iiin20210703

iiin20210703_10q.htm

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 July 3, 2021

☐

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

For the transition period from ________ to ________

Commission File Number: 1-9929

Insteel Industries, Inc.

(Exact name of registrant as specified in its charter)

North Carolina

(State or other jurisdiction of

incorporation or organization)

56-0674867

(I.R.S. Employer Identification No.)

1373 Boggs Drive, Mount Airy, North Carolina

(Address of principal executive offices)

27030

(Zip Code)

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

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

Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock (No Par Value)	IIIN	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒

No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒

No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

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

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

Yes ☐

No ☒

As of July 21, 2021, 19,357,571 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	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)
(Unaudited)

	Three Months Ended						Nine Months Ended
	July 3,			June 27,			July 3,			June 27,
	2021			2020			2021			2020

Net sales	$	160,739		$	121,959		$	419,343		$	334,387
Cost of sales		129,189			107,154			337,714			298,062
Gross profit		31,550			14,805			81,629			36,325
Selling, general and administrative expense		6,184			6,694			25,067			22,040
Restructuring charges, net		1,598			808			2,800			957
Acquisition costs		-			8			-			195
Other expense (income), net		35			(1,240	)		123			(1,283	)
Interest expense		24			26			73			78
Interest income		(5	)		(22	)		(15	)		(452	)
Earnings before income taxes		23,714			8,531			53,581			14,790
Income taxes		5,319			1,867			12,123			3,207
Net earnings	$	18,395		$	6,664		$	41,458		$	11,583


Net earnings per share:
Basic	$	0.95		$	0.35		$	2.14		$	0.60
Diluted		0.94			0.34			2.13			0.60

Weighted average shares outstanding:
Basic		19,352			19,283			19,330			19,272
Diluted		19,573			19,377			19,508			19,378

Cash dividends declared per share	$	0.03		$	0.03		$	1.59		$	0.09

Comprehensive income	$	18,395		$	6,664		$	41,458		$	11,583

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	$	89,827		$	68,688
Accounts receivable, net		59,349			53,817
Inventories		71,158			68,963
Other current assets		7,479			5,570
Total current assets		227,813			197,038
Property, plant and equipment, net		105,729			101,392
Intangibles, net		7,882			8,567
Goodwill		9,745			9,745
Other assets		20,762			21,160
Total assets	$	371,931		$	337,902

Liabilities and shareholders' equity
Current liabilities:
Accounts payable	$	60,217		$	38,961
Accrued expenses		15,412			14,717
Total current liabilities		75,629			53,678
Other liabilities		19,306			19,421
Commitments and contingencies
Shareholders' equity:
Common stock		19,358			19,304
Additional paid-in capital		77,780			76,387
Retained earnings		181,814			171,068
Accumulated other comprehensive loss		(1,956	)		(1,956	)
Total shareholders' equity		276,996			264,803
Total liabilities and shareholders' equity	$	371,931		$	337,902

See accompanying notes to consolidated financial statements.

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

	Nine Months Ended
	July 3,			June 27,
	2021			2020
Cash Flows From Operating Activities:
Net earnings	$	41,458		$	11,583
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		10,828			10,626
Amortization of capitalized financing costs		49			49
Stock-based compensation expense		1,174			1,277
Deferred income taxes		(36	)		392
Asset impairment charges		1,415			343
Loss (gain) on sale and disposition of property, plant and equipment		125			(1,031	)
Gain from life insurance proceeds		-			(200	)
Increase in cash surrender value of life insurance policies over premiums paid		(1,535	)		-
Net changes in assets and liabilities (net of assets and liabilities acquired):
Accounts receivable, net		(5,532	)		(6,890	)
Inventories		(2,195	)		(246	)
Accounts payable and accrued expenses		19,642			26,281
Other changes		69			2,444
Total adjustments		24,004			33,045
Net cash provided by operating activities		65,462			44,628

Cash Flows From Investing Activities:
Acquisition of business		-			(18,356	)
Capital expenditures		(13,681	)		(3,448	)
Increase in cash surrender value of life insurance policies		(309	)		(133	)
Proceeds from sale of assets held for sale		79			1,875
Proceeds from life insurance death benefit		-			200
Proceeds from surrender of life insurance policies		27			195
Proceeds from sale of property, plant and equipment		-			40
Net cash used for investing activities		(13,884	)		(19,627	)

Cash Flows From Financing Activities:
Proceeds from long-term debt		230			223
Principal payments on long-term debt		(230	)		(223	)
Cash dividends paid		(30,712	)		(1,735	)
Payment of employee tax withholdings related to net share transactions		(161	)		(76	)
Cash received from exercise of stock options		434			-
Net cash used for financing activities		(30,439	)		(1,811	)

Net increase in cash and cash equivalents		21,139			23,190
Cash and cash equivalents at beginning of period		68,688			38,181
Cash and cash equivalents at end of period	$	89,827		$	61,371

Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Income taxes, net	$	10,874		$	342
Non-cash investing and financing activities:
Purchases of property, plant and equipment in accounts payable		946			712
Restricted stock units and stock options surrendered for withholding taxes payable		161			76
Accrued liability related to holdback for business acquired		-			1,000

See accompanying notes to consolidated financial statements.

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 nine months ended July 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
Net earnings									18,395						18,395
Stock options exercised, net		17		17		240									257
Compensation expense associated with stock-based plans						240									240
Restricted stock units and stock options surrendered for withholding taxes payable						(51	)								(51	)
Cash dividends declared									(581	)					(581	)
Balance at July 3, 2021		19,358	$	19,358	$	77,780		$	181,814		$	(1,956	)	$	276,996

*For the nine months ended June 27, 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
Net earnings									6,664						6,664
Compensation expense associated with stock-based plans						150									150
Cash dividends declared									(579	)					(579	)
Balance at June 27, 2020		19,283	$	19,283	$	75,811		$	164,220		$	(2,248	)	$	257,066

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 $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 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	$	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 nine-month periods ended June 27, 2020 are as follows:

	June 27, 2020
(In thousands)	Three Months Ended		Nine Months Ended
Net sales	$	121,959	$	346,890
Earnings before income taxes		8,531		12,730
Net earnings		6,664		6,447

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	$	-		$	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
Restructuring charges		-			35			176			1,387			1,598
Cash payments		-			(35	)		(183	)		-			(218	)
Non-cash charges		-			-			-			(

SEC Form 10-Q filed by Insteel Industries, Inc.