Company Quick10K Filing
Insteel Industries
Price21.10 EPS0
Shares19 P/E73
MCap408 P/FCF62
Net Debt-38 EBIT9
TEV370 TEV/EBIT43
TTM 2019-09-28, in MM, except price, ratios
10-Q 2021-01-02 Filed 2021-01-21
10-K 2020-10-03 Filed 2020-10-29
10-Q 2020-06-27 Filed 2020-07-16
10-Q 2020-03-28 Filed 2020-04-16
10-Q 2019-12-28 Filed 2020-01-16
10-K 2019-09-28 Filed 2019-10-25
10-Q 2019-06-29 Filed 2019-07-18
10-Q 2019-03-30 Filed 2019-04-18
10-Q 2018-12-29 Filed 2019-01-17
10-K 2018-09-29 Filed 2018-10-26
10-Q 2018-06-30 Filed 2018-07-19
10-Q 2018-03-31 Filed 2018-04-23
10-Q 2017-12-30 Filed 2018-01-18
10-K 2017-09-30 Filed 2017-10-27
10-Q 2017-07-01 Filed 2017-07-20
10-Q 2017-04-01 Filed 2017-04-20
10-Q 2016-12-31 Filed 2017-01-19
10-K 2016-10-01 Filed 2016-10-28
10-Q 2016-07-02 Filed 2016-07-21
10-Q 2016-04-02 Filed 2016-04-21
10-Q 2016-01-02 Filed 2016-01-21
10-K 2015-10-03 Filed 2015-10-30
10-Q 2015-06-27 Filed 2015-07-16
10-Q 2015-03-28 Filed 2015-04-16
10-Q 2014-12-27 Filed 2015-01-15
10-K 2014-09-27 Filed 2014-10-24
10-Q 2014-06-28 Filed 2014-07-17
10-Q 2014-03-29 Filed 2014-04-17
10-Q 2013-12-28 Filed 2014-01-16
10-K 2013-09-28 Filed 2013-10-29
10-Q 2013-06-29 Filed 2013-07-18
10-Q 2013-03-30 Filed 2013-04-18
10-Q 2012-12-29 Filed 2013-01-18
10-K 2012-09-29 Filed 2012-11-01
10-Q 2012-06-30 Filed 2012-07-24
10-Q 2012-03-31 Filed 2012-04-26
10-Q 2011-12-31 Filed 2012-02-02
10-K 2011-10-01 Filed 2011-11-10
10-Q 2011-07-02 Filed 2011-07-28
10-Q 2011-04-02 Filed 2011-04-26
10-Q 2011-01-01 Filed 2011-02-08
10-K 2010-10-02 Filed 2010-11-30
10-Q 2010-07-03 Filed 2010-07-26
10-Q 2010-04-03 Filed 2010-04-26
10-Q 2010-01-02 Filed 2010-01-25
8-K 2020-11-17
8-K 2020-10-22
8-K 2020-10-12
8-K 2020-08-18
8-K 2020-07-16
8-K 2020-05-19
8-K 2020-04-29
8-K 2020-04-16
8-K 2020-03-16
8-K 2020-02-11
8-K 2020-02-07
8-K 2020-01-16
8-K 2019-12-16
8-K 2019-11-12
8-K 2019-10-17
8-K 2019-08-13
8-K 2019-07-18
8-K 2019-05-15
8-K 2019-05-14
8-K 2019-04-18
8-K 2019-04-08
8-K 2019-02-12
8-K 2019-02-12
8-K 2019-01-17
8-K 2018-11-15
8-K 2018-11-14
8-K 2018-10-18
8-K 2018-08-14
8-K 2018-07-19
8-K 2018-07-16
8-K 2018-05-15
8-K 2018-04-23
8-K 2018-03-21
8-K 2018-02-13
8-K 2018-02-13
8-K 2018-01-18

IIIN 10Q Quarterly Report

Part I – Financial Information
Item 1. Financial Statements
Item 2. Management’S Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II – Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
EX-31.1 ex_221232.htm
EX-31.2 ex_221233.htm
EX-32.1 ex_221234.htm
EX-32.2 ex_221235.htm

Insteel Industries Earnings 2021-01-02

Balance SheetIncome StatementCash Flow
3302641981326602012201420172020
Assets, Equity
130103775024-12012201420172020
Rev, G Profit, Net Income
35205-10-25-402012201420172020
Ops, Inv, Fin

iiin20210102_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 January 2, 2021

 

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

The Nasdaq Stock Market LLC

(Nasdaq Global Select Market)

 

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 January 20, 2021, 19,313,967 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 23
     
Item 4. Controls and Procedures 23
     
PART II – OTHER INFORMATION
     
Item 1. Legal Proceedings 24
     
Item 1A. Risk Factors 24
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
     
Item 6. Exhibits 24
     
SIGNATURES 25

 

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

 
   

January 2,

   

December 28,

 
   

2021

   

2019

 
                 

Net sales

  $ 119,605     $ 97,569  

Cost of sales

    99,754       91,332  

Gross profit

    19,851       6,237  

Selling, general and administrative expense

    8,553       5,744  

Restructuring charges, net

    657       -  

Other expense (income), net

    13       (25 )

Interest expense

    25       26  

Interest income

    (5 )     (226 )

Earnings before income taxes

    10,608       718  

Income taxes

    2,465       163  

Net earnings

  $ 8,143     $ 555  
                 
                 

Net earnings per share:

               

Basic

  $ 0.42     $ 0.03  

Diluted

    0.42       0.03  
                 

Weighted average shares outstanding:

               

Basic

    19,309       19,261  

Diluted

    19,434       19,370  
                 

Cash dividends declared per share

  $ 1.53     $ 0.03  
                 

Comprehensive income

  $ 8,143     $ 555  

 

See accompanying notes to consolidated financial statements. 

 

3

 

 

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

(In thousands)

 

 

   

(Unaudited)

         
   

January 2,

   

October 3,

 
   

2021

   

2020

 

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 50,182     $ 68,688  

Accounts receivable, net

    49,224       53,817  

Inventories

    64,276       68,963  

Other current assets

    5,201       5,570  

Total current assets

    168,883       197,038  

Property, plant and equipment, net

    101,351       101,392  

Intangibles, net

    8,331       8,567  

Goodwill

    9,745       9,745  

Other assets

    21,641       21,160  

Total assets

  $ 309,951     $ 337,902  
                 

Liabilities and shareholders' equity

               

Current liabilities:

               

Accounts payable

  $ 31,761     $ 38,961  

Accrued expenses

    15,012       14,717  

Total current liabilities

    46,773       53,678  

Other liabilities

    19,444       19,421  

Commitments and contingencies

               

Shareholders' equity:

               

Common stock

    19,314       19,304  

Additional paid-in capital

    76,716       76,387  

Retained earnings

    149,660       171,068  

Accumulated other comprehensive loss

    (1,956 )     (1,956 )

Total shareholders' equity

    243,734       264,803  

Total liabilities and shareholders' equity

  $ 309,951     $ 337,902  

 

See accompanying notes to consolidated financial statements.

 

4

 

 

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(In thousands)

 

(Unaudited)

 

 

   

Three Months Ended

 
   

January 2,

   

December 28,

 
   

2021

   

2019

 

Cash Flows From Operating Activities:

               

Net earnings

  $ 8,143     $ 555  

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

               

Depreciation and amortization

    3,610       3,478  

Amortization of capitalized financing costs

    16       16  

Stock-based compensation expense

    224       186  

Deferred income taxes

    (64 )     186  

Loss on sale and disposition of property, plant and equipment

    32       -  

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

    (364 )     (339 )

Net changes in assets and liabilities (net of assets and liabilities acquired):

               

Accounts receivable, net

    4,593       8,777  

Inventories

    4,687       5,599  

Accounts payable and accrued expenses

    (9,753 )     10,225  

Other changes

    2,826       892  

Total adjustments

    5,807       29,020  

Net cash provided by operating activities

    13,950       29,575  
                 

Cash Flows From Investing Activities:

               

Capital expenditures

    (2,860 )     (600 )

Increase in cash surrender value of life insurance policies

    (197 )     (42 )

Proceeds from sale of assets held for sale

    19       -  

Proceeds from surrender of life insurance policies

    18       -  

Net cash used for investing activities

    (3,020 )     (642 )
                 

Cash Flows From Financing Activities:

               

Proceeds from long-term debt

    45       67  

Principal payments on long-term debt

    (45 )     (67 )

Cash dividends paid

    (29,551 )     -  

Payment of employee tax withholdings related to net share transactions

    (13 )     -  

Cash received from exercise of stock options

    128       -  

Net cash used for financing activities

    (29,436 )     -  
                 

Net increase (decrease) in cash and cash equivalents

    (18,506 )     28,933  

Cash and cash equivalents at beginning of period

    68,688       38,181  

Cash and cash equivalents at end of period

  $ 50,182     $ 67,114  
                 

Supplemental Disclosures of Cash Flow Information:

               

Cash paid during the period for:

               

Income taxes, net

  $ 95     $ 14  

Non-cash investing and financing activities:

               

Purchases of property, plant and equipment in accounts payable

    500       310  

Declaration of cash dividends to be paid

    -       578  

Restricted stock units and stock options surrendered for withholding taxes payable

    13       -  

 

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 months ended January 2, 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  
                                                 

For the three months ended December 28, 2019

                                         
                                                 

Balance at September 28, 2019

    19,261     $ 19,261     $ 74,632     $ 154,372     $ (2,248 )   $ 246,017  

Net earnings

                        555             555  

Compensation expense associated with stock-based plans

                  186                   186  

Cash dividends declared

                        (578 )           (578 )

Balance at December 28, 2019

    19,261     $ 19,261     $ 74,818     $ 154,349     $ (2,248 )   $ 246,180  

 

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 3, 2020 (“2020 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 3, 2020 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 2020 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.

 

On March 16, 2020, we, through our wholly-owned subsidiary, Insteel Wire Products Company (“IWP”), purchased substantially all of the assets of Strand-Tech Manufacturing, Inc. (“STM”) (see Note 3 to the consolidated financial statements).

 

 

 

(2) Recent Accounting Pronouncements

 

Current Adoptions

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-13 “Credit Losses - Measurement of Credit Losses on Financial Instruments.” ASU No. 2016-13 significantly changes how entities will measure credit losses for most financial assets, including accounts and notes receivables, by replacing today’s “incurred loss” approach with an “expected loss” model under which allowances will be recognized based on expected rather than incurred losses. We adopted ASU No. 2016-13 in the current quarter. The adoption of this update did not have an impact on our consolidated financial statements. We estimate our allowance for doubtful accounts based upon several factors, including customer credit quality and historical write-off trends. The adoption of this guidance did not significantly impact our accounting policies or methods utilized to determine the allowance for doubtful accounts.

 

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 became effective for us in the current quarter. The adoption of this update did not have a material impact on our consolidated financial statements.

 

Future Adoptions

 

In December 2019, the FASB issued ASU 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. ASU 2019-12 will become effective for us in the first quarter of fiscal 2022. The adoption of this update will not have a material impact on our consolidated financial statements.

 

 

(3) Business Combination

 

On March 16, 2020, we purchased substantially all of the assets of STM for an adjusted purchase price of $19.4 million, reflecting certain post-closing adjustments (the “STM Acquisition”), which included a $1.0 million holdback that is payable one year from the acquisition date.

 

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. The STM Acquisition serves to strengthen our competitive position as we contend with increased low-priced import competition.

 

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Following is a summary of our final allocation of the adjusted purchase price to the fair values of the assets acquired and liabilities assumed as of the acquisition date:

 

(In thousands)

       

Assets acquired:

       

Accounts receivable

  $ 3,829  

Inventories

    3,172  

Other current assets

    178  

Property, plant and equipment

    10,919  

Intangibles

    970  

Total assets acquired

  $ 19,068  
         

Liabilities assumed:

       

Accounts payable

  $ 852  

Accrued expenses

    312  

Total liabilities assumed

    1,164  

Net assets acquired

    17,904  

Adjusted purchase price

    19,356  

Goodwill

  $ 1,452  

 

In connection with the STM Acquisition, we acquired certain intangible assets including customer relationships, a trade name and non-competition agreement. Goodwill associated with the STM Acquisition, which is deductible for tax purposes, consists largely of the synergies we expect to realize through the integration of the acquired assets with our operations.

 

The STM Acquisition was accounted for as a business purchase pursuant to ASC Topic 805, Business Combinations (“ASC 805”). Under the provisions of ASC 805, acquisition and integration costs are recorded as expenses in the period in which such costs are incurred rather than included as components of consideration transferred.

 

The following unaudited supplemental pro forma financial information reflects our combined results of operations had the STM Acquisition occurred at the beginning of fiscal 2019. The pro forma information reflects certain adjustments related to the STM Acquisition, including adjusted amortization and depreciation expense based on the fair values of the assets acquired. The pro forma information does not reflect any potential operating efficiencies or cost savings that may result from the STM Acquisition. Accordingly, this pro forma information is for illustrative purposes and is not intended to represent the actual results of operations of the combined company that would have been achieved had the STM Acquisition occurred at the beginning of fiscal 2019, nor is it intended to indicate future results of operations. The pro forma combined results of operations for the three-months ended December 28, 2019 are as follows:

 

   

December 28,

 

(In thousands)

 

2019

 

Net sales

  $ 103,641  

Earnings before income taxes

    212  

Net earnings

    183  

 

 

Restructuring charges. 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. Following is a summary of the restructuring activity during the three-month period ended January 2, 2021:

 

   

Employee

Separation Costs

   

Equipment

Relocation Costs

   

Facility

Closure Costs
   

Asset

Impairments
    Total  

(In thousands)

                                       

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  

 

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As of January 2, 2021 and October 3, 2020, we recorded a liability of $47,000 and $171,000, respectively, for restructuring liabilities in accrued expenses on our consolidated balance sheet. We currently expect to incur approximately $800,000 of additional restructuring charges for equipment relocation and facility closure costs.

 

 

(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

 
   

January 2,

   

December 28,

 

(In thousands)

 

2021

   

2019

 

Welded wire reinforcement

  $ 74,026     $ 61,827  

Prestressed concrete strand

    45,579       35,742  

Total

  $ 119,605     $ 97,569  

 

Our net sales by geographic region are as follows:

 

   

Three Months Ended

 
   

January 2,

   

December 28,

 

(In thousands)

 

2021

   

2019

 

United States

  $ 118,337     $ 97,257  

Foreign

    1,268       312  

Total

  $ 119,605     $ 97,569  

 

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 January 2, 2021 and October 3, 2020.

 

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.

 

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(5) Fair Value Measurements

 

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

 

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

 

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

 

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

 

As of January 2, 2021 and October 3, 2020, 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 January 2, 2021:

            

Current assets:

            

Cash equivalents

 $52,725  $52,725  $- 

Other assets:

            

Cash surrender value of life insurance policies

  11,127   -   11,127 

Total

 $63,852  $52,725  $11,127 
             

As of October 3, 2020:

            

Current assets:

            

Cash equivalents

 $72,234  $72,234  $- 

Other assets:

            

Cash surrender value of life insurance policies

  10,584   -   10,584 

Total

 $82,818  $72,234  $10,584 

 

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 January 2, 2021 and October 3, 2020, we had no nonfinancial assets that were required to be measured at fair value on a nonrecurring basis other than the assets and liabilities that were acquired from STM at fair value during the prior year ended October 3, 2020 (see Note 3 to the consolidated financial statements). The carrying amounts of accounts receivable, accounts payable and accrued expenses approximate fair value due to the short-term maturities of these financial instruments.

 

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(6) Intangible Assets

 

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

 

(In thousands)

 

Gross Amount

   

Accumulated

Amortization

   

Net Book Value

 

As of January 2, 2021:

                       

Customer relationships

  $ 9,870     $ (2,996 )   $ 6,874  

Developed technology and know-how

    1,800       (572 )     1,228  

Non-competition agreements

    400       (224 )     176  

Trade name

    250       (197 )     53  
    $ 12,320     $ (3,989 )   $ 8,331  
                         

As of October 3, 2020:

                       

Customer relationships

  $ 9,870     $ (2,837 )   $ 7,033  

Developed technology and know-how

    1,800       (551 )     1,249  

Non-competition agreements

    1,860       (1,663 )     197  

Trade name

    250       (162 )     88  
    $ 13,780     $ (5,213 )   $ 8,567  

 

Amortization expense for intangibles was $236,000 and $273,000 for the three-month periods ended January 2, 2021 and December 28, 2019, respectively.

 

 

(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 January 2, 2021, there were 738,000 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 $76,000 and $60,000 for the three-month periods ended January 2, 2021 and December 28, 2019, respectively. As of January 2, 2021, there was $292,000 of unrecognized compensation cost related to unvested options which is expected to be recognized over a weighted average period of 1.57 years.

 

The following table summarizes stock option activity:

 

                               

Contractual

   

Aggregate

 
   

Options

   

Exercise Price Per Share

   

Term - Weighted

   

Intrinsic

 
   

Outstanding

               

Weighted

   

Average

   

Value

 
   

(in thousands)

   

Range

   

Average

   

(in years)

   

(in thousands)

 

Outstanding at October 3, 2020

    482       $10.23 - $41.85     $ 24.90                  

Exercised

    (22 )     13.06 - 18.25       17.11                  

Outstanding at January 2, 2021

    460       10.23 - 41.85       25.28       6.53     $ 589  
                                             

Vested and anticipated to vest in the future at January 2, 2021

    454                   25.33       6.50       578  
                                             

Exercisable at January 2, 2021

    261                   27.84       4.77       274  

 

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 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 $148,000 and $126,000 for the three-month periods ended January 2, 2021 and December 28, 2019, respectively.

 

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As of January 2, 2021, there was $441,000 of unrecognized compensation cost related to unvested RSUs which is expected to be recognized over a weighted average period of 1.90 years.

 

The following table summarizes RSU activity:

 

           

Weighted

 
   

Restricted

   

Average

 
   

Stock Units

   

Grant Date

 

(Unit amounts in thousands)

 

Outstanding

   

Fair Value

 

Balance, October 3, 2020

    122     $ 23.07  

Released

    -       -  

Balance, January 2, 2021

    122       23.07  

 

 

(8) Income Taxes

 

Effective income tax rate. Our effective income tax rate was 23.2% for the three-month period ended January 2, 2021 compared with 22.7% for the three-month period ended December 28, 2019. 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 January 2, 2021 and October 3, 2020, we recorded a deferred tax liability (net of valuation allowance) of $6.5 million and $6.6 million, respectively, in other liabilities on our consolidated balance sheet. We have $2.9 million of state net operating loss carryforwards (“NOLs”) that begin to expire in 2031, but principally expire between 2031 and 2036.

 

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 January 2, 2021 and October 3, 2020, we recorded a valuation allowance of $162,000 and $207,000, respectively, 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.

 

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 January 2, 2021, 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 2015 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.

 

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

 

   

Three Months Ended

 
   

January 2,

   

December 28,

 

(In thousands)

 

2021

   

2019

 

Interest cost

  $ 79     $ 82  

Service cost

    78       83  

Recognized net actuarial loss

    54       72  

Net periodic pension cost

  $ 211     $ 237  

 

 

(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 January 2, 2021, no borrowings were outstanding on the Credit Facility, $81.8 million of borrowing capacity was available and outstanding letters of credit totaled $1.5 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 January 2, 2021, 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 January 2, 2021, 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 January 2, 2021 and December 28, 2019.

 

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(11) Earnings Per Share

 

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

 

   

Three Months Ended

 
   

January 2,

   

December 28,

 

(In thousands, except per share amounts)

 

2021

   

2019

 

Net earnings

  $ 8,143     $ 555  
                 

Basic weighted average shares outstanding

    19,309       19,261  

Dilutive effect of stock-based compensation

    125       109  

Diluted weighted average shares outstanding

    19,434       19,370  
                 

Net earnings per share:

               

Basic

  $ 0.42     $ 0.03  

Diluted

  $ 0.42     $ 0.03  

 

Options and RSUs that were antidilutive and not included in the dilutive earnings per share calculation amounted to 254,000 and 293,000 shares for the three-month periods ended January 2, 2021 and December 28, 2019, 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 January 2, 2021, there was $24.8 million remaining available for future share repurchases under this Authorization. There were no share repurchases during the three-month periods ended January 2, 2021 and December 28, 2019.

 

14

 
 

(13) Other Financial Data

 

Balance sheet information

 

   

January 2,

   

October 3,

 

(In thousands)

 

2021

   

2020

 

Accounts receivable, net:

               

Accounts receivable

  $ 49,489     $ 54,108  

Less allowance for doubtful accounts

    (265 )     (291 )

Total

  $ 49,224     $ 53,817  
                 

Inventories:

               

Raw materials

  $ 27,015     $ 31,553  

Work in process

    3,637       3,813  

Finished goods

    33,624       33,597  

Total

  $ 64,276     $ 68,963  
                 

Other current assets:

               

Prepaid insurance

  $ 3,582     $ 4,096  

Other

    1,619       1,474  

Total

  $ 5,201     $ 5,570  
                 

Other assets:

               

Cash surrender value of life insurance policies

  $ 11,127     $ 10,584  

Assets held for sale

    7,754       7,778  

Right-of-use asset

    2,494       2,522  

Capitalized financing costs, net

    155       170  

Other

    111       106  

Total

  $ 21,641     $ 21,160  
                 

Property, plant and equipment, net:

               

Land and land improvements

  $ 14,540     $ 14,520  

Buildings

    52,501       52,462  

Machinery and equipment

    172,268       172,617  

Construction in progress

    5,717       3,978  
      245,026       243,577  

Less accumulated depreciation

    (143,675 )     (142,185 )

Total

  $ 101,351     $ 101,392  
                 

Accrued expenses:

               

Salaries, wages and related expenses

  $ 4,555     $ 4,971  

Income taxes

    3,636       1,201  

Customer rebates

    2,304       1,581  

Property taxes

    1,445       1,726  

Operating lease liability

    1,284       1,230  

Holdback for business acquired

    1,000       1,000  

State sales and use taxes

    315       544  

Other

    473       2,464  

Total

  $ 15,012     $ 14,717  
                 

Other liabilities:

               

Deferred compensation

  $ 11,722     $ 11,553  

Deferred income taxes

    6,504       6,568  

Operating lease liability

    1,218       1,300  

Total

  $ 19,444     $ 19,421  

 

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(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 sheet. Lease expense for operating leases with original terms of more than twelve months was $360,000 and $327,000 for the three-month periods ended January 2, 2021 and December 28, 2019, 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 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:

 

   

Three Months Ended

 

(In thousands)

 

January 2,

2021

   

December 28,

2019

 

Cash paid for operating leases included in operating cash flows

  $ 361     $ 335  

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

    303       358  

 

Supplemental balance sheet information related to leases is as follows:

 

(In thousands)

 

January 2,

2021

   

October 3,

2020

 

Right-of-use assets:

               

Other assets

  $ 2,494     $ 2,522  
                 

Lease liabilities:

               

Accrued expenses

    1,284       1,230  

Other liabilities

    1,218       1,300  

Total operating lease liabilities

  $ 2,502     $ 2,530  

 

As of January 2, 2021, our operating leases had a weighted average remaining lease term of 2.2 years and a weighted average discount rate of 4.3%. Aggregate future operating lease payments as of January 2, 2021 are as follows:

 

(In thousands)

       

2021

  $ 1,283  

2022

    889  

2023

    436  

2024

    54  

Total future operating lease payments

    2,662  

Less: imputed interest

    (160 )

Present value of lease liabilities

  $ 2,502  

 

 

(16) Contingencies

 

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

 

16

 

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. Management’s 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 involved 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 3, 2020 (our “2020 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, including the Section 232 tariff on imported steel, affecting imports or exports of steel wire rod or our products;

 

 

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

 

 

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

 

 

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

 

 

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

 

 

unanticipated plant outages, equipment failures or labor difficulties; and

 

 

the “Risk Factors” discussed in our 2020 Annual Report and in other filings made by us with the SEC.

 

17

 

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.

 

On March 16, 2020, we, through our wholly-owned subsidiary, Insteel Wire Products (“IWP”), purchased substantially all of the assets of Strand-Tech Manufacturing, Inc. (“STM”) for an adjusted purchase price of $19.4 million, which reflects certain post-closing adjustments (the “STM Acquisition”). STM was a leading manufacturer of 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.

 

COVID-19 Update

 

In March 2020, the World Health Organization characterized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The rapid spread of the outbreak has caused significant disruptions in the U.S. and global economies. We are a company operating in a critical infrastructure industry, as defined by the U.S. Department of Homeland Security, and our facilities have been allowed to remain open. Accordingly, COVID-19 has had limited impact on our operations to date. The situation remains dynamic and the ultimate duration and magnitude of the impact on the economy and our business are not known at this time. We are continuing to monitor the progression of the pandemic, measures taken by governmental authorities to address it, and the potential effect on our financial position, results of operations, and cash flows.

 

18

 

Results of Operations

 

Statements of Operations – Selected Data

(Dollars in thousands)

 

   

Three Months Ended

 
   

January 2,

           

December 28,

 
   

2021

   

Change

   

2019

 
                         

Net sales

  $ 119,605       22.6 %   $ 97,569  

Gross profit

    19,851       218.3 %     6,237  

Percentage of net sales

    16.6 %             6.4 %

Selling, general and administrative expense

  $ 8,553       48.9 %   $ 5,744  

Percentage of net sales

    7.2 %             5.9 %

Restructuring charges, net

  $ 657       100.0 %   $ -  

Other expense (income), net

    13    

N/M

      (25 )

Interest expense

    25       (3.8 %)     26  

Interest income

    (5 )     (97.8 %)     (226 )

Effective income tax rate

    23.2 %             22.7 %

Net earnings

  $ 8,143    

N/M

    $ 555  

 

"N/M" = not meaningful

 

First Quarter of Fiscal 2021 Compared to First Quarter of Fiscal 2020

 

Net Sales

 

Net sales for the first quarter of 2021 increased 22.6% to $119.6 million from $97.6 million in the prior year quarter, reflecting an 21.6% increase in shipments together with a 1.0% increase in average selling prices. The increase in shipments was primarily due to improved market conditions, the additional business provided by the STM Acquisition and strengthening demand for our products relative to the prior year quarter. Shipments for the current year quarter were not materially impacted by the COVID-19 pandemic.

 

Gross Profit

 

Gross profit for the first quarter of 2021 increased 218.3% to $19.9 million, or 16.6% of net sales, from $6.2 million, or 6.4% of net sales, in the prior year quarter due to higher spreads between average selling prices and raw material costs ($11.4 million), lower manufacturing costs ($1.1 million) and an increase in shipments ($1.1 million). The increase in spreads was driven by lower raw material costs ($9.2 million), higher average selling prices ($1.7 million) and lower freight expense ($449,000).

 

Selling, General and Administrative Expense

 

Selling, general and administrative expense (“SG&A expense”) for the first quarter of 2021 increased 48.9% to $8.6 million, or 7.2% of net sales, from $5.7 million, or 5.9% of net sales in the prior year quarter primarily due to higher compensation ($2.3 million) and legal expense ($658,000) partially offset by lower employee benefit expense ($99,000). The increase in compensation expense was largely driven by higher incentive plan expense due to our improved financial results in the current year quarter. The increase in legal expense was primarily related to costs associated with trade matters. The decrease in employee benefit expense was due to lower employee health insurance costs in the current year quarter.

 

Restructuring Charges, Net

 

Net restructuring charges of $657,000 were incurred in the first quarter of 2021 related to the closure of the Summerville, South Carolina facility, which had been acquired through the STM Acquisition. Restructuring charges included facility closure ($552,000), equipment relocation ($88,000), employee separation costs ($13,000) and asset impairments charges ($4,000).

 

19

 

Income Taxes

 

Our effective tax rate for the first quarter of 2021 increased to 23.2% from 22.7% for the prior year quarter primarily due to changes in book versus tax differences during the prior year quarter.

 

Net Earnings

 

Net earnings for the first quarter of 2021 increased to $8.1 million ($0.42 per share) from $555,000 ($0.03 per share) in the prior year quarter primarily due to the increase in gross profit partially offset by higher SG&A expense and restructuring charges associated with the consolidation of our PC strand operations.

 

Liquidity and Capital Resources

 

Selected Financial Data

(Dollars in thousands)

 

   

Three Months Ended

 
   

January 2,

   

December 28,

 
   

2021

   

2019

 

Net cash provided by operating activities

  $ 13,950     $ 29,575  

Net cash used for investing activities

    (3,020 )     (642 )

Net cash used for financing activities

    (29,436 )     -  
                 

Net working capital

    122,110       133,959  

Total debt

    -       -  

Percentage of total capital

    -       -  

Shareholders' equity

  $ 243,734     $ 246,180  

Percentage of total capital

    100.0 %     100.0 %

Total capital (total debt + shareholders' equity)

  $ 243,734     $ 246,180  

 

Operating Activities

 

Operating activities provided $13.9 million of cash during the first quarter of 2021 primarily from net earnings adjusted for non-cash items together with a net decrease in working capital. Working capital used $0.5 million of cash due to a $9.8 million decrease in accounts payable and accrued expenses partially offset by a $4.7 million decrease in inventories and $4.6 million decrease in accounts receivable. The decrease in accounts payable and accrued expenses was largely related to lower raw material purchases throughout the quarter together with decreases in accrued salaries, wages and related expenses and the earnout liability partially offset by an increase in accrued customer rebates. The decrease in inventories was due to the lower raw material purchases along with higher shipments during the current quarter. The decrease in accounts receivable was largely driven by the seasonal decline in shipments during the quarter partially offset by higher average selling prices.

 

Operating activities provided $29.6 million of cash during the first quarter of 2020 primarily from a net decrease in working capital together with net earnings adjusted for non-cash items. Working capital provided $24.6 million of cash due to a $10.2 million increase in accounts payable and accrued expenses, an $8.8 million decrease in accounts receivable and a $5.6 million decrease in inventories. The increase in accounts payable and accrued expenses was largely due to higher raw material purchases near the end of the quarter. The reduction in accounts receivable was largely related to the usual seasonal downturn in sales and decrease in selling prices. The reduction in inventories was driven by lower average unit costs.

 

We may elect to adjust our operating activities as there are changes in our construction end-markets, which could materially impact our cash requirements. While a downturn in the level of construction activity adversely affects sales to our customers, it generally reduces our working capital requirements.

 

20

 

Investing Activities

 

Investing activities used $3.0 million of cash during the first quarter of 2021 compared to $642,000 during the prior year quarter primarily due to higher capital expenditures ($2.3 million). Capital expenditures increased to $2.9 million from $600,000 in the prior year quarter and are expected to total up to $20.0 million for fiscal 2021, which include expenditures to upgrade and deploy the STM assets, advance the growth of our engineered structural mesh business and support cost and productivity improvement initiatives in addition to recurring maintenance requirements.

 

Our investing activities are largely discretionary, providing us with the ability to significantly curtail outlays when warranted based on business conditions.

 

Financing Activities

 

Financing activities used $29.4 million of cash during the first quarter of 2021 while not providing or using any significant amounts of cash during the prior year quarter. During the first quarter of 2021, we declared and paid a special dividend totaling $29.0 million, or $1.50 per share, and a regular quarterly dividend of $578,000, or $0.03 per share. During the first quarter of 2020, we declared a regular quarterly cash dividend of $578,000, or $0.03 per share, which was paid in the second quarter of 2020.

 

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 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 January 2, 2021, no borrowings were outstanding on the Credit Facility, $81.8 million of borrowing capacity was available and outstanding letters of credit totaled $1.5 million (see Note 10 to the consolidated financial statements).

 

We believe that, in the absence of significant unanticipated funding requirements, cash and cash equivalents, net cash generated by operating activities and the borrowing availability provided under the Credit Facility will be sufficient to satisfy our expected requirements for working capital, capital expenditures, dividends and share repurchases, if any. We expect to have access to the amounts available under the 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, cease dividend payments, delay or restrict share repurchases 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 would be 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 and borrowing capacity available to us under our Credit Facility position us to meet our anticipated liquidity requirements for the foreseeable future, including the next 12 months. 

 

Seasonality and Cyclicality

 

Demand in our markets is both seasonal and cyclical, driven by the level of construction activity, but can also be impacted by fluctuations in the inventory positions of our customers. From a seasonal standpoint, shipments typically reach their highest level of the year when weather conditions are the most conducive to construction activity. As a result, assuming normal seasonal weather patterns, shipments and profitability are usually higher in the third and fourth quarters of the fiscal year and lower in the first and second quarters. From a cyclical standpoint, construction activity and demand for our products is generally correlated with general economic conditions, although there can be significant differences between the relative strength of nonresidential and residential construction for extended periods.

 

21

 

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. Inflation did not have a material impact on our sales or earnings during the first quarter of fiscal 2021. The timing and magnitude of any future increases in our raw material costs and the selling prices for our products is uncertain at this time.   

 

Off-Balance Sheet Arrangements

 

We do not have any material transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons, as described by Item 303(a)(4) of Regulation S-K of the SEC, that have or are reasonably likely to have a material current or future impact on our financial condition, results of operations, liquidity, capital expenditures, capital resources or significant components of revenues or expenses.

 

Contractual Obligations

 

There have been no material changes in our contractual obligations and commitments as disclosed in our 2020 Annual Report other than those which occur in the ordinary course of business.

 

Critical Accounting Policies 

 

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our unaudited financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information. The preparation of our 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. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” included in our 2020 Annual Report for further information regarding our critical accounting policies and estimates. As of January 2, 2021, there were no changes in our critical accounting policies or the application of those policies from those reported in our 2020 Annual Report.

 

Recent Accounting Pronouncements

 

Refer to Note 2 of the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report for recently adopted and issued accounting pronouncements including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements.

 

Outlook

 

Looking ahead to the remainder of 2021, we are cautiously optimistic that our financial results will benefit from continued strong demand in our construction end-markets. Near term business conditions remain positive and should support higher shipments and operating levels, and reduced unit manufacturing costs at our facilities. In particular, our strong growth in the ESM market during the current quarter should continue and the recent favorable ruling in the PC strand trade case is expected to have a positive financial impact for us in certain of our markets going forward. Additionally, the new administration and Congress have publicly signaled support for additional infrastructure spending that may potentially benefit our markets. However, our outlook remains vulnerable to an uncertain near-term recovery in the U.S. economy and our visibility continues to be limited by the ultimate impact of COVID-19 on our operations and markets. As a result, the prospect, if any, of future funding constraints for public infrastructure projects and economic weakness slowing the non-residential construction markets cannot be measured at this time.

 

22

 

In response to these challenges, we will continue to focus on those factors that we can control: 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 acquisitions opportunistically in our existing businesses that expand our penetration of markets we currently serve or expand our footprint.

 

Item 3. 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, 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 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 wire rod costs through higher selling prices, which would reduce our earnings and cash flows. Additionally, when raw material costs decline, our financial results may be negatively impacted if the selling prices for our products decrease to an even greater extent and if we are consuming higher cost material from inventory. Based on our shipments and average wire rod cost reflected in cost of sales for the first quarter of 2021, a 10% increase in the price of wire rod would have resulted in a $6.7 million decrease in our pre-tax earnings (assuming there was not a corresponding change in our selling prices).

 

Interest Rates 

 

Although we did not have any balances outstanding on our Credit Facility as of January 2, 2021, 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 January 2, 2021.

 

Item 4. Controls and Procedures

 

We have conducted an evaluation of the effectiveness of our disclosure controls and procedures as of January 2, 2021. 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 SEC’s rules and forms. Further, they concluded that our disclosure controls and procedures were effective to ensure that 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.

 

23

 

There has been no change in our internal control over financial reporting that occurred during the quarter ended January 2, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

Item 1. 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 costs to resolve these matters will have a material adverse effect on our financial position, results of operations or cash flows.

 

Item 1A. Risk Factors

 

During the quarter ended January 2, 2021, there have been no material changes from the risk factors set forth under Part I, Item 1A. “Risk Factors” in our 2020 Annual Report. You should carefully consider these factors in addition to the other information set forth in this report which could materially affect our business, financial condition or future results. The risks and uncertainties described in this report and in our 2020 Annual Report, as well as other reports and statements that we file with the SEC, are not the only risks and uncertainties facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also have a material adverse effect on our financial position, results of operations or cash flows.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

On November 18, 2008, our Board of Directors approved a share repurchase authorization to buy back up to $25.0 million of our outstanding common stock (the “Authorization”). Repurchases may be made from time to time in the open market or in privately negotiated transactions subject to market conditions, applicable legal requirements and other factors. We are not obligated to acquire any common stock and may commence or suspend the program at any time at our discretion without prior notice. The Authorization continues in effect until terminated by our Board of Directors. As of January 2, 2021, there was $24.8 million remaining available for future share repurchases under the Authorization. There were no share repurchases during the three-month periods ended January 2, 2021 and December 28, 2019.

 

Item 6. Exhibits  
   

31.1

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.

31.2

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.

32.1

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.

32.2

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.

101

The following financial information from the Quarterly Report on Form 10-Q of Insteel Industries, Inc. for the quarter ended January 2, 2021, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Statements of Operations and Comprehensive Income for the three months ended January 2, 2021 and December 28, 2019, (ii) the Consolidated Balance Sheets as of January 2, 2021 and October 3, 2020, (iii) the Consolidated Statements of Cash Flows for the three months ended January 2, 2021 and December 28, 2019, (iv) the Consolidated Statements of Shareholders’ Equity for the three months ended January 2, 2021 and December 28, 2019, and (v) the Notes to Consolidated Financial Statements.

104

The cover page from our Quarterly Report on Form 10-Q for the quarter ended January 2, 2021, formatted in iXBRL

   
 

Our SEC file number reference for documents filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended, is 1-09929.

 

24

 

SIGNATURES

 

Pursuant to the requirements 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

 

 

 

Date: January 21, 2021

By:

/s/  Mark A. Carano

 
   

Mark A. Carano

 
   

Senior Vice President, Chief Financial Officer and Treasurer

 

 

 

(Duly Authorized Officer and Principal Financial Officer)

 

 

25