Insteel Industries Inc 10-Q for FY2021 Q3
Insteel Industries Inc (IIIN)
About this 10-Q
Insteel Industries Inc filed this 10-Q on July 22, 2021, covering the quarter ended July 3, 2021 (FY2021 Q3).
Headline figures
Quarter ended July 3, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $160.74M
- up 31.8% from $121.96M a year earlier
- Net income
- $18.4M
- up 176.0% from net income of $6.66M a year earlier
- Diluted EPS
- $0.94
- up 176.5% from $0.34 a year earlier
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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:
Insteel Industries, Inc.
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered subject to Section 12(b) of the Exchange Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
| | | |
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.
| | 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).
| | 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 ☐ | |
| 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 July 21, 2021,
| TABLE OF CONTENTS |
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| 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 |
18 |
| Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
25 |
| Item 4. |
Controls and Procedures |
25 |
| PART II – OTHER INFORMATION |
||
| Item 1. |
Legal Proceedings |
26 |
| Item 1A. |
Risk Factors |
26 |
| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
26 |
| Item 6. |
Exhibits |
26 |
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) |
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| (Unaudited) |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| July 3, | June 27, | July 3, | June 27, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Cost of sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Selling, general and administrative expense | ||||||||||||||||
| Restructuring charges, net | ||||||||||||||||
| Acquisition costs | ||||||||||||||||
| Other expense (income), net | ( | ) | ( | ) | ||||||||||||
| Interest expense | ||||||||||||||||
| Interest income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Earnings before income taxes | ||||||||||||||||
| Income taxes | ||||||||||||||||
| Net earnings | $ | $ | $ | $ | ||||||||||||
| Net earnings per share: | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | ||||||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
| Cash dividends declared per share | $ | $ | $ | $ | ||||||||||||
| Comprehensive income | $ | $ | $ | $ | ||||||||||||
| See accompanying notes to consolidated financial statements. |
| INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES |
||||
| CONSOLIDATED BALANCE SHEETS |
||||
| (In thousands) |
| (Unaudited) | ||||||||
| July 3, | October 3, | |||||||
| 2021 | 2020 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Intangibles, net | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and shareholders' equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Total current liabilities | ||||||||
| Other liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Shareholders' equity: | ||||||||
| Common stock | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total shareholders' equity | ||||||||
| Total liabilities and shareholders' equity | $ | $ | ||||||
| See accompanying notes to consolidated financial statements. |
| INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES |
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| CONSOLIDATED STATEMENTS OF CASH FLOWS |
||||
| (In thousands) |
||||
| (Unaudited) |
| Nine Months Ended | ||||||||
| July 3, | June 27, | |||||||
| 2021 | 2020 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net earnings | $ | $ | ||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of capitalized financing costs | ||||||||
| Stock-based compensation expense | ||||||||
| Deferred income taxes | ( | ) | ||||||
| Asset impairment charges | ||||||||
| Loss (gain) on sale and disposition of property, plant and equipment | ( | ) | ||||||
| Gain from life insurance proceeds | ( | ) | ||||||
| Increase in cash surrender value of life insurance policies over premiums paid | ( | ) | ||||||
| Net changes in assets and liabilities (net of assets and liabilities acquired): | ||||||||
| Accounts receivable, net | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ||||||||
| Other changes | ||||||||
| Total adjustments | ||||||||
| Net cash provided by operating activities | ||||||||
| Cash Flows From Investing Activities: | ||||||||
| Acquisition of business | ( | ) | ||||||
| Capital expenditures | ( | ) | ( | ) | ||||
| Increase in cash surrender value of life insurance policies | ( | ) | ( | ) | ||||
| Proceeds from sale of assets held for sale | ||||||||
| Proceeds from life insurance death benefit | ||||||||
| Proceeds from surrender of life insurance policies | ||||||||
| Proceeds from sale of property, plant and equipment | ||||||||
| Net cash used for investing activities | ( | ) | ( | ) | ||||
| Cash Flows From Financing Activities: | ||||||||
| Proceeds from long-term debt | ||||||||
| Principal payments on long-term debt | ( | ) | ( | ) | ||||
| Cash dividends paid | ( | ) | ( | ) | ||||
| Payment of employee tax withholdings related to net share transactions | ( | ) | ( | ) | ||||
| Cash received from exercise of stock options | ||||||||
| Net cash used for financing activities | ( | ) | ( | ) | ||||
| Net increase in cash and cash equivalents | ||||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash paid during the period for: | ||||||||
| Income taxes, net | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Purchases of property, plant and equipment in accounts payable | ||||||||
| Restricted stock units and stock options surrendered for withholding taxes payable | ||||||||
| Accrued liability related to holdback for business acquired | ||||||||
| See accompanying notes to consolidated financial statements. |
| INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES |
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| CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY |
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| (In thousands) |
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| (Unaudited) |
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||
| Common Stock | Paid-In | Retained | Comprehensive | Shareholders' | ||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Loss | Equity | |||||||||||||||||||
| For the nine months ended July 3, 2021 | ||||||||||||||||||||||||
| Balance at October 3, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Net earnings | ||||||||||||||||||||||||
| Stock options exercised, net | ||||||||||||||||||||||||
| Compensation expense associated with stock-based plans | ||||||||||||||||||||||||
| Restricted stock units and stock options surrendered for withholding taxes payable | ( | ) | ( | ) | ||||||||||||||||||||
| Cash dividends declared | ( | ) | ( | ) | ||||||||||||||||||||
| Balance at January 2, 2021 | ( | ) | ||||||||||||||||||||||
| Net earnings | ||||||||||||||||||||||||
| Stock options exercised, net | ||||||||||||||||||||||||
| Vesting of restricted stock units | ( | ) | ||||||||||||||||||||||
| Compensation expense associated with stock-based plans | ||||||||||||||||||||||||
| Restricted stock units and stock options surrendered for withholding taxes payable | ( | ) | ( | ) | ||||||||||||||||||||
| Cash dividends declared | ( | ) | ( | ) | ||||||||||||||||||||
| Balance at April 3, 2021 | ( | ) | ||||||||||||||||||||||
| Net earnings | ||||||||||||||||||||||||
| Stock options exercised, net | ||||||||||||||||||||||||
| Compensation expense associated with stock-based plans | ||||||||||||||||||||||||
| Restricted stock units and stock options surrendered for withholding taxes payable | ( | ) | ( | ) | ||||||||||||||||||||
| Cash dividends declared | ( | ) | ( | ) | ||||||||||||||||||||
| Balance at July 3, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| For the nine months ended June 27, 2020 | ||||||||||||||||||||||||
| Balance at September 28, 2019 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Net earnings | ||||||||||||||||||||||||
| Compensation expense associated with stock-based plans | ||||||||||||||||||||||||
| Cash dividends declared | ( | ) | ( | ) | ||||||||||||||||||||
| Balance at December 28, 2019 | ( | ) | ||||||||||||||||||||||
| Net earnings | ||||||||||||||||||||||||
| Vesting of restricted stock units | ( | ) | ||||||||||||||||||||||
| Compensation expense associated with stock-based plans | ||||||||||||||||||||||||
| Restricted stock units and stock options surrendered for withholding taxes payable | ( | ) | ( | ) | ||||||||||||||||||||
| Cash dividends declared | ( | ) | ( | ) | ||||||||||||||||||||
| Balance at March 28, 2020 | ( | ) | ||||||||||||||||||||||
| Net earnings | ||||||||||||||||||||||||
| Compensation expense associated with stock-based plans | ||||||||||||||||||||||||
| Cash dividends declared | ( | ) | ( | ) | ||||||||||||||||||||
| Balance at June 27, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| See accompanying notes to consolidated financial statements |
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 $
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 within the PC strand market.
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 | $ | |||
| Inventories | ||||
| Other current assets | ||||
| Property, plant and equipment | ||||
| Intangibles | ||||
| Total assets acquired | $ | |||
| Liabilities assumed: | ||||
| Accounts payable | $ | |||
| Accrued expenses | ||||
| Total liabilities assumed | ||||
| Net assets acquired | ||||
| Adjusted purchase price | ||||
| Goodwill | $ |
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 nine-month periods ended June 27, 2020 are as follows:
| June 27, 2020 | ||||||||
| (In thousands) | Three Months Ended | Nine Months Ended | ||||||
| Net sales | $ | $ | ||||||
| Earnings before income taxes | ||||||||
| Net earnings | ||||||||
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 nine-month periods ended July 3, 2021 and June 27, 2020:
| (In thousands) | Employee Separation Costs | Equipment Relocation Costs | Facility Closure Costs | Asset Impairments | Total | |||||||||||||||
| 2021 | ||||||||||||||||||||
| Liability as of October 3, 2020 | $ | $ | $ | $ | $ | |||||||||||||||
| Restructuring charges | ||||||||||||||||||||
| Cash payments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Non-cash charges | ( | ) | ( | ) | ||||||||||||||||
| Liability as of January 2, 2021 | ||||||||||||||||||||
| Restructuring charges | ||||||||||||||||||||
| Cash payments | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Non-cash charges | ||||||||||||||||||||
| Liability as of April 3, 2021 | ||||||||||||||||||||
| Restructuring charges | ||||||||||||||||||||
| Cash payments | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Non-cash charges | ( | ) | ( | ) | ||||||||||||||||
| Liability as of July 3, 2021 | $ | $ | $ | $ | $ | |||||||||||||||
| 2020 | ||||||||||||||||||||
| Restructuring charges | $ | $ | $ | $ | $ | |||||||||||||||
| Cash payments | ( | ) | ( | ) | ||||||||||||||||
| Liability as of March 28, 2020 | ||||||||||||||||||||
| Restructuring charges | ||||||||||||||||||||
| Cash payments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Non-cash charges | ( | ) | ( | ) | ||||||||||||||||
| Liability as of June 27, 2020 | $ | $ | $ | $ | $ | |||||||||||||||
During the three months ended July 3, 2021, we committed to a plan to sell the Summerville facility acquired in the STM Acquisition for net consideration of $
(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 | Nine Months Ended | |||||||||||||||
| July 3, | June 27, | July 3, | June 27, | |||||||||||||
| (In thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Welded wire reinforcement | $ | $ | $ | $ | ||||||||||||
| Prestressed concrete strand | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Our net sales by geographic region are as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| July 3, | June 27, | July 3, | June 27, | |||||||||||||
| (In thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||
| Foreign | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
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 July 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 July 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 July 3, 2021: | ||||||||||||
| Current assets: | ||||||||||||
| Cash equivalents | $ | $ | $ | |||||||||
| Other assets: | ||||||||||||
| Cash surrender value of life insurance policies | ||||||||||||
| Total | $ | $ | $ | |||||||||
| As of October 3, 2020: | ||||||||||||
| Current assets: | ||||||||||||
| Cash equivalents | $ | $ | $ | |||||||||
| Other assets: | ||||||||||||
| Cash surrender value of life insurance policies | ||||||||||||
| Total | $ | $ | $ | |||||||||
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 July 3, 2021 and October 3, 2020, we had
(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 July 3, 2021: | ||||||||||||
| Customer relationships | $ | $ | ( | ) | $ | |||||||
| Developed technology and know-how | ( | ) | ||||||||||
| Non-competition agreements | ( | ) | ||||||||||
| Trade name | ( | ) | ||||||||||
| $ | $ | ( | ) | $ | ||||||||
| As of October 3, 2020: | ||||||||||||
| Customer relationships | $ | $ | ( | ) | $ | |||||||
| Developed technology and know-how | ( | ) | ||||||||||
| Non-competition agreements | ( | ) | ||||||||||
| Trade name | ( | ) | ||||||||||
| $ | $ | ( | ) | $ | ||||||||
Amortization expense for intangibles was $
(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
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 years and expire years from the date of the grant. Compensation expense associated with stock options was $
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 nine-month periods ended July 3, 2021 and June 27, 2020 was $
| Nine Months Ended | ||||||||
| July 3, | June 27, | |||||||
| 2021 | 2020 | |||||||
| Risk-free interest rate | % | % | ||||||
| Dividend yield | % | % | ||||||
| Expected volatility | % | % | ||||||
| Expected term (in years) | ||||||||
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 Term - | Aggregate | ||||||||||||||||||||
| Options | Exercise Price Per Share | Weighted | Intrinsic | ||||||||||||||||||
| Outstanding | Weighted | Average | Value | ||||||||||||||||||
| (in thousands) | Range | Average | (in years) | (in thousands) | |||||||||||||||||
| Outstanding at October 3, 2020 | $ | - | $ | $ | |||||||||||||||||
| Granted | - | ||||||||||||||||||||
| Exercised | ( | ) | - | $ | |||||||||||||||||
| Outstanding at July 3, 2021 | - | ||||||||||||||||||||
| Vested and anticipated to vest in the future at July 3, 2021 | |||||||||||||||||||||
| Exercisable at July 3, 2021 | |||||||||||||||||||||
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 year from the date of the grant for RSUs granted to directors and years from the date of the grant for RSUs granted to employees. RSUs do not have voting rights. Compensation expense associated with RSUs was $
As of July 3, 2021, there was $
The following table summarizes RSU activity:
| Weighted | ||||||||
| Restricted | Average | |||||||
| Stock Units | Grant Date | |||||||
| (Unit amounts in thousands) | Outstanding | Fair Value | ||||||
| Balance, October 3, 2020 | $ | |||||||
| Granted | ||||||||
| Released | ( | ) | ||||||
| Balance, July 3, 2021 | ||||||||
(8) Income Taxes
Effective income tax rate. Our effective income tax rate was
Deferred income taxes. As of July 3, 2021 and October 3, 2020, we recorded a deferred tax liability (net of valuation allowance) of $
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 July 3, 2021 and October 3, 2020, we recorded a valuation allowance of $
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 July 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
Net periodic pension cost for the SRBAs includes the following components:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| July 3, | June 27, | July 3, | June 27, | |||||||||||||
| (In thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Interest cost | $ | $ | $ | $ | ||||||||||||
| Service cost | ||||||||||||||||
| Recognized net actuarial loss | ||||||||||||||||
| Net periodic pension cost | $ | $ | $ | $ | ||||||||||||
(10) Long-Term Debt
Revolving Credit Facility. We have a $
Interest rates on the Credit Facility are based upon (1) an index rate that is established at the highest of the prime rate,
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
Amortization of capitalized financing costs associated with the Credit Facility was $
(11) Earnings Per Share
The computation of basic and diluted earnings per share attributable to common shareholders is as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| July 3, | June 27, | July 3, | June 27, | |||||||||||||
| (In thousands, except per share amounts) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Net earnings | $ | $ | $ | $ | ||||||||||||
| Basic weighted average shares outstanding | ||||||||||||||||
| Dilutive effect of stock-based compensation | ||||||||||||||||
| Diluted weighted average shares outstanding | ||||||||||||||||
| Net earnings per share: | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
Options and RSUs that were antidilutive and not included in the dilutive earnings per share calculation amounted to
(12) Share Repurchases
On November 18, 2008, our Board of Directors approved a share repurchase authorization to buy back up to $
(13) Other Financial Data
Balance sheet information
| July 3, | October 3, | |||||||
| (In thousands) | 2021 | 2020 | ||||||
| Accounts receivable, net: | ||||||||
| Accounts receivable | $ | $ | ||||||
| Less allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
| Inventories: | ||||||||
| Raw materials | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| Total | $ | $ | ||||||
| Other current assets: | ||||||||
| Prepaid insurance | $ | $ | ||||||
| Other | ||||||||
| Total | $ | $ | ||||||
| Other assets: | ||||||||
| Cash surrender value of life insurance policies | $ | $ | ||||||
| Assets held for sale | ||||||||
| Right-of-use asset | ||||||||
| Capitalized financing costs, net | ||||||||
| Other | ||||||||
| Total | $ | $ | ||||||
| Property, plant and equipment, net: | ||||||||
| Land and land improvements | $ | $ | ||||||
| Buildings | ||||||||
| Machinery and equipment | ||||||||
| Construction in progress | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
| Accrued expenses: | ||||||||
| Salaries, wages and related expenses | $ | $ | ||||||
| Income taxes | ||||||||
| Customer rebates | ||||||||
| Property taxes | ||||||||
| Operating lease liability | ||||||||
| State sales and use taxes | ||||||||
| Holdback for business acquired | ||||||||
| Other | ||||||||
| Total | $ | $ | ||||||
| Other liabilities: | ||||||||
| Deferred compensation | $ | $ | ||||||
| Deferred income taxes | ||||||||
| Operating lease liability | ||||||||
| Total | $ | $ | ||||||
(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 reportable segment.
(15) Leases
We have operating leases for certain equipment, office space and vehicles. We determine whether an arrangement is a lease at its inception if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Leases with an initial term of twelve months or less are not recorded on our consolidated balance sheets. Lease expense for operating leases with original terms of more than twelve months was $
Most of our leases include options to extend or terminate the leases which are exercised at our sole discretion. As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate, which approximates the rate to borrow on a collateralized basis, as of the commencement date in determining the present value of lease payments.
Supplemental cash flow and non-cash information related to leases is as follows:
| Nine Months Ended | ||||||||
| (In thousands) | July 3, 2021 | June 27, 2020 | ||||||
| Cash paid for operating leases included in operating cash flows | $ | $ | ||||||
| Right-of-use assets obtained in exchange for new lease obligations | ||||||||
Supplemental balance sheet information related to leases is as follows:
| (In thousands) | July 3, 2021 | October 3, 2020 | ||||||
| Right-of-use assets: | ||||||||
| Other assets | $ | $ | ||||||
| Lease liabilities: | ||||||||
| Accrued expenses | ||||||||
| Other liabilities | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
As of July 3, 2021, our operating leases had a weighted average remaining lease term of
| (In thousands) | ||||
| 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Total future operating lease payments | ||||
| Less: imputed interest | ( | ) | ||
| Present value of lease liabilities | $ |
(16) Contingencies
Insurance recoveries. We maintain general liability, business interruption and replacement cost property insurance coverage on our facilities.
Legal proceedings. We are involved in lawsuits, claims, investigations and proceedings, including commercial, environmental and employment matters, which arise in the ordinary course of business. We do not expect the ultimate outcome or cost to resolve these matters will have a material adverse effect on our financial position, results of operations or cash flows.
Item 2. 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 involve certain assumptions. Actual results may differ materially from those expressed in forward-looking statements, and we can provide no assurances that such plans, intentions or expectations will be implemented or achieved. Many of these risks and uncertainties are discussed in detail, and where appropriate, updated in our filings with the U.S. Securities and Exchange Commission (“SEC”), in particular in our Annual Report on Form 10-K for the fiscal year ended October 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. |
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 rapid spread of the outbreak 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 were allowed to remain open. Accordingly, COVID-19 has had limited impact on our operations to date. While the U.S. economy appears to be entering a recovery and operating conditions are improving, we continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business and the potential effect on our financial position, results of operations, and cash flows. The situation remains dynamic and the ultimate duration and magnitude on our business are not known at this time.
Results of Operations
Statements of Operations – Selected Data
| Three Months Ended |
Nine Months Ended |
|||||||||||||||||||||||
| July 3, |
June 27, |
July 3, |
June 27, |
|||||||||||||||||||||
| (Dollars in thousands) |
2021 |
Change |
2020 |
2021 |
Change |
2020 |
||||||||||||||||||
| Net sales |
$ | 160,739 | 31.8 | % | $ | 121,959 | $ | 419,343 | 25.4 | % | $ | 334,387 | ||||||||||||
| Gross profit |
31,550 | 113.1 | % | 14,805 | 81,629 | 124.7 | % | 36,325 | ||||||||||||||||
| Percentage of net sales |
19.6 | % | 12.1 | % | 19.5 | % | 10.9 | % | ||||||||||||||||
| Selling, general and administrative expense |
$ | 6,184 | (7.6% | ) | $ | 6,694 | $ | 25,067 | 13.7 | % | $ | 22,040 | ||||||||||||
| Percentage of net sales |
3.8 | % | 5.5 | % | 6.0 | % | 6.6 | % | ||||||||||||||||
| Restructuring charges, net |
$ | 1,598 | 97.8 | % | $ | 808 | $ | 2,800 | 192.6 | % | $ | 957 | ||||||||||||
| Acquisition costs |
- | (100.0% | ) | 8 | - | (100.0% | ) | 195 | ||||||||||||||||
| Other expense (income), net |
35 | N/M | (1,240 | ) | 123 | N/M | (1,283 | ) | ||||||||||||||||
| Interest expense |
24 | (7.7% | ) | 26 | 73 | (6.4% | ) | 78 | ||||||||||||||||
| Interest income |
(5 | ) | (77.3% | ) | (22 | ) | (15 | ) | (96.7% | ) | (452 | ) | ||||||||||||
| Effective income tax rate |
22.4 | % | 21.9 | % | 22.6 | % | 21.7 | % | ||||||||||||||||
| Net earnings |
$ | 18,395 | 176.0 | % | $ | 6,664 | $ | 41,458 | 257.9 | % | $ | 11,583 | ||||||||||||
| "N/M" = not meaningful |
Third Quarter of Fiscal 2021 Compared to Third Quarter of Fiscal 2020
Net Sales
Net sales for the third quarter of 2021 increased 31.8% to $160.7 million from $122.0 million in the prior year quarter, reflecting a 32.9% increase in average selling prices partially offset by a 1% decrease in shipments. The increase in selling prices was driven by both strong demand for our products and price increases implemented in the current quarter to recover the escalation in raw material costs. The decrease in shipments was due to the impact of tight supply conditions for raw materials during the current year quarter. Shipments in the current and prior year quarter were not materially impacted by the COVID-19 pandemic.
Gross Profit
Gross profit for the third quarter of 2021 increased 113.1% to $31.5 million, or 19.6% of net sales, from $14.8 million, or 12.1% of net sales, in the prior year quarter due to higher spreads between average selling prices and raw material costs ($20.0 million) partially offset by higher manufacturing costs ($3.2 million) and a decrease in shipments ($139,000). The increase in spreads was driven by higher average selling prices ($40.7 million) partially offset by higher raw material costs ($19.9 million) and freight expense ($735,000).
Selling, General and Administrative Expense
Selling, general and administrative expense (“SG&A expense”) for the third quarter of 2021 decreased 7.6% to $6.2 million, or 3.8% of net sales, from $6.7 million, or 5.5% of net sales, in the prior year quarter primarily due to lower compensation ($793,000) and legal ($155,000) expense partially offset by the relative year-over-year changes in the cash surrender value of life insurance policies ($364,000) and higher travel ($181,000) expense. The decrease in compensation expense was largely driven by lower incentive plan expense due to previously achieving the maximum incentive plan benefit during the first half of the year due to our strong financial results. The decrease in legal expense was primarily related to lower costs associated with trade matters, which concluded during the current quarter. The cash surrender value of life insurance policies increased $367,000 in the current year quarter compared with $731,000 in the prior year quarter due to the corresponding changes in the value of the underlying investments.
Restructuring Charges, Net
Net restructuring charges of $1.6 million were incurred in the third quarter of 2021 related to the closure of the Summerville, South Carolina facility, which had been acquired through the STM Acquisition, and consolidation of our PC strand operations. Net restructuring charges for the current quarter included asset impairment charges ($1.4 million), facility closure ($176,000) and equipment relocation ($35,000) costs. Net restructuring charges of $808,000 were incurred in the prior year quarter for facility closure costs ($373,000), asset impairment charges ($343,000), employee separation ($76,000) and equipment relocation ($16,000) costs.
Other Income
Other income of $1.2 million for the prior year third quarter was primarily related to a gain from the disposition of assets held for sale.
Income Taxes
Our effective tax rate for the third quarter of 2021 increased to 22.4% from 21.9% for the prior year quarter primarily due to changes in book versus tax differences.
Net Earnings
Net earnings for the third quarter of 2021 increased to $18.4 million ($0.94 per diluted share) from $6.7 million ($0.34 per diluted share) in the prior year quarter primarily due to the increase in gross profit partially offset by net restructuring charges associated with the consolidation of our PC strand operations.
First Nine Months of Fiscal 2021 Compared to First Nine Months of Fiscal 2020
Net Sales
Net sales for the first nine months of 2021 increased 25.4% to $419.3 million from $334.4 million in the same year-ago period, reflecting a 16.5% increase in average selling prices along with an 7.7% increase in shipments. The increase in selling prices was driven by price increases implemented in the first nine months of the current year to recover the escalation in raw material costs. 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. Shipments during the current year period were impacted by tight supply conditions for raw materials. Shipments for both periods were not materially impacted by the COVID-19 pandemic.
Gross Profit
Gross profit for the first nine months of 2021 increased 124.7% to $81.6 million, or 19.5% of net sales, from $36.3 million, or 10.9% of net sales, in the same year-ago period. The year-over-year increase was primarily due to the higher spreads between average selling prices and raw material costs ($45.3 million) and an increase in shipments ($2.5 million) partially offset by higher manufacturing costs ($2.5 million). The increase in spreads was driven by higher average selling prices ($60.7 million) partially offset by higher raw material costs ($14.4 million) and higher freight expense ($1.0 million).
Selling, General and Administrative Expense
SG&A expense for the first nine months of 2021 increased 13.7% to $25.1 million, or 6.0% of net sales, from $22.0 million, or 6.6% of net sales, in the same year-ago period primarily due to higher compensation ($4.8 million) and legal ($984,000) expense partially offset by the relative year-over-year changes in the cash surrender value of life insurance policies ($1.7 million), lower earnout ($685,000) and employee benefit ($218,000) expense. The increase in compensation expense was largely driven by higher incentive plan expense due to our improved financial results in the current year period. The increase in legal expense was primarily related to costs associated with trade matters. The cash surrender value of life insurance policies increased $1.5 million in the current year period compared with a decrease of $175,000 in the prior year period due to the corresponding changes in the value of the underlying investments. The decrease in earnout expense was due to the revaluation of a contingent earnout liability in the prior year period. The decrease in employee benefit expense was due to lower employee health insurance costs in the current year period.
Restructuring Charges, Net
Net restructuring charges of $2.8 million were incurred in the first nine months of 2021 related to the closure of the Summerville, South Carolina facility, which had been acquired through the STM Acquisition, and consolidation of our PC strand operations. Net restructuring charges for the current period included asset impairment charges ($1.4 million), facility closure ($987,000), equipment relocation ($409,000) and employee separation ($13,000) costs. Net restructuring charges of $957,000 were incurred in the prior year period for facility closure costs ($393,000), asset impairment charges ($343,000), employee separation ($205,000) and equipment relocation ($16,000) costs.
Acquisition Costs
Acquisition costs of $195,000 were incurred in the first nine months of 2020 for legal, accounting and other professional fees related to the STM Acquisition.
Other Income
Other income of $1.3 million for the first nine months of 2020 was primarily related to a gain from the disposition of assets held for sale.
Income Taxes
Our effective tax rate for the first nine months of 2021 increased to 22.6% from 21.7% for the same year ago period primarily due to a $224,000 discrete tax benefit recorded in the prior year period in connection with the net operating loss carryback provisions of the Coronavirus Aid, Relief and Economic Security Act, which was enacted in March 2020.
Net Earnings
Net earnings for the first nine months of 2021 increased to $41.5 million ($2.13 per diluted share) from $11.6 million ($0.60 per share) in the same year-ago period primarily due to the increase in gross profit partially offset by higher SG&A expense and net restructuring charges associated with the consolidation of our PC strand operations.
Liquidity and Capital Resources
Selected Financial Data
(Dollars in thousands)
| Nine Months Ended |
||||||||
| July 3, |
June 27, |
|||||||
| 2021 |
2020 |
|||||||
| Net cash provided by operating activities |
$ | 65,462 | $ | 44,628 | ||||
| Net cash used for investing activities |
(13,884 | ) | (19,627 | ) | ||||
| Net cash used for financing activities |
(30,439 | ) | (1,811 | ) | ||||
| Net working capital |
152,184 | 137,056 | ||||||
| Total debt |
- | - | ||||||
| Percentage of total capital |
- | - | ||||||
| Shareholders' equity |
$ | 276,996 | $ | 257,066 | ||||
| Percentage of total capital |
100.0 | % | 100.0 | % | ||||
| Total capital (total debt + shareholders' equity) |
$ | 276,996 | $ | 257,066 | ||||
Operating Activities
Operating activities provided $65.5 million of cash during the first nine months of 2021 primarily from net earnings adjusted for non-cash items together with a net decrease in working capital. Working capital provided $11.9 million of cash due to a $19.6 million increase in accounts payable and accrued expenses partially offset by a $5.5 million increase in accounts receivable and a $2.2 million increase in inventories. The increase in accounts payable and accrued expenses was related to higher raw material purchases near the end of the period along with higher unit costs. The increase in accounts receivable was largely driven by higher average selling prices. The increase in inventories was due to higher unit costs partially offset by a decrease in unit volumes.
Operating activities provided $44.6 million of cash during the first nine months of 2020 primarily from net earnings adjusted for non-cash items together with a net decrease in working capital. Working capital provided $19.1 million of cash due to a $26.3 million increase in accounts payable and accrued expenses partially offset by a $6.9 million increase in accounts receivable and a $0.3 million increase in inventories. The increase in accounts payable and accrued expenses was largely related to higher raw material purchases driven by the higher shipments during the period. The increase in accounts receivable was largely driven by the increase in shipments during the third quarter of 2020 partially offset by lower average selling prices. The increase in inventories was due to the higher raw material purchases during the third quarter of 2020 mostly offset by lower 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.
Investing Activities
Investing activities used $13.9 million of cash during the first nine months of 2021 compared to $19.6 million during the prior year period primarily due to the prior year STM Acquisition ($18.4 million). Capital expenditures increased to $13.7 million from $3.4 million in the prior year period 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 ESM 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 $30.4 million of cash during the first nine months of 2021 compared to $1.8 million during the prior year period. During the first nine months of 2021, we declared and paid a special dividend totaling $29.0 million, or $1.50 per share, and regular quarterly dividends of $1.8 million, or $0.09 per share. During the first nine months of 2020, we paid regular quarterly cash dividends of $1.7 million, or $0.09 per share.
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 July 3, 2021, no borrowings were outstanding on the Credit Facility, $92.0 million of borrowing capacity was available and outstanding letters of credit totaled $1.4 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.
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. During the first nine months of 2021, we were successful in implementing price increases sufficient to recover the escalation in our raw material costs that occurred over the course of the period. 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 and Estimates
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 July 3, 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 balance of fiscal 2021, we expect to benefit from continued robust demand in our construction markets. The economic recovery along with positive signals from widely-monitored leading market indicators in private non-residential construction and a resilient public construction market are supporting our optimism in the demand outlook. In addition, the recent favorable rulings in the PC strand and standard welded wire reinforcement trade cases are expected to continue to have a positive impact on those markets. We also believe there is a possibility that Congress and the Administration will successfully negotiate an infrastructure investment plan that may benefit our markets, although the ultimate size and timing of any improvements is not possible to project.
Our markets remain vulnerable to the pace of recovery in the U.S. economy and our visibility continues to be limited by the lingering impact of COVID-19 on our markets. Additionally, the tight supply and escalating prices for steel wire rod, our primary raw material, may result in some plant operating inefficiencies and customer service delays. We expect to pass the rising costs through the supply chain and would anticipate margins returning to more normalized levels once the raw materials markets stabilize.
Regardless of the market dynamics, we 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. Finally, 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 nine months of 2021, a 10% increase in the price of wire rod would have resulted in a $23.2 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 July 3, 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 July 3, 2021.
Item 4. Controls and Procedures
We have conducted an evaluation of the effectiveness of our disclosure controls and procedures as of July 3, 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.
There has been no change in our internal control over financial reporting that occurred during the quarter ended July 3, 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 July 3, 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 July 3, 2021, there was $24.8 million remaining available for future share repurchases under the Authorization. There were no share repurchases during the three- and nine-month periods ended July 3, 2021 and June 27, 2020.
Item 6. Exhibits
| 31.1 |
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| 31.2 |
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| 32.1 |
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| 32.2 |
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| 101 |
The following financial information from the Quarterly Report on Form 10-Q of Insteel Industries, Inc. for the quarter ended July 3, 2021, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended July 3, 2021 and June 27, 2020, (ii) the Consolidated Balance Sheets as of July 3, 2021 and October 3, 2020, (iii) the Consolidated Statements of Cash Flows for the nine months ended July 3, 2021 and June 27, 2020, (iv) the Consolidated Statements of Shareholders’ Equity for the three and nine months ended July 3, 2021 and June 27, 2020, and (v) the Notes to Consolidated Financial Statements. |
| 104 |
The cover page from our Quarterly Report on Form 10-Q for the quarter ended July 3, 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. |
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: July 22, 2021 |
By: |
/s/ Mark A. Carano |
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| Mark A. Carano |
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| Senior Vice President, Chief Financial Officer and Treasurer |
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(Duly Authorized Officer and Principal Financial Officer) |
Exhibit 31.1
CERTIFICATION
I, H.O. Woltz III, certify that:
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1. |
I have reviewed this Quarterly Report on Form 10-Q for the quarter ended July 3, 2021 of Insteel Industries, Inc.; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
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5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: July 22, 2021
/s/ H. O. Woltz III
H. O. Woltz III
President, Chief Executive Officer and Chairman of the Board
Exhibit 31.2
CERTIFICATION
I, Mark A. Carano, certify that:
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1. |
I have reviewed this Quarterly Report on Form 10-Q for the quarter ended July 3, 2021 of Insteel Industries, Inc.; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
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5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: July 22, 2021
/s/ Mark A. Carano
Mark A. Carano
Senior Vice President, Chief Financial Officer and Treasurer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Insteel Industries, Inc. (the “Company”) for the period ended July 3, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, H. O. Woltz III, President, Chief Executive Officer and Chairman of the Board of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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/s/ H.O. Woltz III |
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H.O. Woltz III |
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President, Chief Executive Officer and Chairman of the Board |
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July 22, 2021 |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Insteel Industries, Inc. (the “Company”) for the period ended July 3, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark A. Carano, Senior Vice President, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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/s/ Mark A. Carano |
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Mark A. Carano |
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Senior Vice President, Chief Financial Officer and Treasurer |
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July 22, 2021 |