2018 ANNUAL REPORT
Insteel Industries is the nation’s
largest manufacturer of steel wire
reinforcing products for concrete
construction applications.
We manufacture and market prestressed concrete strand (“PC strand”) and welded wire
reinforcement, including engineered structural mesh, concrete pipe reinforcement and
standard welded wire reinforcement. Our products are sold primarily to manufacturers of
concrete products that are used in nonresidential construction. Headquartered in Mount
Airy, North Carolina, we operate ten manufacturing facilities located in the United States.
14@6" = 7'-0"9"1"7'-10"1"29@6" = 14'-6"1"14'-8"WWR1 DETAIL6x6 D8.0xD8.0 84"(+1",+9") x 14'-8"(1",1")2/PANEL REQ'D = 3,68015'-0"WWR1= 7'-10"15'-0"3" CLR.14'-6"3" CLR.15'X15' PANEL WWR DETAILWWR1 = 7'-10"1'-0" LAP6"6"6"9" oh1'-0" LAPLAP DETAIL9" ohDRAWING TITLE:PREPARED FOR:PROJECT:Drawn By:Date:Dwg #: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 theproject 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 GoverningAuthority 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 ofRecord 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 DriveMount Airy, North Carolina 27030Tel. 800-334-950415'x15' Panel WWR DetailCMC Galaxy AviationVC09 May 2018VC-WWR2 FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share amounts)
2018
2017
2016
Operating Results:
Net sales
Gross profit
% of net sales
Net earnings
% of net sales
Per Share Data:
Net earnings:
Basic
Diluted
Cash dividends declared
Returns:
Return on total capital(1)
Return on shareholders' equity(2)
Financial Position:
Cash and cash equivalents
Total assets
Total debt
Shareholders' equity
Cash Flows:
Net cash provided by operating activities
Acquisition of business
Capital expenditures
Depreciation and amortization
Cash dividends paid
(1) Net earnings/(average total debt + average shareholders’ equity).
(2) Net earnings/average shareholders’ equity.
$453,217
70,807
15.6%
$36,266
8.0%
$388,871
59,781
15.4%
$22,548
5.8%
$418,547
85,188
20.4%
$37,245
8.9%
$1.90
1.88
1.12
$1.19
1.17
1.37
15.6%
15.6%
10.1%
10.1%
$43,941
329,534
-
241,665
$53,969
3,300
18,449
12,818
21,333
$32,105
283,073
-
223,376
$20,840
-
20,575
11,649
26,011
$1.99
1.95
1.12
17.5%
17.5%
$58,873
292,892
-
224,566
$56,253
-
12,977
11,544
20,859
Net Sales
(In millions)
$418.5
$388.9
Gross Margin
$453.2
20.4%
15.4%
15.6%
2016
2017
2018
2016
2017
2018
Net Earnings
Per Share (Diluted)
$1.95
$1.88
$1.17
Return on Total Capital
17.5%
15.6%
10.1%
2016
2017
2018
2016
2017
2018
1
2018 ANNUAL REPORT | INSTEEL INDUSTRIES|
BUSINESS OVERVIEW
60% 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
40% 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
2018 ANNUAL REPORT | INSTEEL INDUSTRIES| LETTER TO SHAREHOLDERS
We continued to pursue an aggressive capital
expenditure program during 2018 focused on
strengthening our cost leadership position,
enhancing our manufacturing capabilities and
expanding our ESM business.
2018 marked another year of considerable progress for Insteel in an increasingly challenging business environment. We acquired
certain of the assets of Ortiz Engineered Products, Inc. (“OEP”) to augment our engineering and sales infrastructure and accelerate
the growth of our engineered structural mesh (“ESM”) business. We continued to make strategic investments in our facilities to
strengthen our low cost producer status and broaden our ESM manufacturing capabilities. We navigated through a period of
escalating raw material costs in the wake of the imposition of the Section 232 tariffs on imported steel. And we maintained our
strong balance sheet, providing us with the financial flexibility to pursue additional growth opportunities that may arise.
FINANCIAL RESULTS
Net sales for 2018 rose 16.5% from the prior year to $453.2 million
driven by an 11.5% increase in average selling prices and a 4.6%
increase in shipments. Gross margin widened 20 basis points
to 15.6% due to higher spreads between selling prices and raw
material costs, and, to a lesser extent, the increase in shipments
and lower unit manufacturing costs on higher production
volume. The spread improvement was driven by a series of price
increases that were implemented over the course of the year in
response to the spike in raw material costs resulting from the
Section 232 tariff program. Net earnings rose to $36.3 million, or
$1.88 per diluted share, from $22.5 million, or $1.17 per diluted
share, in 2017. Our results for 2018 benefited from a $3.3 million,
or $0.17 per share gain, on the remeasurement of deferred tax
assets and liabilities and a lower effective tax rate related to
the reduction in the corporate tax rate under the Tax Cuts and
Jobs Act. Excluding the deferred tax gain, our effective tax rate
dropped to 22.7% from 34.0% in the prior year reflecting the
impact of the new tax law.
Cash flow from operations totaled $54.0 million for the year,
which was used to fund $21.3 million of dividend payments (a
special cash dividend of $1.00 per share and regular quarterly
cash dividends totaling $0.12 per share), $18.4 million of capital
expenditures and the $3.3 million acquisition of OEP. This marks
the third consecutive year in which we paid a special dividend
of at least $1.00 per share. We ended the year debt-free with
$43.9 million of cash on hand and no borrowings outstanding
on our $100 million revolving credit facility.
3
2018 ANNUAL REPORT | INSTEEL INDUSTRIES| OEP ACQUISITION
In November 2017, we acquired certain of the assets of OEP.
OEP provides value-engineered reinforcing solutions for the
concrete construction industry, converting projects that were
designed with conventional rebar to welded wire reinforcement
(“WWR”). The addition of OEP’s engineering staff and project
management capabilities should accelerate our efforts to
penetrate the rebar market through the substitution of ESM
for cast-in-place (“CIP”) applications. Following the completion
of the transaction, we successfully integrated our respective
sales and engineering groups and intensified our focus on
expanding our participation in the CIP market and leveraging
our ESM manufacturing capabilities.
For many applications, ESM can serve as a lower cost and
higher strength concrete reinforcing solution than rebar and
allow contractors to compress their project timelines. The
substitution of ESM eliminates the labor intensive placing
and hand-tying required for the installation of rebar, making
the product even more attractive on a relative basis in today’s
tight labor market. In addition, fewer tons of steel are generally
required when using ESM over rebar due to its higher yield
strength.
CAPITAL EXPENDITURE PROGRAM
We continued to pursue an aggressive capital expenditure
program during 2018 focused on strengthening our cost
leadership position, enhancing our manufacturing capabilities
and expanding our ESM business. Capital outlays for the year
were largely related to further investments in ESM production
lines and ancillary equipment, the purchase of the leased
Houston facility and production technology upgrades across
a number of locations. The ESM investments we are making
replace older equipment with the latest technology, allowing
for the integration and automation of previously separate
processes, increasing our productivity, broadening the range of
design configurations that we can manufacture and providing
additional capacity for future growth. Capital expenditures for
2019 are expected to total up to $22 million primarily for further
cost and productivity improvement initiatives that enhance our
market and cost leadership positions in addition to recurring
maintenance.
LOOKING AHEAD
As we move into 2019, the outlook for our construction end-
markets remains positive. The leading indicators and industry
forecasts for nonresidential building construction are signaling
modest growth in the coming year supported by continued
economic expansion. The infrastructure-related portion of
our business should benefit from increased federal funding
through the FAST Act and supplemental measures together
with higher state and local spending supported by various
initiatives, including fuel tax increases, bond financings and
the redirection of other tax revenues. We are hopeful that the
Administration and Congress will be able to reach common
ground on a meaningful, long-term funding package that
provides for increased infrastructure investment and addresses
the looming deficit in the federal highway trust fund.
Despite the favorable macro outlook, we are concerned about
the market distortions resulting from the Section 232 tariff
program which has driven domestic prices for our primary
raw material, hot-rolled steel wire rod, well above world market
levels. Considering that the tariffs were not applied to most
downstream products, including WWR and PC strand, the
program places us at a competitive disadvantage to foreign
producers who continue to have access to steel from other
markets that are not subject to the 25% tariff. During the
second half of 2018, we began to see a surge in low-priced
imports of PC strand and standard WWR which has eroded
the market share of domestic producers and compressed
margins. These unfavorable trends are likely to persist until
either the 232 program is terminated or the tariffs are extended
to downstream products derived from wire rod that are
susceptible to import competition. We are actively engaged
with the Administration and Congress to arrive at a solution
that addresses the unsustainable competitive environment
that has developed as a result of the tariff program and levels
the playing field for domestic producers of downstream
products.
We will continue to focus on our strategic priorities in
optimizing our costs, improving the productivity of all of our
manufacturing, selling and administrative activities, investing
in our people and facilities, and fully capitalizing on the
scale of our operations and the competitive advantages that
are available to us. We will also pursue further synergistic
acquisitions in our core businesses that create value for our
shareholders.
We look forward to building on the progress that was made
over the past year and to the opportunities that lie ahead.
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
2018 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 29, 2018
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
zz if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES
NO
zz if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
zz 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.
zz whether the registrant has submitted electronically every Interactive Data File required to be submitted
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 such files).
zz 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.
zz whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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
Smaller reporting company
zz 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.
zz whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Emerging growth company
As of March 31, 2018 (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 $437,197,613 based upon the closing sale price as reported on the
Nasdaq Global Select Market. As of October 25, 2018, there were 19,222,479 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 2019 Annual Meeting of
Shareholders are incorporated by reference as set forth in Part III hereof.
Table of Contents
Cautionary Note Regarding Forward-Looking Statements
PART I
Item 1 Business
Item 1A Risk Factors
Item 1B Unresolved Staff Comments
Item 2 Properties
Item 3 Legal Proceedings
Item 4 Mine Safety Disclosures
Executive Officers of the Company
PART II
Item 5
Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities
Item 6 Selected Financial Data
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Item 8 Financial Statements and Supplementary Data
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A Controls and Procedures
Item 9B Other Information
PART III
Item 10 Directors, Executive Officers and Corporate Governance
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13 Certain Relationships and Related Transactions, and Director Independence
Item 14 Principal Accounting Fees and Services
PART IV
Item 15 Exhibits, Financial Statement Schedules
Item 16 Form 10-K Summary
Exhibit Index
Signatures
4
5
5
8
10
10
10
10
11
12
12
14
14
22
23
46
46
48
48
48
48
48
48
49
49
49
49
50
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 safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, particularly in the “Business,” “Risk
Factors” and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” sections of this report.
When used in this report, the words “believes,” “anticipates,”
“expects,” “estimates,” “appears,” “plans,” “intends,” “may,”
“should,” “could” and similar expressions are intended to identify
forward-looking statements. Although we believe that our plans,
intentions and expectations 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 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:
zz general economic and competitive conditions in the markets
in which we operate;
zz changes in the spending levels for nonresidential and residential
construction and the impact on demand for our products;
zz 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;
zz the cyclical nature of the steel and building material industries;
zz credit market conditions and the relative availability of financing
for us, our customers and the construction industry as a whole;
zz fluctuations in the cost and availability of our primary raw
material, hot-rolled carbon steel wire rod, from domestic and
foreign suppliers;
zz competitive pricing pressures and our ability to raise selling
prices in order to recover increases in raw material or operating
costs;
zz changes in U.S. or foreign trade policy affecting imports or
exports of steel wire rod or our products;
zz unanticipated changes in customer demand, order patterns
and inventory levels;
zz the impact of fluctuations in demand and capacity utilization
levels on our unit manufacturing costs;
zz our ability to further develop the market for engineered structural
mesh (“ESM”) and expand our shipments of ESM;
zz legal, environmental, economic or regulatory developments that
significantly impact our operating costs;
zz unanticipated plant outages, equipment failures or labor
difficulties; and
zz the risks and uncertainties discussed herein under the caption
“Risk Factors.”
4
INSTEEL INDUSTRIES INC. ❘ Form 10-Kwww.insteel.com 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 2018, 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
Products
subsidiary. We were incorporated in 1958 in the State of North
Carolina.
Our business strategy is focused on: (1) achieving leadership
positions in our markets; (2) operating as the lowest cost producer
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. 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.
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 2018, 2017 and 2016,
PC strand sales represented 40%, 38% and 39%, respectively,
of our net sales.
WWR is produced as either a standard or a specially engineered
reinforcing product for use in nonresidential and residential
construction. We produce a full range of WWR products, including
ESM, CPR and SWWR. ESM is an engineered made-to-order
product that is used as the primary reinforcement for concrete
elements or structures, frequently serving as a 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 2018, 2017 and 2016, WWR sales represented
60%, 62% and 61%, respectively, of our net sales.
Marketing and Distribution
We market our products through sales representatives who are
our employees. Our outside sales representatives are trained
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.
5
INSTEEL INDUSTRIES INC. ❘ Form 10-K PART I
Item 1 Business
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 2018,
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 2018,
2017 and 2016. The loss of a single customer or a few customers
would not 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 2018 will be shipped during the first quarter of fiscal 2019.
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
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 and 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 the U.S. government or domestic wire rod producers can
significantly impact the pricing and availability of imported wire
rod, which during fiscal years 2018 and 2017 represented
approximately 14% and 27%, respectively, of our total wire rod
Competition
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
overall economic conditions, although there can be significant
differences between the relative strength of nonresidential and
residential construction for extended periods.
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.
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
6
INSTEEL INDUSTRIES INC. ❘ Form 10-Kwww.insteel.com PART I
Item 1 Business
geographic areas. Other competitors are smaller independent
companies that offer limited competition in certain markets. Our
primary competitors for WWR products are Engineered Wire
Products, Inc. (a subsidiary of Keystone), Wire Mesh Corporation,
Concrete Reinforcements, Inc., National Wire Products, Davis
Wire Corporation and Oklahoma Steel & Wire Co., Inc. 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, and, to a lesser extent, the SWWR market that
are not subject to “Buy America” requirements.
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.
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 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
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.
Employees
As of September 29, 2018, we had 810 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
Available Information
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 2019.
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.
7
INSTEEL INDUSTRIES INC. ❘ Form 10-K PART I
Item 1A Risk Factors
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 overall 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 accounts
receivable. 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.
8
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 rebalancing 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 2018. 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 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.
Our financial results can also be significantly impacted if raw
material supplies are inadequate to satisfy our purchasing
requirements. In addition, trade actions by the U.S. government,
such as the imposition of the steel tariffs imposed under Section
232 of the Trade Expansion Act, as amended, or domestic wire
rod producers against other countries can significantly impact the
availability and cost of imported wire rod. The imposition of tariffs,
quotas or anti-dumping or countervailing duty margins by the
U.S. government against exporting countries can have the effect
of reducing or eliminating their competitiveness and participation
in the domestic market, which is of increasing importance 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.
INSTEEL INDUSTRIES INC. ❘ Form 10-Kwww.insteel.com PART I
Item 1A Risk Factors
Foreign competition could adversely impact our
financial results.
Our PC strand business, and, to a lesser extent, our SWWR
business are subject to offshore import competition on an
ongoing basis. 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
and SWWR 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, and during fiscal 2018, a transformer outage and
electrical fire at our Dayton, Texas plant resulted in a temporary
interruption of operations. 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.
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. The Administration and Congress
are pursuing legislative and regulatory changes that modify,
repeal, replace with new legislation or otherwise invalidate all or
certain portions of the ACA. The Tax Cuts and Jobs Act of 2017
effectively eliminated certain provisions of the ACA, including the
individual mandate beginning in 2019. It is uncertain whether the
other reform proposals being considered by the Administration
and Congress will be enacted and potentially alter the full-time
employee healthcare coverage requirement and reporting
obligations imposed on large employers like us. We cannot predict
the ultimate content, timing, or effect of any healthcare reform
legislation or the impact of potential legislation or related proposals
and policies 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 freight, natural gas, electricity,
fuel and consumables would adversely affect our manufacturing
and distribution costs. For most of our business, we incur the
transportation costs 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.
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
9
INSTEEL INDUSTRIES INC. ❘ Form 10-K PART I
Item 1B Unresolved Staff Comments
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
growth, operations, 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 2018, our common stock traded as high
as $43.78 and as low as $24.51. 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 29,
2018, 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 following the exercise of the purchase
option on the previously leased Houston facility in October 2017.
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.
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.
10
INSTEEL INDUSTRIES INC. ❘ Form 10-Kwww.insteel.com Executive Officers of the Company
PART I
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
62
59
68
59
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, 62, 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, 59, 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, 68, 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, 59, 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 13, 2018 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 12, 2019.
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
Our common stock is listed on the Nasdaq Global Select Market under the symbol “IIIN” and has been trading on Nasdaq since
September 28, 2004. As of October 23, 2018, there were 550 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 2018 and 2017:
Fiscal 2018
Fiscal 2017
First Quarter
$
Second Quarter
Third Quarter
Fourth Quarter
$
High
29.65
34.32
35.60
43.78
Low Cash Dividends
$
24.51
27.00
26.05
32.75
$
1.03
0.03
0.03
0.03
$
High
42.81
39.20
36.94
34.00
Low Cash Dividends
$
22.50
32.22
28.94
23.20
1.28
0.03
0.03
0.03
In addition to our regular quarterly cash dividend of $0.03 per
share, we declared special cash dividends of $1.00 per share
in the first quarter of fiscal 2018 and $1.25 per share in the first
quarter of fiscal 2017. 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 after taking into
account various factors, including general business conditions
and our financial condition, operating results, cash requirements
and expansion plans. See Note 7 to 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-Kwww.insteel.com Item 5 Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
PART II
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 29, 2018. The graph and
table assume that $100 was invested on September 28, 2013
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 $
300
250
200
150
100
50
0
9/28/13
9/27/14
10/3/15
10/1/16
9/30/17
9/29/18
Insteel Industries, Inc.
Russell 2000
S&P Building Products
Insteel Industries, Inc.
$
Russell 2000
S&P Building Products
9/28/13
100.00
100.00
100.00
$
9/27/14
131.84
103.93
114.90
$
10/3/15
101.83
105.23
139.13
$
10/1/16
241.02
121.50
180.47
$
9/30/17
180.10
146.70
189.61
$
9/29/18
257.32
169.06
172.16
Fiscal Year Ended
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)
(52 weeks)
September 29, 2018
(52 weeks)
September 30, 2017
(52 weeks)
October 1, 2016
(53 weeks)
October 3, 2015
(52 weeks)
September 27, 2014
Year Ended
Net sales
Net earnings
Net earnings per
share (basic)
Net earnings per
share (diluted)
Cash dividends
declared
Total assets
Total debt
$
453,217
$
388,871
$
418,547
$
447,504
$
36,266
1.90
1.88
1.12
22,548
1.19
1.17
1.37
37,245
1.99
1.95
1.12
21,710
1.18
1.15
0.12
408,978
16,641
0.91
0.89
0.12
329,534
283,073
292,892
260,239
256,795
—
—
—
—
—
Shareholders’ equity
241,665
223,376
224,566
200,215
178,883
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.
14
INSTEEL INDUSTRIES INC. ❘ Form 10-Kwww.insteel.com Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II
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 for accounts
receivable 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 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 and 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 2018.
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
15
INSTEEL INDUSTRIES INC. ❘ Form 10-K PART II
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 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.
Recent Accounting Pronouncements
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
4.00% for fiscal 2018 and 3.75% for fiscal years 2017 and 2016.
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 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 2019 to
be $821,000 for the SERPs. Cash contributions to the SERPs
during fiscal 2019 are expected to be $325,000.
A 0.25% decrease in the assumed discount rate for our SERPs
would have increased our projected and accumulated benefit
obligations as of September 29, 2018 by approximately $281,000
and $228,000, respectively, and our expected net periodic
pension cost for fiscal 2019 by approximately $33,000.
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.
16
INSTEEL INDUSTRIES INC. ❘ Form 10-Kwww.insteel.com Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II
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, net
Interest expense
Interest income
Effective income tax rate
Net earnings
September 29, 2018
Change
September 30, 2017 Change
October 1, 2016
Year Ended
$
$
$
453,217
16.5 % $
388,871
(7.1%)
$
418,547
70,807
18.4%
59,781
(29.8%)
15.6 %
15.4%
85,188
20.4%
28,304
11.0% $
25,508
(2.2%)
$
26,069
—
$
— (100.0%)
$
2,539
6.6%
6.2%
6.2 %
—
—
274
114
(100.0%)
417.0%
(16.2%)
(515)
107.7%
14.9 %
164
42.6%
53
(71.0%)
(13.9%)
49.4%
136
(248)
34.0%
115
183
158
(166)
33.8%
$
36,266
60.8% $
22,548
(39.5%)
$
37,245
2018 Compared with 2017
Net Sales
Net sales increased 16.5% to $453.2 million in 2018 from
$388.9 million in 2017, reflecting a 4.6% increase in shipments
and an 11.5% increase in average selling prices. The increase
in shipments was primarily due to improved market conditions
and strengthening demand for our products relative to the prior
year. The increase in average selling prices was driven by price
increases that were implemented in the current year to recover
the escalation in raw material costs.
Gross Profit
Gross profit increased 18.4% to $70.8 million, or 15.6% of net
sales, in 2018 from $59.8 million, or 15.4% of net sales, in 2017
primarily due to higher spreads between average selling prices and
raw material costs ($6.2 million), higher shipments ($2.8 million)
and lower manufacturing costs ($1.1 million). The increase in
spreads was driven by higher average selling prices ($46.2 million)
partially offset by higher raw material costs ($38.7 million) and
freight expense ($1.3 million).
Selling, General and Administrative Expense
Selling, general and administrative expense (“SG&A expense”)
increased 11.0% to $28.3 million, or 6.2% of net sales, in 2018 from
$25.5 million, or 6.6% of net sales, in 2017 primarily due to higher
compensation ($1.7 million) and employee benefit costs ($566,000)
partially offset by a smaller increase in the cash surrender value of
life insurance policies ($259,000). The increase in compensation
expense was largely driven by additional staffing to support the
growth of our ESM product line and higher incentive plan expense
due to our improved financial results. The increase in employee
benefit costs was primarily related to higher employee health
insurance costs. The cash surrender value of life insurance policies
increased $553,000 in 2018 compared with $812,000 in the prior
year due to the changes in the value of the underlying investments.
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.
Other Expense, Net
Other expense for 2018 was $274,000 compared with $53,000
in 2017 primarily due to losses on the disposition of property,
plant and equipment.
Income Taxes
Our effective income tax rate for 2018 decreased to 14.9% from
34.0% in 2017. The effective rate for 2018 reflects a $3.3 million
gain on the remeasurement of deferred tax assets and liabilities
related to the lower corporate tax rate enacted under the Tax Cuts
and Jobs Act in December 2017. Excluding the deferred tax gain,
our effective rate decreased to 22.7% from 34.0% in the prior year
reflecting the reduction in the federal statutory rate to 21% from
35% for three quarters of fiscal 2018.
Net Earnings
Net earnings increased to $36.3 million ($1.88 per diluted share) in
2018 from $22.5 million ($1.17 per diluted share) in 2017 primarily
due to the increase in gross profit together with the deferred
tax gain and reduction in our effective tax rate related to the
enactment of the Tax Cuts and Jobs Act, partially offset by higher
SG&A expense.
17
INSTEEL INDUSTRIES INC. ❘ Form 10-K PART II
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
2017 Compared with 2016
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.
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
manufacturing 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
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 2016 due to the changes in the value of the
underlying investments. The increase in bad debt expense was
Liquidity and Capital Resources
SELECTED FINANCIAL DATA
due to an adjustment in 2016 that reduced 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.
(Dollars in thousands)
September 29, 2018
September 30, 2017
October 1, 2016
Year Ended
Net cash provided by operating activities
$
53,969
$
20,840
$
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)
18
(21,939)
(20,194)
43,941
123,489
—
—
(20,880)
(26,728)
32,105
117,873
—
—
56,253
(12,972)
(17,666)
58,873
126,704
—
—
$
$
241,665
100%
241,665
$
$
223,376
$
224,566
100%
100%
223,376
$
224,566
INSTEEL INDUSTRIES INC. ❘ Form 10-Kwww.insteel.com Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II
Operating Activities
Operating activities provided $54.0 million of cash in 2018
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 $4.7 million of cash due
to a $28.2 million increase in accounts payable and accrued
expenses partially offset by a $12.3 million increase in inventories
and an $11.2 million increase in accounts receivable. The increase
in accounts payable and accrued expenses was primarily related
to higher raw material purchases near the end of the period and,
to a lesser extent, increases in accrued salaries, wages and
related expenses. The increases in inventories and accounts
receivable were due to the escalation in raw material costs and
average selling prices during 2018.
Operating activities provided $20.8 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
Investing Activities
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 the
lower sales in 2017.
Operating activities provided $56.3 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
2016. The increase in accounts receivable was primarily due to
an increase in days sales outstanding partially offset by lower
average 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.
Investing activities used $21.9 million of cash in 2018 primarily
due to $18.4 million of capital expenditures and $3.3 million for
the acquisition of a business. The capital expenditures were
largely related to additional investments in ESM manufacturing
capabilities, the purchase of the leased Houston facility and
further upgrades of production technology and information
systems. 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. 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 $20.1 million of cash in 2018,
$26.7 million in 2017 and $17.7 million in 2016. In 2018,
$21.3 million of cash was used for dividend payments (including
a special cash dividend of $19.0 million, or $1.00 per share, and
regular cash dividends totaling $2.3 million), which was partially
offset by $2.1 million of proceeds from the exercise of stock
options. 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.
19
INSTEEL INDUSTRIES INC. ❘ Form 10-K PART II
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 29, 2018, no borrowings were
outstanding on the Credit Facility, $98.2 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 September 30, 2017, 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
Impact of Inflation
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 require 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.
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 2018, we were successful in implementing price increases
sufficient to recover the escalation in our raw material costs that
occurred over the course of the year. In 2017, we were unable
to fully recover the increase in our raw material costs due to the
weakening in demand and competitive pricing pressures. During
2016, our raw material costs rose over most of the period, which
we were generally able to recover through price increases. The
timing and magnitude of any future increases in raw material costs
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.
20
INSTEEL INDUSTRIES INC. ❘ Form 10-Kwww.insteel.com Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II
Contractual Obligations
Our contractual obligations and commitments at September 29, 2018 are as follows:
PAYMENTS DUE BY PERIOD
(In thousands)
Contractual obligations:
Total
Less Than
1 Year
1 – 3 Years
3 – 5 Years
More Than
5 Years
Raw material purchase commitments(1)
$
75,116 $
75,116 $
— $
— $
—
Supplemental employee retirement plan obligations
19,904
Operating leases
Trade letters of credit
Commitment fee on unused portion of credit facility
Other unconditional purchase obligations(2)
1,799
1,789
615
9,565
325
1,034
1,789
368
9,565
523
728
—
247
—
1,107
17,949
37
—
—
—
—
—
—
—
TOTAL
$ 108,788 $
88,197 $
1,498 $
1,144 $
17,949
(1) Non-cancelable purchase commitments for raw materials.
(2) Contractual commitments for capital expenditures.
Outlook
Looking ahead to 2019, we expect our financial results will be
favorably impacted by continued growth in our construction
end-markets. The infrastructure-related portion of our business
should benefit from increased federal funding through the FAST
Act and supplementary measures together with higher state and
local spending in many of our markets supported by various
initiatives such as fuel tax increases, bond issuances and other
ballot measures. The leading indicators and industry forecasts
for nonresidential construction remain positive, and the housing
recovery is expected to continue driven by favorable employment
and demographic trends.
Business conditions are likely to remain challenging, however,
in view of the escalation in our raw material costs resulting from
the Administration’s Section 232 imported steel tariff program.
Considering that the tariffs do not apply to imports of downstream
products such as welded wire reinforcement and PC strand, we
expect a surge in low-priced import competition that results in
market share erosion and margin compression for domestic
producers. We are engaged with the Administration and Congress
to arrive at a solution that addresses the unsustainable competitive
environment resulting from the tariff program.
We will continue to maintain our 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 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”.
21
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, quotas and other
Interest Rates
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, 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 2018 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 $26.6 million decrease in our
annual pre-tax earnings (assuming there was not a corresponding
change in our selling prices).
Although we did not have any balances outstanding on our Credit Facility as of September 29, 2018, 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 29, 2018. During 2018, 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.
22
INSTEEL INDUSTRIES INC. ❘ Form 10-Kwww.insteel.com PART II
Item 8
Financial Statements and Supplementary Data
Item 8 Financial Statements and Supplementary Data
PART II
(a) Financial Statements
Consolidated Statements of Operations for the years ended September 29, 2018,
September 30, 2017 and October 1, 2016
Consolidated Statements of Comprehensive Income for the years ended September 29,
2018, September 30, 2017 and October 1, 2016
Consolidated Balance Sheets as of September 29, 2018 and September 30, 2017
Consolidated Statements of Shareholders’ Equity for the years ended September 29, 2018,
September 30, 2017 and October 1, 2016
Consolidated Statements of Cash Flows for the years ended September 29, 2018,
September 30, 2017 and October 1, 2016
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm – Consolidated Financial Statements
Schedule II – Valuation and Qualifying Accounts for the years ended September 29, 2018,
September 30, 2017 and October 1, 2016
(b) Supplementary Data
Selected quarterly financial data for 2018 and 2017 is as follows:
FINANCIAL INFORMATION BY QUARTER (UNAUDITED)
24
25
26
27
28
29
45
46
(In thousands, except per share amounts)
December 30
March 31
June 30
September 29
Quarter Ended
2018
Operating results:
Net sales
Gross profit
Net earnings
Net earnings per share:
Basic
Diluted
2017
Operating results:
Net sales
Gross profit
Net earnings
Net earnings per share:
Basic
Diluted
$
97,741
$
107,417
$
126,688
$
121,371
11,661
8,111
0.43
0.42
15,416
5,879
0.31
0.31
24,186
12,868
0.67
0.67
Quarter Ended
19,544
9,408
0.49
0.49
December 31
April 1
July 1
September 30
$
93,888
$
101,159
$
96,938
$
13,010
4,460
0.24
0.23
18,294
7,420
0.39
0.39
16,676
6,869
0.36
0.36
96,886
11,801
3,799
0.20
0.20
23
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)
September 29, 2018 September 30, 2017
October 1, 2016
Year Ended
Net sales
Cost of sales
Gross profit
Selling, general and administrative expense
Pension plan settlement loss
Restructuring charges, net
Other expense, 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.
$
453,217 $
388,871 $
382,410
70,807
28,304
—
—
274
114
(515)
42,630
6,364
329,090
59,781
25,508
—
164
53
136
(248)
34,168
11,620
$
$
36,266 $
22,548 $
1.90 $
1.88
1.12
1.19 $
1.17
1.37
19,079
19,277
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
24
INSTEEL INDUSTRIES INC. ❘ Form 10-Kwww.insteel.com Item 8 Financial Statements and Supplementary Data
PART II
Insteel Industries, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In thousands)
Net earnings
Pension plan settlement, net of income taxes of ($733)
Adjustment to defined benefit plan liability, net of
income taxes of ($44), ($127) and $363
Other comprehensive income
COMPREHENSIVE INCOME
See accompanying notes to consolidated financial statements.
September 29, 2018 September 30, 2017
October 1, 2016
Year Ended
$
$
36,266 $
22,548 $
—
139
139
—
208
208
36,405 $
22,756 $
37,245
1,197
(592)
605
37,850
25
INSTEEL INDUSTRIES INC. ❘ Form 10-K PART II
Item 8 Financial Statements and Supplementary Data
Insteel Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share amounts)
September 29, 2018
September 30, 2017
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: 2018, 19,223; 2017, 19,041
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
$
43,941
$
51,484
94,157
5,895
195,477
106,148
9,703
8,293
9,913
32,105
40,284
81,853
5,949
160,191
98,670
7,913
6,965
9,334
$
$
329,534 $
283,073
60,059
$
11,929
71,988
15,881
33,651
8,667
42,318
17,379
—
—
19,223
19,041
72,852
151,084
(1,494)
241,665
69,817
135,851
(1,333)
223,376
283,073
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
329,534 $
See accompanying notes to consolidated financial statements.
26
INSTEEL INDUSTRIES INC. ❘ Form 10-Kwww.insteel.com Item 8 Financial Statements and Supplementary Data
PART II
Insteel Industries, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
Total
Shareholders’
Equity
200,215
37,245
605
5,065
—
2,439
Additional
Paid-In
Capital
60,967 $
Retained
Earnings
122,928 $
37,245
Accumulated
Other
Comprehensive
Income (Loss)(1)
(In thousands)
Common Stock
Shares
Amount
605
1,717
(1,861)
(1,541)
67,817
18,466
18,976
18,976
26
39
(2,146) $
463
47
463
47
$ 18,466 $
4,602
(47)
2,439
(20,859)
139,314
22,548
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
Net earnings
Other comprehensive income(1)
Stock options exercised
Vesting of restricted stock units
Compensation expense associated with
stock-based plans
Restricted stock units and stock options
surrendered for withholding taxes payable
Adoption of ASU 2018-02 (Note 3)
Cash dividends declared
BALANCE AT SEPTEMBER 29, 2018
(1) Activity within accumulated other comprehensive income (loss) is reported net of related income taxes: 2016 ($370), 2017 ($127) and 2018 ($44).
See accompanying notes to consolidated financial statements.
(26,011)
135,851
36,266
72,852 $ 151,084 $
1,938
(39)
2,078
19,223 $19,223 $
81
(39)
2,245
300
(21,333)
143
39
143
39
(1,494) $
19,041
19,041
69,817
(1,333)
26
39
(300)
(942)
139
208
(824)
537
1,717
(1,861)
(20,859)
224,566
22,548
208
107
—
2,245
537
(824)
(26,011)
223,376
36,266
139
2,081
—
2,078
(942)
—
(21,333)
241,665
27
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
(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
Loss 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 business
Proceeds from sale of assets held for sale
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
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:
Income taxes, net
Non-cash investing and financing activities:
Purchases of property, plant and equipment
in accounts payable
Restricted stock units and stock options surrendered
for withholding taxes payable
See accompanying notes to consolidated financial statements.
28
September 29, 2018
September 30, 2017
October 1, 2016
Year Ended
$
36,266 $
22,548 $
37,245
12,818
65
2,078
(2,807)
—
—
381
(553)
(11,200)
(12,304)
28,234
991
17,703
53,969
(18,449)
165
(355)
(3,300)
—
—
(21,939)
372
(372)
(21,333)
2,081
(942)
11,649
65
2,245
2,503
—
—
64
11,544
65
2,439
536
620
20
61
(812)
(480)
7,105
(10,667)
(11,930)
(1,930)
(1,708)
20,840
(20,575)
100
(405)
—
—
—
(20,880)
404
(404)
(26,011)
107
(824)
(607)
(5,177)
9,009
978
19,008
56,253
(12,977)
140
(375)
—
180
60
(12,972)
328
(328)
(20,859)
5,065
(1,861)
(11)
(17,666)
25,615
33,258
58,873
—
(20,194)
11,836
32,105
43,941 $
—
(26,728)
(26,768)
58,873
32,105 $
$
$
7,777 $
9,300 $
19,184
967
942
465
824
1,746
1,861
INSTEEL INDUSTRIES INC. ❘ Form 10-Kwww.insteel.com Item 8 Financial Statements and Supplementary Data
PART II
Insteel Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended September 29, 2018, September 30, 2017 and October 1, 2016
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 2018, 2017 and 2016
were 52-week periods. 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.
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.
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 account for forfeitures as they occur. 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.
Concentration of credit risk
Revenue recognition
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
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.
29
INSTEEL INDUSTRIES INC. ❘ Form 10-K PART II
Item 8 Financial Statements and Supplementary Data
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.
Inventories
Inventories are valued at the lower of weighted average cost
(which approximates computation on a first-in, first-out basis)
and net realizable value. 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 $11.6 million in 2018, $10.5 million in 2017 and
$10.4 million in 2016 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 2018, 2017
and 2016.
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 2018. Subsequent to the analysis, there have been
no events or circumstances that indicate any potential impairment
of goodwill.
Other assets
Other assets consist principally of capitalized financing costs
related to our revolving credit facility 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, non-competition agreements and a
trade name, and 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 2018 and 2017. During
2016, we recorded $20,000 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.
30
INSTEEL INDUSTRIES INC. ❘ Form 10-Kwww.insteel.com Item 8 Financial Statements and Supplementary Data
PART II
Income taxes
Earnings per share
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.
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.
Note 3 Recent Accounting Pronouncements
Current Adoptions
In February 2018, the FASB issued Accounting Standards
Update (“ASU”) No. 2018-02 “Income Statement - Reporting
Comprehensive Income (Topic 220): Reclassification of Certain
Tax Effects from Accumulated Other Comprehensive Income.”
ASU No. 2018-02 provides for the reclassification of stranded
income tax effects resulting from the Tax Cuts and Jobs Act from
accumulated other comprehensive income to retained earnings.
ASU 2018-02 is effective for interim and annual periods beginning
after December 15, 2018, with early adoption permitted. We
elected to early adopt ASU 2018-02 during our fourth fiscal quarter.
The amount of the stranded income tax effect was determined
under the specific identification approach and derived from the
deferred tax balance associated with our supplemental employee
retirement plan. The adoption of the guidance resulted in the
transfer of $0.3 million from accumulated other comprehensive
loss to retained earnings, with no impact to total shareholders’
equity or net earnings.
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. We adopted this update during our first quarter.
ASU No. 2016-09 requires that excess income tax benefits and
deficiencies related to share-based payments be recognized
within income tax expense as a discrete event in the period in
which they occur, rather than within additional paid-in capital on
our consolidated balance sheet on a prospective basis. There was
no material impact from this provision on income tax expense in
the current year. The impact of this provision on our future results
of operations is difficult to predict as it will depend in part on the
market prices for the shares of our common stock on the dates
there are taxable events related to the share-based awards. In
connection with another provision within ASU No. 2016-09, we
have elected to account for forfeitures of share-based awards as
an estimate of the number of awards that are expected to vest,
which is consistent with our accounting policy prior to adoption.
We also adopted the provisions related to changes on the
consolidated statements of cash flows on a retrospective basis.
As a result, we no longer classify excess income tax benefits as a
financing activity, which increased net cash provided by operating
activities and reduced net cash provided by financing activities
by $0.5 million and $1.7 million for 2017 and 2016, respectively.
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. We adopted ASU No. 2015-11
during our first quarter. The adoption of this update did not have
a material effect on our consolidated financial statements.
Future Adoptions
In May 2017, the FASB issued 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 January 2017, the FASB issued ASU No. 2017-04
“Intangibles—Goodwill and Other (Topic 350): Simplifying the
Test for Goodwill Impairment,” which simplifies the accounting
for goodwill impairments by eliminating step 2 from the goodwill
impairment test. ASU No. 2017-04 will become effective for us in
the first quarter of fiscal 2021. Early adoption is permitted. 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.
31
INSTEEL INDUSTRIES INC. ❘ Form 10-K PART II
Item 8 Financial Statements and Supplementary Data
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 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 May 2014, the FASB issued ASU No. 2014-09 “Revenue
from Contracts with Customers,” as subsequently amended,
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. We
have substantially completed our evaluation of the impact this
update will have on our consolidated financial statements and plan
on using the modified retrospective method upon adoption. We
have not identified any material changes in the timing of revenue
recognition that will result from the adoption of this guidance, but
expect it will have a material impact on the disclosures required
in our notes to the consolidated financial statements.
Note 4 Restructuring Charges
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.
Following is a summary of the restructuring activities and associated costs that were incurred during 2017 and 2016:
(In thousands)
2017
Asset
Impairment
Charges
Equipment
Relocation
Costs
Severance and
Other Employee
Separation Costs
Facility
Closure
Costs
Gain on Sale
of Property and
Equipment
Liability as of October 1, 2016
$
— $
31
$
239 $
— $
— $
Restructuring charges
Cash payments
Non-cash charges
—
—
—
164
(195)
—
—
(239)
—
—
—
—
—
—
—
LIABILITY AS OF SEPTEMBER 30, 2017 $
— $
— $
— $
— $
— $
2016
Liability as of October 3, 2015
$
— $
— $
735 $
— $
— $
Restructuring charges (recoveries)
Cash payments
Non-cash charges
20
—
(20)
186
(155)
—
—
(496)
—
89
(89)
—
(180)
—
180
LIABILITY AS OF OCTOBER 1, 2016
$
— $
31 $
239 $
— $
— $
Total
270
164
(434)
—
—
735
115
(740)
160
270
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.
32
INSTEEL INDUSTRIES INC. ❘ Form 10-Kwww.insteel.com As of September 29, 2018 and September 30, 2017, we held financial assets that are required to be measured at fair value on a
recurring basis, which are summarized below:
Item 8 Financial Statements and Supplementary Data
PART II
(In thousands)
Year ended September 29, 2018:
Current assets:
Cash equivalents
Other assets:
Cash surrender value of life insurance policies
TOTAL
Year ended September 30, 2017:
Current assets:
Cash equivalents
Other assets:
Cash surrender value of life insurance policies
TOTAL
Quoted Prices
in Active Markets
(Level 1)
Observable
Inputs
(Level 2)
Total
$
$
$
$
44,257
$
44,257
$
—
9,769
—
54,026
$
44,257 $
9,769
9,769
31,659
$
31,659
$
—
9,026
—
40,685
$
31,659 $
9,026
9,026
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.
As of September 29, 2018 and September 30, 2017, 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.
Note 6
Intangible Assets
The primary components of our intangible assets and the related accumulated amortization are as follows:
(In thousands)
Year ended September 29, 2018:
Customer relationships
Developed technology and know-how
Non-competition agreements
Trade name
Year ended September 30, 2017:
Customer relationships
Developed technology and know-how
Non-competition agreements
Amortization expense for intangibles was $1.3 million in 2018
and $1.2 million in 2017 and 2016. Amortization expense for the
next five years, assuming no change in the estimated useful lives
of identified intangible assets, is $1.1 million in 2019, $924,000
in 2020, $809,000 in 2021, $770,000 in 2022 and $705,000 in
Weighted-
Average Useful
Life (Years)
Gross
Accumulated
Amortization
Net Book
Value
16.9
20.0
5.0
4.0
20.0
20.0
4.8
$
9,070 $
(1,598)
$
1,800
3,687
140
(371)
(2,994)
(31)
7,472
1,429
693
109
$
$
14,697 $
(4,994)
$
9,703
6,500 $
(1,018)
$
1,800
3,577
(283)
(2,663)
5,482
1,517
914
$
11,877 $
(3,964)
$
7,913
2023. We completed the acquisition of a business during 2018,
and the effects of the purchase price allocation for this transaction
on the accompanying consolidated financial statements are not
material.
33
INSTEEL INDUSTRIES INC. ❘ Form 10-K PART II
Item 8 Financial Statements and Supplementary Data
Note 7 Long-Term Debt
Revolving Credit Facility
We have a $100.0 million revolving credit facility (the “Credit
Facility”) maturing May 13, 2020 that is used to supplement
our operating cash flow and fund our working capital, capital
expenditure, general corporate and growth requirements.
Advances under the Credit Facility are limited to the lesser of
the revolving loan commitment amount (currently $100.0 million)
or a borrowing base amount that is calculated based upon
a percentage of eligible receivables and inventories. As of
September 29, 2018, no borrowings were outstanding on the
Credit Facility, $98.2 million of borrowing capacity was available
and outstanding letters of credit totaled $1.8 million. As of
September 30, 2017, 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 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 29, 2018, 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
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 on February 17, 2025, replaces the
2005 Equity Incentive Plan of Insteel Industries, Inc., which expired
on February 15, 2015. As of September 29, 2018, there were
334,000 shares of our common stock available for future grants
under the 2015 Plan, which is our only active equity incentive plan.
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
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 29, 2018, 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.
Amortization of capitalized financing costs associated with the
Credit Facility was $65,000 in 2018, 2017 and 2016. Accumulated
amortization of capitalized financing costs was $4.7 million as
of September 29, 2018 and $4.6 million as of September 30,
2017. We expect the amortization of capitalized financing costs
to approximate the following amounts for the next five fiscal years:
Fiscal year
In thousands
2019
2020
2021
2022
2023
$
65
41
—
—
—
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 was $906,000 in 2018, $1.0 million in 2017
and $988,000 in 2016. As of September 29, 2018, there was
$262,000 of unrecognized compensation cost related to unvested
options which is expected to be recognized over a weighted
average period of 1.66 years.
34
INSTEEL INDUSTRIES INC. ❘ Form 10-Kwww.insteel.com Item 8 Financial Statements and Supplementary Data
PART II
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 2018, 2017 and 2016 were $12.06, $11.08 and $9.92 per share, respectively,
based on the following weighted-average assumptions:
Expected term (in years)
Risk-free interest rate
Expected volatility
Expected dividend yield
September 29, 2018
September 30, 2017
October 1, 2016
Year Ended
4.79
2.71%
37.32%
0.37%
5.14
1.98%
38.32%
0.37%
5.45
1.30%
39.00%
0.48%
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 common stock. The dividend yield was calculated based on our annual dividend as of the option grant date.
The following table summarizes stock option activity:
Exercise Price Per Share
Options
Outstanding
Range
Weighted
Average
Contractual Term -
Weighted Average
$7.55 - $21.96
$ 15.14
(Share amounts in thousands)
Outstanding at October 3, 2015
Granted
Exercised
Outstanding at October 1, 2016
Granted
Exercised
Outstanding at September 30, 2017
Granted
Exercised
Forfeited
923
99
(651)
371
88
(67)
392
77
(196)
23.95 - 34.49
7.55 - 21.96
9.16 - 34.49
26.75 - 37.06
9.16 - 23.95
9.16 - 37.06
29.69 - 41.85
9.16 - 37.06
(9)
23.95 - 37.06
OUTSTANDING AT SEPTEMBER 29, 2018
Vested and anticipated to vest in the future at
September 29, 2018
Exercisable at September 29, 2018
264
262
109
10.23 - 41.85
Aggregate
Intrinsic Value
(in thousands)
$
8,718
1,212
3,866
1,845
1,974
28.47
13.93
20.81
30.93
19.05
23.40
34.84
19.68
29.88
29.25
29.22
7.64 years
7.69 years
24.73
5.98 years
1,228
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 the 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 29, 2018
September 30, 2017 October 1, 2016
Year Ended
$
35
1,175
$
1,172
37
1,180
$
1,238
57
1,516
1,451
As of September 29, 2018, there was $451,000 of unrecognized compensation cost related to unvested RSUs which is expected to
be recognized over a weighted average period of 1.74 years.
35
INSTEEL INDUSTRIES INC. ❘ Form 10-K PART II
Item 8 Financial Statements and Supplementary Data
The following table summarizes RSU activity:
(Unit amounts in thousands)
Balance, October 3, 2015
Granted
Forfeited
Released
Balance, October 1, 2016
Granted
Released
Balance, September 30, 2017
Granted
Forfeited
Released
BALANCE, SEPTEMBER 29, 2018
Note 9
Income Taxes
Restricted
Stock Units
Outstanding
Weighted Average
Grant Date
Fair Value
157
$
57
(2)
(67)
145
37
(54)
128
35
(3)
(57)
103
18.96
26.57
23.95
17.95
22.35
31.95
20.43
25.92
33.52
29.60
22.26
30.40
The components of the provision for income taxes are as follows:
(Dollars in thousands)
September 29, 2018
September 30, 2017
October 1, 2016
Year Ended
Current:
Federal
State
Deferred:
Federal
State
$
8,265
$
8,269
$
906
9,171
(2,862)
55
(2,807)
848
9,117
2,455
48
2,503
17,075
1,434
18,509
396
140
536
INCOME TAXES
EFFECTIVE INCOME TAX RATE
$
6,364
$
11,620 $
19,045
14.9 %
34.0 %
33.8 %
The reconciliation between income taxes computed at the federal statutory rate and the provision for income taxes is as follows:
Year Ended
(Dollars in thousands)
September 29, 2018
September 30, 2017
October 1, 2016
Provision for income taxes at federal statutory rate
$
10,444
24.5% $
11,959
35.0% $
19,701
35.0%
Change in federal tax rate - Tax Cuts and Jobs Act
(3,307)
Qualified production activities deduction
Excess tax benefits of stock-based compensation
Valuation allowance
State income taxes, net of federal tax benefit
Other, net
(832)
(634)
(18)
739
(28)
(7.8)
(2.0)
(1.5)
(0.0)
1.7
(0.0)
—
(768)
—
(29)
598
(140)
—
(2.2)
—
(0.1)
1.8
(0.5)
—
(1,596)
—
(213)
1,093
60
—
(2.8)
—
(0.4)
1.9
0.1
PROVISION FOR INCOME TAXES
$
6,364
14.9% $ 11,620
34.0% $ 19,045
33.8%
36
INSTEEL INDUSTRIES INC. ❘ Form 10-Kwww.insteel.com The components of deferred tax assets and liabilities are as follows:
(In thousands)
Deferred tax assets:
Defined benefit plans
Accrued expenses and asset reserves
Stock-based compensation
State net operating loss carryforwards and tax credits
Valuation allowance
DEFERRED TAX ASSETS
Deferred tax liabilities:
Plant and equipment
Prepaid insurance and other reserves
DEFERRED TAX LIABILITIES
NET DEFERRED TAX LIABILITY
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”)
was enacted, which, among other changes, reduced the federal
statutory corporate tax rate from 35% to 21% effective January 1,
2018. Since our fiscal year ends on the Saturday closest to
September 30 rather than the calendar year, we are subject to IRS
rules relating to transitional income tax rates. Based on these rules,
our federal statutory rate was 24.5% for fiscal 2018 and will be 21%
for fiscal 2019 and beyond. Based on the provisions of the Act,
we remeasured our deferred tax assets and liabilities and adjusted
our estimated annual federal income tax rate to incorporate the
lower corporate tax rate into our tax provision during our first fiscal
quarter which resulted in a $3.3 million reduction of income tax
expense. We are still in process of evaluating the income tax effect
of the Act on the executive compensation limitations that will be
effective for our fiscal year 2019.
As of September 29, 2018, we recorded a deferred tax liability
(net of valuation allowance) of $5.3 million in other liabilities on
our consolidated balance sheet. As of September 30, 2017, we
recorded a deferred tax liability (net of valuation allowance) of
$8.1 million in other liabilities on our consolidated balance sheet.
We have $6.6 million of state net operating loss carryforwards
(“NOLs”) that begin to expire in 2019, but principally expire
between 2019 and 2032. We have also recorded deferred tax
assets of $16,000 for various state tax credits that begin to expire
in 2019, but 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
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.
Item 8 Financial Statements and Supplementary Data
PART II
September 29, 2018
September 30, 2017
$
2,302
$
1,939
1,120
233
(233)
5,361
(9,490)
(1,211)
(10,701)
$
(5,340)
$
3,556
3,069
1,907
284
(251)
8,565
(15,093)
(1,575)
(16,668)
(8,103)
jurisdictions. GAAP requires that we periodically assess the need
to establish a reserve against our deferred tax assets to the extent
we no longer believe it is more likely than not that they will be fully
realized. As of September 29, 2018, we recorded a valuation
allowance of $233,000 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 NOLs and tax credits against which
an allowance had previously been provided or determine that
such utilization was more likely than not. The $18,000 decrease
in the valuation allowance during 2018 is primarily due to the
expiration of state NOLs for which an allowance had been
previously recorded.
As of September 29, 2018, we had no material, known tax
exposures that required the establishment of contingency reserves
for uncertain tax positions.
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
2018, 2017 and 2016.
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 2013 remain subject to
examination.
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. We
made contributions totaling $1.9 million to the Delaware Plan
during 2016.
37
INSTEEL INDUSTRIES INC. ❘ Form 10-K PART II
Item 8 Financial Statements and Supplementary Data
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 a 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 loss:
Net loss
Amortization of net loss
Settlement loss
TOTAL RECOGNIZED IN OTHER COMPREHENSIVE INCOME LOSS
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
Year Ended
October 1, 2016
3,463
147
324
290
(4,224)
—
2,201
104
1,919
(4,003)
(221)
—
—
—
—
—
—
—
—
685
(76)
(2,539)
(1,930)
Year Ended
October 1, 2016
147
(175)
2,539
76
2,587
$
$
$
$
$
$
$
$
$
$
$
$
$
$
The assumed discount rate used for the valuation of the Delaware Plan was 3.75% as of October 1, 2016. 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.
38
INSTEEL INDUSTRIES INC. ❘ Form 10-Kwww.insteel.com Item 8 Financial Statements and Supplementary Data
PART II
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 the Participant a supplemental
retirement benefit for the 15-year period following the Participant’s
retirement equal to 50% of the Participant’s highest average
annual base salary for five consecutive years in the 10-year
period preceding the Participant’s retirement. If the Participant
retires prior to the later of age 65 or the completion of 30 years of
continuous service with us, but has completed at least 10 years of
continuous service, the amount of the Participant’s supplemental
retirement benefit will be reduced by 1/360th for each month short
of 30 years that the Participant was employed by us.
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 loss (gain)
Distributions
BENEFIT OBLIGATION AT END OF YEAR
Change in plan assets:
Actual employer contributions
Actual distributions
PLAN ASSETS AT FAIR VALUE AT END OF YEAR
Reconciliation of funded status to net amount recognized:
Funded status
NET AMOUNT RECOGNIZED
Amounts recognized in accumulated other
comprehensive loss:
Unrecognized net loss
NET AMOUNT RECOGNIZED
Other changes in plan assets and benefit obligations
recognized in other comprehensive income (loss):
Net loss (gain)
Amortization of net loss
TOTAL RECOGNIZED IN OTHER COMPREHENSIVE
INCOME (LOSS)
September 29, 2018 September 30, 2017
October 1, 2016
Year Ended
$
$
$
$
$
$
$
$
$
$
9,389
$
9,159
$
310
345
(33)
(262)
344
338
(162)
(290)
9,749
$
9,389
$
262
$
(262)
—
$
(9,749)
(9,749)
1,966
1,966
$
$
$
$
(33)
$
(150)
(183)
$
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
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
Year Ended
September 29, 2018 September 30, 2017
October 1, 2016
$
$
310
$
344
$
345
150
338
174
805
$
856
$
263
326
85
674
The estimated net loss that will be amortized from accumulated other comprehensive loss into net periodic pension cost during 2019
is $140,000.
39
INSTEEL INDUSTRIES INC. ❘ Form 10-K PART II
Item 8 Financial Statements and Supplementary Data
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 29, 2018 September 30, 2017
October 1, 2016
Measurement Date
4.00%
3.00%
3.75%
3.00%
3.75%
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 SERPs. 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)
2019
2020
2021
2022
2023
2024 - 2028
$
In thousands
325
278
245
553
553
4,083
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. We match employee contributions
up to 100% of the first 1% and 50% of the next 5% of eligible
compensation that is contributed by employees. Our contributions
to the Plan were $1.1 million in 2018 and 2017 and $1.0 million
in 2016.
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 $5.1 million in 2018, $5.6 million in 2017
and $5.4 million in 2016. 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
We maintain general liability, business interruption and replacement
cost property insurance coverage on our facilities.
In August 2018, a transformer outage and electrical fire occurred
at our Dayton, Texas manufacturing facility, which resulted in
the temporary curtailment of operations. Alternative power
arrangements for the facility were subsequently made, allowing
for operations to continue until permanent repairs could be
completed. We are in the process of preparing the supporting
analysis for the insurance claim related to the business interruption
and property damage resulting from the fire. During 2018, we
received $183,000 of insurance proceeds related to the claim
and recorded a $462,000 receivable for the anticipated insurance
proceeds associated with the expenses incurred as of the end
of the year. The insurance proceeds attributable to the additional
expenses incurred were recorded in cost of sales ($645,000) on
the consolidated statements of operations.
40
INSTEEL INDUSTRIES INC. ❘ Form 10-Kwww.insteel.com Item 8 Financial Statements and Supplementary Data
PART II
In August 2017, operations at our manufacturing facility located
in Dayton, Texas were adversely affected by hurricane Harvey.
We are in the process of finalizing the supporting analysis for
insurance claims relating to the business interruption and property
damage resulting from the storm. During 2018, we received
$439,000 of insurance proceeds related to the claim and recorded
a $52,000 receivable for the anticipated insurance proceeds
associated with the expenses that were incurred and capital
outlays required to replace property and equipment damaged in
the storm. The insurance proceeds attributable to the additional
expenses incurred were recorded in cost of sales ($439,000),
SG&A expense ($26,000) and other income ($26,000) on the
consolidated statements of operations.
We believe the coverage provided for under our insurance policies
is sufficient to cover the losses incurred from these claims.
Leases and purchase commitments
We lease a portion of our equipment under operating leases that
expire at various dates through 2023. Additionally, we leased
our facility in Houston, Texas through September 30, 2017 and
subsequently exercised the $4.9 million purchase option under
the lease in October 2017. Under most lease agreements, we
pay insurance, taxes and maintenance. Rental expense for
operating leases was $1.5 million in 2018 and $1.8 million in
2017 and 2016. As of September 29, 2018, minimum rental
commitments under all non-cancelable leases with an initial term
in excess of one year are payable as follows: 2019, $1.0 million;
2020 $543,000; 2021, $185,000; 2022, $22,000 and 2023 and
beyond, $16,000.
As of September 29, 2018, we had $75.1 million in non-cancelable
purchase commitments for raw material extending as long as
approximately 100 days and $9.6 million of contractual commitments
for the purchase of certain equipment that had not been fulfilled and
are not reflected in the consolidated financial statements.
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 expect
the ultimate outcome or 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 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.
41
INSTEEL INDUSTRIES INC. ❘ Form 10-K PART II
Item 8 Financial Statements and Supplementary Data
Note 12 Earnings Per Share
The computation of basic and diluted earnings per share attributable to common shareholders is as follows:
(In thousands, except per share amounts)
September 29, 2018 September 30, 2017
October 1, 2016
Year Ended
Net earnings
Basic weighted average shares outstanding
Dilutive effect of stock-based compensation
Diluted weighted average shares outstanding
Net earnings per share:
Basic
Diluted
$
$
36,266
$
22,548
$
19,079
198
19,277
19,011
206
19,217
1.90
$
1.88
1.19
$
1.17
37,245
18,754
301
19,055
1.99
1.95
Options and RSUs that were antidilutive and not included in the diluted EPS calculation amounted to 83,000 shares in 2018, 76,000
shares in 2017 and 51,000 shares in 2016.
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 29, 2018 September 30, 2017
October 1, 2016
Year Ended
$
$
$
$
451,418
$
387,199
$
1,799
1,672
416,391
2,156
453,217
$
388,871
$
418,547
133,913
$
122,574
$
112,130
—
—
—
133,913
$
122,574
$
112,130
September 29, 2018 September 30, 2017
October 1, 2016
Year Ended
$
$
273,658
$
239,522
$
179,559
149,349
256,801
161,746
453,217
$
388,871
$
418,547
There were no customers that accounted for 10% or more of our net sales in 2018, 2017 and 2016.
Note 14 Related Party Transactions
Sales to a company affiliated with one of our directors amounted to $699,000 in 2018, $622,000 in 2017 and $420,000 in 2016.
42
INSTEEL INDUSTRIES INC. ❘ Form 10-Kwww.insteel.com 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
Sales allowance reserves
Income taxes
Workers' compensation
Other
TOTAL
Other liabilities:
Deferred compensation
Deferred income taxes
TOTAL
Item 8 Financial Statements and Supplementary Data
PART II
September 29, 2018
September 30, 2017
$
$
$
$
$
$
$
$
$
$
$
$
$
$
51,779
(295)
51,484
61,008
4,779
28,370
94,157
3,845
—
2,050
5,895
9,769
40
104
9,913
14,438
54,684
160,068
9,672
238,862
(132,714)
106,148
6,775
1,585
1,531
804
469
113
652
11,929
10,541
5,340
15,881
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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
21
—
116
611
8,667
9,276
8,103
17,379
43
INSTEEL INDUSTRIES INC. ❘ Form 10-K PART II
Item 8 Financial Statements and Supplementary Data
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 stock (or, in certain circumstances,
Note 17 Product Warranties
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.
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”). Under
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 the program may be commenced or suspended at
any time at our discretion without prior notice. The Authorization
continues in effect until terminated by the Board of Directors. As of
September 29, 2018, there was $24.8 million remaining available
for future share repurchases under this Authorization. There were
no share repurchases during 2018, 2017 and 2016.
44
INSTEEL INDUSTRIES INC. ❘ Form 10-Kwww.insteel.com Item 8 Financial Statements and Supplementary Data
PART II
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Board of Directors and Shareholders
Insteel Industries, Inc.:
Opinion on the financial statements
Basis for opinion
We have audited the accompanying consolidated balance sheets
of Insteel Industries, Inc. (a North Carolina corporation) and
subsidiaries (the “Company”) as of September 29, 2018 and
September 30, 2017, 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 29, 2018, and the related notes and financial
statement schedule included under Item 15(a) (collectively
referred to as the “financial statements”). In our opinion, the
financial statements present fairly, in all material respects, the
financial position of the Company as of September 29, 2018
and September 30, 2017, and the results of its operations and
its cash flows for each of the three years in the period ended
September 29, 2018, in conformity with accounting principles
generally accepted in the United States of America.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company’s internal control over financial reporting
as of September 29, 2018, 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 26, 2018
expressed an unqualified opinion.
These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a
public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess
the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on
a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our audits also included evaluating
the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation
of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ Grant Thornton LLP
We have served as the Company’s auditor since fiscal 2002.
Charlotte, North Carolina
October 26, 2018
45
INSTEEL INDUSTRIES INC. ❘ Form 10-K PART II
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Schedule II - Valuation and Qualifying Accounts
Years Ended September 29, 2018, September 30, 2017
and October 1, 2016
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(In thousands)
Balance, beginning of year
Amounts charged to earnings
Write-offs, net of recoveries
BALANCE, END OF YEAR
Year Ended
September 29, 2018 September 30, 2017
October 1, 2016
$
$
201
$
291
$
100
(6)
(57)
(33)
295
$
201
$
638
(244)
(103)
291
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 29, 2018.
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.
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 29, 2018. During the quarter ended September 29,
2018, 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 29, 2018, which appears below.
46
INSTEEL INDUSTRIES INC. ❘ Form 10-Kwww.insteel.com PART II
Item 9A Controls and Procedures
Report of Independent Registered Public Accounting Firm
Internal Control Over Financial Reporting
Board of Directors and Shareholders
Insteel Industries, Inc.:
Opinion on internal control over financial
reporting
We have audited the internal control over financial reporting
of Insteel Industries, Inc. (a North Carolina corporation) and
subsidiaries (the “Company”) as of September 29, 2018, based
on criteria established in the 2013 Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (“COSO”). In our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of September 29, 2018, 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)
(“PCAOB”), the consolidated financial statements of the Company
as of and for the year ended September 29, 2018, and our report
dated October 26, 2018 expressed an unqualified opinion on
those financial statements.
Basis for opinion
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 are a public accounting firm
registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the
PCAOB. 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.
Definition and limitations of internal control
over financial reporting
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.
/s/ Grant Thornton LLP
Charlotte, North Carolina
October 26, 2018
47
INSTEEL INDUSTRIES INC. ❘ Form 10-K PART II
Item 9B Other Information
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 2019 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 website
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 website 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 website 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 2019 Annual Meeting of Shareholders and is
incorporated herein by reference.
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 2019
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 2019 Annual Meeting of Shareholders and is
incorporated herein by reference.
48
INSTEEL INDUSTRIES INC. ❘ Form 10-Kwww.insteel.com 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 2019 Annual Meeting of Shareholders and is incorporated herein by reference.
PART IV
Item 16 Form 10-K Summary
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 46 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
Exhibit Index
Exhibit Index
Exhibit
Number
Description
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).
2.1
3.1
3.2
3.3
3.4
3.5
4.1
4.2
10.1
10.2
10.3
10.4*
10.5*
10.6*
10.7*
10.8*
50
INSTEEL INDUSTRIES INC. ❘ Form 10-Kwww.insteel.com Exhibit
Number
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
21.1
23.1
31.1
31.2
32.1
32.2
101
PART IV
Exhibit Index
Description
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).
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 29, 2018.
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 29,
2018, filed on October 26, 2018, formatted in XBRL (eXtensible Business Reporting Language) includes: (i) the
Consolidated Statements of Operations for the years ended September 29, 2018, September 30, 2017 and
October 1, 2016, (ii) the Consolidated Statements of Comprehensive Income for the years ended September 29,
2018, September 30, 2017 and October 1, 2016, (iii) the Consolidated Balance Sheets as of September 29, 2018
and September 30, 2017, (iv) the Consolidated Statements of Cash Flows for the years ended September 29,
2018, September 30, 2017 and October 1, 2016, (v) the Consolidated Statements of Shareholders’ Equity as
of September 29, 2018, September 30, 2017 and October 1, 2016 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
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.
Registrant
By:
/S/ MICHAEL C. GAZMARIAN
Michael C. Gazmarian
Vice President, Chief Financial Officer and Treasurer
Date: October 26, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on October 26, 2018 below by the
following persons on behalf of the registrant and in the capacities indicated:
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
Director
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/ ABNEY S. BOXLEY III
Abney S. Boxley III
/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
52
INSTEEL INDUSTRIES INC. ❘ Form 10-Kwww.insteel.com 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 2018 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 29, 2018, which is
included as part of this 2018 Annual Report.
CORPORATE INFORMATION
BOARD OF DIRECTORS
EXECUTIVE OFFICERS
Abney S. Boxley, III(2,3)
President and Chief Executive Officer
Boxley Materials Company
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 12, 2019 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 23, 2018, there
were 550 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
(800) 937-5449
www.amstock.com
1373 Boggs Drive
Mount Airy, North Carolina 27030
www.insteel.com