10-Q 1 iiin20220403_10q.htm FORM 10-Q iiin20220403_10q.htm
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended April 2, 2022

 

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

(Address of principal executive offices)

 

27030

(Zip Code)

 

Registrant’s telephone number, including area code: (336) 786-2141

 

Securities registered subject to Section 12(b) of the Exchange Act:

 

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock (No Par Value)

IIIN

New York Stock Exchange

 

Indicate by check mark 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.

 

Yes

No ☐

 

Indicate by check mark 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).

 

Yes ☒

No ☐

 

Indicate by check mark 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.

 

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company 

Emerging growth company 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes

No ☒

 

As of April 21, 2022, 19,439,206 shares of the registrant’s common stock were outstanding.

 

 

 

 

TABLE OF CONTENTS

 

PART I  FINANCIAL INFORMATION

     

Item 1.

Unaudited Financial Statements

 
 

Consolidated Statements of Operations and Comprehensive Income

3

 

Consolidated Balance Sheets

4

 

Consolidated Statements of Cash Flows

5

 

Consolidated Statements of Shareholders' Equity

6

 

Notes to Consolidated Financial Statements

7

     

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

17

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

24

     

Item 4.

Controls and Procedures

24

     

PART II  OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings 25
     

Item 1A.

Risk Factors

25

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25

 

 

 

Item 6.

Exhibits 25
     

SIGNATURES

26

 

2

 

PART I FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except per share amounts)

(Unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

April 2,

   

April 3,

   

April 2,

   

April 3,

 
   

2022

   

2021

   

2022

   

2021

 
                                 

Net sales

  $ 213,209     $ 138,999     $ 391,668     $ 258,604  

Cost of sales

    156,140       108,771       292,235       208,525  

Gross profit

    57,069       30,228       99,433       50,079  

Selling, general and administrative expense

    7,202       10,330       19,483       18,883  

Restructuring charges (recoveries), net

    (365 )     545       (318 )     1,202  

Other expense (income), net

    (11 )     75       (16 )     88  

Interest expense

    23       24       45       49  

Interest income

    (10 )     (5 )     (24 )     (10 )

Earnings before income taxes

    50,230       19,259       80,263       29,867  

Income taxes

    11,213       4,339       18,117       6,804  

Net earnings

  $ 39,017     $ 14,920     $ 62,146     $ 23,063  
                                 
                                 

Net earnings per share:

                               

Basic

  $ 2.00     $ 0.77     $ 3.19     $ 1.19  

Diluted

    1.99       0.76       3.17       1.18  
                                 

Weighted average shares outstanding:

                               

Basic

    19,492       19,328       19,487       19,319  

Diluted

    19,623       19,517       19,615       19,476  
                                 

Cash dividends declared per share

  $ 0.03     $ 0.03     $ 2.06     $ 1.56  
                                 

Comprehensive income

  $ 39,017     $ 14,920     $ 62,146     $ 23,063  

 

See accompanying notes to consolidated financial statements.

 

3

 

 

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

 

  

(Unaudited)

     
  

April 2,

  

October 2,

 
  

2022

  

2021

 

Assets

        

Current assets:

        

Cash and cash equivalents

 $69,725  $89,884 

Accounts receivable, net

  80,690   67,917 

Inventories

  127,049   79,049 

Other current assets

  5,340   10,056 

Total current assets

  282,804   246,906 

Property, plant and equipment, net

  107,159   105,624 

Intangibles, net

  7,256   7,668 

Goodwill

  9,745   9,745 

Other assets

  13,594   20,767 

Total assets

 $420,558  $390,710 
         

Liabilities and shareholders' equity

        

Current liabilities:

        

Accounts payable

 $58,459  $49,443 

Accrued expenses

  15,357   19,406 

Total current liabilities

  73,816   68,849 

Other liabilities

  21,595   19,823 

Commitments and contingencies

          

Shareholders' equity:

        

Common stock

  19,439   19,408 

Additional paid-in capital

  79,613   78,688 

Retained earnings

  228,537   206,384 

Accumulated other comprehensive loss

  (2,442)  (2,442)

Total shareholders' equity

  325,147   302,038 

Total liabilities and shareholders' equity

 $420,558  $390,710 

 

See accompanying notes to consolidated financial statements.

 

4

 

 

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

  

Six Months Ended

 
  

April 2,

  

April 3,

 
  

2022

  

2021

 

Cash Flows From Operating Activities:

        

Net earnings

 $62,146  $23,063 

Adjustments to reconcile net earnings to net cash provided by operating activities:

        

Depreciation and amortization

  7,345   7,200 

Amortization of capitalized financing costs

  33   32 

Stock-based compensation expense

  1,102   934 

Deferred income taxes

  1,116   (466)

(Gain) loss on sale of property, plant and equipment and assets held for sale

  (608)  115 

Gain from life insurance proceeds

  (364)  - 

Increase in cash surrender value of life insurance policies over premiums paid

  -   (1,168)

Net changes in assets and liabilities:

        

Accounts receivable, net

  (12,773)  (4,306)

Inventories

  (48,000)  340 

Accounts payable and accrued expenses

  6,805   2,677 

Other changes

  3,264   818 

Total adjustments

  (42,080)  6,176 

Net cash provided by operating activities

  20,066   29,239 
         

Cash Flows From Investing Activities:

        

Capital expenditures

  (8,617)  (8,768)

Decrease (increase) in cash surrender value of life insurance policies

  35   (197)

Proceeds from sale of assets held for sale

  6,934   19 

Proceeds from life insurance claims

  1,456   - 

Proceeds from surrender of life insurance policies

  106   23 

Net cash used for investing activities

  (86)  (8,923)
         

Cash Flows From Financing Activities:

        

Proceeds from long-term debt

  133   134 

Principal payments on long-term debt

  (133)  (134)

Cash dividends paid

  (39,993)  (30,131)

Payment of employee tax withholdings related to net share transactions

  (192)  (110)

Cash received from exercise of stock options

  46   177 

Net cash used for financing activities

  (40,139)  (30,064)
         

Net decrease in cash and cash equivalents

  (20,159)  (9,748)

Cash and cash equivalents at beginning of period

  89,884   68,688 

Cash and cash equivalents at end of period

 $69,725  $58,940 
         

Supplemental Disclosures of Cash Flow Information:

        

Cash paid during the period for:

        

Income taxes, net

 $18,053  $5,812 

Non-cash investing and financing activities:

        

Purchases of property, plant and equipment in accounts payable

  372   1,357 

Restricted stock units and stock options surrendered for withholding taxes payable

  192   110 

 

See accompanying notes to consolidated financial statements.

 

5

 

 

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(In thousands)

(Unaudited)

 

                                   

Accumulated

         
                   

Additional

           

Other

   

Total

 
   

Common Stock

   

Paid-In

   

Retained

   

Comprehensive

   

Shareholders'

 
   

Shares

   

Amount

   

Capital

   

Earnings

   

Loss

   

Equity

 

For the three and six months ended April 2, 2022

                                         
                                                 

Balance at October 2, 2021

    19,408     $ 19,408     $ 78,688     $ 206,384     $ (2,442 )   $ 302,038  

Net earnings

                            23,129               23,129  

Stock options exercised, net

    6       6       40                       46  

Compensation expense associated with stock-based plans

                    272                       272  

Restricted stock units and stock options surrendered for withholding taxes payable

                    (55 )                     (55 )

Cash dividends declared

                            (39,410 )             (39,410 )

Balance at January 1, 2022

    19,414     $ 19,414     $ 78,945     $ 190,103     $ (2,442 )   $ 286,020  

Net earnings

                            39,017               39,017  

Vesting of restricted stock units

    25       25       (25 )                     -  

Compensation expense associated with stock-based plans

                    830                       830  

Restricted stock units and stock options surrendered for withholding taxes payable

                    (137 )                     (137 )

Cash dividends declared

                            (583 )             (583 )

Balance at April 2, 2022

    19,439     $ 19,439     $ 79,613     $ 228,537     $ (2,442 )   $ 325,147  
                                                 

For the three and six months ended April 3, 2021

                                         
                                                 

Balance at October 3, 2020

    19,304     $ 19,304     $ 76,387     $ 171,068     $ (1,956 )   $ 264,803  

Net earnings

                            8,143               8,143  

Stock options exercised, net

    10       10       118                       128  

Compensation expense associated with stock-based plans

                    224                       224  

Restricted stock units and stock options surrendered for withholding taxes payable

                    (13 )                     (13 )

Cash dividends declared

                            (29,551 )             (29,551 )

Balance at January 2, 2021

    19,314       19,314       76,716       149,660       (1,956 )     243,734  

Net earnings

                            14,920               14,920  

Stock options exercised, net

    2       2       47                       49  

Vesting of restricted stock units

    25       25       (25 )                     -  

Compensation expense associated with stock-based plans

                    710                       710  

Restricted stock units and stock options surrendered for withholding taxes payable

                    (97 )                     (97 )

Cash dividends declared

                            (580 )             (580 )

Balance at April 3, 2021

    19,341     $ 19,341     $ 77,351     $ 164,000     $ (1,956 )   $ 258,736  

 

See accompanying notes to consolidated financial statements

 

6

 

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(1) Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the U.S. (“GAAP”) on a basis consistent with that used in the Annual Report on Form 10-K for the year ended October 2, 2021 (“2021 Form 10-K”) filed by us with the Securities and Exchange Commission (the “SEC”). These statements include all normal recurring adjustments necessary to present fairly the consolidated balance sheets and the statements of operations and comprehensive income, cash flows and shareholders’ equity for the periods indicated. The October 2, 2021 consolidated balance sheet was derived from audited consolidated financial statements but does not include all the disclosures required by GAAP. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2021 Form 10-K. The results of operations for the periods indicated are not necessarily indicative of the results that may be expected for the full fiscal year or any future periods.

 

 

(2) Recent Accounting Pronouncements

 

Current Adoptions

 

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12 “Simplifying the Accounting for Income Taxes (Topic 740)”.  ASU No. 2019-12 removes certain exceptions to the general principles in Accounting Standards Codification (“ASC”) 740 and also clarifies and amends existing guidance to provide for more consistent application. We adopted ASU No. 2019-12 in the first quarter. The adoption of this guidance did not have a material impact on our consolidated financial statements.

 

Future Adoptions

 

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”. ASU No. 2020-04 provides optional expedients and exceptions to account for contracts, hedging relationships and other transactions that reference LIBOR or another reference rate if certain criteria are met. ASU No. 2020-04 is effective March 12, 2020 through December 31, 2022. The adoption of this guidance will not have a material impact on our consolidated financial statements and disclosures.

 

 

(3) Restructuring

 

On March 16, 2020, we purchased substantially all of the assets of Strand-Tech Manufacturing, Inc. (“STM”) for an adjusted purchase price of $19.4 million, reflecting certain post-closing adjustments (the “STM Acquisition”). STM was a leading manufacturer of prestressed concrete strand (“PC strand”) for concrete construction applications. We acquired, among other assets, STM’s accounts receivable, inventories, production equipment and facility located in Summerville, South Carolina, and assumed certain of its accounts payable and accrued liabilities.

 

In connection with the STM acquisition, we elected to consolidate our PC strand operations through the closure of the Summerville facility and the redeployment of its equipment to our other three PC strand production facilities located in Gallatin, Tennessee; Houston, Texas; and Sanderson, Florida. Operations at the Summerville facility ceased during the third quarter of fiscal 2020.

 

7

 

Following is a summary of the restructuring activity during the three- and six-month periods ended April 2, 2022 and April 3, 2021:

 

(In thousands)

 

Employee
Separation

   

Equipment
Relocation

   

Facility
Closure

   

Asset

   

Gain on Sale

         
    Costs     Costs    

Costs

   

Impairments

   

of Property

   

Total

 

2022

                                               

Liability as of October 2, 2021

  $ -     $ -     $ 10     $ -     $ -     $ 10  

Restructuring charges

    -       -       47       -       -       47  

Cash payments

    -       -       (53 )     -       -       (53 )

Non-cash charges

    -       -       -       -       -       -  

Liability as of January 1, 2022

    -       -       4       -       -       4  

Restructuring charges (recoveries)

    -       -       257       -       (622 )     (365 )

Cash payments

    -       -       (261 )     -       -       (261 )

Non-cash charges

    -       -       -       -       622       622  

Liability as of April 2, 2022

  $ -     $ -     $ -     $ -     $ -     $ -  
                                                 

2021

                                               

Liability as of October 3, 2020

  $ -     $ 20     $ 151     $ -     $ -     $ 171  

Restructuring charges

    13       88       552       4       -       657  

Cash payments

    (13 )     (95 )     (669 )     -       -       (777 )

Non-cash charges

    -       -       -       (4 )     -       (4 )

Liability as of January 2, 2021

    -       13       34       -       -       47  

Restructuring charges

    -       286       259       -       -       545  

Cash payments

    -       (299 )     (266 )     -       -       (565 )

Non-cash charges

    -       -       -       -       -       -  

Liability as of April 3, 2021

  $ -     $ -     $ 27     $ -     $ -     $ 27  

 

We do not expect to incur any additional restructuring charges (recoveries) related to the consolidation of our PC strand operations.

 

 

(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 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.

 

Our net sales by product line are as follows:

 

   

Three Months Ended

   

Six Months Ended

 
   

April 2,

   

April 3,

   

April 2,

   

April 3,

 

(In thousands)

 

2022

   

2021

   

2022

   

2021

 

Welded wire reinforcement

  $ 133,651     $ 81,923     $ 247,044     $ 155,949  

Prestressed concrete strand

    79,558       57,076       144,624       102,655  

Total

  $ 213,209     $ 138,999     $ 391,668     $ 258,604  

 

8

 

Our net sales by geographic region are as follows:

 

   

Three Months Ended

   

Six Months Ended

 
   

April 2,

   

April 3,

   

April 2,

   

April 3,

 

(In thousands)

 

2022

   

2021

   

2022

   

2021

 

United States

  $ 211,527     $ 136,778     $ 388,268     $ 255,115  

Foreign

    1,682       2,221       3,400       3,489  

Total

  $ 213,209     $ 138,999     $ 391,668     $ 258,604  

 

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 collect from 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 April 2, 2022 and October 2, 2021.

 

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 an allowance for doubtful accounts to provide for the estimated 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.

 

 

(5) Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative guidance for fair value measurements establishes a three-level fair value hierarchy that encourages an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs used to measure fair value are as follows:

 

Level 1 - Quoted prices in active markets for identical assets or liabilities.

 

Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets.

 

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities, including certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

 

9

 

As of April 2, 2022 and October 2, 2021, we held financial assets that are required to be measured at fair value on a recurring basis, which are summarized below:

 

(In thousands)

 

Total

  

Quoted Prices

in Active

Markets

(Level 1)

  

Observable

Inputs

(Level 2)

 

As of April 2, 2022:

            

Current assets:

            

Cash equivalents

 $69,076  $69,076  $- 

Other assets:

            

Cash surrender value of life insurance policies

  11,267   -   11,267 

Total

 $80,343  $69,076  $11,267 
             

As of October 2, 2021:

            

Current assets:

            

Cash equivalents

 $86,395  $86,395  $- 

Other assets:

            

Cash surrender value of life insurance policies

  12,501   -   12,501 

Total

 $98,896  $86,395  $12,501 

 

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 April 2, 2022 and October 2, 2021, we had no nonfinancial assets that were required to be measured at fair value on a nonrecurring basis. The carrying amounts of accounts receivable, accounts payable and accrued expenses approximate fair value due to the short-term maturities of these financial instruments.

 

 

(6) Intangible Assets

 

The primary components of our intangible assets and the related accumulated amortization are as follows:

 

(In thousands)

 

Weighted-

Average Useful

Life (Years)

   

Gross

   

Accumulated

Amortization

   

Net Book Value

 

As of April 2, 2022:

                             

Customer relationships

  17.1     $ 9,870     $ (3,806 )   $ 6,064  

Developed technology and know-how

 

20.0

      1,800       (684 )     1,116  

Non-competition agreements

  5.0       400       (324 )     76  
          $ 12,070     $ (4,814 )   $ 7,256  
                               

As of October 2, 2021:

                             

Customer relationships

  17.1     $ 9,870     $ (3,482 )   $ 6,388  

Developed technology and know-how

 

20.0

      1,800       (639 )     1,161  

Non-competition agreements

  5.0       400       (284 )     116  

Trade name

  2.7       250       (247 )     3  
          $ 12,320     $ (4,652 )   $ 7,668  

 

Amortization expense for intangibles was $204,000 and $236,000 for the three-month periods ended April 2, 2022 and April 3, 2021, respectively, and $412,000 and $472,000 for the six-month periods ended April 2, 2022 and April 3, 2021, respectively. Amortization expense for the next five years is $409,000 in 2022, $756,000 in 2023, $750,000 in 2024, $743,000 in 2025, $752,000 in 2026 and $3.8 million thereafter.

 

10

 
 

(7) Stock-Based Compensation

 

Under our equity incentive plan, employees and directors may be granted stock options, restricted stock, restricted stock units and performance awards. Effective February 28, 2020, our shareholders approved an amendment to the 2015 Equity Incentive Plan of Insteel Industries, Inc. (the “2015 Plan”), which authorizes up to an additional 750,000 shares of our common stock for future grants under the plan and expires on February 17, 2025. As of April 2, 2022, there were 620,000 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 these plans generally vest over three years and expire ten years from the date of the grant. Compensation expense associated with stock options was $374,000 and $324,000 for the three-month periods ended April 2, 2022 and April 3, 2021, respectively, and $480,000 and $400,000 for the six-month periods ended April 2, 2022 and April 3, 2021, respectively. As of April 2, 2022, there was $624,000 of unrecognized compensation cost related to unvested options which is expected to be recognized over a weighted average period of 2.2 years.

 

The fair value of each option award granted is estimated on the date of grant using a Monte Carlo valuation model. The estimated fair values of stock options granted during the three- and six-month periods ended April 2, 2022 and April 3, 2021 was $15.45 and $12.33 per share, respectively, based on the following assumptions:

 

   

Six Months Ended

 
   

April 2,

   

April 3,

 
   

2022

   

2021

 

Risk-free interest rate

    1.92 %     0.56 %

Dividend yield

    0.30 %     0.48 %

Expected volatility

    48.92 %     51.47 %

Expected term (in years)

    4.65       4.92  

 

The assumptions utilized in the Monte Carlo valuation model are evaluated and revised, as necessary, to reflect market conditions and actual historical experience. 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 dividend yield was calculated based on our annual dividend as of the option grant date. 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 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 following table summarizes stock option activity:

 

                   

Contractual

   

Aggregate

 
   

Options

   

Weighted

   

Term - Weighted

   

Intrinsic

 
   

Outstanding

   

Average

   

Average

   

Value

 
   

(in thousands)

   

Exercise Price

   

(in years)

   

(in thousands)

 

Outstanding at October 2, 2021

    428     $ 27.73                  

Granted

    36       38.54                  

Forfeited

    (60 )     29.29                  

Exercised

    (10 )     19.14             $ 254  

Outstanding at April 2, 2022

    394       28.73       7.41       3,622  
                                 

Vested and anticipated to vest in the future at April 2, 2022

    379       28.58       7.35       3,533  
                                 

Exercisable at April 2, 2022

    224       28.08       6.36       2,139  

 

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.

 

11

 

Restricted stock units. Restricted stock units (“RSUs”) granted under our equity incentive plans are valued based upon the fair market value on the date of the grant and provide for a dividend equivalent payment which is included in compensation expense. 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. Compensation expense associated with RSUs was $455,000 and $386,000 for the three-month periods ended April 2, 2022 and April 3, 2021, respectively, and $622,000 and $534,000 for the six-month periods ended April 2, 2022 and April 3, 2021, respectively.

 

As of April 2, 2022, there was $1.1 million of unrecognized compensation cost related to unvested RSUs which is expected to be recognized over a weighted average period of 1.67 years.

 

The following table summarizes RSU activity:

 

           

Weighted

 
   

Restricted

   

Average

 
   

Stock Units

   

Grant Date

 

(Unit amounts in thousands)

 

Outstanding

   

Fair Value

 

Balance, October 2, 2021

    129     $ 24.73  

Granted

    24       38.54  

Forfeited

    (3 )     22.09  

Released

    (29 )     24.86  

Balance, April 2, 2022

    121       27.48  

 

 

(8) Income Taxes

 

Effective income tax rate. Our effective income tax rate was 22.6% for the six-month period ended April 2, 2022 compared with 22.8% for the six-month period ended April 3, 2021. The effective income tax rates for both periods were based upon the estimated rate applicable for the entire fiscal year adjusted to reflect any significant items related specifically to interim periods.

 

Deferred income taxes. As of April 2, 2022 and October 2, 2021, we recorded a deferred tax liability (net of valuation allowance) of $7.4 million and $6.3 million, respectively, in other liabilities on our consolidated balance sheets. We have $2.4 million of state net operating loss carryforwards (“NOLs”) that begin to expire in 2031, but principally expire between 2031 and 2037.

 

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 we no longer believe it is more likely than not that they will be fully realized. As of April 2, 2022 and October 2, 2021, we recorded a valuation allowance of $74,000 and $73,000, respectively, pertaining to various state NOLs 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 against which an allowance had previously been provided or determine that such utilization was more likely than not.

 

Uncertainty in income taxes. We establish contingency reserves for material, known tax exposures based on our assessment of the estimated liability that would be incurred in connection with the settlement of such matters. As of April 2, 2022, we had no material, known tax exposures that required the establishment of contingency reserves for uncertain tax positions.

 

We file U.S. federal, state and local income tax returns in various jurisdictions. Federal and various state tax returns filed subsequent to 2016 remain subject to examination.

 

 

(9) Employee Benefit Plans

 

Supplemental retirement benefit plan. We have Supplemental Retirement Benefit Agreements (each, a “SRBA”) with certain of our employees (each, a “Participant”). Under the SRBAs, 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.

 

12

 

Net periodic pension cost for the SRBAs includes the following components:

 

   

Three Months Ended

   

Six Months Ended

 
   

April 2,

   

April 3,

   

April 2,

   

April 3,

 

(In thousands)

 

2022

   

2021

   

2022

   

2021

 

Interest cost

  $ 87     $ 79     $ 174     $ 158  

Service cost

    100       78       200       156  

Recognized net actuarial loss

    69       54       138       108  

Net periodic pension cost

  $ 256     $ 211     $ 512     $ 422  

 

 

(10) 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 accordion 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 April 2, 2022, no borrowings were outstanding on the Credit Facility, $98.6 million of borrowing capacity was available and outstanding letters of credit totaled $1.4 million.

 

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 April 2, 2022, 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 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 April 2, 2022, 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 $16,000 for each of the three-month periods ended April 2, 2022 and April 3, 2021, and $33,000 and $32,000 for each of the six-month periods ended April 2, 2022 and April 3, 2021, respectively.

 

13

 
 

(11) Earnings Per Share

 

The computation of basic and diluted earnings per share attributable to common shareholders is as follows:

 

   

Three Months Ended

   

Six Months Ended

 
   

April 2,

   

April 3,

   

April 2,

   

April 3,

 

(In thousands, except per share amounts)

 

2022

   

2021

   

2022

   

2021

 

Net earnings

  $ 39,017     $ 14,920     $ 62,146     $ 23,063  
                                 

Basic weighted average shares outstanding

    19,492       19,328       19,487       19,319  

Dilutive effect of stock-based compensation

    131       189       128       157  

Diluted weighted average shares outstanding

    19,623       19,517       19,615       19,476  
                                 

Net earnings per share:

                               

Basic

  $ 2.00     $ 0.77     $ 3.19     $ 1.19  

Diluted

  $ 1.99     $ 0.76     $ 3.17     $ 1.18  

 

Options that were antidilutive and not included in the dilutive earnings per share calculation amounted to 67,000 and 116,000 shares for the three-month periods ended April 2, 2022 and April 3, 2021, respectively, and 62,000 and 185,000 shares for the six-month periods ended April 2, 2022 and April 3, 2021, respectively.

 

 

(12) 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 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 April 2, 2022, there was $24.8 million remaining available for future share repurchases under this Authorization. There were no share repurchases during the three- and six-month periods ended April 2, 2022 and April 3, 2021.

 

14

 
 

(13) Other Financial Data

 

Balance sheet information

 

   

April 2,

   

October 2,

 

(In thousands)

 

2022

   

2021

 

Accounts receivable, net:

               

Accounts receivable

  $ 81,090     $ 68,274  

Less allowance for doubtful accounts

    (400 )     (357 )

Total

  $ 80,690     $ 67,917  
                 

Inventories:

               

Raw materials

  $ 80,435     $ 50,459  

Work in process

    9,224       6,680  

Finished goods

    37,390       21,910  

Total

  $ 127,049     $ 79,049  
                 

Other current assets:

               

Prepaid insurance

  $ 3,706     $ 5,169  

Other

    1,634       4,887  

Total

  $ 5,340     $ 10,056  
                 

Other assets:

               

Cash surrender value of life insurance policies

  $ 11,267     $ 12,501  

Assets held for sale

    -       6,306  

Right-of-use asset

    2,135       1,717  

Capitalized financing costs, net

    73       106  

Other

    119       137  

Total

  $ 13,594     $ 20,767  
                 

Property, plant and equipment, net:

               

Land and land improvements

  $ 14,577     $ 14,554  

Buildings

    53,362       53,182  

Machinery and equipment

    190,248       180,654  

Construction in progress

    8,572       10,191  
      266,759       258,581  

Less accumulated depreciation

    (159,600 )     (152,957 )

Total

  $ 107,159     $ 105,624  
                 

Accrued expenses:

               

Salaries, wages and related expenses

  $ 7,731     $ 8,229  

Income taxes

    2,961       4,014  

Customer rebates

    1,552       2,354  

Operating lease liability

    1,191       1,030  

Property taxes

    598       1,575  

State sales and use taxes

    430       760  

Sales allowance reserves

    351       991  

Other

    543       453  

Total

  $ 15,357     $ 19,406  
                 

Other liabilities:

               

Deferred compensation

  $ 13,235     $ 12,832  

Deferred income taxes

    7,412       6,296  

Operating lease liability

    948       695  

Total

  $ 21,595     $ 19,823  

 

15

 
 

(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 welded wire reinforcement. Based on the criteria specified in ASC Topic 280, Segment Reporting, we have one reportable segment.

 

 

(15) Leases

 

We have operating leases for certain equipment, office space and vehicles. We determine whether an arrangement is a lease at its inception if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Leases with an initial term of twelve months or less are not recorded on our consolidated balance sheets. Lease expense for operating leases with original terms of more than twelve months was $350,000 and $361,000 for the three-month periods ended April 2, 2022 and April 3, 2021, respectively, and $717,000 and $721,000 for the six-month periods ended April 2, 2022 and April 3, 2021, respectively.

 

Most of our leases include options to extend or terminate the leases which are exercised at our sole discretion. As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate, which approximates the rate to borrow on a collateralized basis, as of the commencement date in determining the present value of lease payments.

 

Supplemental cash flow and non-cash information related to leases is as follows:

 

   

Six Months Ended

 

(In thousands)

 

April 2, 2022

   

April 3, 2021

 

Cash paid for operating leases included in operating cash flows

  $ 717     $ 724  

Right-of-use assets obtained in exchange for new lease obligations

    1,124       303  

 

Supplemental balance sheet information related to leases is as follows:

 

(In thousands)

 

April 2, 2022

   

October 2, 2021

 

Right-of-use assets:

               

Other assets

  $ 2,135     $ 1,717  
                 

Lease liabilities:

               

Accrued expenses

    1,191       1,030  

Other liabilities

    948       695  

Total operating lease liabilities

  $ 2,139     $ 1,725  

 

The weighted average remaining lease terms and discount rates for operating leases are as follows:

 

   

April 2, 2022

   

October 2, 2021

 

Weighted average lease term (years)

    2.0       1.8  

Weighted average discount rate

    3.7 %     4.1 %

 

Aggregate future operating lease payments as of April 2, 2022 are as follows:

 

(In thousands)

       

2022

  $ 675  

2023

    989  

2024

    489  

2025

    68  

Total future operating lease payments

    2,221  

Less: imputed interest

    (82 )

Present value of lease liabilities

  $ 2,139  

 

16

 
 

(16) Contingencies

 

Insurance recoveries. We maintain general liability, business interruption and replacement cost property insurance coverage on our facilities.

 

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.

 

 

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

 

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 under the caption “Outlook” below. When used in this report, the words “believes,” “anticipates,” “expects,” “estimates,” “appears,” “plans,” “intends,” “continue,” “outlook,” “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 numerous risks and uncertainties and involve certain assumptions. Actual results may differ materially from those expressed in forward-looking statements, 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 detail, and where appropriate, updated in our filings with the U.S. Securities and Exchange Commission (“SEC”), in particular in our Annual Report on Form 10-K for the fiscal year ended October 2, 2021 (our “2021 Annual Report”). You should carefully review these risks and uncertainties.

 

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 business, future operations or financial performance; however, they include, but are not limited to, the following:

 

 

the impact of COVID-19 on the economy, demand for our products and our operations, including the measures taken by governmental authorities to address it, which may precipitate or exacerbate other risks and/or uncertainties;

 

 

general economic and competitive conditions in the markets in which we operate;

 

 

changes in the spending levels for nonresidential and residential construction and the impact on demand for our products;

 

 

changes in the amount and duration of transportation funding provided by federal, state and local governments and the impact on spending for infrastructure construction and demand for our products;

 

 

the cyclical nature of the steel and building material industries;

 

 

credit market conditions and the relative availability of financing for us, our customers and the construction industry as a whole;

 

 

fluctuations in the cost and availability of our primary raw material, hot-rolled carbon steel wire rod, from domestic and foreign suppliers;

 

 

competitive pricing pressures and our ability to raise selling prices in order to recover increases in raw material or operating costs;

 

 

changes in U.S. or foreign trade policy affecting imports or exports of steel wire rod or our products;

 

 

unanticipated changes in customer demand, order patterns and inventory levels;

 

 

the impact of fluctuations in demand and capacity utilization levels on our unit manufacturing costs;

 

 

our ability to further develop the market for engineered structural mesh (“ESM”) and expand our shipments of ESM;

 

17

 

 

legal, environmental, economic, geopolitical or regulatory developments that significantly impact our business or operating costs;

 

 

unanticipated plant outages, equipment failures or labor difficulties; and

 

 

the “Risk Factors” discussed in our 2021 Annual Report and in other filings made by us with the SEC.

 

Overview

 

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, including ESM, concrete pipe reinforcement and standard welded wire reinforcement. Our products are sold primarily to manufacturers of concrete products that are used in nonresidential construction. We market our products through sales representatives who are our employees. We sell our products nationwide across the U.S. and, to a much lesser extent, into Canada, Mexico, and Central and South America, delivering them primarily by truck, using common or contract carriers. 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.

 

Impact of COVID-19

 

Despite the significant disruption in the U.S. and global economies, including supply chain challenges and labor market obstacles, COVID-19 has had a limited impact on our financial position and results of operation to date. We continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business and the potential effect on our financial position, results of operations, and cash flows. There are many uncertainties regarding the future and ultimate impact that COVID-19 will have on all aspects of our business. We will continue to assess and make adjustments as necessary.

 

 

Results of Operations

 

Statements of Operations Selected Data

(Dollars in thousands)

 

   

Three Months Ended

   

Six Months Ended

 
   

April 2,

           

April 3,

   

April 2,

           

April 3,

 
   

2022

   

Change

   

2021

   

2022

   

Change

   

2021

 
                                                 

Net sales

  $ 213,209       53.4 %   $ 138,999     $ 391,668       51.5 %   $ 258,604  

Gross profit

    57,069       88.8 %     30,228       99,433       98.6 %     50,079  

Percentage of net sales

    26.8 %             21.7 %     25.4 %             19.4 %

Selling, general and administrative expense

  $ 7,202       (30.3 %)   $ 10,330     $ 19,483       3.2 %   $ 18,883  

Percentage of net sales

    3.4 %             7.4 %     5.0 %             7.3 %

Restructuring charges (recoveries), net

  $ (365 )     (167.0 %)   $ 545     $ (318 )     (126.5 %)   $ 1,202  

Other expense (income), net

    (11 )     (114.7 %)     75       (16 )     (118.2 %)     88  

Interest expense

    23       (4.2 %)     24       45       (8.2 %)     49  

Interest income

    (10 )     100.0 %     (5 )     (24 )     140.0 %     (10 )

Effective income tax rate

    22.3 %             22.5 %     22.6 %             22.8 %

Net earnings

  $ 39,017       161.5 %   $ 14,920     $ 62,146       169.5 %   $ 23,063  

 

Second Quarter of Fiscal 2022 Compared to Second Quarter of Fiscal 2021

 

Net Sales

 

Net sales for the second quarter of 2022 increased 53.4% to $213.2 million from $139.0 million in the prior year quarter, reflecting a 65.4% increase in average selling prices partially offset by a 7.2% decrease in shipments. The increase in average selling prices was driven by price increases implemented to recover the escalation in raw material costs together with strong demand for our products. The decrease in shipments was due to the impact of sustained tight supply conditions for raw materials during the current year quarter. Shipments in the current and prior year quarter were not materially impacted by the COVID-19 pandemic.

 

18

 

Gross Profit

 

Gross profit for the second quarter of 2022 increased 88.8% to $57.1 million, or 26.8% of net sales, from $30.2 million, or 21.7% of net sales, in the prior year quarter due to higher spreads between average selling prices and raw material costs ($31.7 million) partially offset by higher manufacturing costs ($2.9 million) and a decrease in shipments ($2.0 million). The increase in spreads was driven by higher average selling prices ($84.2 million) partially offset by higher raw material costs ($51.2 million) and freight expense ($1.3 million).

 

Selling, General and Administrative Expense

 

Selling, general and administrative expense (“SG&A expense”) for the second quarter of 2022 decreased 30.3% to $7.2 million, or 3.4% of net sales, from $10.3 million, or 7.4% of net sales, in the prior year quarter primarily due to lower compensation ($3.6 million), legal ($631,000) and employee benefits ($502,000) expense partially offset by the relative year-over-year changes in the cash surrender value of life insurance policies ($1.4 million). The decrease in compensation expense was largely driven by lower incentive plan expense due to previously achieving the maximum incentive plan benefit during the first quarter due to our strong financial results. The decrease in employee benefits expense was due to a net gain on the settlement of life insurance policies ($364,000) as well as lower employee health insurance costs in the current year quarter. The decrease in legal expense was due to costs associated with trade matters incurred in the prior year quarter. The cash surrender value of life insurance policies decreased $566,000 in the current year quarter compared with an increase of $804,000 in the prior year quarter due to the corresponding changes in the value of the underlying investments.

 

Restructuring Charges (Recoveries), Net

 

Net restructuring recoveries of $365,000 were incurred in the second quarter of 2022 related to the closure of the Summerville, South Carolina facility, which had been acquired through the Strand-Tech Manufacturing, Inc. acquisition, and consolidation of our PC strand operations. Net restructuring recoveries for the current quarter included a gain on sale of the Summerville facility ($622,000) partially offset by facility closure ($257,000) costs. Net restructuring charges of $545,000 were incurred in the prior year quarter for equipment relocation ($286,000) and facility closure ($259,000) costs.

 

Income Taxes

 

Our effective tax rate for the second quarter of 2022 decreased to 22.3% from 22.5% for the prior year quarter primarily due to changes in book versus tax difference.

 

Net Earnings

 

Net earnings for the second quarter of 2022 increased to $39.0 million ($1.99 per diluted share) from $14.9 million ($0.76 per diluted share) in the prior year quarter primarily due to the increase in gross profit and lower SG&A expense.

 

First Half of Fiscal 2022 Compared to First Half of Fiscal 2021

 

Net Sales

 

Net sales for the first half of 2022 increased 51.5% to $391.7 million from $258.6 million in the same year-ago period, reflecting a 67.5% increase in average selling prices partially offset by a 9.5% decrease in shipments. The increase in average selling prices was driven by price increases implemented to recover the escalation in raw mate