position
President, Chief Executive Officer and Chairman of the Board
Vice President, Chief Financial Officer and Treasurer
Vice President - Administration and Secretary
Vice President and General Manager of IWP
H. O. Woltz III, 61, was elected Chief Executive Officer in 1991 and
has been employed by us and our subsidiaries in various capacities
since 1978. He was named President and Chief Operating Officer
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, 58, was elected Vice President, Chief Financial
Officer and Treasurer in February 2007. He had previously served as
Chief Financial Officer 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 financial capacities.
James F. Petelle, 67, 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, 58, joined us in 1992 and has served as Vice President
and General Manager of the Concrete Reinforcing Products Business
Unit of our 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,
which was later acquired by us in 2000.
The executive officers listed above were elected by our Board of Directors
at its annual meeting held February 7, 2017 for a term that will expire
at the next annual meeting or until their successors are elected and
qualify. The next meeting at which officers will be elected is expected
to be February 13, 2018.
11
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
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 25, 2017, there were 582 shareholders of record. The 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 fiscal 2017 and 2016:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2017
Fiscal 2016
$
High
42.81 $
39.20
36.94
34.00
Low
22.50 $
32.22
28.94
23.20
Cash Dividends
1.28
0.03
0.03
0.03
$
High
25.78 $
32.05
32.11
37.22
Low
16.19 $
18.72
25.40
28.33
Cash Dividends
1.03
0.03
0.03
0.03
We currently pay a quarterly cash dividend of $0.03 per share. In
addition to the regular quarterly cash dividend, we paid special cash
dividends of $1.25 per share in the first quarter of fiscal 2017 and
$1.00 per share in the first quarter of fiscal 2016. 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 our Board of Directors each
quarter after taking into account various factors, including general
business conditions and our financial condition, operating results,
cash requirements and expansion plans. See Note 7 of the consolidated
financial 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 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 September 30, 2017. The graph and table assume that $100 was
invested on September 29, 2012 in our common stock and in each of
the two indices and the reinvestment of all dividends. 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 $
400
350
300
250
200
150
100
50
0
9/29/12
9/28/13
9/27/14
10/3/15
10/1/16
9/30/17
Insteel Industries, Inc.
Russell 2000
S&P Building Products
Insteel Industries, Inc.
Russell 2000
S&P Building Products
$
9/29/12
100.00 $
100.00
100.00
9/28/13
140.31 $
130.06
143.86
Fiscal Year Ended
9/27/14
184.99 $
135.17
165.29
10/3/15
142.88 $
136.85
200.16
10/1/16
338.18 $
158.02
259.63
9/30/17
252.71
190.80
272.78
Issuer Purchases of equity Securities
Information regarding our share repurchase authorization is discussed in Note 18 to our consolidated financial statements and incorporated herein
by reference.
Rights Agreement
Information regarding our Rights Agreement is discussed in Note 16 to our consolidated financial statements and incorporated herein by reference.
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
Net earnings per share (basic)
Net earnings per share (diluted)
Cash dividends declared
Total assets
Total debt
Shareholders’ equity
(52 weeks)
September 30, 2017
(52 weeks)
October 1, 2016
(53 weeks)
October 3, 2015
(52 weeks)
September 27, 2014
Year Ended
388,871 $
22,548
1.19
1.17
1.37
283,073
-
223,376
418,547 $
37,245
1.99
1.95
1.12
292,892
-
224,566
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
(52 weeks)
September 28, 2013
363,896
11,735
0.65
0.64
0.37
212,649
-
161,056
Our August 15, 2014 acquisition of substantially all the assets associated with the PC strand business of American Spring Wire Corporation (the
“ASW Acquisition”) may materially affect the comparability of the information reflected in the selected financial data presented in this Item 6.
Item 7 management’s Discussion and Analysis
of Financial Condition and Results of Operations
The 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 in our industry;
and (3) pursuing growth opportunities within our core businesses that further our penetration of the markets we currently serve or expand
our footprint.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States
(“GAAP”). Our discussion and analysis of our financial condition
and results of operations are based on these consolidated financial
statements. The preparation of our consolidated financial 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 differ from these estimates.
The following critical accounting policies are both important to the
depiction of our financial condition and results of operations and
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 excluded from revenues and
recorded on a net basis.
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 financial 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 are generally not secured by collateral depending
upon the creditworthiness of the account. We provide an allowance
14
INSTEEL INDUSTRIES, INC. - Form 10-K PART II
Item 7 management’s Discussion and Analysis of Financial Condition and Results of Operations
for doubtful accounts based upon our assessment of the credit risk of
specific customers, historical trends and other information. There is
no disproportionate concentration of credit risk.
Allowance for doubtful accounts. We maintain allowances for doubtful
accounts for estimated losses resulting from the potential inability of
our customers to make required payments on outstanding balances
owed to us. Significant management judgments and estimates are used
in establishing the allowances. These judgments and estimates consider
such factors as the financial position, cash flows and payment history of
our customers as well as current and expected business conditions. It is
reasonably likely that actual collections will differ from our estimates,
which may result in increases or decreases in the allowances. Adjustments
to the allowances may also be required if there are significant changes
in the financial condition of our customers.
Inventory valuation. We periodically evaluate the carrying value
of our inventory. This evaluation includes assessing the adequacy of
allowances for 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 differ from our estimates. Adjustments to these reserves
may be required if actual market conditions are substantially different
than the assumptions underlying our estimates.
Long-lived assets. We review long-lived assets, which consist principally
of property, plant and equipment and finite-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 flows 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 difference between the
carrying value and the present value of estimated future net cash flows 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 affect 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 first day of the fourth quarter each fiscal
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 flow 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 flows for the five-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 flows 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 flows and discount rate,
could reduce our estimated fair value in the future and result in an
impairment of goodwill. There was no goodwill impairment loss
recognized in fiscal 2017.
Self-insurance. We are self-insured for certain losses relating to medical
and workers’ compensation claims. Self-insurance claims filed and
claims incurred but not reported are accrued based upon our estimates
of the discounted ultimate cost for uninsured claims incurred using
actuarial assumptions followed by the insurance industry and historical
experience. These estimates are subject to a high degree of variability
based upon future inflation rates, litigation trends, changes in benefit
levels and claim settlement patterns. Because of uncertainties related
to these factors as well as the possibility of changes in the underlying
facts and circumstances, future adjustments to these reserves may be
required.
Litigation. We are involved in claims, lawsuits and other proceedings,
which arise in the ordinary course of business. The 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 differ 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 significant developments.
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
and 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 for
the expected term, volatility, dividend yield, risk-free interest rate and
forfeiture rates. These assumptions are based on historical information
and judgment regarding market factors and trends. If actual results
differ from our assumptions and judgments used in estimating these
factors, future adjustments to these estimates may be required.
Assumptions for employee benefit plan. We account for our supplemental
employee retirement plans (each, a “SERP”) in accordance with
15
INSTEEL INDUSTRIES, INC. - Form 10-K PART II
Item 7 management’s Discussion and Analysis of Financial Condition and Results of Operations
ASC Topic 715, Compensation - Retirement Benefits. Under the
provisions of ASC Topic 715, we recognize net periodic pension cost
and value liabilities based on certain actuarial assumptions, principally
the assumed discount rate.
The discount rate we utilize for determining net periodic pension cost
and the related benefit obligation for the SERPs is based, in part, on
current interest rates earned on long-term bonds that receive one of the
two highest ratings assigned by recognized rating agencies. Our discount
rate assumptions are adjusted as of each valuation date to reflect current
interest rates on such long-term bonds. The discount rate is used to
determine the actuarial present value of the benefit obligations as of
the valuation date as well as the interest component of the net periodic
pension cost for the following year. The discount rate for the SERPs
was 3.75% for fiscal years 2017 and 2016 and 4.25% for fiscal 2015.
The assumed discount rate is reevaluated annually. Changes in this
assumption can result in the recognition of a materially different
pension cost over different periods and a materially different liability
amount in our consolidated financial statements. A reduction in
the assumed discount rate generally results in an actuarial loss, as
the actuarially-determined present value of estimated future benefit
payments will increase. Conversely, an increase in the assumed discount
rate generally results in an actuarial gain. However, any actuarial gains
generated in future periods reduce the negative amortization effect of
Recent Accounting Pronouncements
any cumulative unamortized actuarial losses, while any actuarial losses
generated in future periods reduce the favorable amortization effect of
any cumulative unamortized actuarial gains.
The projected benefit 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 inflation rates.
We currently expect net periodic pension cost for fiscal 2018 to be
$806,000 for the SERPs. Cash contributions to the SERPs during
fiscal 2018 are expected to be $358,000.
A 0.25% decrease in the assumed discount rate for our SERPs would
have increased our projected and accumulated benefit obligations as
of September 30, 2017 by approximately $284,000 and $230,000,
respectively, and our expected net periodic pension cost for fiscal 2018
by approximately $31,000.
See Note 10 to our consolidated financial statements for the related
accounting and disclosures surrounding our terminated pension plan,
the Insteel Wire Products Company Retirement Income Plan for Hourly
Employees, Wilmington, Delaware (the “Delaware Plan”).
The nature and impact of recent accounting pronouncements is discussed in Note 3 to our consolidated financial statements and incorporated
herein by reference.
Results of Operations
StAtemeNtS OF OPeRAtIONS – SeLeCteD DAtA
(Dollars in thousands)
Net sales
Gross profit
Percentage of net sales
Selling, general and administrative expense
Percentage of net sales
Pension plan settlement loss
Restructuring charges, net
Other expense (income), net
Interest expense
Interest income
Effective income tax rate
Net earnings
“N/M” = not meaningful
2017 Compared with 2016
$
$
$
$
September 30, 2017
388,871
59,781
Change
(7.1%) $
(29.8%)
Year Ended
October 1, 2016
418,547
85,188
Change
(6.5%) $
46.0 %
October 3, 2015
447,504
58,333
15.4%
25,508
6.6%
-
164
53
136
(248)
34.0 %
(2.2%) $
$
N/M
42.6 %
(71.0%)
(13.9%)
49.4 %
20.4 %
26,069
6.2 %
2,539
115
183
158
(166)
33.8 %
0.9 % $
$
N/M
(67.0%)
N/M
(50.6%)
N/M
22,548
(39.5%) $
37,245
71.6 % $
13.0 %
25,824
5.8 %
-
349
(1,113)
320
(11)
34.1 %
21,710
Net Sales
Net sales decreased 7.1% to $388.9 million in 2017 from $418.5 million
in 2016 due to lower shipments as average selling prices were essentially
unchanged. Shipments in 2017 were unfavorably impacted by adverse
weather conditions during the second half of the year including the effect
from hurricanes Harvey and Irma on our Texas and Florida facilities together
with a reduction in new project activity and competitive pricing pressures.
16
INSTEEL INDUSTRIES, INC. - Form 10-K PART II
Item 7 management’s Discussion and Analysis of Financial Condition and Results of Operations
Gross Profit
Gross profit decreased 29.8% to $59.8 million, or 15.4% of net sales,
in 2017 from $85.2 million, or 20.4% of net sales, in 2016. The
year-over-year decrease was primarily due to lower spreads between
average selling prices and raw material costs ($16.8 million), the
decrease in shipments ($6.4 million) and higher unit conversion
costs ($3.4 million). The decrease in spreads was driven by higher
raw material costs ($16.2 million) and freight expense ($0.7 million)
partially offset by higher average selling prices ($0.1 million).
Selling, General and Administrative Expense
Selling, general and administrative expense (“SG&A expense”) decreased
2.2% to $25.5 million, or 6.6% of net sales, in 2017 from $26.1 million,
or 6.2% of net sales, in 2016 primarily due to lower compensation
expense ($762,000) together with the relative year-over-year change in
the cash surrender value of life insurance policies ($332,000), which was
partially offset by higher bad debt ($186,000), travel ($163,000) and
employee benefit expense ($160,000). The decrease in compensation
expense was largely driven by lower incentive plan expense based on
our weaker results in 2017. The cash surrender value of life insurance
policies increased $812,000 in 2017 compared with $480,000 in the
prior year due to the changes in the value of the underlying investments.
The increase in bad debt expense was due to a prior year adjustment to
the allowance for doubtful accounts based on our favorable collections
experience. The increase in employee benefit costs was primarily due
to higher employee supplemental retirement plan expense.
Pension Plan Settlement Loss
A pension plan settlement loss of $2.5 million was incurred in 2016
related to the termination of the Delaware Plan.
Restructuring Charges, Net
Net restructuring charges of $164,000 were incurred in 2017 for
equipment relocation costs related to the consolidation of our PC
strand facilities. Net restructuring charges of $115,000 were incurred
in 2016, which included equipment relocation costs ($186,000),
facility closure costs ($89,000) and impairment charges related to the
decommissioning of equipment ($20,000) partially offset by a gain on
the sale of equipment previously associated with the Newnan, Georgia
PC strand facility ($180,000).
Income Taxes
Our effective income tax rate for 2017 increased slightly to 34.0% from
33.8% in 2016 due to changes in permanent book versus tax differences.
Net Earnings
Net earnings decreased to $22.5 million ($1.17 per diluted share) in
2017 from $37.2 million ($1.95 per diluted share) in 2016 primarily
due to the decrease in gross profit partially offset by lower SG&A
expense and the pension plan settlement loss incurred in 2016.
2016 Compared with 2015
in average selling prices. Shipments for the prior year benefited from an
extra week based on our fiscal calendar. On a pro forma basis adjusting
both years to reflect the same 52-week period as 2016, the year-over-year
shipment increase was 4.8%. The increase in shipments was primarily
due to improved market conditions and increased demand for our
products relative to the prior year. The decrease in average selling prices
was driven by competitive pricing pressures.
Gross Profit
Gross profit increased 46.0% to $85.2 million, or 20.4% of net sales,
in 2016 from $58.3 million, or 13.0% of net sales, in 2015. The
year-over-year increase was primarily due to higher spreads between
average selling prices and raw material costs ($22.3 million), lower
unit conversion costs ($2.3 million) and the increase in shipments
($1.6 million). The increase in spreads was driven by lower raw material
costs ($62.4 million) and freight expense ($0.5 million) partially offset
by lower average selling prices ($40.6 million).
Selling, General and Administrative Expense
SG&A expense increased 0.9% to $26.1 million, or 6.2% of net sales,
in 2016 from $25.8 million, or 5.8% of net sales, in 2015 primarily
due to higher compensation expense ($1.8 million), which was partially
offset by lower employee benefit ($657,000), bad debt ($250,000)
and legal expense ($114,000) together with the relative year-over-
year change in the cash surrender value of life insurance policies
($441,000). The increase in compensation expense was largely driven
by higher incentive plan expense due to our improved financial results
in 2016. The decrease in employee benefit costs was primarily related
to a reduction in high-dollar health insurance claims. The decrease
in bad debt expense was due to an adjustment to the allowance for
doubtful accounts based on our favorable collections experience. The
cash surrender value of life insurance policies increased $480,000 in
2016 compared with $39,000 in 2015 due to the changes in the value
of the underlying investments.
Pension Plan Settlement Loss
A pension plan settlement loss of $2.5 million was incurred in 2016
related to the termination of the Delaware Plan.
Restructuring Charges, Net
Net restructuring charges of $115,000 were incurred in 2016 related
to the consolidation of our PC strand facilities, including equipment
relocation costs ($186,000), facility closure costs ($89,000) and
impairment charges related to the decommissioning of equipment
($20,000) partially offset by a gain on the sale of equipment previously
associated with the Newnan, Georgia PC strand facility ($180,000).
Net restructuring charges of $349,000 were incurred in 2015 related
to the closure of the Newnan facility, which included facility closure
costs ($547,000), impairment charges related to the decommissioning
of equipment ($543,000), equipment relocation costs ($79,000) and
employee separation costs ($75,000). These charges were partially
offset by an $895,000 gain on the sale of the real estate and certain of
the equipment associated with the Newnan facility.
Net Sales
Net sales decreased 6.5% to $418.5 million in 2016 from $447.5 million
in 2015 as a 2.6% increase in shipments was offset by an 8.8% reduction
Other Expense (Income)
Other expense for 2016 was $0.2 million compared with other income
of $1.1 million in 2015. The other income for 2015 was primarily
17
INSTEEL INDUSTRIES, INC. - Form 10-K PART II
Item 7 management’s Discussion and Analysis of Financial Condition and Results of Operations
related to a $1.7 million net gain from insurance proceeds attributable
to the replacement of property and equipment damaged in the fire at
our Gallatin, Tennessee PC strand facility in 2014, partially offset by
a $0.7 million charge related to the settlement of a customer dispute.
Income Taxes
Our effective income tax rate for 2016 decreased slightly to 33.8% from
34.1% in 2015 due to changes in permanent book versus tax differences.
Interest Expense
Interest expense decreased 50.6% to $158,000 in 2016 from $320,000
in 2015 primarily due to borrowings on our revolving credit facility
during the prior year.
Net Earnings
Net earnings increased to $37.2 million ($1.95 per diluted share) in
2016 from $21.7 million ($1.15 per diluted share) in 2015 primarily
due to the increase in gross profit partially offset by higher SG&A
expense and the pension plan settlement loss.
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 financing 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
September 30, 2017
20,303
(20,880)
(26,191)
32,105
117,873
-
-
223,376
100%
223,376
$
$
$
$
$
$
Year Ended
October 1, 2016
54,536 $
(12,972)
(15,949)
58,873
126,704
-
-
224,566 $
100%
224,566 $
October 3, 2015
35,774
(3,039)
(2,527)
33,258
105,532
-
-
200,215
100%
200,215
Operating activities provided $20.3 million of cash in 2017 primarily
from net earnings adjusted for non-cash items partially offset by an
increase in the net working capital components of accounts receivable,
inventories, and accounts payable and accrued expenses. Net working
capital used $15.5 million of cash due to an $11.9 million decrease in
accounts payable and accrued expenses and a $10.7 million increase
in inventories partially offset by a $7.1 million decrease in accounts
receivable. The decrease in accounts payable and accrued expenses
was primarily related to lower raw material purchases near the end of
the period along with a decrease in accrued salaries, wages and related
expenses. The increase in inventories was due to higher raw material
costs and, to a lesser extent, quantities on-hand. The decrease in
accounts receivable was primarily due to lower sales during the period.
Operating activities provided $54.5 million of cash in 2016 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
$3.2 million of cash due to a $9.0 million increase in accounts payable
and accrued expenses partially offset by a $5.2 million increase in
inventories and a $0.6 million increase in accounts receivable. The
increases in accounts payable and accrued expenses and inventories
were largely related to higher raw material purchases near the end of
the period. The increase in accounts receivable was primarily due to an
increase in days sales outstanding partially offset by lower selling prices.
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 offset by
a $17.9 million decrease in accounts payable and accrued expenses.
The decrease in inventories and accounts payable and accrued expenses
was primarily due to lower raw material purchases and unit costs. The
decrease in accounts receivable was related to lower selling prices.
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 affects sales to our customers, it generally
reduces our working capital requirements.
18
INSTEEL INDUSTRIES, INC. - Form 10-K PART II
Item 7 management’s Discussion and Analysis of Financial Condition and Results of Operations
Investing Activities
Investing activities used $20.9 million of cash in 2017 primarily due to
$20.6 million of capital expenditures largely related to the expansion
of the Houston, Texas PC strand facility and the addition of a new
ESM production line at the St. Joseph, Missouri facility. Investing
activities used $13.0 million of cash in 2016 primarily due to capital
expenditures largely related to the expansion of the Houston facility.
Investing activities used $3.0 million of cash in 2015 primarily related
to $7.2 million of capital expenditures and the $1.5 million acquisition
of an intangible asset from a competitor, which was partially offset by
$3.5 million of proceeds from the sale of the real estate and certain
of the equipment associated with the Newnan, Georgia PC Strand
facility, $1.7 million of insurance proceeds related to the insurance
claim for the fire at our Gallatin, Tennessee PC strand facility in 2014
and $0.5 million of post-closing adjustments associated with the ASW
Acquisition. Our investing activities are largely discretionary, providing
us with the ability to significantly curtail outlays should future business
conditions warrant that such actions be taken.
Financing Activities
Financing activities used $26.2 million of cash in 2017, $15.9 million
in 2016 and $2.5 million in 2015. In 2017, $26.0 million of cash
was used for dividend payments (including a special cash dividend of
$23.7 million, or $1.25 per share, and regular cash dividends totaling
$2.3 million). In 2016, $20.9 million of cash was used for dividend
payments (including a special cash dividend of $18.6 million, or
$1.00 per share, and regular cash dividends totaling $2.3 million),
which was partially offset by $5.1 million of proceeds from the exercise
of stock options. In 2015, $2.2 million of cash was used for dividend
payments and $0.2 million for financing costs that were incurred in
connection with the amendment of our revolving credit facility.
Cash management
Our cash is principally concentrated at one financial 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 flow 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 its 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 September 30, 2017, no
borrowings were outstanding on the Credit Facility, $85.4 million of
borrowing capacity was available and outstanding letters of credit totaled
$1.8 million (see Note 7 to the consolidated financial statements). As
of October 1, 2016, there were no borrowings outstanding on the
Credit Facility.
We believe that, in the absence of significant unanticipated cash demands,
cash and cash equivalents, cash generated by operating activities and
the borrowing availability provided under the Credit Facility will be
sufficient 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
as required. However, should we experience future reductions in our
operating cash flows 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 required additional short-
term liquidity, we would evaluate the alternative sources of financing
that were potentially available to provide such funding. There can be
no assurance that any such financing, if pursued, would be obtained, or
if obtained, would be adequate or on terms acceptable to us. However,
we believe that our strong balance sheet, flexible capital structure and
borrowing capacity available to us under our Credit Facility position us
to meet our anticipated liquidity requirements for the foreseeable future.
Impact of Inflation
We are subject to inflationary risks arising from fluctuations in the market
prices for our primary raw material, hot-rolled carbon steel wire rod,
and, to a much lesser extent, freight, energy and other consumables that
are used in our manufacturing processes. We have generally been able to
adjust our selling prices to pass through increases in these costs or offset
them through various cost reduction and productivity improvement
initiatives. However, our ability to raise 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 2017, we were unable to fully recover the escalation in our raw
material costs through price increases due to the weakening in demand
19
INSTEEL INDUSTRIES, INC. - Form 10-K PART II
Item 7 management’s Discussion and Analysis of Financial Condition and Results of Operations
and competitive pricing pressures. During the second half of 2016, our
raw material costs rose over most of the period due to increasing scrap
costs for wire rod producers which we were generally able to recover
through price increases. During 2015 and through the first half of 2016,
wire rod prices declined through most of the period due to reductions
in scrap costs which favorably impacted our margins after the higher
cost inventory we had purchased in earlier periods was consumed. The
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 defined 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 financial condition,
results of operations, liquidity, capital expenditures, capital resources
or significant components of revenues or expenses.
Contractual Obligations
Our contractual obligations and commitments at September 30, 2017 are as follows:
PAYmeNtS DUe BY PeRIOD
(In thousands)
Contractual obligations:
Raw material purchase commitments(1)
Supplemental employee retirement plan obligations
Operating leases
Trade letters of credit
Commitment fee on unused portion of credit facility
Other unconditional purchase obligations(2)
Total
(1) Non-cancelable purchase commitments for raw materials.
(2) Contractual commitments for capital expenditures.
$
$
Outlook
Total
28,897 $
20,208
1,621
1,781
855
15,498
68,860 $
Less Than 1 Year
28,897 $
358
984
1,781
320
15,498
47,838 $
$
1 - 3 Years
-
561
634
-
535
-
1,730 $
3 - 5 Years
- $
783
3
-
-
-
786 $
More Than 5 Years
-
18,506
-
-
-
-
18,506
As we look ahead to 2018, we expect improved conditions in our
construction end-markets. Customer sentiment remains positive
and we expect the infrastructure-related portion of our business will
be favorably impacted by higher state and local funding in many
of our markets. We also expect to benefit from modest increases in
nonresidential construction together with the continued recovery of
the housing market. We believe the recent compression in spreads
that we have experienced will diminish as these factors begin to drive
increased demand for our products.
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 effectiveness of all of our
manufacturing, selling and administrative activities. We expect that
our financial results will be favorably impacted by the realization of
additional operating synergies associated with the ASW Acquisition
and the related reconfiguration of our PC strand operations as we
ramp up the new raw material cleaning and production lines at our
Houston plant. 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. 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 footprint.
The statements contained in this section are forward-looking statements.
See “Cautionary Note Regarding Forward-Looking Statements” and
“Risk Factors”.
20
INSTEEL INDUSTRIES, INC. - Form 10-K PART II
Item 7A Quantitative and Qualitative Disclosures About market Risk
Item 7A Quantitative and Qualitative Disclosures
About market Risk
Our cash flows and earnings are subject to fluctuations resulting from
changes in commodity prices, interest rates and foreign exchange rates.
We manage our exposure to these market risks through internally
established policies and procedures and, when appropriate, through
the use of derivative financial instruments. We do not use financial
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 we can modify or adapt our hedging
strategies as necessary.
Commodity Prices
We are subject to significant fluctuations in the cost and availability
of our primary raw material, hot-rolled carbon steel wire rod, which
we purchase from both domestic and foreign suppliers. We negotiate
quantities and pricing for both domestic and foreign wire rod purchases
for varying periods (most recently monthly for domestic suppliers),
depending upon market conditions, to manage our exposure to price
fluctuations and to ensure adequate availability of material consistent
with our requirements. We do not use derivative commodity instruments
to hedge our exposure to changes in prices as such instruments are not
currently available for wire rod. Our ability to acquire wire rod from
foreign sources on favorable terms is impacted by fluctuations in foreign
currency exchange rates, foreign taxes, duties, tariffs and other trade
actions. Although changes in our wire rod costs and selling prices tend
to be correlated, in weaker market environments, we may be unable to
fully recover increased rod costs through higher selling prices, which
would reduce our earnings and cash flows. Additionally, when raw
material costs decline, our financial results may be negatively impacted
if the selling prices for our products decrease to an even greater extent
and if we are consuming higher cost material from inventory. Based
on our 2017 shipments and average wire rod cost reflected in cost of
sales, a 10% increase in the price of wire rod would have resulted in a
$21.7 million decrease in our annual pre-tax earnings (assuming there
was not a corresponding change in our selling prices).
Interest Rates
Although we did not have any balances outstanding on our Credit Facility as of September 30, 2017, future borrowings under the 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 firm commitments for certain equipment purchases that are
denominated in foreign currencies. The decision to hedge any such
transactions is made by us on a case-by-case basis. There were no
forward contracts outstanding as of September 30, 2017. During 2017,
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 financial position, results of operations
or cash flows.
21
INSTEEL INDUSTRIES, INC. - Form 10-K PART II
Item 8 Financial Statements and Supplementary Data
Item 8 Financial Statements and Supplementary Data
(a) Financial Statements
Consolidated Statements of Operations for the years ended September 30, 2017,
October 1, 2016 and October 3, 2015 .......................................................................................................................................................................... 23
Consolidated Statements of Comprehensive Income for the years ended September 30, 2017,
October 1, 2016 and October 3, 2015 ........................................................................................................................................................................... 24
Consolidated Balance Sheets as of September 30, 2017 and October 1, 2016 ................................................................................................................ 25
Consolidated Statements of Shareholders’ equity for the years ended September 30, 2017,
October 1, 2016 and October 3, 2015 ........................................................................................................................................................................... 26
Consolidated Statements of Cash Flows for the years ended September 30, 2017,
October 1, 2016 and October 3, 2015 ........................................................................................................................................................................... 27
Notes to Consolidated Financial Statements ................................................................................................................................................................... 28
Report of Independent Registered Public Accounting Firm – Consolidated Financial Statements .................................................................................. 44
Schedule II – Valuation and Qualifying Accounts for the years ended September 30, 2017,
October 1, 2016 and October 3, 2015 ........................................................................................................................................................................... 45
December 31
April 1
July 1
September 30
Quarter Ended
$
$
$
93,888
13,010
4,460
$
101,159
18,294
7,420
$
96,938
16,676
6,869
0.24
0.23
0.39
0.39
0.36
0.36
Quarter Ended
96,886
11,801
3,799
0.20
0.20
January 2
April 2
July 2
October 1
$
92,391
16,423
6,708
$
107,414
18,615
7,152
$
115,629
27,547
13,531
0.36
0.36
0.38
0.38
0.72
0.71
103,113
22,603
9,854
0.52
0.51
(b) Supplementary Data
Selected quarterly financial data for 2017 and 2016 is as follows:
FINANCIAL INFORmAtION BY QUARteR (UNAUDIteD)
(In thousands, except per share and price data)
2017
Operating results:
Net sales
Gross profit
Net earnings
Net earnings per share:
Basic
Diluted
2016
Operating results:
Net sales
Gross profit
Net earnings
Net earnings per share:
Basic
Diluted
22
INSTEEL INDUSTRIES, INC. - Form 10-K PART II
Item 8 Financial Statements and Supplementary Data
Insteel Industries, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expense
Pension plan settlement loss
Restructuring charges, net
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.
$
$
$
September 30, 2017
Year Ended
October 1, 2016
388,871 $
329,090
59,781
25,508
-
164
53
136
(248)
34,168
11,620
22,548 $
1.19 $
1.17
1.37
19,011
19,217
418,547 $
333,359
85,188
26,069
2,539
115
183
158
(166)
56,290
19,045
37,245 $
1.99 $
1.95
1.12
18,754
19,055
October 3, 2015
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
23
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
Pension plan settlement loss, net of income taxes of ($733)
Adjustment to defined benefit plan liability, net of
income taxes of ($127), $363 and $218
Other comprehensive income (loss)
COmPReHeNSIVe INCOme
See accompanying notes to consolidated financial statements.
September 30, 2017
October 1, 2016
Year Ended
$
$
22,548 $
-
208
208
22,756 $
37,245 $
1,197
(592)
605
37,850 $
October 3, 2015
21,710
-
(356)
(356)
21,354
24
INSTEEL INDUSTRIES, INC. - Form 10-K Insteel Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except 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: 2017, 19,041; 2016, 18,976
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.
PART II
Item 8 Financial Statements and Supplementary Data
September 30, 2017
October 1, 2016
$
$
$
$
32,105 $
40,284
81,853
5,949
160,191
98,670
7,913
6,965
9,334
283,073 $
33,651 $
8,667
42,318
17,379
58,873
47,389
71,186
3,039
180,487
88,193
9,063
6,965
8,184
292,892
42,759
11,024
53,783
14,543
-
-
19,041
69,817
135,851
(1,333)
223,376
283,073 $
18,976
67,817
139,314
(1,541)
224,566
292,892
25
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
Retained
Earnings
103,429 $
21,710
Accumulated
Other Comprehensive
Income (Loss)(1)
(1,790) $
(356)
Common Stock
Additional
Paid-In Capital
$
169
(478)
Shares
2,298
18,466
60,967
18,466
24
65
24
65
58,867 $
463
47
176
(65)
Amount
18,377 $ 18,377
(2,211)
122,928
37,245
(In thousands)
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 benefits from stock-based
compensation
Restricted stock units and stock options
surrendered for withholding taxes payable
Cash dividends declared
Balance at October 3, 2015
Net earnings
Other comprehensive income(1)
Stock options exercised
Vesting of restricted stock units
Compensation expense associated with
stock-based plans
Excess tax benefits from stock-based
compensation
Restricted stock units and stock options
surrendered for withholding taxes payable
Cash dividends declared
Balance at October 1, 2016
Net earnings
Other comprehensive income(1)
Stock options exercised
Vesting of restricted stock units
Compensation expense associated with
stock-based plans
Excess tax benefits from stock-based
compensation
Restricted stock units and stock options
surrendered for withholding taxes payable
Cash dividends declared
Balance at September 30, 2017
(1) Activity within accumulated other comprehensive income (loss) is reported net of related income taxes: 2015 $218, 2016 ($370) and 2017 ($127).
See accompanying notes to consolidated financial statements.
(20,859)
139,314
22,548
(26,011)
135,851 $
19,041 $ 19,041
4,602
(47)
463
47
69,817 $
81
(39)
26
39
67,817
18,976
18,976
(1,861)
2,439
1,717
26
39
2,245
(824)
537
$
(2,146)
605
(1,541)
208
(1,333) $
Total
Shareholders’
Equity
178,883
21,710
(356)
200
-
2,298
169
(478)
(2,211)
200,215
37,245
605
5,065
-
2,439
1,717
(1,861)
(20,859)
224,566
22,548
208
107
-
2,245
537
(824)
(26,011)
223,376
26
INSTEEL INDUSTRIES, INC. - Form 10-K PART II
Item 8 Financial Statements and Supplementary Data
Insteel Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
September 30, 2017
Year Ended
October 1, 2016
October 3, 2015
$
22,548 $
37,245 $
21,710
(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 financing costs
Stock-based compensation expense
Deferred income taxes
Pension plan settlement loss, net of cash contributed
Asset impairment charges
Excess tax benefits 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
Net changes in assets and liabilities:
Accounts receivable, net
Inventories
Accounts payable and accrued expenses
Other changes
Total adjustments
Net cash provided by operating activities
Cash Flows From Investing Activities:
Capital expenditures
Proceeds from surrender of life insurance policies
Increase in cash surrender value of life insurance policies
Acquisition of intangible asset
Acquisition of business
Proceeds from sale of assets held for sale
Proceeds from fire loss insurance
Proceeds from sale of property, plant and equipment
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 benefits from stock-based compensation
Payment of employee tax withholdings related to net share transactions
Financing costs
Net cash used for financing 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 financing activities:
$
$
11,649
65
2,245
2,503
-
-
(537)
64
(812)
7,105
(10,667)
(11,930)
(1,930)
(2,245)
20,303
(20,575)
100
(405)
-
-
-
-
-
(20,880)
404
(404)
(26,011)
107
537
(824)
-
(26,191)
(26,768)
58,873
32,105 $
11,544
65
2,439
536
620
20
(1,717)
61
(480)
(607)
(5,177)
9,009
978
17,291
54,536
(12,977)
140
(375)
-
-
180
-
60
(12,972)
328
(328)
(20,859)
5,065
1,717
(1,861)
(11)
(15,949)
25,615
33,258
58,873 $
- $
9,300
- $
19,184
Purchases of property, plant and equipment in accounts payable
Restricted stock units and stock options surrendered for withholding taxes payable
465
824
1,746
1,861
See accompanying notes to consolidated financial statements.
11,934
89
2,298
333
-
543
(169)
(2,652)
(39)
4,266
15,890
(17,861)
(568)
14,064
35,774
(7,153)
40
(328)
(1,460)
480
3,537
1,713
132
(3,039)
60,978
(60,978)
(2,211)
200
169
(478)
(207)
(2,527)
30,208
3,050
33,258
143
7,805
570
478
27
INSTEEL INDUSTRIES, INC. - Form 10-K PART II
Item 8 Financial Statements and Supplementary Data
Insteel Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended September 30, 2017, October 1, 2016 And October 3, 2015
NOte 1 Description of Business
Insteel Industries, Inc. (“we,” “us,” “our,” “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. We manufacture and
market prestressed concrete strand (“PC strand”) and welded wire
reinforcement (“WWR”), including engineered structural mesh,
concrete pipe reinforcement and standard welded wire reinforcement.
Our products are primarily sold to manufacturers of concrete products
and, to a lesser extent, distributors, rebar fabricators and contractors.
We sell our products nationwide across the U.S. and, to a much lesser
extent, into Canada, Mexico, and Central and South America.
We have evaluated all subsequent events that occurred after the balance
sheet date through the time of filing this Annual Report on Form 10-K
and concluded there were no events or transactions during this period that
required additional recognition or disclosure in our financial statements.
NOte 2 Summary of Significant Accounting Policies
Fiscal year
Our fiscal year is the 52 or 53 weeks ending on the Saturday closest to
September 30. Fiscal years 2017 and 2016 were 52-week periods and
fiscal year 2015 was a 53-week period. All references to years relate to
fiscal years rather than calendar years.
Principles of consolidation
The consolidated financial statements include the accounts of Insteel
and our subsidiaries. All significant intercompany transactions and
accounts have been eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States (“U.S.” and such
accounting principles, “GAAP”) requires us to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. There is no assurance that actual results will
not differ from these estimates.
Cash equivalents
We consider all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
Concentration of credit risk
of the amounts recorded on the balance sheet. We invest excess cash
primarily in money market funds, which are highly liquid securities.
The majority of our accounts receivable are due from customers that are
located in the U.S. and are generally not secured by collateral depending
upon the creditworthiness of the account. We provide an allowance
for doubtful accounts based upon our assessment of the credit risk of
specific customers, historical trends and other information. We write
off accounts receivable when they become uncollectible. There is no
disproportionate concentration of credit risk.
Stock-based compensation
We account for stock-based compensation in accordance with the fair
value recognition provisions of Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) Topic 718,
Compensation – Stock Compensation, which requires stock-based
compensation expense to be recognized in net earnings based on the
fair value of the award on the date of the grant. We determine 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
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 excluded from revenues and recorded on a net basis.
Financial instruments that subject us to concentrations of credit risk
consist principally of cash and cash equivalents and trade accounts
receivable. Our cash is principally concentrated at one financial
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
Shipping and handling costs
We include 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 us for shipping and handling are
recorded in net sales on the consolidated statements of operations.
28
INSTEEL INDUSTRIES, INC. - Form 10-K PART II
Item 8 Financial Statements and Supplementary Data
Inventories
Other assets
Inventories are valued at the lower of weighted average cost (which
approximates computation on a first-in, first-out basis) or market
(net realizable value or replacement cost). The 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 financial 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 $10.5 million in 2017, $10.4 million in 2016 and
$10.9 million in 2015 and reflected 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 reflected in SG&A
expense in the consolidated statements of operations. No interest costs
were capitalized in 2017, 2016 and 2015.
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. We perform
our annual impairment analysis as of the first day of the fourth quarter
each year. The evaluation of impairment 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 flow 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 flows for the five-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
flows 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. Assumptions in estimating future cash flows are subject
to a high degree of judgment and complexity. Changes in assumptions
and estimates may affect the fair value of goodwill and could result
in impairment charges in future periods. Based on the results of our
impairment analysis, no goodwill impairment losses were recognized
in the consolidated statements of operations for 2017. Subsequent to
the analysis, there have been no events or circumstances that indicate
any potential impairment of goodwill.
Other assets consist principally of capitalized financing costs and the
cash surrender value of life insurance policies. Capitalized financing costs
are amortized using the straight-line method, which approximates the
effective interest method over the term of the related credit agreement,
and reflected in interest expense in the consolidated statements of
operations.
Long-lived assets
Long-lived assets include property, plant and equipment and identifiable
intangible assets with definite useful lives. Finite-lived intangible assets
are amortized over their estimated useful lives. Our 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 finite useful lives (see Note 6 to the
consolidated financial statements). We assess the impairment of long-
lived assets whenever events or changes in circumstances indicate that
the carrying value may not be fully recoverable. When we determine that
the carrying value of such assets may not be recoverable, we measure
recoverability based on the undiscounted cash flows 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 difference between the
carrying value and the present value of estimated future net cash flows
or comparable market values.
There were no impairment losses in 2017. During 2016 and 2015,
we recorded $20,000 and $0.3 million, respectively, of impairment
charges related to long-lived assets resulting from the consolidation
of our PC strand operations with the closure of the Newnan, Georgia
facility (see Note 4 to the consolidated financial statements).
Fair value of financial instruments
The carrying amounts for cash and cash equivalents, accounts receivable,
and accounts payable and accrued expenses approximate fair value
because of their short maturities.
Income taxes
Income taxes are based on pretax financial accounting income. Deferred
tax assets and liabilities are recognized for the expected tax consequences
of temporary differences between the tax bases of assets and liabilities
and their reported amounts. We assess the need to establish a valuation
allowance against deferred tax assets to the extent we no longer believe
it is more likely than not that the tax assets will be fully realized.
earnings per share
Basic earnings per share (“EPS”) are computed by dividing earnings
available to common shareholders by the weighted average number of
shares of common stock outstanding during the period. Diluted EPS
are computed by dividing earnings available to common shareholders
by the weighted average number of shares of common stock and other
dilutive equity securities outstanding during the period. Securities that
have the effect of increasing EPS are considered to be antidilutive and
are not included in the computation of diluted EPS.
29
INSTEEL INDUSTRIES, INC. - Form 10-K PART II
Item 8 Financial Statements and Supplementary Data
NOte 3 Recent Accounting Pronouncements
Future Adoptions
In May 2017, the FASB issued Accounting Standards Update (“ASU”)
No. 2017-09 “Compensation – Stock Compensation (Topic 718):
Scope of Modification Accounting.” ASU No. 2017-09 was issued
to clarify and reduce both (i) diversity in practice and (ii) cost and
complexity when applying its guidance to changes in the terms and
conditions of a share-based payment award. ASU No. 2017-09 will
become effective for us in the first quarter of fiscal 2020. We are
evaluating the impact that the adoption of this update will have on
our consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15 “Statement of
Cash Flows Topic 230: Classification of Certain Cash Receipts and
Cash Payments.” ASU No. 2016-15 addresses how certain cash receipts
and cash payments are presented and classified in the statement of
cash flows with the objective of reducing existing differences in the
presentation of these items. The amendments in ASU No. 2016-15 are
to be adopted retrospectively and will become effective for us in the first
quarter of fiscal 2019. We do not expect the adoption of this update
will have a material effect on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09 “Compensation –
Stock Compensation Topic 718: Improvements to Employee Share-Based
Payment Accounting,” which is intended to simplify the accounting
for share-based payment transactions, including the income tax
consequences, classification of awards as either equity or liabilities and
classification on the statement of cash flows. ASU No. 2016-09 will
become effective for us in the first quarter of fiscal 2018. We do not
expect the adoption of this update will have a material effect on our
consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02 “Leases,” which
will replace the guidance in ASC Topic 840. ASU No. 2016-02 was
NOte 4 Restructuring Charges
issued to increase transparency and comparability among organizations
by recognizing all lease transactions (with terms in excess of 12 months)
on the balance sheet as a lease liability and a right-of-use asset. ASU
No. 2016-02 will become effective for us in the first quarter of fiscal
2020. We are evaluating the impact that the adoption of this update
will have on our consolidated financial 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 effective for us in the first quarter of
fiscal 2018. We do not expect the adoption of this update will have a
material effect on our consolidated financial statements.
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. ASU No. 2014-09 provides
that an entity recognize revenue when it transfers promised goods or
services to customers in an amount that reflects the consideration to
which the entity expects to be entitled in exchange for those goods
or services. This update also requires additional disclosure about the
nature, amount, timing and uncertainty of revenue and cash flows arising
from customer contracts, including significant judgments and changes
in judgments, and assets recognized from costs incurred to obtain or
fulfill a contract. ASU No. 2014-09 allows for either full retrospective
or modified retrospective adoption and will become effective for us in
the first quarter of fiscal 2019. While we have not yet identified any
material changes in the timing of revenue recognition, our evaluation
is ongoing and not complete.
In 2014 we purchased substantially all of the assets associated with
the PC strand business of American Spring Wire Corporation (“ASW
Acquisition”). Subsequent to the ASW Acquisition, in 2014, we
incurred employee separation costs for staffing reductions associated
with the acquisition. In February 2015, we elected to consolidate
our 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.
30
INSTEEL INDUSTRIES, INC. - Form 10-K Following is a summary of the restructuring activities and associated costs that were incurred during 2017, 2016 and 2015:
PART II
Item 8 Financial Statements and Supplementary Data
$
(In thousands)
2017
Liability as of October 1, 2016
Restructuring charges
Cash payments
Non-cash charges
LIABILITY AS OF SEPTEMBER 30, 2017 $
2016
Liability as of October 3, 2015
Restructuring charges (recoveries)
Cash payments
Non-cash charges
LIABILITY AS OF OCTOBER 1, 2016
2015
Liability as of September 27, 2014
Restructuring charges (recoveries)
Cash payments
Non-cash charges
LIABILITY AS OF OCTOBER 3, 2015
$
$
$
$
Asset
Impairment
Charges
Equipment
Relocation
Costs
Severance and
Other Employee
Separation Costs
Facility
Closure Costs
Gain on Sale
of Property and
Equipment
- $
-
-
-
- $
- $
20
-
(20)
- $
- $
543
-
(543)
- $
31 $
164
(195)
-
- $
- $
186
(155)
-
31 $
- $
79
(79)
-
- $
239 $
-
(239)
-
- $
735 $
-
(496)
-
239 $
1,208 $
75
(548)
-
735 $
- $
-
-
-
- $
- $
89
(89)
-
- $
- $
547
(547)
-
- $
- $
-
-
-
- $
- $
(180)
-
180
- $
- $
(895)
-
895
- $
Total
270
164
(434)
-
-
735
115
(740)
160
270
1,208
349
(1,174)
352
735
As of October 1, 2016, we recorded restructuring liabilities amounting to $0.3 million on our consolidated balance sheet, including $0.1 million
in accounts payable and $0.2 million in accrued expenses. We do not currently expect to incur any additional restructuring charges during 2018
related to the consolidation of our PC strand operations.
NOte 5 Fair Value measurements
Fair value is defined as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The authoritative guidance for
fair value measurements establishes a three-level fair value hierarchy
that encourages an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
The 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 significant to the fair value of the assets or liabilities,
including certain pricing models, discounted cash flow methodologies
and similar techniques that use significant unobservable inputs.
As of September 30, 2017 and October 1, 2016, we held financial assets that are required to be measured at fair value on a recurring basis, which
are summarized below:
(In thousands)
Year ended September 30, 2017:
Current assets:
Cash equivalents
Other assets:
Cash surrender value of life insurance policies
TOTAL
Year ended October 1, 2016:
Current assets:
Cash equivalents
Other assets:
Cash surrender value of life insurance policies
TOTAL
Quoted Prices
in Active Markets
(Level 1)
Total
Observable
Inputs
(Level 2)
31,659 $
31,659 $
-
9,026
40,685 $
-
31,659 $
9,026
9,026
58,846 $
58,846 $
-
7,909
66,755 $
-
58,846 $
7,909
7,909
$
$
$
$
31
INSTEEL INDUSTRIES, INC. - Form 10-K
PART II
Item 8 Financial Statements and Supplementary Data
Cash equivalents, which include all highly liquid investments with
original maturities of three months or less, are classified as Level 1 of
the fair value hierarchy. The carrying amount of our 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 classified as Level 2. The fair value of the life insurance
policies was determined by the underwriting insurance company’s
valuation models and represents the guaranteed value we would receive
upon surrender of these policies as of the reporting date.
NOte 6
Intangible Assets
As of September 30, 2017 and October 1, 2016, we had no nonfinancial
assets that are required to be measured at fair value on a nonrecurring
basis. The carrying amounts of accounts receivable, accounts payable
and accrued expenses approximates fair value due to the short-term
maturities of these financial instruments.
The primary components of our intangible assets and the related accumulated amortization are as follows:
(In thousands)
Year ended September 30, 2017:
Customer relationships
Developed technology and know-how
Non-competition agreements
Year ended October 1, 2016:
Customer relationships
Developed technology and know-how
Non-competition agreements
Weighted-
Average Useful
Life (Years)
Gross
Accumulated
Amortization
Net Book
Value
20.0
20.0
4.8
20.0
20.0
4.8
$
6,500
1,800
3,577
$ 11,877
$
6,500
1,800
3,577
$ 11,877
$
$
$
$
(1,018)
(283)
(2,663)
(3,964)
(693)
(192)
(1,929)
(2,814)
$
$
$
$
5,482
1,517
914
7,913
5,807
1,608
1,648
9,063
Amortization expense for intangibles was $1.2 million in 2017 and 2016 and $1.1 million in 2015. Amortization expense for the next five years,
assuming no change in the estimated useful lives of identified intangible assets, is $918,000 in 2018, $705,000 in 2019, $537,000 in 2020 and
$414,000 in 2021 and 2022.
NOte 7 Long-term Debt
Revolving Credit Facility
We have a $100.0 million revolving credit facility (the “Credit Facility”)
that is used to supplement our operating cash flow 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 its 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 September 30, 2017, no
borrowings were outstanding on the Credit Facility, $85.4 million
of borrowing capacity was available and outstanding letters of credit
totaled $1.8 million. As of October 1, 2016, there were no borrowings
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 our election, a LIBOR rate, plus in either case, an
applicable interest rate margin. The applicable interest rate margins are
adjusted on a quarterly basis based upon the amount of excess availability
32
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 our excess availability as of September 30,
2017, the applicable interest rate margins on the Credit Facility were
0.25% for index rate loans and 1.25% for LIBOR loans.
Our 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 we are unable to make certain representations
and warranties provided for under the terms of the Credit Facility. We
are required to maintain a fixed charge coverage ratio of not less than
1.10 at the end of each fiscal 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 our
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 our stock subject to certain
minimum borrowing availability requirements; incur or assume
INSTEEL INDUSTRIES, INC. - Form 10-K
PART II
Item 8 Financial Statements and Supplementary Data
Amortization of capitalized financing costs associated with the
Credit Facility was $65,000 in 2017 and 2016 and $89,000 in 2015.
Accumulated amortization of capitalized financing costs was $4.6 million
as of September 30, 2017 and $4.5 million as of October 1, 2016. We
expect the amortization of capitalized financing costs to approximate
the following amounts for the next five fiscal years:
Fiscal year
2018
2019
2020
2021
2022
$
In thousands
65
65
41
-
-
on February 17, 2025, replaces the 2005 Equity Incentive Plan of
Insteel Industries, Inc., which expired on February 15, 2015. As of
September 30, 2017, there were 433,000 shares of our common stock
available for future grants under the 2015 Plan, which is our only
active equity incentive plan.
indebtedness; issue securities; enter into certain transactions with
our affiliates; or permit liens to encumber our property and assets.
The terms of the Credit Facility also provide that an event of default
will occur 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 us or any of our 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; certain entries of judgment against us or
any of our subsidiaries, which are not covered by insurance; or a change
of control. As of September 30, 2017, we were in compliance with all
of the financial and negative covenants under the Credit Facility and
there have not been any events of default.
NOte 8 Stock-Based Compensation
Under our equity incentive plan, employees and directors may be
granted stock options, restricted stock, restricted stock units and
performance awards. Effective February 17, 2015, our shareholders
approved the 2015 Equity Incentive Plan of Insteel Industries, Inc. (the
“2015 Plan”), which authorizes up to 900,000 shares of our common
stock for future grants under the plan. The 2015 Plan, which expires
Stock option awards
Under our equity incentive plan, 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 the plan 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
September 30, 2017
Year Ended
October 1, 2016
October 3, 2015
$
1,007
$
988
$
1,007
The remaining unrecognized compensation cost related to unvested options at September 30, 2017 was $330,000, which is expected to be
recognized over a weighted average period of 1.49 years.
The fair value of each option award granted is estimated on the date of grant using a Monte Carlo valuation model. The weighted-average
estimated fair values of stock options granted during 2017, 2016 and 2015 were $11.08, $9.92 and $7.10 per share, respectively, based on the
following weighted-average assumptions:
Expected term (in years)
Risk-free interest rate
Expected volatility
Expected dividend yield
September 30, 2017
5.14
1.98%
38.32%
0.37%
Year Ended
October 1, 2016
5.45
1.30%
39.00%
0.48%
October 3, 2015
5.72
2.18%
37.99%
0.61%
The assumptions utilized in the Monte Carlo valuation model are
evaluated and revised, as necessary, to reflect market conditions and
actual historical experience. The expected term for options was based
on the results of a Monte Carlo simulation model, using the model’s
estimated fair value as an input to the Black-Scholes-Merton model,
and then solving for the expected term. The risk-free interest rate for
periods within the contractual life of the option was based on the U.S.
Treasury yield curve in effect at the time of the grant. The expected
volatility was derived using a term structure based on historical volatility
and the volatility implied by exchange-traded options on our stock.
The dividend yield was calculated based on our annual dividend as of
the option grant date.
33
INSTEEL INDUSTRIES, INC. - Form 10-K
PART II
Item 8 Financial Statements and Supplementary Data
The following table summarizes stock option activity:
Exercise Price Per Share
(Share amounts in thousands)
Outstanding at September 27, 2014
Granted
Exercised
Forfeited
Outstanding at October 3, 2015
Granted
Exercised
Outstanding at October 1, 2016
Granted
Exercised
OUTSTANDING AT SEPTEMBER 30, 2017
Vested and anticipated to vest in future at September 30, 2017
Exercisable at September 30, 2017
Options
Outstanding
871
134
(27)
(55)
923
99
(651)
371
88
(67)
392
388
194
Range
$6.89 - $ 20.50
18.05 - 21.96
6.89 - 11.15
9.16 - 21.96
7.55 - 21.96
23.95 - 34.49
7.55 - 21.96
9.16 - 34.49
26.75 - 37.06
9.16 - 23.95
9.16 - 37.06
$
14.23
19.89
9.17
15.37
15.14
28.47
13.93
20.81
30.93
19.05
23.40
23.36
19.05
Weighted
Average
Contractual Term -
Weighted Average
Aggregate
Intrinsic Value
(in thousands)
$
328
8,718
1,212
1,845
1,837
1,491
7.64 years
7.63 years
6.41 years
Stock option exercises include “net exercises” for 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 our equity incentive plan
are valued based upon the fair market value on the date of the grant
and provide for a dividend equivalent payment which is included in
compensation expense. The vesting period for RSUs is generally one
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. RSU grants and compensation expense are
as follows:
(In thousands)
Restricted stock unit grants:
Units
Market value
Compensation expense
September 30, 2017
Year Ended
October 1, 2016
October 3, 2015
$
37
1,180 $
1,238
57
1,516 $
1,451
62
1,253
1,291
The remaining unrecognized compensation cost related to unvested RSUs on September 30, 2017 was $548,000 which is expected to be recognized
over a weighted average period of 1.69 years.
The following table summarizes RSU activity:
(Unit amounts in thousands)
Balance, September 27, 2014
Granted
Forfeited
Released
Balance, October 3, 2015
Granted
Forfeited
Released
Balance, October 1, 2016
Granted
Released
BALANCE, SEPTEMBER 30, 2017
34
Restricted
Stock Units
Outstanding
197
62
(13)
(89)
157
57
(2)
(67)
145
37
(54)
128
$
Weighted Average
Grant Date
Fair Value
15.68
20.33
17.52
12.86
18.96
26.57
23.95
17.95
22.35
31.95
20.43
25.92
INSTEEL INDUSTRIES, INC. - Form 10-K
PART II
Item 8 Financial Statements and Supplementary Data
NOte 9
Income taxes
The components of the provision for income taxes are as follows:
(Dollars in thousands)
Current:
Federal
State
Deferred:
Federal
State
INCOME TAXES
EFFECTIVE INCOME TAX RATE
September 30, 2017
Year Ended
October 1, 2016
October 3, 2015
$
$
8,269
848
9,117
2,455
48
2,503
11,620
34.0%
$
$
17,075
1,434
18,509
396
140
536
19,045
33.8%
$
$
10,149
772
10,921
222
111
333
11,254
34.1%
The 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
Qualified production activities deduction
Valuation allowance
State income taxes, net of federal tax benefit
Other, net
PROVISION FOR INCOME TAXES
September 30, 2017
$
$
11,959
(768)
(29)
598
(140)
11,620
35.0% $
(2.2)
(0.1 )
1.8
(0.5 )
34.0 % $
Year Ended
October 1, 2016
19,701
(1,596)
(213)
1,093
60
19,045
The components of deferred tax assets and liabilities are as follows:
October 3, 2015
11,537
(1,005)
(55)
612
165
33.8 % $ 11,254
35.0% $
(2.8 )
(0.4 )
1.9
0.1
35.0%
(3.0 )
(0.2 )
1.9
0.4
34.1 %
(In thousands)
Deferred tax assets:
Defined benefit 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
September 30, 2017
October 1, 2016
$
3,556 $
3,069
1,907
284
-
(251)
8,565
(15,093)
(1,575)
(16,668)
$
(8,103) $
3,497
2,942
1,652
354
277
(280)
8,442
(12,915)
(999)
(13,914)
(5,472)
As of September 30, 2017, we recorded a non-current deferred tax
liability (net of valuation allowance) of $8.1 million in other liabilities
on our consolidated balance sheet. As of October 1, 2016, we recorded
a non-current deferred tax liability (net of valuation allowance) of
$5.5 million in other liabilities on our consolidated balance sheet. We
have $7.4 million of state net operating loss carryforwards (“NOLs”)
that begin to expire in 2018, but principally expire between 2018 and
2031. We have also recorded deferred tax assets for various state tax
credits of $46,000, which will begin to expire in 2019 and principally
expire between 2019 and 2020.
The realization of our deferred tax assets is entirely dependent upon
our ability to generate future taxable income in applicable jurisdictions.
GAAP requires that we periodically assess the need to establish a
valuation allowance against our deferred tax assets to the extent we no
longer believe it is more likely than not that they will be fully utilized.
As of September 30, 2017, we had recorded a valuation allowance of
$251,000 pertaining to various state NOLs and tax credits that were not
expected to be utilized. The valuation allowance is subject to periodic
review and adjustment based on changes in facts and circumstances
and would be reduced should we 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. The $29,000
decrease in the valuation allowance during 2017 is primarily due to the
reduction in enacted state tax rates and the expiration of state NOLs
for which an allowance had been previously recorded.
As of September 30, 2017, we had no material, known tax exposures
that required the establishment of contingency reserves for uncertain
tax positions.
35
INSTEEL INDUSTRIES, INC. - Form 10-K PART II
Item 8 Financial Statements and Supplementary Data
We classify interest and penalties related to unrecognized tax benefits as
part of income tax expense. There were no interest and penalties related
to unrecognized tax benefits incurred during 2017, 2016 and 2015.
We file U.S. federal income tax returns as well as state and local income
tax returns in various jurisdictions. Federal and various state tax returns
filed subsequent to 2012 remain subject to examination.
NOte 10 employee Benefit Plans
Retirement plans
We had one defined benefit pension plan, the Insteel Wire Products
Company Retirement Income Plan for Hourly Employees, Wilmington,
Delaware (the “Delaware Plan”). The Delaware Plan provided benefits
for eligible employees based primarily upon years of service and
compensation levels. The Delaware Plan was frozen effective September
30, 2008 whereby participants no longer earned additional benefits.
During 2016, we terminated the Delaware Plan and settled plan
liabilities through either lump sum distributions to plan participants or
annuity contracts purchased from a third-party insurance company that
provided for the payment of vested benefits to those participants that
did not elect the lump sum option. As of October 1, 2016, there were
no remaining plan assets. We made contributions totaling $1.9 million
and $234,000 to the Delaware Plan during 2016 and 2015, respectively.
As a result of the pension termination, unrecognized losses, which
previously were recorded in accumulated other comprehensive loss
on our consolidated balance sheets, were recognized as expense and
the pension plan settlement loss of $2.5 million was recorded on our
consolidated statements of operations for the year ended October 1, 2016.
The reconciliation of the projected benefit obligation, plan assets, funded status and amounts recognized in our consolidated balance sheets for
the Delaware Plan is as follows:
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of year
Interest cost
Actuarial loss
Plan settlement
Distributions
BENEFIT OBLIGATION AT END OF YEAR
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Plan settlement
Distributions
FAIR VALUE OF PLAN ASSETS AT END OF YEAR
Reconciliation of funded status to net amount recognized:
Funded status
NET AMOUNT RECOGNIZED
Amounts recognized on the consolidated balance sheet:
Accrued benefit 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 benefit obligations recognized in other comprehensive income (loss):
Net loss
Amortization of net loss
Settlement loss
TOTAL RECOGNIZED IN OTHER COMPREHENSIVE INCOME (LOSS)
36
Year Ended
October 1, 2016
October 3, 2015
3,463 $
147
324
290
(4,224)
- $
2,201 $
104
1,919
(4,003)
(221)
- $
- $
- $
- $
-
- $
- $
- $
685 $
(76)
(2,539)
(1,930) $
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
$
$
$
$
$
$
$
$
$
$
$
$
INSTEEL INDUSTRIES, INC. - Form 10-K
PART II
Item 8 Financial Statements and Supplementary Data
Net periodic pension cost for the Delaware Plan includes the following components:
(In thousands)
Interest cost
Expected return on plan assets
Settlement loss recognized
Amortization of net loss
NET PERIODIC PENSION COST
The 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
Year Ended
October 1, 2016
October 3, 2015
147 $
(175)
2,539
76
2,587 $
130
(181)
-
53
2
$
$
Measurement Date
October 1, 2016
October 3, 2015
3.75%
N/A
4.25%
8.00%
The assumed discount rate is established as of our fiscal year-end
measurement date. In establishing the discount rate, we reviewed
published market indices of high-quality debt securities, adjusted as
appropriate for duration, and high-quality bond yield curves applicable
to the expected benefit payments of the Delaware Plan. To develop the
expected long-term rate of return on assets assumption, we considered
the historical returns and future expectations of returns for each asset
class, as well as the target asset allocation of the Delaware Plan portfolio.
Prior to the termination and settlement of the Delaware Plan the
fundamental goal underlying the investment policy was to ensure that
its assets were invested in a prudent manner to meet its obligations
as such obligations became due. The primary investment objectives
included providing a total return that would promote the goal of
benefit 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 complied with applicable laws
and regulations. The investment strategy for equities emphasized U.S.
large cap equities with the portfolio’s performance measured against the
S&P 500 index or other applicable indices. The investment strategy
for fixed income investments was focused on maintaining an overall
portfolio with a minimum credit rating of A-1 as well as a minimum
rating of any security at the time of purchase of Baa/BBB by Moody’s
or Standard & Poor’s, if rated.
The Delaware Plan had a long-term target asset mix of 60% equities and 40% fixed income. The asset allocations for the Delaware Plan as of
October 3, 2015 were as follows:
Large-cap equities
Mid-cap equities
Small-cap equities
International equities
Fixed income securities
Cash and cash equivalents
Percentage of Plan Assets at
Measurement Date
37.6%
7.7%
8.2%
8.8%
37.3%
0.4%
Supplemental employee retirement plan
We have Retirement Security Agreements (each, a “SERP”) with
certain of our employees (each, a “Participant”). Under the SERPs, if
the Participant remains in continuous service with us for a period of
at least 30 years, we will pay them a supplemental retirement benefit
for the 15-year period following their retirement equal to 50% of their
highest average annual base salary for five consecutive years in the
10-year period preceding their retirement. If the Participant retires
prior to the later of age 65 or the completion of 30 years of continuous
service with us, but has completed at least 10 years of continuous
service, the amount of their supplemental retirement benefit will be
reduced by 1/360th for each month short of 30 years that they were
employed by us. In 2005, we revised the SERPs to add Participants
and increase benefits to existing Participants.
37
INSTEEL INDUSTRIES, INC. - Form 10-K
PART II
Item 8 Financial Statements and Supplementary Data
The reconciliation of the projected benefit obligation, plan assets, funded status and amounts recognized for the SERPs in our consolidated
balance sheets is as follows:
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial (gain) loss
Distributions
BENEFIT OBLIGATION AT END OF YEAR
Change in plan assets:
Actual employer contributions
Actual distributions
PLAN ASSETS AT FAIR VALUE AT END OF YEAR
Reconciliation of funded status to net amount recognized:
Funded status
NET AMOUNT RECOGNIZED
Amounts recognized in accumulated other comprehensive loss:
Unrecognized net loss
NET AMOUNT RECOGNIZED
Other changes in plan assets and benefit 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 SERPs includes the following components:
(In thousands)
Service cost
Interest cost
Amortization of net loss
NET PERIODIC PENSION COST
September 30, 2017
Year Ended
October 1, 2016
October 3, 2015
$
$
$
$
$
$
$
$
$
$
9,159 $
344
338
(162)
(290)
9,389 $
290 $
(290)
- $
(9,389) $
(9,389) $
2,149 $
2,149 $
(162) $
(174)
(336) $
7,821 $
263
326
1,039
(290)
9,159 $
290 $
(290)
- $
(9,159) $
(9,159) $
2,485 $
2,485 $
1,039 $
(85)
954 $
7,480
287
323
21
(290)
7,821
290
(290)
-
(7,821)
(7,821)
1,531
1,531
21
(117)
(96)
September 30, 2017
344
338
174
856
$
$
Year Ended
October 1, 2016
263
326
85
674
$
$
October 3, 2015
287
323
117
727
$
$
The estimated net loss that will be amortized from accumulated other comprehensive loss into net periodic pension cost during 2018 is $150,000.
The assumptions used in the valuation of the SERPs are as follows:
Assumptions at year-end:
Discount rate
Rate of increase in compensation levels
September 30, 2017
October 1, 2016
October 3, 2015
Measurement Date
3.75%
3.00%
3.75%
3.00%
4.25%
3.00%
The assumed discount rate is established as of our fiscal year-end measurement date. In establishing the discount rate, we review published market
indices of high-quality debt securities, adjusted as appropriate for duration, and high-quality bond yield curves applicable to the expected benefit
payments of the plan. The SERPs expected rate of increase in compensation levels is based on the anticipated increases in annual compensation.
The projected benefit payments under the SERPs are as follows:
Fiscal year(s)
2018
2019
2020
2021
2022
2023 - 2027
38
$
In thousands
358
320
240
240
543
3,652
INSTEEL INDUSTRIES, INC. - Form 10-K
PART II
Item 8 Financial Statements and Supplementary Data
As noted above, the SERPs were revised in 2005 to add Participants
and increase benefits to certain existing Participants. However, for
certain Participants we still maintain the benefits of the respective
SERPs that were in effect prior to the 2005 changes, which entitle them
to fixed cash benefits upon retirement at age 65, payable annually for
15 years. These SERPs are supported by life insurance policies on the
Participants that are purchased and owned by us. The cash benefits
paid under these SERPs were $40,000 in 2017 and 25,000 in 2016
and 2015. The expense attributable to these SERPs was $34,000 in
2017, $26,000 in 2016 and $23,000 in 2015.
Retirement savings plan
In 1996, we adopted the Retirement Savings Plan of Insteel Industries,
Inc. (the “Plan”) to provide retirement benefits and stock ownership
for our employees. The Plan is an amendment and restatement of
our 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.
The Plan allows for discretionary contributions to be made by us as
determined by the Board of Directors, which are allocated among
eligible participants based on their compensation relative to the
total compensation of all participants. Employees are 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. During 2015 to 2017, we matched
employee contributions up to 100% of the first 1% and 50% of
the next 5% of eligible compensation that was contributed by
employees. Our contributions to the Plan were $1.1 million in
2017 and $1.0 million in 2016 and 2015.
Voluntary employee Beneficiary Associations (“VeBA”)
We have a VEBA which allows both us and our employees to make
contributions to pay for medical costs. Our contributions to the VEBA
were $5.6 million in 2017, $5.4 million in 2016 and $6.3 million in
2015. We are primarily self-insured for our employee’s healthcare costs,
carrying stop-loss insurance coverage for individual claims in excess of
$175,000 per benefit plan year. Our self-insurance liabilities are based
on the total estimated costs of claims filed and claims incurred but not
reported, less amounts paid against such claims. We review current
and historical claims data in developing our estimates.
NOte 11 Commitments and Contingencies
Insurance recoveries
Leases and purchase commitments
During August and September of 2017, operations at our four
manufacturing facilities located in Texas and Florida were adversely
affected by hurricanes Harvey and Irma. We are in the process of
completing the supporting analysis for insurance claims relating to the
business interruption and property damage resulting from the storm.
During 2014, a fire occurred at our 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. In response, we reassigned a portion of our strand
production requirements to our facility located in Sanderson, Florida,
which was operating at a reduced utilization level. During the first
quarter of 2015, we completed the remainder of the repairs and the
Gallatin facility was fully operational.
We maintained general liability, business interruption and replacement
cost property insurance coverage on our facilities that was sufficient
to cover the losses incurred from the fire. We received $2.0 million of
insurance proceeds in 2015 related to the expenses that were incurred
and capital outlays that were required to replace property and equipment
damaged in the fire. 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 our consolidated statement
of operations. The insurance proceeds attributable to the property
and equipment damaged in the fire were reported in cash flows from
investing activities and all other insurance proceeds received were
reported in cash flows from operating activities on our consolidated
statement of cash flows. We reached a final settlement on this claim
with our insurance carrier during the third quarter of 2015.
We lease a portion of our equipment under operating leases that expire
at various dates through 2022. Additionally, we leased our facility in
Houston, Texas through September 30, 2017 and subsequently exercised
the $4.9 million purchase option under the lease on October 2, 2017.
Under most lease agreements, we pay insurance, taxes and maintenance.
Rental expense for operating leases was $1.8 million in 2017, 2016
and 2015. As of September 30, 2017, minimum rental commitments
under all non-cancelable leases with an initial term in excess of one
year are payable as follows: 2018, $984,000; 2019, $498,000; 2020
$136,000; 2021, $2,000 and 2022 and beyond, $1,000.
As of September 30, 2017, we had $28.9 million in non-cancelable
purchase commitments for raw material extending as long as
approximately 100 days and $15.5 million of contractual commitments
for the purchase of certain equipment that had not been fulfilled and
are not reflected in the consolidated financial statements.
Customer dispute
During 2015, we settled a dispute with a customer resulting in
a $0.7 million charge that was recorded in other expense on our
consolidated statement of operations.
Legal proceedings
We are involved in lawsuits, claims, investigations and proceedings,
including commercial, environmental and employment matters, which
39
INSTEEL INDUSTRIES, INC. - Form 10-K PART II
Item 8 Financial Statements and Supplementary Data
arise in the ordinary course of business. We do not expect the ultimate
cost to resolve these matters will have a material adverse effect on our
financial position, results of operations or cash flows.
Severance and change of control agreements
We have entered into severance agreements with our Chief Executive
Officer and Chief Financial Officer that provide them with certain
termination benefits in the event their employment with us is terminated
without cause. The initial term of each agreement is two years and they
automatically renew for successive one year terms unless we or the
executive provide notice of termination as specified in the agreement.
In the event of termination of the executive’s employment without
cause, these agreements provide that they would receive termination
benefits equal to one and one-half times their annual base salary in effect
on the termination date and the continuation of health and welfare
benefits for eighteen months. In addition, all of the executive’s stock
options and restricted stock would vest immediately, and outplacement
services would be provided.
We have also entered into change in control agreements with key members
of management, including our executive officers, which specify the
terms of separation in the event that termination of their employment
NOte 12 earnings Per Share
followed a change in control. The initial term of each agreement is
two years and they automatically renew for successive one year terms
unless we or the executive provide notice of termination as specified in
the agreement. The agreements do not provide assurances of continued
employment or specify the terms of an executive’s termination should
one occur in the absence of a change in control. The compensation
payable under the terms of these agreements differs between the
Chief Executive Officer and Chief Financial Officer, and the other
covered executives. In the event of termination of the Chief Executive
Officer or the Chief Financial Officer within two years of a change
of control, they would receive severance benefits equal to two times
base compensation, two times the average bonus for the prior three
years and the continuation of health and welfare benefits for two
years. In the event of such a termination of the other key members of
management, including our other two executive officers, within two
years of a change of control, they would receive severance benefits equal
to one times base compensation, one times the average bonus for the
prior three years and the continuation of health and welfare benefits
for one year. In addition, for any covered executive that is terminated
within two years of a change of control, all of their stock options and
restricted stock would vest immediately, and outplacement services
would be provided.
The 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 effect of stock-based compensation
Diluted weighted average shares outstanding
Net earnings per share:
Basic
Diluted
September 30, 2017
$
22,548 $
19,011
206
19,217
$
1.19 $
1.17
Year Ended
October 1, 2016
October 3, 2015
37,245 $
18,754
301
19,055
1.99 $
1.95
21,710
18,418
385
18,803
1.18
1.15
Options and RSUs representing 76,000 shares in 2017, 51,000 shares in 2016 and 144,000 shares in 2015 were antidilutive and were not
included in the diluted EPS computation.
40
INSTEEL INDUSTRIES, INC. - Form 10-K
PART II
Item 8 Financial Statements and Supplementary Data
NOte 13 Business Segment Information
Our operations are entirely focused on the manufacture and marketing of steel wire reinforcing products for concrete construction applications.
Our concrete reinforcing products consist of two product lines: PC strand and WWR. Based on the criteria specified in ASC Topic 280, Segment
Reporting, we have one reportable segment.
Our 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
Our net sales by product line are as follows:
(In thousands)
Net sales:
Welded wire reinforcement
Prestressed concrete strand
TOTAL
September 30, 2017
Year Ended
October 1, 2016
October 3, 2015
$
$
$
$
387,199 $
1,672
388,871 $
416,391 $
2,156
418,547 $
122,574 $
112,130 $
-
-
122,574 $
112,130 $
444,475
3,029
447,504
108,557
-
108,557
September 30, 2017
Year Ended
October 1, 2016
October 3, 2015
$
$
239,522 $
149,349
388,871 $
256,801 $
161,746
418,547 $
255,219
192,285
447,504
There were no customers that accounted for 10% or more of our net sales in 2017, 2016 and 2015.
NOte 14 Related Party transactions
Sales to a company affiliated with one of our directors amounted to $622,000 in 2017, $420,000 in 2016 and $361,000 in 2015.
41
INSTEEL INDUSTRIES, INC. - Form 10-K
PART II
Item 8 Financial Statements and Supplementary Data
NOte 15 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
Income taxes receivable
Other
TOTAL
Other assets:
Cash surrender value of life insurance policies
Capitalized financing costs, net
Other
TOTAL
Property, plant and equipment, net:
Land and land improvements
Buildings
Machinery and equipment
Construction in progress
Less accumulated depreciation
TOTAL
Accrued expenses:
Salaries, wages and related expenses
Property taxes
Customer rebates
Workers’ compensation
Sales allowance reserves
Restructuring liabilities
Other
TOTAL
Other liabilities:
Deferred compensation
Deferred income taxes
TOTAL
42
September 30, 2017
October 1, 2016
$
$
$
$
$
$
$
$
$
$
$
$
$
$
40,485 $
(201)
40,284 $
51,808 $
2,637
27,408
81,853 $
3,796 $
925
1,228
5,949 $
9,026 $
105
203
9,334 $
12,177 $
50,373
153,484
5,641
221,675
(123,005)
98,670 $
5,520 $
1,384
1,015
116
21
-
611
8,667 $
9,276 $
8,103
17,379 $
47,680
(291)
47,389
45,032
2,788
23,366
71,186
1,805
205
1,029
3,039
7,909
170
105
8,184
9,619
43,739
143,789
11,318
208,465
(120,272)
88,193
6,619
1,328
1,296
127
577
239
838
11,024
9,071
5,472
14,543
INSTEEL INDUSTRIES, INC. - Form 10-K
PART II
Item 8 Financial Statements and Supplementary Data
stock (or, in certain circumstances, cash, property or 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 difference 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 specified
circumstances) were, beneficially owned by any acquiring person will
be null and void. The 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, we may exchange all
or part of the rights for shares of common stock at an exchange ratio
of one share per right, as appropriately adjusted to reflect any stock
dividend, stock split or similar transaction.
In addition, each rights holder, other than an acquiring person, upon
exercise of rights will have the right to receive shares of the common
stock of the acquiring corporation having a value equal to two times
the purchase price for such holder’s rights if we engage in a merger or
other business combination where we are not the surviving entity or
where we are the surviving entity and all or part of our common stock
is exchanged for the stock or other securities of the other company, or
if 50% or more of our assets or earning power is sold or transferred.
The rights will expire on April 24, 2019, and may be redeemed by us
at any time prior to the distribution date at a price of $0.005 per right.
NOte 16 Rights Agreement
On April 26, 1999, our Board of Directors declared a dividend
distribution of one right per share of our outstanding common stock
as of May 17, 1999 pursuant to a Rights Agreement, dated as of
April 27, 1999. The Rights Agreement also provides that one right
will attach to each share of our common stock issued after May 17,
1999. On April 21, 2009, effective April 25, 2009, our Board of
Directors amended the Rights Agreement to, among other changes,
extend the final expiration date and adjust the purchase price payable
upon exercise of a right.
The rights are not currently exercisable but trade with our common stock
shares and become exercisable on the distribution date. The distribution
date will occur upon the earliest of 10 business days following a public
announcement that either a person or group of affiliated or associated
persons (an “acquiring person”) has acquired, or obtained the right to
acquire, beneficial ownership of 20% or more (after adjustment for
certain derivative transactions) of the outstanding shares of common
stock (the “stock acquisition date”), or of a tender offer or exchange offer
that would, if consummated, result in an acquiring person beneficially
owning 20% or more of such outstanding shares of common stock,
subject to certain limitations.
Each right will entitle the holder, other than the acquiring person or
group, to purchase one two-hundredths of a share (a “Unit”) of our
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 specified,
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
NOte 17 Product Warranties
Our products are used in applications which are subject to inherent
risks including performance deficiencies, personal injury, property
damage, environmental contamination or loss of production. We
warrant our products to meet certain specifications, and actual or
claimed deficiencies from these specifications may give rise to claims.
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.
NOte 18 Share Repurchases
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 (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. 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 Authorization
continues in effect until terminated by the Board of Directors. As of
September 30, 2017, there was $24.8 million remaining available for
future share repurchases under the Authorization. There were no share
repurchases during 2017, 2016 and 2015.
43
INSTEEL INDUSTRIES, INC. - Form 10-K 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 September 30, 2017 and October 1, 2016,
and the related consolidated statements of operations, comprehensive
income, changes in shareholders’ equity, and cash flows for each of the
three years in the period ended September 30, 2017. Our audits of the
basic consolidated financial statements included the financial statement
schedule listed in the index appearing under Schedule II, as listed in
the index at Item 15(a)(2). These financial statements and financial
statement schedule are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements
and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Insteel Industries, Inc. and subsidiaries as of September 30, 2017 and
October 1, 2016, and the results of their operations and their cash
flows for each of the three years in the period ended September 30,
2017 in conformity with accounting principles generally accepted
in the United States of America. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial 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 financial reporting as of September 30, 2017,
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 27, 2017
expressed an unqualified opinion.
/s/ Grant Thornton LLP
Charlotte, North Carolina
October 27, 2017
44
INSTEEL INDUSTRIES, INC. - Form 10-K Part II
Part II
Item 9A Controls and Procedures
Schedule II - Valuation and Qualifying Accounts
Years ended September 30, 2017, October 1, 2016
and October 3, 2015
ALLOWANCe FOR DOUBtFUL ACCOUNtS
(In thousands)
Balance, beginning of year
Amounts charged to earnings
Write-offs, net of recoveries
BaLaNCE, END OF YEar
September 30, 2017
Year Ended
October 1, 2016
October 3, 2015
$
$
291 $
(57)
(33)
201 $
638 $
(244)
(103)
291 $
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 effectiveness of our disclosure
controls and procedures as of September 30, 2017. This evaluation
was conducted under the supervision and with the participation of
management, including our principal executive officer and our principal
financial officer. Based upon that evaluation, our principal executive
officer and our principal financial officer concluded that our disclosure
controls and procedures were effective to ensure that information
required to be disclosed in the reports that we file or submit under the
Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the
Commission’s rules and forms. Furthermore, we concluded that our
disclosure controls and procedures were effective to ensure that such
information is accumulated and communicated to management, including
our principal executive officer and our principal financial officer, 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 financial reporting. Internal control
over financial reporting is a process to provide reasonable assurance
regarding the reliability of our financial reporting and the preparation
of our financial statements for external purposes in accordance with
generally accepted accounting principles (“GAAP”). Internal control over
financial reporting includes: (1) maintaining records that in reasonable
detail accurately and fairly reflect the transactions and dispositions
of assets; (2) providing reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with GAAP, and that receipts and expenditures are made
only 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 effect on financial
statements would be prevented or detected on a timely basis. Because of
its inherent limitations, internal control over financial reporting can only
provide reasonable assurance that a misstatement of financial statements
would be prevented or detected. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over
financial reporting based on the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in the 2013
Internal Control – Integrated Framework. Based on this assessment,
our management concluded that our internal control over financial
reporting was effective as of September 30, 2017. During the quarter
ended September 30, 2017, there were no changes in our internal control
over financial reporting that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
Our independent registered public accounting firm has issued an
audit report on the effectiveness of our internal control over financial
reporting as of September 30, 2017, which appears below.
45
INSTEEL INDUSTRIES, INC. - Form 10-K
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 financial reporting of Insteel
Industries, Inc. (a North Carolina corporation) and subsidiaries (the
“Company”) as of September 30, 2017, based on criteria established
in the 2013 Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included
in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, testing and evaluating the design
and operating effectiveness of internal control based on the assessed
risk, and performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting 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 effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of September 30,
2017, 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
financial statements of the Company as of and for the year ended
September 30, 2017, and our report dated October 27, 2017 expressed
an unqualified opinion on those financial statements.
/s/ Grant Thornton LLP
Charlotte, North Carolina
October 27, 2017
46
INSTEEL INDUSTRIES, INC. - Form 10-K Part III
Item 11 executive Compensation
Item 9B Other Information
None.
Part III
Item 10 Directors, executive Officers and Corporate
Governance
The information called for by this item and not presented herein appears under the captions “Item Number One: Election of Directors”, “Security
Ownership of Directors and Executive Officers – Section 16(a) Beneficial Reporting Compliance” and “Corporate Governance Guidelines and
Board Matters” in our Proxy Statement for the 2018 Annual Meeting of Shareholders and is incorporated herein by reference. Information on
executive officers appears under the caption “Executive Officers of the Company” in Part I of this report.
We have adopted a Code of Business Conduct that applies to all directors, officers and employees which is available on our web site at
https://insteelgcs.gcs-web.com/corporate-governance/governance-documents. 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). Our web site does not constitute part of this Annual Report on Form 10-K.
Item 11 executive Compensation
The information called for by this item appears under the captions “Executive Compensation”, “Compensation Committee Interlocks and
Insider Participation” and “Director Compensation” in our Proxy Statement for the 2018 Annual Meeting of Shareholders and is incorporated
herein by reference.
47
INSTEEL INDUSTRIES, INC. - Form 10-K Part III
Item 14 Principal Accounting Fees and Services
Item 12 Security Ownership of Certain Beneficial Owners
and management and Related Stockholder matters
The information called for by this item appears under the captions “Security Ownership of Certain Beneficial Owners”, “Security Ownership
of Directors and Executive Officers” and “Equity Compensation Plan Information” in our Proxy Statement for the 2018 Annual Meeting of
Shareholders and is incorporated herein by reference.
Item 13 Certain Relationships and Related transactions,
and Director Independence
The information called for by this item appears under the captions “Certain Relationships and Related Person Transactions” and “Corporate
Governance Guidelines and Board Matters” in our Proxy Statement for the 2018 Annual Meeting of Shareholders and is incorporated herein
by reference.
Item 14 Principal Accounting Fees and Services
The information called for by this item appears under the caption “Item Number Three: Ratification of the Appointment of Grant Thornton
LLP” in our Proxy Statement for the 2018 Annual Meeting of Shareholders and is incorporated herein by reference.
48
INSTEEL INDUSTRIES, INC. - Form 10-K Part IV
Item 15 exhibits, Financial Statement Schedules
(a)(1) Financial Statements
The financial statements as set forth under Item 8 are filed as part of this report.
(a)(2) Financial Statement Schedules
Supplemental Schedule II - Valuation and Qualifying Accounts appears on page 45 of this report.
All other schedules have been omitted because they are either not required or not applicable.
(a)(3) exhibits
The list of exhibits filed as part of this annual report is set forth on the Exhibit Index immediately preceding the signatures to
this annual report and is incorporated herein by reference.
(b) exhibits
See Exhibit Index on pages 50 and 51.
(c) Financial Statement Schedules
See Item 15(a)(2) above.
Item 16 Form 10-K Summary
None.
49
INSTEEL INDUSTRIES, INC. - Form 10-K Part IV
Item 15 exhibit Index
exhibit Index
Exhibit
Number Description
2.1
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 filed 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 filed 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 filed 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 filed on April 26, 2010).
Bylaws of the Company (as last amended December 19, 2016) (incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report
on Form 10-Q filed on January 19, 2017).
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 filed 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 filed 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 filed 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 filed 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 filed 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 filed 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 filed 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 filed 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 filed 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 filed 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 filed 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 filed 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 filed 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 filed 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 fiscal year ended October 1, 2011 filed 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 fiscal year ended September 27, 2008 filed 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 filed on January 23, 2009).
Insteel Industries, Inc. Return on Capital Incentive Compensation Plan (as amended and restated effective August 12, 2008) (incorporated by
reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on February 13, 2009).
3.1
3.2
3.3
3.4
3.5
4.1
4.2
10.1
10.2
10.3
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
50
INSTEEL INDUSTRIES, INC. - Form 10-K Part IV
Item 15 exhibit Index
Exhibit
Number Description
10.17*
10.18*
21.1
23.1
31.1
31.2
32.1
32.2
101
*
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 filed on October 29, 2013).
2015 Equity Incentive Plan of Insteel Industries, Inc. (incorporated by reference to Exhibit 99 filed with the Company’s Registration
Statement on Form S-8, filed with the SEC on February 17, 2015 (File No. 333-202128)).
List of Subsidiaries of Insteel Industries, Inc. at September 30, 2017.
Consent of Independent Registered Public Accounting Firm.
Certification of the Chief Executive Officer 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.
Certification of the Chief Financial Officer 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.
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
The following financial information from our Annual Report on Form 10-K for the fiscal year ended September 30, 2017, filed on
October 27, 2017, formatted in XBRL (eXtensible Business Reporting Language) includes: (i) the Consolidated Statements of Operations
for the years ended September 30, 2017, October 1, 2016 and October 3, 2015, (ii) the Consolidated Statements of Comprehensive Income
for the years ended September 30, 2017, October 1, 2016 and October 3, 2015, (iii) the Consolidated Balance Sheets as of September 30,
2017 and October 1, 2016, (iv) the Consolidated Statements of Cash Flows for the years ended September 30, 2017, October 1, 2016 and
October 3, 2015, (v) the Consolidated Statements of Shareholders’ Equity as of September 30, 2017, October 1, 2016 and October 3, 2015
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.
51
INSTEEL INDUSTRIES, INC. - Form 10-K
Part IV
Item 16 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 Officer and Treasurer
Date: October 27, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on October 27, 2017 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/ CHARLES B. NEWSOME
Charles B. Newsome
/s/ W. ALLEN ROGERS II
W. allen rogers II
/s/ JON M. RUTH
Jon M. ruth
/s/ JOSEPH A. RUTKOWSKI
Joseph a. rutkowski
/s/ G. KENNEDY THOMPSON
G. Kennedy Thompson
Position(s)
President, Chief Executive Officer and Chairman of the Board (Principal Executive Officer)
Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)
Chief Accounting Officer and Corporate Controller (Principal Accounting Officer)
Director
Director
Director
Director
Director
52
INSTEEL INDUSTRIES, INC. - Form 10-K
Investor Relations
For information on Insteel, additional
copies of this report or other financial
information, contact Michael C. Gazmarian,
Vice President, Chief Financial Officer and
Treasurer, at our headquarters. You may also
visit the Investors section of our web site at
http://insteelgcs.gcs-web.com.
FORWARD-LOOKING STATEMENTS
Any statements in this 2017 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 statements,
please read the “Cautionary Note Regarding
Forward-Looking Statements” on page 4 of
Insteel’s Annual Report on Form 10-K for the
year ended September 30, 2017, which is
included as part of this 2017 Annual Report.
CORPORATE INFORMATION
BOARD OF DIRECTORS
EXECUTIVE OFFICERS
Charles B. Newsome(1,2,4)
Executive Vice President
Johnson Concrete Company
W. Allen Rogers II(1,3,4)
Lead Independent Director
Principal
Ewing Capital Partners, LLC
Partner
Peter Browning Partners, LLC
Jon M. Ruth(1,2,3)
Retired Vice President
Cargill
Joseph A. Rutkowski(2,3)
Principal
Winyah Advisors LLC
G. Kennedy Thompson(1,2)
Partner
Aquiline Capital Partners 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 Tuesday, February 13, 2018 at 9:00
a.m. ET at the Cross Creek Country
Club, 1129 Greenhill Road, Mount Airy,
North Carolina 27030.
Common Stock
Insteel’s common stock trades on the
NASDAQ Global Select Market under the
symbol IIIN. As of October 25, 2017, there
were 582 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
1373 Boggs Drive
Mount Airy, North Carolina 27030
www.insteel.com
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