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 2021-04-03 Filed 2021-04-22
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
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10-Q 2018-12-29 Filed 2019-01-17
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10-Q 2012-12-29 Filed 2013-01-18
10-K 2012-09-29 Filed 2012-11-01
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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
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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
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
Item 6. Exhibits
EX-31.1 ex_241544.htm
EX-31.2 ex_241545.htm
EX-32.1 ex_241546.htm
EX-32.2 ex_241547.htm

Insteel Industries Earnings 2021-04-03

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

iiin20210403_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 3, 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

 

56-0674867

 
 (State or other jurisdiction of (I.R.S. Employer 
 incorporation or organization) Identification No.) 
     
 

1373 Boggs Drive, Mount Airy, North Carolina

 

27030

 
 (Address of principal executive offices) (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, 2021, 19,340,644 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 25
     
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 3,

  

March 28,

  

April 3,

  

March 28,

 
  

2021

  

2020

  

2021

  

2020

 
                 

Net sales

 $138,999  $114,859  $258,604  $212,428 

Cost of sales

  108,771   99,576   208,525   190,908 

Gross profit

  30,228   15,283   50,079   21,520 

Selling, general and administrative expense

  10,330   9,602   18,883   15,346 

Restructuring charges, net

  545   149   1,202   149 

Acquisition costs

  -   187   -   187 

Other expense (income), net

  75   (18)  88   (43)

Interest expense

  24   26   49   52 

Interest income

  (5)  (204)  (10)  (430)

Earnings before income taxes

  19,259   5,541   29,867   6,259 

Income taxes

  4,339   1,177   6,804   1,340 

Net earnings

 $14,920  $4,364  $23,063  $4,919 
                 
                 

Net earnings per share:

                

Basic

 $0.77  $0.23  $1.19  $0.26 

Diluted

  0.76   0.23   1.18   0.25 
                 

Weighted average shares outstanding:

                

Basic

  19,328   19,272   19,319   19,266 

Diluted

  19,517   19,386   19,476   19,378 
                 

Cash dividends declared per share

 $0.03  $0.03  $1.56  $0.06 
                 

Comprehensive income

 $14,920  $4,364  $23,063  $4,919 

 

See accompanying notes to consolidated financial statements.

 

3

 

 

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

 

  

(Unaudited)

     
  

April 3,

  

October 3,

 
  

2021

  

2020

 

Assets

        

Current assets:

        

Cash and cash equivalents

 $58,940  $68,688 

Accounts receivable, net

  58,123   53,817 

Inventories

  68,623   68,963 

Other current assets

  6,556   5,570 

Total current assets

  192,242   197,038 

Property, plant and equipment, net

  104,680   101,392 

Intangibles, net

  8,095   8,567 

Goodwill

  9,745   9,745 

Other assets

  22,099   21,160 

Total assets

 $336,861  $337,902 
         

Liabilities and shareholders' equity

        

Current liabilities:

        

Accounts payable

 $44,941  $38,961 

Accrued expenses

  14,252   14,717 

Total current liabilities

  59,193   53,678 

Other liabilities

  18,932   19,421 

Commitments and contingencies

          

Shareholders' equity:

        

Common stock

  19,341   19,304 

Additional paid-in capital

  77,351   76,387 

Retained earnings

  164,000   171,068 

Accumulated other comprehensive loss

  (1,956)  (1,956)

Total shareholders' equity

  258,736   264,803 

Total liabilities and shareholders' equity

 $336,861  $337,902 

 

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 3,

  

March 28,

 
  

2021

  

2020

 

Cash Flows From Operating Activities:

        

Net earnings

 $23,063  $4,919 

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

        

Depreciation and amortization

  7,200   6,991 

Amortization of capitalized financing costs

  32   32 

Stock-based compensation expense

  934   1,127 

Deferred income taxes

  (466)  605 

Loss on sale and disposition of property, plant and equipment

  115   2 

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

  (1,168)  - 

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

        

Accounts receivable, net

  (4,306)  (6,870)

Inventories

  340   2,338 

Accounts payable and accrued expenses

  2,677   15,297 

Other changes

  818   2,167 

Total adjustments

  6,176   21,689 

Net cash provided by operating activities

  29,239   26,608 
         

Cash Flows From Investing Activities:

        

Acquisition of business

  -   (21,500)

Capital expenditures

  (8,768)  (2,368)

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

  (197)  668 

Proceeds from sale of assets held for sale

  19   - 

Proceeds from surrender of life insurance policies

  23   6 

Net cash used for investing activities

  (8,923)  (23,194)
         

Cash Flows From Financing Activities:

        

Proceeds from long-term debt

  134   135 

Principal payments on long-term debt

  (134)  (135)

Cash dividends paid

  (30,131)  (1,156)

Payment of employee tax withholdings related to net share transactions

  (110)  (76)

Cash received from exercise of stock options

  177   - 

Net cash used for financing activities

  (30,064)  (1,232)
         

Net increase (decrease) in cash and cash equivalents

  (9,748)  2,182 

Cash and cash equivalents at beginning of period

  68,688   38,181 

Cash and cash equivalents at end of period

 $58,940  $40,363 
         

Supplemental Disclosures of Cash Flow Information:

        

Cash paid during the period for:

        

Income taxes, net

 $5,812  $275 

Non-cash investing and financing activities:

        

Receivable related to post-closing purchase price adjustment for business acquired

  -   3,113 

Purchases of property, plant and equipment in accounts payable

  1,357   274 

Restricted stock units and stock options surrendered for withholding taxes payable

  110   76 

Accrued liability related to holdback for business acquired

  -   1,000 

 

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 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 
                         

For the six months ended March 28, 2020

                        
                         

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 

Net earnings

            4,364      4,364 

Vesting of restricted stock units

  22   22   (22)        - 

Compensation expense associated with stock-based plans

         941         941 

Restricted stock units and stock options surrendered for withholding taxes payable

         (76)        (76)

Cash dividends declared

            (578)     (578)

Balance at March 28, 2020

  19,283  $19,283  $75,661  $158,135  $(2,248) $250,831 

 

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 measure credit losses for most financial assets, including accounts and notes receivables, by replacing the “incurred loss” approach with an “expected loss” model under which allowances will be recognized based on expected rather than incurred losses. ASU No. 2016-13 became effective for us in the first 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 first 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 was 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.

 

7

 

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- and six-month periods ended March 28, 2020 are as follows:

 

  

March 28, 2020

 

(In thousands)

 

Three Months

Ended

  

Six Months

Ended

 

Net sales

 $121,290  $224,931 

Earnings before income taxes

  4,591   4,285 

Net earnings

  2,353   2,136 

 

8

 

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- and six-month periods ended April 3, 2021 and March 28, 2020:

 

(In thousands)

 

Employee

  

Equipment

  

Facility

  

Asset

     
  Separation Costs  Relocation Costs  

Closure Costs

  

Impairments

  

Total

 

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 
                     

2020

                    

Restructuring charges

 $129  $-  $20  $-  $149 

Cash payments

  (4)  -   -   -   (4)

Liability as of March 28, 2020

 $125  $-  $20  $-  $145 

 

As of April 3, 2021 and October 3, 2020, we recorded a liability of $27,000 and $171,000, respectively, for restructuring liabilities in accrued expenses on our consolidated balance sheets. We currently expect to incur approximately $300,000 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

  

Six Months Ended

 
  

April 3,

  

March 28,

  

April 3,

  

March 28,

 

(In thousands)

 

2021

  

2020

  

2021

  

2020

 

Welded wire reinforcement

 $81,923  $69,355  $155,949  $131,182 

Prestressed concrete strand

  57,076   45,504   102,655   81,246 

Total

 $138,999  $114,859  $258,604  $212,428 

 

Our net sales by geographic region are as follows:

 

  

Three Months Ended

  

Six Months Ended

 
  

April 3,

  

March 28,

  

April 3,

  

March 28,

 

(In thousands)

 

2021

  

2020

  

2021

  

2020

 

United States

 $136,778  $114,549  $255,115  $211,806 

Foreign

  2,221   310   3,489   622 

Total

 $138,999  $114,859  $258,604  $212,428 

 

9

 

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 April 3, 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.

 

 

(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 April 3, 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 April 3, 2021:

            

Current assets:

            

Cash equivalents

 $53,652  $53,652  $- 

Other assets:

            

Cash surrender value of life insurance policies

  11,926   -   11,926 

Total

 $65,578  $53,652  $11,926 
             

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 April 3, 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.

 

10

 
 

(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 April 3, 2021:

            

Customer relationships

 $9,870  $(3,158) $6,712 

Developed technology and know-how

  1,800   (594)  1,206 

Non-competition agreements

  400   (244)  156 

Trade name

  250   (229)  21 
  $12,320  $(4,225) $8,095 
             

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 $257,000 for the three-month periods ended April 3, 2021 and March 28, 2020, respectively, and $472,000 and $530,000 for the six-month periods ended April 3, 2021 and March 28, 2020, 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 April 3, 2021, there were 666,000 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 $324,000 and $403,000 for the three-month periods ended April 3, 2021 and March 28, 2020, respectively, and $400,000 and $463,000 for the six-month periods ended April 3, 2021 and March 28, 2020, respectively. As of April 3, 2021, there was $418,000 of unrecognized compensation cost related to unvested options which is expected to be recognized over a weighted average period of 1.67 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 3, 2021 and March 28, 2020 was $12.33 and $7.39 per share, respectively, based on the following assumptions:

 

  

Six Months Ended

 
  

April 3,

  

March 28,

 
  

2021

  

2020

 

Risk-free interest rate

  0.56%  2.75%

Dividend yield

  0.48%  0.54%

Expected volatility

  51.47%  40.89%

Expected term (in years)

  4.92   4.59 

 

11

 

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

  

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         

Granted

  42  29.43-29.43   29.43         

Exercised

  (24) 13.06-21.57   17.53      $158 

Outstanding at April 3, 2021

  500  10.23-41.85   25.65   6.61   3,607 
                      

Vested and anticipated to vest in the future at April 3, 2021

  486        25.68   6.53   3,502 
                      

Exercisable at April 3, 2021

  304        27.28   5.07   1,832 

 

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 $386,000 and $538,000 for the three-month periods ended April 3, 2021 and March 28, 2020, respectively, and $534,000 and $664,000 for the six-month periods ended April 3, 2021 and March 28, 2020, respectively.

 

As of April 3, 2021, there was $805,000 of unrecognized compensation cost related to unvested RSUs which is expected to be recognized over a weighted average period of 1.75 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 

Granted

  30   29.43 

Released

  (28)  25.22 

Balance, April 3, 2021

  124   24.12 

 

 

(8) Income Taxes

 

Effective income tax rate. Our effective income tax rate was 22.8% for the six-month period ended April 3, 2021 compared with 21.4% for the six-month period ended March 28, 2020. 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 3, 2021 and October 3, 2020, we recorded a deferred tax liability (net of valuation allowance) of $6.1 million and $6.6 million, respectively, in other liabilities on our consolidated balance sheets. 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.

 

12

 

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

 

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

 

  

Three Months Ended

  

Six Months Ended

 
  

April 3,

  

March 28,

  

April 3,

  

March 28,

 

(In thousands)

 

2021

  

2020

  

2021

  

2020

 

Interest cost

 $79  $82  $158  $167 

Service cost

  78   76   156   162 

Recognized net actuarial loss

  54   65   108   140 

Net periodic pension cost

 $211  $223  $422  $469 

 

 

(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 3, 2021, no borrowings were outstanding on the Credit Facility, $93.6 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 April 3, 2021, the applicable interest rate margins on the Credit Facility were 0.25% for index rate loans and 1.25% for LIBOR loans.

 

13

 

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 3, 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 April 3, 2021 and March 28, 2020, and $32,000 for each of the six-month periods ended April 3, 2021 and March 28, 2020.

 

 

(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 3,

  

March 28,

  

April 3,

  

March 28,

 

(In thousands, except per share amounts)

 

2021

  

2020

  

2021

  

2020

 

Net earnings

 $14,920  $4,364  $23,063  $4,919 
                 

Basic weighted average shares outstanding

  19,328   19,272   19,319   19,266 

Dilutive effect of stock-based compensation

  189   114   157   112 

Diluted weighted average shares outstanding

  19,517   19,386   19,476   19,378 
                 

Net earnings per share:

                

Basic

 $0.77  $0.23  $1.19  $0.26 

Diluted

 $0.76  $0.23  $1.18  $0.25 

 

Options and RSUs that were antidilutive and not included in the dilutive earnings per share calculation amounted to 116,000 and 363,000 shares for the three-month periods ended April 3, 2021 and March 28, 2020, respectively, and 185,000 and 328,000 shares for the six-month periods ended April 3, 2021 and March 28, 2020, 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 3, 2021, 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 3, 2021 and March 28, 2020.

 

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(13) Other Financial Data

 

Balance sheet information

 

  

April 3,

  

October 3,

 

(In thousands)

 

2021

  

2020

 

Accounts receivable, net:

        

Accounts receivable

 $58,438  $54,108 

Less allowance for doubtful accounts

  (315)  (291)

Total

 $58,123  $53,817 
         

Inventories:

        

Raw materials

 $30,633  $31,553 

Work in process

  4,732   3,813 

Finished goods

  33,258   33,597 

Total

 $68,623  $68,963 
         

Other current assets:

        

Prepaid insurance

 $4,769  $4,096 

Other

  1,787   1,474 

Total

 $6,556  $5,570 
         

Other assets:

        

Cash surrender value of life insurance policies

 $11,926  $10,584 

Assets held for sale