2019 ANNUAL REPORT
0202
F25-0202
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7
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4°
C
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B
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30'-10 1/16" M
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Insteel Industries is the nation’s
largest manufacturer of steel wire
reinforcing products for concrete
construction applications.
We manufacture and market prestressed concrete 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.
FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share amounts)
2019
2018
2017
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.
$455,713
30,061
6.6%
$5,598
1.2%
$453,217
70,807
15.6%
$36,266
8.0%
$388,871
59,781
15.4%
$22,548
5.8%
$0.29
0.29
0.12
$1.90
1.88
1.12
$1.19
1.17
1.37
2.3%
2.3%
15.6%
15.6%
10.1%
10.1%
$38,181
293,009
-
246,017
$43,941
329,534
-
241,665
$6,608
-
10,512
13,553
2,310
$53,969
3,300
18,449
12,818
21,333
$32,105
283,073
-
223,376
$20,840
-
20,575
11,649
26,011
Net Sales
(In millions)
$388.9
$453.2
$455.7
Gross Margin
15.4%
15.6%
6.6%
2017
2018
2019
2017
2018
2019
Net Earnings
Per Share (Diluted)
$1.17
Return on Total Capital
$1.88
15.6%
10.1%
$0.29
2.3%
2017
2018
2019
2017
2018
2019
2019 ANNUAL REPORT | INSTEEL INDUSTRIES |
1
BUSINESS OVERVIEW
64% OF 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 transverse 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
36% OF 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
2019 ANNUAL REPORT | INSTEEL INDUSTRIES
LETTER TO SHAREHOLDERS
During the year, we intensified our
focus on our primary organic growth
initiative - the expansion of our cast-
in-place business through further
penetration of the rebar market.
WWR-T5 = 39'-0"
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2019 was a difficult year for Insteel as we contended with a surge in low-priced import competition together with unusually wet
weather that resulted in construction delays and deferred orders. Prices for our primary raw material, hot-rolled steel wire rod, and
our products, which had escalated over the second half of 2018, reversed course and trended lower during the year.
In the face of these challenges, we continued to execute our strategy for long-term growth and the creation of shareholder value, which
is centered on leveraging our market leadership positions across our product portfolio and strengthening our low-cost producer
status. We made additional investments in our facilities and systems that supported our cost and productivity improvement initiatives
and broadened our engineered structural mesh (“ESM”) manufacturing capabilities. And we maintained our strong balance sheet,
giving us the financial flexibility to pursue strategic growth opportunities that may develop in this challenging environment.
FINANCIAL RESULTS
Net sales for 2019 were essentially unchanged from the prior
year at $455.7 million as an 8.2% increase in average selling
prices was offset by a 7.2% decrease in shipments, reflecting
the increased import competition and adverse weather through
the first nine months of the year. Gross margin narrowed 900
basis points to 6.6% due to lower spreads between selling prices
and raw material costs, and, to a lesser extent, the reduction
in shipments and higher unit manufacturing costs on lower
production volume. The spread and margin compression
were compounded by the declining price environment and the
resulting consumption of higher cost inventory purchased in
earlier periods matched against lower average selling prices for
our products. Net earnings declined to $5.6 million, or $0.29 per
share, from $36.3 million, or $1.88 per diluted share, in 2018.
Cash flow from operations fell to $6.6 million from $54.0 million
in the prior year due to the lower earnings and a $12.0 million
increase in working capital. We ended the year debt-free with
$38.2 million of cash and no borrowings outstanding on our
$100 million revolving credit facility.
2019 ANNUAL REPORT | INSTEEL INDUSTRIES |
3
232 TARIFF
Import competition continued to escalate during the year,
particularly in certain of our PC strand and standard welded
wire reinforcement markets, extending the upward trend
that began during the second half of 2018 in the wake of the
imposition of the Section 232 tariffs on imported steel. The 25%
tariff, which applies to imports of our primary raw material but
excludes our finished products, has caused wire rod imports
to plummet and driven domestic prices substantially higher
than global market levels. Foreign competitors have responded
by shifting production to downstream products in order to
leverage the cost advantage they now enjoy and expand their
market share in the U.S. The increased pricing pressure
resulting from the influx of imports has spilled over into certain
of our other markets as domestic competitors seek to backfill
lost volume and retain their existing business.
We continued our dialogue with the Administration regarding
the increasingly negative impact of the tariffs on our industry.
Unfortunately, although we believe senior officials at the
Department of Commerce, USTR and White House understand
the adverse effect of the tariff program on steel consumers, it
is unclear whether they are willing to take action to resolve the
competitive disadvantage that it has created. Since it appears
the Administration is firmly committed to its tariff approach on
trade policy, we believe the only reasonable resolution would
be to extend it to include downstream products.
GROWTH INITIATIVES
During the year, we intensified our focus on our primary
organic growth initiative - the expansion of our cast-in-place
(“CIP”) business through further penetration of the rebar
market. For many applications, the substitution of ESM for
rebar represents an attractive value proposition for contractors
by significantly reducing the installation labor and material
requirements for a project and accelerating the construction
process. The elimination of the labor-intensive placing and
hand-tying inherent to rebar is particularly attractive in today’s
tight job market environment. An additional advantage is the
higher yield strength of ESM relative to rebar, which allows for
the use of less material to obtain the equivalent reinforcement.
As rebar users initially convert projects to ESM and experience
first-hand the advantages that it offers, they tend to become
repeat customers going forward.
With six manufacturing locations that produce ESM, our
broad footprint positions us to supply projects nationwide
in a responsive and cost-effective manner. The substantial
investments we’ve made in our facilities in recent years
employ the latest technology, allowing for a broader range of
design configurations, higher productivity levels, the economic
production of smaller order sizes and additional capacity to
support the execution of our growth plan. During 2019, we
began the commissioning process for a new production line at
our North Carolina facility that will allow us to produce certain
niche products and significantly reduce our operating costs.
Complementing these
investments, our November 2017
acquisition of certain of the assets of Ortiz Engineered
Products, Inc. (“OEP”) has strengthened our engineering
and project management capabilities in order to accelerate
our CIP growth efforts. OEP, a provider of value-engineered
reinforcing solutions for the concrete construction industry,
had carved out a niche primarily in the Northeast market
converting projects that were designed with rebar to ESM. We
expect to make considerable progress in expanding our CIP
business going forward as we leverage the sales engineering
and manufacturing infrastructure we have developed, which is
unmatched in the industry.
LOOKING AHEAD
As we move into 2020, we expect continued growth in our
infrastructure-related business should be
markets. Our
favorably impacted by higher state and local spending in many
of our markets supported by various funding initiatives together
with FAST Act and supplementary measures at the federal level.
Leading indicators and industry forecasts for nonresidential
construction remain relatively stable, implying modest growth
with the continued expansion in the economy. We should also
benefit, to some extent, from the weather-related deferral of
business from last year.
We expect business conditions will remain challenging,
however, as the increased import competition and related
pricing pressure is likely to persist pending a solution to the
tariff issue that levels the playing field for domestic producers
of downstream products. In the interim, we will maintain our
focus on our strategic priorities and those factors that we can
control: aggressively pursuing improvements in the productivity
and effectiveness of all our business activities; optimizing
our operating costs; meeting the service expectations of our
customers; and continuing to make strategic investments in
our people, facilities and systems. In addition, we will utilize our
strong balance sheet and flexible capital structure to pursue
further strategic acquisition opportunities that may develop
in a more difficult market environment. In doing so, we will
continue to exercise valuation discipline and maintain sound
judgment to ensure that we achieve satisfactory returns for
our shareholders without compromising our strong financial
position.
We believe that Insteel will emerge from this challenging period
even stronger and look forward 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
2019 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 28, 2019
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 SUBJECT TO SECTION 12(b) OF THE EXCHANGE ACT:
Title of Each Class
Trading Symbol(s)
Common Stock (No Par Value)
IIIN
Name of Each Exchange on Which Registered
The Nasdaq Stock Market LLC
(Nasdaq Global Select Market)
Indicate by check mark
(cid:122) if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES
NO
(cid:122) if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
(cid:122) 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.
(cid:122) 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).
(cid:122) 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
(cid:122) 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.
(cid:122) whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Emerging growth company
As of March 30, 2019 (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 $289,144,525 based upon the closing sale price as reported on the
Nasdaq Global Select Market. As of October 24, 2019, there were 19,260,725 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 2020 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
Signatures
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INSTEEL INDUSTRIES INC. ❘ Form 10-K
3
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:
(cid:122) general economic and competitive conditions in the markets
in which we operate;
(cid:122) changes in the spending levels for nonresidential and residential
construction and the impact on demand for our products;
(cid:122) 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;
(cid:122) the cyclical nature of the steel and building material industries;
(cid:122) credit market conditions and the relative availability of financing
for us, our customers and the construction industry as a whole;
(cid:122) fluctuations in the cost and availability of our primary raw
material, hot-rolled carbon steel wire rod, from domestic and
foreign suppliers;
(cid:122) competitive pricing pressures and our ability to raise selling
prices in order to recover increases in raw material or operating
costs;
(cid:122) changes in U.S. or foreign trade policy, including the Section
232 tariff on imported steel, affecting imports or exports of steel
wire rod or our products;
(cid:122) unanticipated changes in customer demand, order patterns
and inventory levels;
(cid:122) the impact of fluctuations in demand and capacity utilization
levels on our unit manufacturing costs;
(cid:122) our ability to further develop the market for engineered structural
mesh (“ESM”) and expand our shipments of ESM;
(cid:122) legal, environmental, economic or regulatory developments that
significantly impact our operating costs;
(cid:122) unanticipated plant outages, equipment failures or labor
difficulties; and
(cid:122) the risks and uncertainties discussed herein under the caption
“Risk Factors.”
4
INSTEEL INDUSTRIES INC. ❘ Form 10-K
www.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 2019, we estimate that approximately 85%
of our sales were related to nonresidential construction and 15%
were related to residential construction.
Insteel is the parent holding company for two wholly-owned
subsidiaries, Insteel Wire Products Company (“IWP”), an operating
subsidiary, and Intercontinental Metals Corporation, an inactive
subsidiary. We were incorporated in 1958 in the State of North
Carolina.
Our business strategy is focused on: (1) achieving leadership
positions in our markets; (2) operating as the lowest cost producer
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 strategic acquisitions in existing or related
markets that leverage our infrastructure and core competencies in
the manufacture and marketing of concrete reinforcing products.
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.
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.
Marketing and Distribution
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.
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. Our products
are shipped primarily by truck, using common or contract
carriers. The delivery method selected is determined based on
backhaul opportunities, comparative costs and customer service
requirements.
INSTEEL INDUSTRIES INC. ❘ Form 10-K
5
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 2019,
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 2019,
2018 and 2017. The loss of a single customer or a few customers
would not have a material adverse impact 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 2019 will be shipped during the first quarter of fiscal 2020.
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.
Shipments are seasonal, typically reaching their highest level
when weather conditions are the most conducive to construction
activity. As a result, assuming normal seasonal weather patterns,
shipments and profitability are usually higher in the third and
fourth quarters of the fiscal year and lower in the first and second
quarters. Construction activity and demand for our products is
cyclical based on overall economic conditions, although there
can be significant differences between the relative strength of
nonresidential and residential construction for extended periods.
Raw Materials
The primary raw material used to manufacture our products is
hot-rolled carbon steel wire rod, which we purchase from both
domestic and foreign suppliers 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. U.S. government trade
policies and trade actions by domestic wire rod producers
can significantly impact the pricing and availability of imported
wire rod, which during fiscal years 2019 and 2018 represented
approximately 8% and 14%, respectively, of our total wire rod
purchases. We believe that our substantial wire rod requirements,
desirable mix of sizes and grades, and strong financial condition
represent a competitive advantage by making us a relatively more
attractive customer to our suppliers.
Our ability to source wire rod from overseas suppliers is limited
by domestic content requirements generally referred to as
“Buy America” or “Buy American” laws that exist at both the
federal and state levels. These laws generally prescribe a domestic
“melt and cast” standard for purposes of compliance. Customers
purchasing PC strand and WWR for certain applications require
the Company to certify compliance with Buy America laws.
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.
Competition
We are the nation’s largest manufacturer of steel wire reinforcing
products for concrete construction applications. Our markets
are highly competitive based on price, quality and service. Some
of our competitors, such as Nucor Corporation, Liberty Steel
USA (“Liberty”) and Oklahoma Steel and Wire, are vertically
integrated companies that produce both wire rod and concrete
reinforcing products and offer multiple product lines over broad
geographic areas. Other competitors are smaller independent
companies that offer limited competition in certain markets. Our
primary competitors for WWR products are Engineered Wire
Products, Inc. (a subsidiary of Liberty), 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
6
INSTEEL INDUSTRIES INC. ❘ Form 10-K
www.insteel.com
PART I
Item 1 Business
Corporation, Strand-Tech Manufacturing, Inc. (a subsidiary of
Liberty) and Wire Mesh Corporation. Import competition is also a
significant factor in certain segments of the PC strand and SWWR
markets that are not subject to “Buy America” requirements.
In response to illegally traded 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 countries in the
domestic market. In 2010, we joined together with a coalition
of domestic PC strand producers and filed petitions with the
DOC alleging that imports of PC strand from China were being
“dumped” or sold in the U.S. at a price that was lower than fair
value and that subsidies were being provided to Chinese PC
strand producers by the Chinese government, both of which
had injured the domestic PC strand industry. The DOC ruled in
our favor and imposed final countervailing duty margins ranging
from 9% to 46% and anti-dumping margins ranging from 43% to
194%, which had the effect of limiting the continued participation
of Chinese producers in the domestic market.
Quality and service expectations of customers have risen
substantially over the years and are key factors that impact
their selection of suppliers. Technology has become a critical
competitive factor from the standpoint of manufacturing costs,
quality and customer service capabilities. In view of our strong
market positions, broad product offering and national footprint,
technologically advanced manufacturing facilities, low-cost
production capabilities, sophisticated information systems
and financial strength and flexibility, we believe that we are
well-positioned to compete favorably with other producers of our
concrete reinforcing products.
Employees
As of September 28, 2019, we had 834 employees, none of which were represented by labor unions. In the event of production
disruptions, we believe that our contingency plans would enable us to continue serving our customers, although there can be no
assurances that a work slowdown or stoppage would not adversely impact our operating costs and financial results.
Product Warranties
Our products are used in applications that are subject to inherent
risks, including performance deficiencies, personal injury, property
damage, environmental contamination or loss of production. We
warrant our products to meet certain specifications. Although
actual or claimed deficiencies from these specifications may give
rise to claims, we do not maintain a reserve for warranties as
the historical claims have been immaterial. We maintain product
liability insurance coverage to minimize our exposure to such risks.
Environmental Matters
We believe that we are in compliance in all material respects
with applicable environmental laws and regulations. We have
experienced no material difficulties in complying with legislative
or regulatory standards and believe that these standards have not
materially impacted our financial position or results of operations.
Although our future compliance with additional environmental
requirements could necessitate capital outlays, we do not believe
these expenditures would ultimately have a material adverse effect
on our financial position or results of operations. We do not expect
to incur material capital expenditures for environmental control
facilities during fiscal 2020.
Available Information
Our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and any amendments to
these reports, are available at no cost on our web site at https://
insteelgcs.gcs-web.com/financial-information/sec-filings and the
SEC’s web site at www.sec.gov as soon as reasonably practicable
after we file these reports with the SEC. The information available
on our web site and the SEC’s website is not incorporated into
this report or any of our filings with the SEC.
INSTEEL INDUSTRIES INC. ❘ Form 10-K
7
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.
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. Prices for wire rod have become increasingly
volatile in recent years driven by the higher degree of variability in
raw material costs for rod producers, changes in trade policy and
the tightening of domestic supply. 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 would 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, U.S. government trade policies, such
as the imposition of the steel tariffs imposed under Section
232 of the Trade Expansion Act of 1962, as amended, or trade
actions by 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. 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.
8
INSTEEL INDUSTRIES INC. ❘ Form 10-K
www.insteel.com
PART I
Item 1A Risk Factors
Foreign competition could adversely impact our
financial results.
Certain of our PC strand and SWWR markets are subject to
foreign 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 illegally traded 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.
The perpetuation of the Section 232 tariff on
imported steel, as currently structured, would
continue to negatively impact our financial results
and cash flows.
The imposition of the Section 232 tariff on imported steel, which
became effective in March 2018, has resulted in a surge in
low-priced imports in certain of our markets, particularly PC strand
and SWWR. The tariff, which applies to imports of our primary raw
material but excludes our finished products, has provided offshore
competitors with a significant cost advantage that has allowed them
to underprice domestic producers and expand their market share,
thereby displacing U.S. production. If the Administration continues
the tariff program and fails to extend it to include our finished
products, the resulting adverse impact on our market share, financial
results and cash flow that we experienced during 2019 will persist.
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 plant shutdowns and 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 would 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. 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.
INSTEEL INDUSTRIES INC. ❘ Form 10-K
9
PART I
Item 1B Unresolved Staff Comments
Our financial results could be adversely impacted
by the impairment of goodwill.
Our balance sheet includes intangible assets, including
goodwill and other separately identifiable assets related to prior
acquisitions, and we may acquire additional intangible assets in
connection with future acquisitions. We are required to review
goodwill for impairment on an annual basis, or more frequently if
certain indicators of permanent impairment arise such as, among
other things, a decline in our stock price and market capitalization
or a reduction in our projected operating results and cash flows. If
our review indicates that goodwill has been impaired, the impaired
portion would have to be written-off during that period which
could adversely impact 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.
Changes in environmental compliance and
remediation requirements could result in
substantial increases in our 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 2019, our common stock traded as high
as $36.04 and as low as $17.50. There are numerous factors
that could cause the price of our common stock to fluctuate
significantly, including: variations in our financial results; changes
in our business outlook and expectations for the construction
industry; changes in market valuations of companies in our
industry; and announcements by us, our competitors or industry
participants that may be perceived to impact our financial results.
Item 1B Unresolved Staff Comments
None.
Item 2 Properties
Our corporate headquarters and IWP’s sales and administrative
offices are located in Mount Airy, North Carolina. At September 28,
2019, 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-K
www.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
63
60
69
60
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, 63, 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
was elected Chairman of the Board in 2009.
Michael C. Gazmarian, 60, 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, 69, 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, 60, 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 12, 2019 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 11, 2020.
INSTEEL INDUSTRIES INC. ❘ Form 10-K
11
PART II
Item 5 Market for Registrant’s Common Equity, Related
Shareholder Matters and Issuer Purchases
of Equity Securities
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, 2019, there were 531 shareholders of record.
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 28, 2019. The graph and
table assume that $100 was invested on September 27, 2014
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 $
200
150
100
50
0
9/27/14
10/3/15
10/1/16
9/30/17
9/29/18
9/28/19
Insteel Industries, Inc.
Russell 2000
S&P Building Products
Insteel Industries, Inc.
$
Russell 2000
S&P Building Products
9/27/14
100.00
100.00
100.00
10/3/15
$
77.24
$
101.25
121.09
10/1/16
182.81
116.91
157.07
$
9/30/17
136.61
141.15
165.02
$
9/29/18
195.18
162.66
149.83
$
9/28/19
113.29
148.20
176.67
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.
12
INSTEEL INDUSTRIES INC. ❘ Form 10-K
www.insteel.com
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II
Item 6
Selected Financial Data
Financial Highlights
(In thousands, except per
share amounts)
(52 weeks)
September 28, 2019
(52 weeks)
September 29, 2018
(52 weeks)
September 30, 2017
(52 weeks)
October 1, 2016
(53 weeks)
October 3, 2015
Year Ended
Net sales
Net earnings
Net earnings per
share (basic)
Net earnings per
share (diluted)
Cash dividends
declared
Total assets
Total debt
$
455,713
$
453,217
$
388,871
$
418,547
$
5,598
0.29
0.29
0.12
36,266
1.90
1.88
1.12
22,548
1.19
1.17
1.37
37,245
1.99
1.95
1.12
447,504
21,710
1.18
1.15
0.12
293,009
329,534
283,073
292,892
260,239
—
—
—
—
—
Shareholders’ equity
246,017
241,665
223,376
224,566
200,215
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 revenues when obligations under the terms of a
contract with our customers are satisfied, which generally occurs
when products are shipped and control is transferred. Revenue
is measured as the amount of consideration expected to be
received in exchange for our products.
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
INSTEEL INDUSTRIES INC. ❘ Form 10-K
13
PART II
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
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.
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, anticipated
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
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 2019.
Self-insurance
We are self-insured for certain losses relating to medical and
workers’ compensation claims. Self-insurance claims filed and
claims incurred but not reported are accrued based upon our
estimates of the discounted ultimate cost for uninsured claims
incurred using actuarial assumptions followed by the insurance
industry and historical experience. These estimates are subject
to a high degree of variability based upon future inflation rates,
litigation trends, changes in benefit levels and claim settlement
patterns. Because of uncertainties related to these factors as
well as the possibility of changes in the underlying facts and
circumstances, future adjustments to these reserves may be
required.
14
INSTEEL INDUSTRIES INC. ❘ Form 10-K
www.insteel.com
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II
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 3.00% for fiscal
2019, 4.00% for fiscal 2018 and 3.75% for fiscal 2017.
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 2020 to
be $966,000 for the SERPs. Cash contributions to the SERPs
during fiscal 2020 are expected to be $283,000.
A 0.25% decrease in the assumed discount rate for our SERPs
would have increased our projected and accumulated benefit
obligations as of September 28, 2019 by approximately $326,000
and $271,000, respectively, and our expected net periodic
pension cost for fiscal 2020 by approximately $40,000.
The nature and impact of recent accounting pronouncements is discussed in Note 3 to our consolidated financial statements and
incorporated herein by reference.
INSTEEL INDUSTRIES INC. ❘ Form 10-K
15
PART II
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
The table below presents a summary of our results of operations for fiscal 2019 and fiscal 2018. See Part II, Item 7 of our Annual Report
on Form 10-K for the fiscal year ended September 29, 2018, filed with the SEC on October 26, 2018, for Management’s Discussion
and Analysis of Financial Condition and Results of Operations for the fiscal year ended September 30, 2017.
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
Other expense (income), net
Interest expense
Interest income
Effective income tax rate
Net earnings
N/M = Not meaningful
2019 Compared with 2018
Net Sales
Net sales increased 0.6% to $455.7 million in 2019 from
$453.2 million in 2018, reflecting an 8.1% increase in average
selling prices partially offset by a 7.1% decrease in shipments. The
increase in average selling prices was driven by price increases
that were implemented over the course of the prior year to recover
the escalation in raw material costs. Shipments for the current
year were unfavorably impacted by an increase in low-priced
import competition spurred by the Section 232 tariff on imported
steel together with the unusually wet weather across many of our
markets through the first three quarters of the year.
Gross Profit
Gross profit decreased 57.5% to $30.1 million, or 6.6% of net
sales, in 2019 from $70.8 million, or 15.6% of net sales, in 2018
primarily due to lower spreads between average selling prices
and raw material costs ($29.7 million), higher manufacturing costs
($5.8 million) and lower shipments ($5.1 million). The decrease in
spreads was driven by higher raw material costs ($63.1 million)
partially offset by higher average selling prices ($33.3 million) and
lower freight costs ($0.1 million).
Selling, General and Administrative Expense
Selling, general and administrative expense (“SG&A expense”)
decreased 13.4% to $24.5 million, or 5.4% of net sales, in
2019 from $28.3 million, or 6.2% of net sales, in 2018 primarily
due to lower compensation expense ($4.2 million) partially
offset by a smaller increase in the cash surrender value of life
insurance policies ($367,000) in the current year. The decrease
September 28, 2019
Change
September 29, 2018
Year Ended
$
$
$
$
455,713
0.6% $
30,061
(57.5%)
6.6 %
24,504
(13.4%)
$
5.4%
(1,773)
N/M
$
47.4%
(43.1%)
168
(293)
24.9%
5,598
(84.6%)
$
453,217
70,807
15.6%
28,304
6.2%
274
114
(515)
14.9%
36,266
in compensation expense was largely driven by lower incentive
plan expense based on our weaker financial results in the current
year. The cash surrender value of life insurance policies increased
$186,000 in 2019 compared with $553,000 in the prior year due
to the changes in the value of the underlying investments.
Other Expense (Income), Net
Other income was $1.8 million for 2019 compared with other
expense of $274,000 in 2018. Other income for the current year
was primarily related to gains from property insurance ($1.2 million)
and the disposition of property, plant and equipment ($497,000).
Other expense for the prior year was primarily related to losses
on the disposition of property, plant and equipment.
Income Taxes
Our effective income tax rate for 2019 increased to 24.9% from
14.9% in 2018. The effective rate for 2018 reflects a $3.3 million
benefit from the remeasurement of deferred tax liabilities related
to the lower corporate tax rate enacted under the Tax Cuts and
Jobs Act in December 2017. Excluding the deferred tax benefit,
our effective tax rate increased to 24.9% from 22.7% in the prior
year due primarily to changes in permanent book versus tax
differences.
Net Earnings
Net earnings decreased to $5.6 million ($0.29 per share) in 2019
from $36.3 million ($1.88 per diluted share) in 2018 primarily due
to the decrease in gross profit partially offset by lower SG&A
expense.
16
INSTEEL INDUSTRIES INC. ❘ Form 10-K
www.insteel.com
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II
Liquidity and Capital Resources
SELECTED FINANCIAL DATA
(Dollars in thousands)
Net cash provided by operating activities
Net cash used for investing activities
Net cash used for financing activities
Cash and cash equivalents
Net working capital
Total debt
Percentage of total capital
Shareholders’ equity
Percentage of total capital
Total capital (total debt + shareholders’ equity)
Operating Activities
Operating activities provided $6.6 million of cash in 2019 primarily
from net earnings adjusted for non-cash items partially offset by
an increase in working capital. Working capital used $12.0 million
of cash due to a $42.6 million decrease in accounts payable and
accrued expenses partially offset by a $23.3 million decrease in
inventories and a $7.3 million decrease in accounts receivable.
The reductions in accounts payable and accrued expenses were
primarily related to lower raw material purchases near the end of
the year relative to the elevated level at the beginning of the year
together with a decrease in accrued salaries, wages and related
expenses. The reduction in inventories was primarily driven by
lower raw material purchases and unit costs. The reduction in
accounts receivable was primarily related to lower selling prices
and a decrease in days sales outstanding.
Operating activities provided $54.0 million of cash in 2018
primarily from net earnings adjusted for non-cash items and a
Investing Activities
Year Ended
September 28, 2019
September 29, 2018
$
6,608
$
(9,556)
(2,812)
38,181
132,171
—
—
$
$
246,017
100%
246,017
$
$
53,969
(21,939)
(20,194)
43,941
123,489
—
—
241,665
100%
241,665
reduction in working capital. 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 year 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 the year.
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 $9.6 million of cash in 2019 primarily
due to $10.5 million of capital expenditures focused on cost
and productivity improvement initiatives in addition to recurring
maintenance partially offset by $1.2 million of insurance proceeds
related to an insurance claim at our Dayton, Texas facility. 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. 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.
INSTEEL INDUSTRIES INC. ❘ Form 10-K
17
PART II
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financing Activities
Financing activities used $2.8 million of cash in 2019 and $20.2
million of cash in 2018. In 2019, $2.3 million of cash was used for
dividend payments and $0.3 million for financing costs associated
with the amendment of our revolving credit facility. 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.
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 2019, we entered into a new credit
agreement, which amended and restated in its entirety the previous
agreement pertaining to the revolving credit facility that had been in
effect since June 2010. The new credit agreement, among other
changes, extended the maturity date of the Credit Facility from May
13, 2020 to May 15, 2024 and provided for an incremental feature
whereby its size may be increased by up to $50.0 million, subject to
our lender’s approval. Advances under the Credit Facility are limited
to the lesser of the revolving loan commitment amount (currently
$100.0 million) or a borrowing base amount that is calculated
based upon a percentage of eligible receivables and inventories.
As of September 28, 2019, no borrowings were outstanding on
the Credit Facility, $82.9 million of borrowing capacity was available
and outstanding letters of credit totaled $1.6 million (see Note 8 to
the consolidated financial statements). As of September 29, 2018,
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
Impact of Inflation
We are subject to inflationary risks arising from fluctuations in
the market prices for our primary raw material, hot-rolled carbon
steel wire rod, and, to a much lesser extent, freight, energy and
other consumables that are used in our manufacturing processes.
We have generally been able to adjust our selling prices to pass
through increases in these costs or offset them through various
cost reduction and productivity improvement initiatives. However,
our ability to raise our selling prices depends on market conditions
and competitive dynamics, and there may be periods during
which we are unable to fully recover increases in our costs.
Off-Balance Sheet Arrangements
by operating activities and the borrowing availability provided
under the Credit Facility will be sufficient to satisfy our expected
requirements for working capital, capital expenditures, dividends
and share repurchases, if any. We also expect to have access
to the amounts available under our Credit Facility as required.
However, should we experience future reductions in our operating
cash flows due to weakening conditions in our construction
end-markets and reduced demand from our customers, we may
need to curtail capital and operating expenditures, delay or restrict
share repurchases, cease dividend payments and/or realign our
working capital requirements.
Should we determine, at any time, that we 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.
In 2019, the year-over-year escalation in our raw material costs
exceeded the increase in our selling prices due to competitive
pricing pressures. 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. 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.
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.
18
INSTEEL INDUSTRIES INC. ❘ Form 10-K
www.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 28, 2019 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)
$
23,763 $
23,763 $
— $
— $
—
Supplemental employee retirement plan obligations
19,426
Operating leases
Trade letters of credit
Commitment fee on unused portion of credit facility
Other unconditional purchase obligations(2)
2,058
1,633
967
2,787
283
1,028
1,633
207
2,787
812
922
—
414
—
1,086
17,245
108
—
346
—
—
—
—
—
TOTAL
$ 50,634 $
29,701 $
2,148 $
1,540 $
17,245
(1) Non-cancelable purchase commitments for raw materials.
(2) Contractual commitments for capital expenditures.
Outlook
Looking ahead to 2020, we expect our financial results will be
favorably impacted by the continued growth in our construction
end-markets and the weather-related deferral of business from
last year. The infrastructure-related portion of our business
should benefit from 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 together
with increased federal funding through the FAST Act and
supplementary measures. The leading indicators and industry
forecasts for nonresidential construction indicate that growth rates
are likely to moderate but remain positive.
We expect business conditions will remain challenging, however,
in view of the surge of low-priced imports that has followed
the imposition of the Section 232 tariff on imports of hot-rolled
steel wire rod. In addition to continuing our dialogue with the
Administration concerning the impact of imports on our business,
we will 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 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”.
INSTEEL INDUSTRIES INC. ❘ Form 10-K
19
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 2019 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 $31.1 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 28, 2019, 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 28, 2019. During 2019, 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.
20
INSTEEL INDUSTRIES INC. ❘ Form 10-K
www.insteel.com
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 28, 2019,
September 29, 2018 and September 30, 2017
Consolidated Statements of Comprehensive Income for the years ended September 28,
2019, September 29, 2018 and September 30, 2017
Consolidated Balance Sheets as of September 28, 2019 and September 29, 2018
Consolidated Statements of Shareholders’ Equity for the years ended September 28, 2019,
September 29, 2018 and September 30, 2017
Consolidated Statements of Cash Flows for the years ended September 28, 2019,
September 29, 2018 and September 30, 2017
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 28, 2019,
September 29, 2018 and September 30, 2017
(b) Supplementary Data
Selected quarterly financial data for 2019 and 2018 is as follows:
FINANCIAL INFORMATION BY QUARTER (UNAUDITED)
22
23
24
25
26
27
42
43
(In thousands, except per share amounts)
December 29
March 30
June 29
September 28
Quarter Ended
2019
Operating results:
Net sales
Gross profit
Net earnings (loss)
Net earnings (loss) per share:
Basic
Diluted
2018
Operating results:
Net sales
Gross profit
Net earnings
Net earnings per share:
Basic
Diluted
$
104,110
$
111,948
$
126,252
$
113,403
10,976
4,126
0.21
0.21
7,021
1,049
0.05
0.05
8,236
2,190
0.11
0.11
3,828
(1,767)
(0.09)
(0.09)
December 30
March 31
June 30
September 29
Quarter Ended
$
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
19,544
9,408
0.49
0.49
INSTEEL INDUSTRIES INC. ❘ Form 10-K
21
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 28, 2019 September 29, 2018 September 30, 2017
Year Ended
Net sales
Cost of sales
Gross profit
Selling, general and administrative expense
Restructuring charges, net
Other expense (income), net
Interest expense
Interest income
Earnings before income taxes
Income taxes
NET EARNINGS
Net earnings per share:
Basic
Diluted
Cash dividends declared
Weighted average shares outstanding:
Basic
Diluted
See accompanying notes to consolidated financial statements.
$
455,713 $
453,217 $
425,652
30,061
24,504
—
(1,773)
168
(293)
7,455
1,857
382,410
70,807
28,304
—
274
114
(515)
42,630
6,364
$
$
5,598 $
36,266 $
0.29 $
0.29
0.12
1.90 $
1.88
1.12
19,243
19,340
19,079
19,277
388,871
329,090
59,781
25,508
164
53
136
(248)
34,168
11,620
22,548
1.19
1.17
1.37
19,011
19,217
22
INSTEEL INDUSTRIES INC. ❘ Form 10-K
www.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
Adjustment to defined benefit plan liability, net of
income taxes of $239, ($44) and ($127)
Other comprehensive (loss) income
COMPREHENSIVE INCOME
See accompanying notes to consolidated financial statements.
September 28, 2019 September 29, 2018
September 30, 2017
Year Ended
$
$
5,598 $
36,266 $
22,548
(754)
(754)
139
139
208
208
4,844 $
36,405 $
22,756
INSTEEL INDUSTRIES INC. ❘ Form 10-K
23
PART II
Item 8 Financial Statements and Supplementary Data
Insteel Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share amounts)
September 28, 2019
September 29, 2018
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: 2019, 19,261; 2018, 19,223
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
$
38,181
$
44,182
70,851
7,370
160,584
104,960
8,610
8,293
10,562
43,941
51,484
94,157
5,895
195,477
106,148
9,703
8,293
9,913
$
$
293,009 $
329,534
21,595
$
6,818
28,413
18,579
60,059
11,929
71,988
15,881
—
—
19,261
19,223
74,632
154,372
(2,248)
246,017
72,852
151,084
(1,494)
241,665
329,534
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
293,009 $
See accompanying notes to consolidated financial statements.
24
INSTEEL INDUSTRIES INC. ❘ Form 10-K
www.insteel.com
Item 8 Financial Statements and Supplementary Data
PART II
Insteel Industries, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
Total
Shareholders’
Equity
224,566
22,548
208
107
—
2,245
(In thousands)
Common Stock
Shares
Amount
Additional
Paid-In
Capital
67,817 $ 139,314 $
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)(1)
537
(824)
208
26
39
69,817
22,548
19,041
19,041
26
39
(1,541) $
81
(39)
2,245
18,976 $ 18,976 $
(26,011)
135,851
36,266
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
Reclassification of stranded tax effects
Cash dividends declared
Balance at September 29, 2018
Net earnings
Other comprehensive loss(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
Cash dividends declared
BALANCE AT SEPTEMBER 28, 2019
(1) Activity within accumulated other comprehensive income (loss) is reported net of related income taxes: 2017 ($127), 2018 ($44) and 2019 $239.
See accompanying notes to consolidated financial statements.
300
(21,333)
151,084
5,598
74,632 $ 154,372 $
1,938
(39)
2,078
19,261 $ 19,261 $
(38)
2,057
143
39
143
39
(2,248) $
19,223
19,223
72,852
(1,494)
(1,333)
(2,310)
(942)
(239)
(300)
139
(754)
38
38
537
(824)
(26,011)
223,376
36,266
139
2,081
—
2,078
(942)
—
(21,333)
241,665
5,598
(754)
—
—
2,057
(239)
(2,310)
246,017
INSTEEL INDUSTRIES INC. ❘ Form 10-K
25
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
Loss (gain) on sale and disposition of property, plant
and equipment
Increase in cash surrender value of life insurance
policies over premiums paid
Net changes in assets and liabilities:
Accounts receivable, net
Inventories
Accounts payable and accrued expenses
Other changes
Total adjustments
NET CASH PROVIDED BY OPERATING ACTIVITIES
Cash Flows From Investing Activities:
Capital expenditures
Proceeds from property insurance
Proceeds from sale of property, plant and equipment
Proceeds from surrender of life insurance policies
Increase in cash surrender value of life insurance policies
Acquisition of business
NET CASH USED FOR INVESTING ACTIVITIES
Cash Flows From Financing Activities:
Proceeds from long-term debt
Principal payments on long-term debt
Cash dividends paid
Cash received from exercise of stock options
Payment of employee tax withholdings related to
net share transactions
Financing costs
NET CASH USED FOR FINANCING ACTIVITIES
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
CASH AND CASH EQUIVALENTS AT END OF PERIOD $
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest
Income taxes, net
$
Non-cash investing and financing activities:
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.
September 28, 2019
September 29, 2018
September 30, 2017
Year Ended
$
5,598 $
36,266 $
22,548
13,553
65
2,057
1,798
(1,688)
(187)
7,302
23,306
(42,592)
(2,604)
1,010
6,608
(10,512)
1,192
19
67
(322)
—
(9,556)
44,333
(44,333)
(2,310)
—
(239)
(263)
(2,812)
(5,760)
43,941
38,181 $
49 $
1,743
377
239
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)
—
(20,194)
11,836
32,105
43,941 $
— $
7,777
967
942
11,649
65
2,245
2,503
64
(812)
7,105
(10,667)
(11,930)
(1,930)
(1,708)
20,840
(20,575)
—
—
100
(405)
—
(20,880)
404
(404)
(26,011)
107
(824)
—
(26,728)
(26,768)
58,873
32,105
—
9,300
465
824
26
INSTEEL INDUSTRIES INC. ❘ Form 10-K
www.insteel.com
Item 8 Financial Statements and Supplementary Data
PART II
Insteel Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended September 28, 2019, September 29, 2018 and September 30, 2017
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 2019, 2018 and 2017
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 revenues when obligations under the terms of a
contract with our customers are satisfied, which generally occurs
when products are shipped and control is transferred. Revenue
is measured as the amount of consideration expected to be
received in exchange for our products.
INSTEEL INDUSTRIES INC. ❘ Form 10-K
27
PART II
Item 8 Financial Statements and Supplementary Data
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 $12.5 million in
2019, $11.6 million in 2018 and $10.5 million in 2017 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. No interest
costs were capitalized in 2019, 2018 and 2017.
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
2019. 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
are 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 7 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 2019, 2018 and 2017.
Fair value of financial instruments
The carrying amounts for cash and cash equivalents, accounts
receivable, and accounts payable and accrued expenses
approximate fair value because of their short maturities.
Income taxes
Income taxes are based on pretax financial accounting income.
Deferred tax assets and liabilities are recognized for the expected
tax consequences of temporary differences between the tax bases
of assets and liabilities and their reported amounts. We assess
the need to establish a valuation allowance against deferred tax
assets to the extent we no longer believe it is more likely than not
that the tax assets will be fully realized.
Earnings per share
Basic earnings per share (“EPS”) are computed by dividing
earnings available to common shareholders by the weighted
average number of shares of common stock outstanding during
the period. Diluted EPS are computed by dividing earnings
available to common shareholders by the weighted average
number of shares of common stock and other dilutive equity
securities outstanding during the period. Securities that have the
effect of increasing EPS are considered to be antidilutive and are
not included in the computation of diluted EPS.
28
INSTEEL INDUSTRIES INC. ❘ Form 10-K
www.insteel.com
Item 8 Financial Statements and Supplementary Data
PART II
Note 3 Recent Accounting Pronouncements
Current Adoptions
In August 2016, the FASB issued Accounting Standards Update
(“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 became effective for us in the first quarter and were adopted
retrospectively. The adoption of this update did not impact our
consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09 “Revenue from
Contracts with Customers,” as subsequently amended, which
supersedes 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. We adopted ASU 2014-09 during
the first quarter using the modified retrospective method. The
adoption of this update did not significantly change our timing
for recognizing revenue nor materially impact our consolidated
financial statements (see Note 4).
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
Note 4 Revenue Recognition
We recognize revenues when performance obligations under
the terms of a contract with our customers are satisfied, which
generally occurs when products are shipped and control is
transferred. We enter into contracts that pertain to products,
which are accounted for as separate performance obligations
and typically one year or less in duration. We do not exercise
significant judgment in determining the timing for the satisfaction
of performance obligations or the transaction price. Revenue
is measured as the amount of consideration expected to be
received in exchange for our products. We have elected to apply
the practical expedient provided for in ASU No. 2014-09 and not
disclose information regarding remaining performance obligations
that have original expected durations of one year or less.
Variable consideration that may affect the total transaction price,
including contractual discounts, rebates, returns and credits are
included in net sales. Estimates for variable consideration are
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.
The adoption of this update will not have a material impact 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 and early adoption is permitted.
We are evaluating the impact that the adoption of this update will
have on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02 “Leases,”
which will replace the guidance in Accounting Standards
Codification (“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. In July 2018, the FASB issued
ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements,”
which provides an additional (and optional) transition method
whereby the new lease standard is applied at the adoption
date and recognized as an adjustment to retained earnings.
The amendment has the same effective date and transition
requirements as ASU No. 2016-02. We expect the adoption of
this guidance will increase our lease liability by approximately
$1.9 million with a corresponding increase to recognize our
right-of-use assets by approximately $1.9 million, with no material
impact to our consolidated statements of operations. Additionally,
the adoption of Topic 842 is expected to significantly expand the
disclosures pertaining to leases in our notes to the consolidated
financial statements.
based on historical experience, anticipated performance and
management’s judgment and are updated as of each reporting
date. Shipping and related expenses associated with outbound
freight are accounted for as fulfillment costs and included in cost
of sales. We do not have significant financing components.
Contract assets primarily relate to our rights to consideration for
products that are delivered but not billed as of the reporting date
and are reclassified to receivables when the customer is invoiced.
Contract liabilities primarily relate to performance obligations that
are to be satisfied in the future and arise when we bill the customer
in advance of shipments. Contract costs are not significant and
are recognized as incurred. Contract assets and liabilities were
not material as of September 28, 2019.
Accounts receivable includes amounts billed and currently due
from customers stated at their net estimated realizable value.
Customer payment terms are generally 30 days. We maintain
INSTEEL INDUSTRIES INC. ❘ Form 10-K
29
PART II
Item 8 Financial Statements and Supplementary Data
an allowance for doubtful accounts to provide for the estimated
amount of receivables that will not be collected, which is based
upon our assessment of customer creditworthiness, historical
payment experience and the age of outstanding receivables.
Past-due trade receivable balances are written off when our
collection efforts have been unsuccessful.
See Note 14 for the disaggregation of our net sales by product
line and geography.
Note 5 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:
(In thousands)
Liability as of October 1, 2016
Restructuring charges
Cash payments
Non-cash charges
LIABILITY AS OF SEPTEMBER 30, 2017
Note 6 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.
Equipment
Relocation
Costs
Severance and
Other Employee
Separation Costs
31 $
239 $
164
(195)
—
—
(239)
—
— $
— $
$
$
Total
270
164
(434)
—
—
Level 2 - Observable inputs other than quoted prices included
in Level 1, such as quoted prices for similar assets and liabilities
in active markets.
Level 3 - Unobservable inputs that are supported by little or no
market activity and that are significant to the fair value of the assets
or liabilities, including certain pricing models, discounted cash
flow methodologies and similar techniques that use significant
unobservable inputs.
As of September 28, 2019 and September 29, 2018, we held financial assets that are required to be measured at fair value on a
recurring basis, which are summarized below:
(In thousands)
As of September 28, 2019:
Current assets:
Cash equivalents
Other assets:
Cash surrender value of life insurance policies
TOTAL
As of September 29, 2018:
Current assets:
Cash equivalents
Other assets:
Cash surrender value of life insurance policies
TOTAL
30
Quoted Prices
in Active Markets
(Level 1)
Observable
Inputs
(Level 2)
Total
$
$
$
$
37,826 $
37,826 $
—
10,211
—
10,211
48,037 $
37,826 $
10,211
44,257 $
44,257 $
—
9,769
—
54,026 $
44,257 $
9,769
9,769
INSTEEL INDUSTRIES INC. ❘ Form 10-K
www.insteel.com
Item 8 Financial Statements and Supplementary Data
PART II
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 28, 2019 and September 29, 2018, 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 7
Intangible Assets
The primary components of our intangible assets and the related accumulated amortization are as follows:
(In thousands)
As of September 28, 2019:
Customer relationships
Developed technology and know-how
Non-competition agreements
Trade name
As of September 29, 2018:
Customer relationships
Developed technology and know-how
Non-competition agreements
Trade name
Amortization expense for intangibles was $1.1 million in 2019,
$1.3 million in 2018 and $1.2 million in 2017. Amortization expense
for the next five years, assuming no change in the estimated
useful lives of identified intangible assets, is $924,000 in 2020,
$809,000 in 2021, $770,000 in 2022, $705,000 in 2023 and
Note 8 Long-Term Debt
Revolving Credit Facility
We have a $100.0 million revolving credit facility (the “Credit
Facility”) that is used to supplement our operating cash flow and
fund our working capital, capital expenditure, general corporate
and growth requirements. In May 2019, we entered into a new
credit agreement, which amended and restated in its entirety the
previous agreement pertaining to the revolving credit facility that
had been in effect since June 2010. The new credit agreement,
among other changes, extended the maturity date of the Credit
Facility from May 13, 2020 to May 15, 2024 and provided for an
Weighted-
Average Useful
Life (Years)
Gross
Accumulated
Amortization
Net Book
Value
16.9
20.0
5.0
4.0
16.9
20.0
5.0
4.0
$
9,070 $
(2,207)
$
1,800
1,800
140
(461)
(1,466)
(66)
6,863
1,339
334
74
$
$
12,810 $
(4,200)
$
8,610
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
$699,000 in 2024. 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 were not material.
incremental feature whereby its size may be increased by up to
$50.0 million, subject to our lender’s approval. Advances under
the Credit Facility are limited to the lesser of the revolving loan
commitment amount (currently $100.0 million) or a borrowing
base amount that is calculated based upon a percentage of
eligible receivables and inventories. As of September 28, 2019, no
borrowings were outstanding on the Credit Facility, $82.9 million
of borrowing capacity was available and outstanding letters of
credit totaled $1.6 million. As of September 29, 2018, there were
no borrowings outstanding on the Credit Facility.
INSTEEL INDUSTRIES INC. ❘ Form 10-K
31
PART II
Item 8 Financial Statements and Supplementary Data
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 0.50% for index rate loans and 1.25% to 1.50%
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 28, 2019, 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 1.0 at the end of each fiscal quarter for the
twelve-month period then ended when the amount of liquidity on
the Credit Facility is less than $10.0 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
Note 9 Stock-Based Compensation
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 28, 2019, 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 2019, 2018 and 2017. We expect
the amortization of capitalized financing costs to approximate the
following amounts for the next five fiscal years:
Fiscal year
In thousands
2020
2021
2022
2023
2024
$
67
65
65
65
41
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, replaced the 2005 Equity Incentive Plan of Insteel Industries, Inc., which expired on February 15,
2015. As of September 28, 2019, there were 143,000 shares of our common stock available for future grants under the 2015 Plan,
which is our only active equity incentive plan.
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 $889,000 in 2019, $906,000 in 2018 and $1.0 million
in 2017. As of September 28, 2019, there was $282,000 of unrecognized compensation cost related to unvested options which is
expected to be recognized over a weighted average period of 1.64 years.
The fair value of each option award granted is estimated on the date of grant using a Monte Carlo valuation model. The weighted-average
estimated fair values of stock options granted during 2019, 2018 and 2017 were $7.15, $12.06 and $11.08 per share, respectively,
based on the following weighted-average assumptions:
Expected term (in years)
Risk-free interest rate
Expected volatility
Expected dividend yield
September 28, 2019
September 29, 2018
September 30, 2017
Year Ended
4.59
2.03%
42.79%
0.56%
4.79
2.71%
37.32%
0.37%
5.14
1.98%
38.32%
0.37%
32
INSTEEL INDUSTRIES INC. ❘ Form 10-K
www.insteel.com
Item 8 Financial Statements and Supplementary Data
PART II
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:
(Share amounts in thousands)
Outstanding at October 1, 2016
Granted
Exercised
Outstanding at September 30, 2017
Granted
Exercised
Forfeited
Outstanding at September 29, 2018
Granted
Exercised
OUTSTANDING AT SEPTEMBER 28, 2019
Vested and anticipated to vest in the future at
September 28, 2019
Exercisable at September 28, 2019
Exercise Price Per Share
Options
Outstanding
Range
Weighted
Average
Contractual Term -
Weighted Average
$9.16 - $34.49
$ 20.81
371
88
(67)
392
77
26.75 - 37.06
9.16 - 23.95
9.16 - 37.06
29.69 - 41.85
(196)
9.16 - 37.06
23.95 - 37.06
10.23 - 41.85
18.25 - 21.57
18.05 - 26.75
10.23 - 41.85
(9)
264
129
(5)
388
384
184
30.93
19.05
23.40
34.84
19.68
29.88
29.25
19.74
23.95
26.16
26.17
7.81 years
7.79 years
27.62
6.31 years
Aggregate
Intrinsic Value
(in thousands)
$
1,212
3,866
21
370
366
195
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 28, 2019
September 29, 2018
September 30, 2017
Year Ended
$
61
1,225
$
1,168
35
1,175
$
1,172
37
1,180
1,238
As of September 28, 2019, there was $482,000 of unrecognized compensation cost related to unvested RSUs which is expected to
be recognized over a weighted average period of 1.74 years.
The following table summarizes RSU activity:
INSTEEL INDUSTRIES INC. ❘ Form 10-K
33
PART II
Item 8 Financial Statements and Supplementary Data
(Unit amounts in thousands)
Balance, October 1, 2016
Granted
Released
Balance, September 30, 2017
Granted
Forfeited
Released
Balance, September 29, 2018
Granted
Released
BALANCE, SEPTEMBER 28, 2019
Note 10 Income Taxes
Restricted
Stock Units
Outstanding
Weighted Average
Grant Date
Fair Value
145
$
37
(54)
128
35
(3)
(57)
103
61
(49)
115
22.35
31.95
20.43
25.92
33.52
29.60
22.26
30.40
20.18
27.64
26.16
The components of the provision for income taxes are as follows:
(Dollars in thousands)
September 28, 2019
September 29, 2018
September 30, 2017
Year Ended
Current:
Federal
State
Deferred:
Federal
State
$
(126)
185
59
1,649
149
1,798
$
8,265
$
906
9,171
(2,862)
55
(2,807)
8,269
848
9,117
2,455
48
2,503
INCOME TAXES
EFFECTIVE INCOME TAX RATE
$
1,857
$
6,364
$
11,620
24.9 %
14.9 %
34.0 %
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 28, 2019
September 29, 2018
September 30, 2017
Provision for income taxes at federal statutory rate
$
1,566
21.0% $
10,444
24.5% $
11,959
35.0%
State income taxes, net of federal tax benefit
Stock-based compensation
Valuation allowance
Federal tax return true-up
Change in federal tax rate - Tax Cuts and Jobs Act
Qualified production activities deduction
Other, net
297
90
24
(142)
—
—
22
4.0
1.2
0.3
(1.9)
—
—
0.3
739
(634)
(18)
(147)
(3,307)
(832)
119
1.7
(1.5)
(0.0)
(0.3)
(7.8)
(2.0)
0.3
598
—
(29)
—
—
(768)
(140)
1.8
—
(0.1)
—
—
(2.2)
(0.5)
PROVISION FOR INCOME TAXES
$
1,857
24.9% $
6,364
14.9% $ 11,620
34.0%
The components of deferred tax assets and liabilities are as follows:
34
INSTEEL INDUSTRIES INC. ❘ Form 10-K
www.insteel.com
(In thousands)
Deferred tax assets:
Defined benefit plans
Stock-based compensation
Accrued expenses and asset reserves
Federal net operating loss carryforward
State net operating loss carryforwards and tax credits
Valuation allowance
DEFERRED TAX ASSETS
Deferred tax liabilities:
Plant and equipment
Prepaid insurance
Goodwill
DEFERRED TAX LIABILITIES
NET DEFERRED TAX LIABILITY
Item 8 Financial Statements and Supplementary Data
PART II
September 28, 2019
September 29, 2018
$
$
2,661
1,259
1,207
363
120
(257)
5,353
(10,625)
(1,311)
(317)
(12,253)
$
(6,900)
$
2,302
1,120
1,939
—
233
(233)
5,361
(9,490)
(1,041)
(170)
(10,701)
(5,340)
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 is 21% for fiscal 2019
and beyond. We remeasured our deferred tax assets and liabilities
and adjusted our estimated annual federal income tax rate to
incorporate the lower corporate tax rate provided for under the Act
in our first quarter tax provision for fiscal 2018, which resulted in a
$3.3 million reduction in income tax expense for 2018.
we no longer believe it is more likely than not that they will be fully
realized. As of September 28, 2019, we recorded a valuation
allowance of $257,000 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 $24,000 increase in the valuation allowance
during 2019 is primarily due to state NOLs for which a tax benefit is
not expected to be realized partially offset by the expiration of state
tax credits for which an allowance had been previously recorded.
As of September 28, 2019 and September 29, 2018, we recorded
deferred tax liabilities (net of valuation allowances) of $6.9 million
and $5.3 million, respectively, in other liabilities on our consolidated
balance sheet. We have $1.7 million of federal net operating loss
carryforwards (“NOLs”) and $2.2 million of state NOLs that begin
to expire in 2022, but principally expire between 2022 and 2034.
We have also recorded deferred tax assets of $8,000 for state
tax credits that expire in 2020.
The realization of our deferred tax assets is entirely dependent
upon our ability to generate future taxable income in applicable
jurisdictions. GAAP requires that we periodically assess the need
to establish a reserve against our deferred tax assets to the extent
As of September 28, 2019, 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
2019, 2018 and 2017.
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 2014 remain subject to
examination.
Note 11 Employee Benefit Plans
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.
INSTEEL INDUSTRIES INC. ❘ Form 10-K
35
PART II
Item 8 Financial Statements and Supplementary Data
The reconciliation of the projected benefit obligation, plan assets, funded status and amounts recognized for the SERPs in our
consolidated balance sheets is as follows:
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial 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 28, 2019
September 29, 2018
September 30, 2017
Year Ended
$
$
$
$
$
$
$
$
$
$
9,749
$
9,389
$
9,159
297
384
1,133
(285)
11,278
285
(285)
—
(11,278)
(11,278)
2,958
2,958
1,133
(140)
993
$
$
$
$
$
$
$
$
$
310
345
(33)
(262)
9,749
262
(262)
—
(9,749)
(9,749)
1,966
1,966
(33)
(150)
(183)
$
$
$
$
$
$
$
$
$
344
338
(162)
(290)
9,389
290
(290)
—
(9,389)
(9,389)
2,149
2,149
(162)
(174)
(336)
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 28, 2019
September 29, 2018
September 30, 2017
$
$
297
384
140
821
$
$
310
345
150
805
$
$
344
338
174
856
The estimated net loss that will be amortized from accumulated other comprehensive loss into net periodic pension cost during 2020
is $293,000.
The assumptions used in the valuation of the SERPs are as follows:
Assumptions at year-end:
Discount rate
Rate of increase in compensation levels
September 28, 2019 September 29, 2018 September 30, 2017
Measurement Date
3.00%
3.00%
4.00%
3.00%
3.75%
3.00%
36
INSTEEL INDUSTRIES INC. ❘ Form 10-K
www.insteel.com
Item 8 Financial Statements and Supplementary Data
PART II
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)
2020
2021
2022
2023
2024
2025 - 2029
$
In thousands
283
250
562
562
524
4,476
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 $1.2 million in 2019 and $1.1 million in 2018
and 2017.
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 $5.8 million in 2019, $5.1 million in 2018
and $5.6 million in 2017. 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 12 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 that
allowed operations to continue until permanent repairs were
completed during the first quarter of this year. We reached a final
settlement on the property damage and business interruption
claim with our insurance carrier in the third quarter. During 2019,
we received $2.2 million of insurance proceeds related to the
claim that was partially applied against the beginning receivable
balance of $462,000 with the remainder recorded in other income
($1.1 million), cost of sales ($645,000) and SG&A expense
($48,000) on the consolidated statements of operations. 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.
In August 2017, operations at our manufacturing facility located
in Dayton, Texas were adversely affected by hurricane Harvey. We
reached a final settlement on the property damage and business
interruption claim with our insurance carrier in the first quarter of
2019. During 2019, we received $150,000 of proceeds related
to this claim of which $98,000 was recorded in other income
on the consolidated statements of operations. 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.
The insurance proceeds attributable to the property and
equipment damaged are reported in cash flows from investing
activities and all other insurance proceeds received are reported
in cash flows from operating activities on the consolidated
statements of cash flows.
INSTEEL INDUSTRIES INC. ❘ Form 10-K
37
PART II
Item 8 Financial Statements and Supplementary Data
Leases and purchase commitments
We lease a portion of our equipment under operating leases that
expire at various dates through 2024. 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 $1.6 million in 2019, $1.5 million in 2018 and
$1.8 million in 2017. As of September 28, 2019, minimum rental
commitments under all non-cancelable leases with an initial term
in excess of one year are payable as follows: 2020 $1.0 million;
2021, $666,000; 2022, $256,000; 2023, $61,000 and 2024 and
beyond, $47,000.
As of September 28, 2019, we had $23.8 million in non-cancelable
purchase commitments for raw material extending as long as
approximately 100 days and $2.8 million of contractual commitments
for the purchase of certain equipment that had not been fulfilled and
are not reflected in our 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
Note 13 Earnings Per Share
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.
The computation of basic and diluted earnings per share attributable to common shareholders is as follows:
(In thousands, except per share amounts)
September 28, 2019 September 29, 2018 September 30, 2017
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
$
$
5,598
$
36,266
$
19,243
97
19,340
19,079
198
19,277
0.29
$
0.29
1.90
$
1.88
22,548
19,011
206
19,217
1.19
1.17
Options and RSUs that were antidilutive and not included in the diluted EPS calculation amounted to 240,000 shares in 2019, 83,000
shares in 2018 and 76,000 shares in 2017.
38
INSTEEL INDUSTRIES INC. ❘ Form 10-K
www.insteel.com
Item 8 Financial Statements and Supplementary Data
PART II
Note 14 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 28, 2019 September 29, 2018 September 30, 2017
Year Ended
$
$
$
$
454,373
$
451,418
$
387,199
1,340
1,799
1,672
455,713
$
453,217
$
388,871
132,074
$
133,913
$
122,574
—
—
—
132,074
$
133,913
$
122,574
September 28, 2019 September 29, 2018 September 30, 2017
Year Ended
$
$
290,423
$
273,658
$
165,290
179,559
455,713
$
453,217
$
239,522
149,349
388,871
There were no customers that accounted for 10% or more of our net sales in 2019, 2018 and 2017.
Note 15 Related Party Transactions
Sales to a company affiliated with one of our former directors amounted to $716,000 in 2019, $699,000 in 2018 and $622,000 in 2017.
INSTEEL INDUSTRIES INC. ❘ Form 10-K
39
PART II
Item 8 Financial Statements and Supplementary Data
Note 16 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
Workers’ compensation
Income taxes
Other
TOTAL
Other liabilities:
Deferred compensation
Deferred income taxes
TOTAL
September 28, 2019
September 29, 2018
$
$
$
$
$
$
$
$
$
$
$
$
$
$
44,436
(254)
44,182
27,667
4,885
38,299
70,851
4,545
1,215
1,610
7,370
10,211
237
114
10,562
14,548
56,404
165,609
5,285
241,846
(136,886)
104,960
2,463
1,820
1,381
544
112
—
498
6,818
11,679
6,900
18,579
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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
113
469
652
11,929
10,541
5,340
15,881
40
INSTEEL INDUSTRIES INC. ❘ Form 10-K
www.insteel.com
Item 8 Financial Statements and Supplementary Data
PART II
Note 17 Product Warranties
Our products are used in applications which are subject to inherent
risks including performance deficiencies, personal injury, property
damage, environmental contamination or loss of production. We
warrant our products to meet certain specifications, and actual
or claimed deficiencies from these specifications may give rise
to claims. We do not maintain a reserve for warranties as the
historical claims have been immaterial. We maintain product
liability insurance coverage to minimize our exposure to such risks.
Note 18 Share Repurchases
On November 18, 2008, our Board of Directors approved a
share repurchase authorization to buy back up to $25.0 million
of our outstanding common stock (the “Authorization”). 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 28, 2019, there was $24.8 million remaining available
for future share repurchases under this Authorization. There were
no share repurchases during 2019, 2018 and 2017.
INSTEEL INDUSTRIES INC. ❘ Form 10-K
41
PART II
Item 8 Financial Statements and Supplementary Data
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 28, 2019 and
September 29, 2018, 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 28, 2019, 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 28, 2019
and September 29, 2018, and the results of its operations and
its cash flows for each of the three years in the period ended
September 28, 2019, 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 28, 2019, 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 25, 2019
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 25, 2019
42
INSTEEL INDUSTRIES INC. ❘ Form 10-K
www.insteel.com
PART II
Item 9A Controls and Procedures
Schedule II - Valuation and Qualifying Accounts
Years Ended September 28, 2019, September 29, 2018
and September 30, 2017
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 28, 2019 September 29, 2018 September 30, 2017
$
$
295
$
201
$
(41)
—
100
(6)
254
$
295
$
291
(57)
(33)
201
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 28, 2019.
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 28, 2019. During the quarter ended September 28,
2019, 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 28, 2019, which appears below.
INSTEEL INDUSTRIES INC. ❘ Form 10-K
43
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 28, 2019, 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 28, 2019, 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 28, 2019, and our report
dated October 25, 2019 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 25, 2019
44
INSTEEL INDUSTRIES INC. ❘ Form 10-K
www.insteel.com
Item 13 Certain Relationships and Related Transactions, and Director Independence
PART III
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 – Delinquent Section 16(a) Reports” and “Corporate Governance Guidelines
and Board Matters” in our Proxy Statement for the 2020 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 2020 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 2020
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 2020 Annual Meeting of Shareholders and is
incorporated herein by reference.
INSTEEL INDUSTRIES INC. ❘ Form 10-K
45
PART III
Item 14 Principal Accounting Fees and Services
Item 14 Principal Accounting Fees and Services
The information called for by this item appears under the caption “Item Number Four: Ratification of the Appointment of Grant Thornton
LLP” in our Proxy Statement for the 2020 Annual Meeting of Shareholders and is incorporated herein by reference.
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 43 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 47-49.
(c) Financial Statement Schedules
See Item 15(a)(2) above.
Item 16 Form 10-K Summary
None.
46
INSTEEL INDUSTRIES INC. ❘ Form 10-K
www.insteel.com
PART IV
Exhibit Index
Exhibit Index
Exhibit
Number
Description
2.1
3.1
3.2
3.3
3.4
3.5
4.1
4.2
4.3
4.4
10.1
10.2
10.3
10.4
10.5
10.6*
10.7*
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).
Amendment No. 2 to the Rights Agreement, dated as of November 15, 2018, by and between the Company
and American Stock Transfer & Trust Company, LLC (as Successor Rights Agent to First union National Bank)
(incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on November 19, 2018)
Description of Securities
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).
Third Amended and Restated Credit Agreement dated as of May 15, 2019, among Insteel Wire Products Company,
as Borrower; Insteel Industries, Inc., as a Credit Party; and Wells Fargo Bank, as Agent and Lender (incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 16, 2019).
Guaranty and Second Amended and Restated Security Agreement dated as of May 15, 2019, among Insteel
Industries, Inc., Insteel Wire Products Company, Intercontinental Metals Corporation, and Wells Fargo Bank, as
administrative agent (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed
May 16, 2019)
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).
INSTEEL INDUSTRIES INC. ❘ Form 10-K
47
PART IV
Exhibit Index
Exhibit
Number
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
10.20*
10.21*
10.22*
21.1
23.1
31.1
31.2
32.1
32.2
Description
Change in Control Severance Agreement between the Company and James F. Petelle dated November 14, 2006
(incorporated by reference to Exhibit 99.3 of the Company’s Current Report on Form 8-K filed on November 16, 2006).
Amended and Restated Retirement Security Agreement by and between the Company and H.O. Woltz III dated
September 19, 2007 (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed
on September 21, 2007).
Form of Retirement Security Agreement between the Company and each of Michael C. Gazmarian, James F. Petelle
and Richard T. Wagner, respectively, dated September 19, 2007; each agreement is substantially identical to the
form in all material respects (incorporated by reference to Exhibit 10.3 of the Company's Current Report on Form
8-K filed on September 21, 2007).
Letter of Employment between the Company and James F. Petelle, dated August 23, 2006 (incorporated by
reference to Exhibit 99.7 of the Company’s Current Report on Form 8-K filed on November 16, 2006).
Relocation Proposal between the Company and James F. Petelle, dated August 23, 2006 (incorporated by reference
to Exhibit 10.20.1 of the Company's Annual Report on Form 10-K for the year ended October 3, 2009 filed on
November 9, 2009).
Addendum to Relocation Proposal between the Company and James F. Petelle, dated September 18, 2009
(incorporated by reference to Exhibit 10.20.2 of the Company's Annual Report on Form 10-K for the year ended
October 3, 2009 filed on November 9, 2009).
Amended and Restated Change in Control Severance Agreement between the Company and Richard T. Wagner
dated November 14, 2006 (incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K
filed on February 15, 2007).
2005 Equity Incentive Plan of Insteel Industries, Inc., as amended on November 8, 2011 (incorporated by reference
to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the fiscal year ended October 1, 2011 filed on
November 10, 2011).
Summary of amendments to the Insteel Industries, Inc. Director Compensation Plan (incorporated by reference to
exhibit 10.23 of the Company's Annual Report on Form 10-K for the fiscal year ended September 27, 2008 filed on
November 18, 2008).
Form of Notice of Grant of Restricted Stock Units and Restricted Stock Unit Agreement (incorporated by reference
to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on January 23, 2009).
Insteel Industries, Inc. Return on Capital Incentive Compensation Plan (as amended and restated effective August
12, 2008) (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on
February 13, 2009).
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)).
Form of Restricted Stock Unit Agreement under the 2015 Equity Incentive Plan of Insteel Industries, Inc.
Form of Stock Option Agreement under the 2015 Equity Incentive Plan of Insteel Industries, Inc.
List of Subsidiaries of Insteel Industries, Inc. at September 28, 2019.
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.
48
INSTEEL INDUSTRIES INC. ❘ Form 10-K
www.insteel.com
PART IV
Exhibit Index
Exhibit
Number
101
Description
The following financial information from our Annual Report on Form 10-K for the fiscal year ended September 28,
2019, filed on October 25, 2019, formatted in XBRL (eXtensible Business Reporting Language) includes: (i) the
Consolidated Statements of Operations for the years ended September 28, 2019, September 29, 2018 and
September 30, 2017, (ii) the Consolidated Statements of Comprehensive Income for the years ended September
28, 2019, September 29, 2018 and September 30, 2017, (iii) the Consolidated Balance Sheets as of September 28,
2019 and September 29, 2018, (iv) the Consolidated Statements of Cash Flows for the years ended September 28,
2019, September 29, 2018 and September 30, 2017, (v) the Consolidated Statements of Shareholders’ Equity as
of September 28, 2019, September 29, 2018 and September 30, 2017 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.
INSTEEL INDUSTRIES INC. ❘ Form 10-K
49
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 25, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on October 25, 2019 below by the
following persons on behalf of the registrant and in the capacities indicated:
Name and Signature
/s/ H. O. WOLTZ III
H. O. Woltz III
/s/ MICHAEL C. GAZMARIAN
Michael C. Gazmarian
/s/ SCOT R. JAFROODI
Scot R. Jafroodi
/s/ ABNEY S. BOXLEY III
Abney S. Boxley III
/s/ ANNE H. LLOYD
Anne H. Lloyd
/s/ W. ALLEN ROGERS II
W. Allen Rogers II
/s/ JON M. RUTH
Jon M. Ruth
/s/ JOSEPH A. RUTKOWSKI
Joseph A. Rutkowski
/s/ G. KENNEDY THOMPSON
G. Kennedy Thompson
Position(s)
President, Chief Executive Officer and Chairman of the Board (Principal Executive Officer)
Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)
Chief Accounting Officer and Corporate Controller (Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
50
INSTEEL INDUSTRIES INC. ❘ Form 10-K
www.insteel.com
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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 2019 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 28, 2019, which is
included as part of this 2019 Annual Report.
CORPORATE INFORMATION
BOARD OF DIRECTORS
EXECUTIVE OFFICERS
Abney S. Boxley, III(2,3)
President, Eastern Region
Summit Materials, Inc.
Anne H. Lloyd(1,2)
Retired Executive Vice President and
Chief Financial Officer
Martin Marietta Materials, Inc.
W. Allen Rogers II(1,3)
Lead Independent Director
Principal
Ewing Capital Partners, LLC
Partner
Peter Browning Partners, LLC
Jon M. Ruth(2,3)
Retired Vice President
Cargill
Joseph A. Rutkowski(2,3)
Principal
Winyah Advisors LLC
G. Kennedy Thompson(1,2)
Retired Partner
Aquiline Capital Partners LLC
H.O. Woltz III
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
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 11, 2020 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, 2019, there
were 531 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:
AST, LLC
Operations Center
6201 15th Avenue
Brooklyn, New York 11219
(800) 937-5449
www.astfinancial.com
1373 Boggs Drive
Mount Airy, North Carolina 27030
www.insteel.com
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