iiin20230401

iiin20230401_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 April 1, 2023.

☐	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to .

Commission File Number: 1-9929

Insteel Industries Inc.

(Exact name of registrant as specified in its charter)

North Carolina	56-0674867

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

1373 Boggs Drive, Mount Airy, North Carolina	27030

(Address of principal executive offices)	(Zip code)

(336) 786-2141

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report) Securities registered pursuant to Section 12(b) of the 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, 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 ☒

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.

Common Stock (No Par Value)	19,441,241

Title of Class	Number of Shares Outstanding as of April 20, 2023

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	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20

Item 4.	Controls and Procedures	20

PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	21

Item 1A.	Risk Factors	21

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21

Item 6.	Exhibits	21

SIGNATURES		22

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

INSTEEL INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands, except per share amounts)
(Unaudited)

	Three Months Ended						Six Months Ended
	April 1,			April 2,			April 1,			April 2,
	2023			2022			2023			2022

Net sales	$	159,051		$	213,209		$	325,950		$	391,668
Cost of sales		145,789			156,140			294,902			292,235
Gross profit		13,262			57,069			31,048			99,433
Selling, general and administrative expense		7,506			7,202			14,632			19,483
Restructuring recoveries, net		-			(365	)		-			(318	)
Other income, net		(57	)		(11	)		(3,399	)		(16	)
Interest expense		23			23			47			45
Interest income		(747	)		(10	)		(1,187	)		(24	)
Earnings before income taxes		6,537			50,230			20,955			80,263
Income taxes		1,436			11,213			4,731			18,117
Net earnings	$	5,101		$	39,017		$	16,224		$	62,146


Net earnings per share:
Basic	$	0.26		$	2.00		$	0.83		$	3.19
Diluted		0.26			1.99			0.83			3.17

Weighted average shares outstanding:
Basic		19,503			19,492			19,514			19,487
Diluted		19,562			19,623			19,573			19,615

Cash dividends declared per share	$	0.03		$	0.03		$	2.06		$	2.06

Comprehensive income	$	5,101		$	39,017		$	16,224		$	62,146

See accompanying notes to consolidated financial statements.

INSTEEL INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)

	(Unaudited)
	April 1,			October 1,
	2023			2022
Assets
Current assets:
Cash and cash equivalents	$	80,156		$	48,316
Accounts receivable, net		65,874			81,646
Inventories		136,492			197,654
Other current assets		5,357			7,716
Total current assets		287,879			335,332
Property, plant and equipment, net		111,946			108,156
Intangibles, net		6,465			6,847
Goodwill		9,745			9,745
Other assets		12,189			11,665
Total assets	$	428,224		$	471,745

Liabilities and shareholders' equity
Current liabilities:
Accounts payable	$	36,936		$	46,796
Accrued expenses		8,153			15,800
Total current liabilities		45,089			62,596
Other liabilities		18,157			19,405
Commitments and contingencies
Shareholders' equity:
Common stock		19,441			19,478
Additional paid-in capital		82,708			81,997
Retained earnings		263,806			289,246
Accumulated other comprehensive loss		(977	)		(977	)
Total shareholders' equity		364,978			389,744
Total liabilities and shareholders' equity	$	428,224		$	471,745

See accompanying notes to consolidated financial statements.

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

	Six Months Ended
	April 1,			April 2,
	2023			2022
Cash Flows From Operating Activities:
Net earnings	$	16,224		$	62,146
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		6,573			7,345
Amortization of capitalized financing costs		32			33
Stock-based compensation expense		1,113			1,102
Deferred income taxes		(1,479	)		1,116
Gain on sale and disposition of property, plant and equipment and assets held for sale		(3,324	)		(608	)
Gain from life insurance proceeds		-			(364	)
Increase in cash surrender value of life insurance policies over premiums paid		(732	)		-
Net changes in assets and liabilities:
Accounts receivable, net		15,772			(12,773	)
Inventories		61,162			(48,000	)
Accounts payable and accrued expenses		(19,451	)		6,805
Other changes		3,681			3,264
Total adjustments		63,347			(42,080	)
Net cash provided by operating activities		79,571			20,066

Cash Flows From Investing Activities:
Capital expenditures		(15,400	)		(8,617	)
(Increase) decrease in cash surrender value of life insurance policies		(327	)		35
Proceeds from sale of assets held for sale		-			6,934
Proceeds from sale of property, plant and equipment		9,920			-
Proceeds from life insurance claims		-			1,456
Proceeds from surrender of life insurance policies		343			106
Net cash used for investing activities		(5,464	)		(86	)

Cash Flows From Financing Activities:
Proceeds from long-term debt		142			133
Principal payments on long-term debt		(142	)		(133	)
Cash dividends paid		(40,085	)		(39,993	)
Payment of employee tax withholdings related to net share transactions		(187	)		(192	)
Cash received from exercise of stock options		94			46
Financing costs		(164	)		-
Repurchases of common stock		(1,925	)		-
Net cash used for financing activities		(42,267	)		(40,139	)

Net increase (decrease) in cash and cash equivalents		31,840			(20,159	)
Cash and cash equivalents at beginning of period		48,316			89,884
Cash and cash equivalents at end of period	$	80,156		$	69,725

Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Income taxes, net	$	4,132		$	18,053
Non-cash investing and financing activities:
Purchases of property, plant and equipment in accounts payable		2,123			372
Restricted stock units and stock options surrendered for withholding taxes payable		187			192

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 three and six months ended April 1, 2023

Balance at October 1, 2022		19,478		$	19,478		$	81,997		$	289,246		$	(977	)	$	389,744
Net earnings											11,123						11,123
Stock options exercised, net		5			5			89									94
Compensation expense associated with stock-based plans								130									130
Repurchases of common stock		(32	)		(32	)		(134	)		(750	)					(916	)
Cash dividends declared											(39,501	)					(39,501	)
Balance at December 31, 2022		19,451			19,451			82,082			260,118			(977	)		360,674
Net earnings											5,101						5,101
Vesting of restricted stock units		24			24			(24	)								-
Compensation expense associated with stock-based plans								983									983
Repurchases of common stock		(34	)		(34	)		(146	)		(829	)					(1,009	)
Restricted stock units and stock options surrendered for withholding taxes payable								(187	)								(187	)
Cash dividends declared											(584	)					(584	)
Balance at April 1, 2023		19,441		$	19,441		$	82,708		$	263,806		$	(977	)	$	364,978

For the three and six months ended April 2, 2022

Balance at October 2, 2021		19,408		$	19,408		$	78,688		$	206,384		$	(2,442	)	$	302,038
Net earnings											23,129						23,129
Stock options exercised, net		6			6			40									46
Compensation expense associated with stock-based plans								272									272
Restricted stock units and stock options surrendered for withholding taxes payable								(55	)								(55	)
Cash dividends declared											(39,410	)					(39,410	)
Balance at January 1, 2022		19,414			19,414			78,945			190,103			(2,442	)		286,020
Net earnings											39,017						39,017
Vesting of restricted stock units		25			25			(25	)								-
Compensation expense associated with stock-based plans								830									830
Restricted stock units and stock options surrendered for withholding taxes payable								(137	)								(137	)
Cash dividends declared											(583	)					(583	)
Balance at April 2, 2022		19,439		$	19,439		$	79,613		$	228,537		$	(2,442	)	$	325,147

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 1, 2022 (“2022 Form 10-K”) filed by us with the Securities and Exchange Commission. 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 1, 2022 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 2022 Form 10-K. The results of operations for the periods indicated are not necessarily indicative of the results that may be expected for the full fiscal year or any future periods.

(2) Recent Accounting Pronouncements

There were not any recently adopted or newly issued accounting pronouncements for the six-month period ended April 1, 2023, that have had, or are expected to have, a material impact on our consolidated financial statements and disclosures.

(3) 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 present revenue net of amounts collected from customers for sales tax.

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. Contract costs are not significant and are recognized as incurred.

Our net sales by product line are as follows:

	Three Months Ended				Six Months Ended
	April 1,		April 2,		April 1,		April 2,
(In thousands)	2023		2022		2023		2022
Welded wire reinforcement	$	91,378	$	133,651	$	187,346	$	247,044
Prestressed concrete strand		67,673		79,558		138,604		144,624
Total	$	159,051	$	213,209	$	325,950	$	391,668

Contract assets primarily relate to our rights to consideration for products that are delivered but not billed as of the reporting date and are reclassified to receivables when the customer is invoiced. Contract liabilities primarily relate to performance obligations that are to be satisfied in the future and arise when we collect from the customer in advance of shipments. Contract assets and liabilities were not material as of April 1, 2023, and October 1, 2022.

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.

(4) Fair Value Measurements

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

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

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

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

As of April 1, 2023, and October 1, 2022, we held financial assets that are required to be measured at fair value on a recurring basis, which are summarized below:

(In thousands)	Total		Quoted Prices in Active Markets (Level 1)		Observable Inputs (Level 2)
As of April 1, 2023:
Current assets:
Cash equivalents	$	80,308	$	80,308	$	-
Other assets:
Cash surrender value of life insurance policies		10,654		-		10,654
Total	$	90,962	$	80,308	$	10,654

As of October 1, 2022:
Current assets:
Cash equivalents	$	48,045	$	48,045	$	-
Other assets:
Cash surrender value of life insurance policies		9,938		-		9,938
Total	$	57,983	$	48,045	$	9,938

Cash equivalents, which include all highly liquid investments with original maturities of three months or less, are classified as Level 1 of the fair value hierarchy. The carrying amount of our cash equivalents, which consist of investments in money market funds, approximates fair value due to their short maturities. Cash surrender value of life insurance policies are classified as Level 2. The fair value of the life insurance policies was determined by the underwriting insurance company’s valuation models and represents the guaranteed value we would receive upon surrender of these policies as of the reporting date.

As of April 1, 2023, and October 1, 2022, we had no nonfinancial assets that were required to be measured at fair value on a nonrecurring basis. The carrying amounts of accounts receivable, accounts payable and accrued expenses approximate fair value due to the short-term maturities of these financial instruments.

(5) Intangible Assets

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

(In thousands)	Weighted- Average Useful Life (Years)		Gross		Accumulated Amortization			Net Book Value
As of April 1, 2023:
Customer relationships		17.1	$	9,870	$	(4,455	)	$	5,415
Developed technology and know-how		20.0		1,800		(773	)		1,027
Non-competition agreements		5.0		400		(377	)		23
			$	12,070	$	(5,605	)	$	6,465

As of October 1, 2022:
Customer relationships		17.1	$	9,870	$	(4,130	)	$	5,740
Developed technology and know-how		20.0		1,800		(729	)		1,071
Non-competition agreements		5.0		400		(364	)		36
			$	12,070	$	(5,223	)	$	6,847

Amortization expense for intangibles was $187,000 and $204,000 for the three-month periods ended April 1, 2023 and April 2, 2022, respectively, and $382,000 and $412,000 for the six-month periods ended April 1, 2023 and April 2, 2022, respectively. Amortization expense for the next five years is $375,000 in 2023, $750,000 in 2024, $743,000 in 2025, $752,000 in 2026, $480,000 in 2027 and $3.4 million thereafter.

(6) Stock-Based Compensation

Under our equity incentive plan, employees and directors may be granted stock options, restricted stock, restricted stock units and performance awards. Effective February 28, 2020, our shareholders approved an amendment to the 2015 Equity Incentive Plan of Insteel Industries Inc. (the “2015 Plan”), which authorizes up to an additional 750,000 shares of our common stock for future grants under the plan and expires on February 17, 2025. As of April 1, 2023, there were 500,000 shares of our common stock available for future grants under the 2015 Plan, which is our only active equity incentive plan.

Stock option awards. Under our equity incentive plan, employees and directors may be granted options to purchase shares of common stock at the fair market value on the date of the grant. Options granted under these plans generally vest over three years and expire ten years from the date of the grant. Compensation expense associated with stock options was $439,000 and $374,000 for the three-month periods ended April 1, 2023, and April 2, 2022, respectively, and $475,000 and $480,000 for the six-month periods ended April 1, 2023 and April 2, 2022, respectively. As of April 1, 2023, there was $650,000 of unrecognized compensation cost related to unvested options which is expected to be recognized over a weighted average period of 2.03 years.

The following table summarizes stock option activity:

						Contractual		Aggregate
	Options			Weighted		Term - Weighted		Intrinsic
	Outstanding			Average		Average		Value
	(in thousands)			Exercise Price		(in years)		(in thousands)
Outstanding at October 1, 2022		365		$	30.00
Granted		49			30.27
Forfeited		(19	)		33.22
Exercised		(5	)		19.86			$	46
Outstanding at April 1, 2023		390			30.00		7.33		938

Vested and anticipated to vest in the future at April 1, 2023		382			29.94		7.29		936

Exercisable at April 1, 2023		231			28.42		6.16		811

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 plan are valued based upon the fair market value on the date of the grant and provide for a dividend equivalent payment which is included in compensation expense. The vesting period for RSUs is generally one year from the date of the grant for RSUs granted to directors and three years from the date of the grant for RSUs granted to employees. RSUs do not have voting rights. Compensation expense associated with RSUs was $544,000 and $455,000 for the three-month periods ended April 1, 2023, and April 2, 2022, respectively, and $638,000 and $622,000 for the six-month periods ended April 1, 2023 and April 2, 2022, respectively.

As of April 1, 2023, there was $1.2 million of unrecognized compensation cost related to unvested RSUs which is expected to be recognized over a weighted average period of 1.56 years.

The following table summarizes RSU activity:

				Weighted
	Restricted			Average
	Stock Units			Grant Date
(Unit amounts in thousands)	Outstanding			Fair Value
Balance, October 1, 2022		120		$	29.88
Granted		36			30.27
Forfeited		(10	)		30.36
Released		(31	)		27.06
Balance, April 1, 2023		115			30.72

(7) Income Taxes

Effective income tax rate. Our effective income tax rate was 22.6% for the six-month periods ended April 1, 2023 and April 2, 2022. The effective income tax rates for both periods were based upon the estimated rate applicable for the entire fiscal year adjusted to reflect any significant items related specifically to interim periods.

Deferred income taxes. As of April 1, 2023, and October 1, 2022, we recorded a deferred tax liability (net of valuation allowance) of $5.6 million and $7.1 million, respectively, in other liabilities on our consolidated balance sheets. We have $7.1 million of state net operating loss carryforwards (“NOLs”) that begin to expire in 2031, but principally expire between 2031 and 2038.

The realization of our deferred tax assets is entirely dependent upon our ability to generate future taxable income in applicable jurisdictions. GAAP requires that we periodically assess the need to establish a reserve against our deferred tax assets to the extent we no longer believe it is more likely than not that they will be fully realized. As of April 1, 2023, and October 1, 2022, we recorded a valuation allowance of $32,000 pertaining to various state NOLs that were not expected to be utilized. The valuation allowance is subject to periodic review and adjustment based on changes in facts and circumstances and would be reduced should we utilize the state NOLs against which an allowance had previously been provided or determine that such utilization was more likely than not.

Uncertainty in income taxes. We establish contingency reserves for material, known tax exposures based on our assessment of the estimated liability that would be incurred in connection with the settlement of such matters. As of April 1, 2023, 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 2017 remain subject to examination.

(8) Employee Benefit Plans

Supplemental retirement benefit plan. We have Supplemental Retirement Benefit Agreements (each, a “SRBA”) with certain of our employees (each, a “Participant”). Under the SRBAs, if the Participant remains in continuous service with us for a period of at least 30 years, we will pay the Participant a supplemental retirement benefit for the 15-year period following the Participant’s retirement equal to 50% of the Participant’s highest average annual base salary for five consecutive years in the 10-year period preceding the Participant’s retirement. If the Participant retires prior to the later of age 65 or the completion of 30 years of continuous service with us but has completed at least 10 years of continuous service, the amount of the Participant’s supplemental retirement benefit will be reduced by 1/360th for each month short of 30 years that the Participant was employed by us.

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

	Three Months Ended				Six Months Ended
	April 1,		April 2,		April 1,		April 2,
(In thousands)	2023		2022		2023		2022
Interest cost	$	130	$	87	$	260	$	174
Service cost		83		100		166		200
Recognized net actuarial loss		3		69		6		138
Net periodic pension cost	$	216	$	256	$	432	$	512

(9) Long-Term Debt

Revolving Credit Facility. We have a $100.0 million revolving credit facility (the “Credit Facility”) that is used to supplement our operating cash flow and fund our working capital, capital expenditure, general corporate and growth requirements. In March 2023, we amended our credit agreement to extend the maturity date of the Credit Facility from May 15, 2024, to March 15, 2028, and replaced the London Inter-Bank Offered Rate with the secured overnight financing rate (“SOFR”). The Credit Facility provides for an accordion feature whereby its size may be increased by up to $50.0 million, subject to our lender’s approval. Advances under the Credit Facility are limited to the lesser of the revolving loan commitment amount (currently $100.0 million) or a borrowing base amount that is calculated based upon a percentage of eligible receivables and inventories. As of April 1, 2023, no borrowings were outstanding on the Credit Facility, $98.6 million of borrowing capacity was available and outstanding letters of credit totaled $1.4 million.

Interest rates on the Credit Facility are based upon (1) an index rate that is established at the highest of the prime rate, 0.50% plus the federal funds rate or the SOFR rate plus 1.00% or (2) at our election, a SOFR rate including a credit adjustment of 0.10%, plus in either case, an applicable interest rate margin. The applicable interest rate margins are adjusted on a quarterly basis based upon the amount of excess availability on the Credit Facility within the range of 0.25% to 0.50% for index rate loans and 1.25% to 1.50% for SOFR-based loans. In addition, the applicable interest rate margins would be increased by 2.00% upon the occurrence of certain events of default provided for under the terms of the Credit Facility. Based on our excess availability as of April 1, 2023, the applicable interest rate margins on the Credit Facility were 0.25% for index rate loans and 1.25% for SOFR-based loans.

Our ability to borrow available amounts under the Credit Facility will be restricted or eliminated in the event of certain covenant breaches, events of default or if we are unable to make certain representations and warranties provided for under the terms of the Credit Facility. We are required to maintain a fixed charge coverage ratio of not less than 1.0 at the end of each fiscal quarter for the twelve-month period then ended when the amount of liquidity on the Credit Facility is less than $10.0 million. In addition, the terms of the Credit Facility restrict our ability to, among other things: engage in certain business combinations or divestitures; make investments in or loans to third parties, unless certain conditions are met with respect to such investments or loans; pay cash dividends or repurchase shares of our stock subject to certain minimum borrowing availability requirements; incur or assume indebtedness; issue securities; enter into certain transactions with our affiliates; or permit liens to encumber our property and assets. The terms of the Credit Facility also provide that an event of default will occur upon the occurrence of, among other things: defaults or breaches under the loan documents, subject in certain cases to cure periods; defaults or breaches by us or any of our subsidiaries under any agreement resulting in the acceleration of amounts above certain thresholds or payment defaults above certain thresholds; certain events of bankruptcy or insolvency; certain entries of judgment against us or any of our subsidiaries, which are not covered by insurance; or a change of control. As of April 1, 2023, we were in compliance with all of the financial and negative covenants under the Credit Facility, and there have not been any events of default.

Amortization of capitalized financing costs associated with the Credit Facility was $16,000 for each of the three-month periods ended April 1, 2023 and April 2, 2022, and $32,000 and $33,000 for the six-month periods ended April 1, 2023 and April 2, 2022, respectively.

(10) Earnings Per Share

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

	Three Months Ended				Six Months Ended
	April 1,		April 2,		April 1,		April 2,
(In thousands, except per share amounts)	2023		2022		2023		2022
Net earnings	$	5,101	$	39,017	$	16,224	$	62,146

Basic weighted average shares outstanding		19,503		19,492		19,514		19,487
Dilutive effect of stock-based compensation		59		131		59		128
Diluted weighted average shares outstanding		19,562		19,623		19,573		19,615

Net earnings per share:
Basic	$	0.26	$	2.00	$	0.83	$	3.19
Diluted	$	0.26	$	1.99	$	0.83	$	3.17

Options and RSUs that were antidilutive and not included in the dilutive earnings per share calculation amounted to 70,000 and 67,000 shares for the three-month periods ended April 1, 2023, and April 2, 2022, respectively, and 82,000 and 62,000 shares for the six-month periods ended April 1, 2023, and April 2, 2022, respectively.

(11) Share Repurchases

On November 18, 2008, our Board of Directors approved a share repurchase authorization to buy back up to $25.0 million of our outstanding common stock (the “Authorization”). Under the Authorization, repurchases may be made from time to time in the open market or in privately negotiated transactions subject to market conditions, applicable legal requirements and other factors. We are not obligated to acquire any common stock, and the program may be commenced or suspended at any time at our discretion without prior notice. The Authorization continues in effect until terminated by the Board of Directors. The Company repurchased $1.0 million or 34,459 shares and $1.9 million or 66,113 shares of its common stock during the three- and six-month periods ended April 1, 2023, respectively. As of April 1, 2023, there was $21.6 million remaining available for future share repurchases under this Authorization. There were no share repurchases during the three- and six-month periods ended April 2, 2022.

(12) Other Financial Data

Balance sheet information:

	April 1,			October 1,
(In thousands)	2023			2022
Accounts receivable, net:
Accounts receivable	$	66,219		$	82,043
Less allowance for doubtful accounts		(345	)		(397	)
Total	$	65,874		$	81,646

Inventories:
Raw materials	$	47,075		$	108,894
Work in process		7,675			8,817
Finished goods		81,742			79,943
Total	$	136,492		$	197,654

Other current assets:
Prepaid insurance	$	3,354		$	4,563
Other		2,003			3,153
Total	$	5,357		$	7,716

Other assets:
Cash surrender value of life insurance policies	$	10,654		$	9,938
Right-of-use asset		1,215			1,565
Capitalized financing costs, net		191			41
Other		129			121
Total	$	12,189		$	11,665

Property, plant and equipment, net:
Land and land improvements	$	15,092		$	14,947
Buildings		55,451			55,044
Machinery and equipment		181,316			191,790
Construction in progress		24,776			11,745
		276,635			273,526
Less accumulated depreciation		(164,689	)		(165,370	)
Total	$	111,946		$	108,156

Accrued expenses:
Salaries, wages and related expenses	$	3,772		$	8,128
Income taxes		998			-
Customer rebates		889			2,760
Operating lease liability		776			997
Property taxes		658			1,782
Sales allowance reserves		453			1,013
State sales and use taxes		200			595
Other		407			525
Total	$	8,153		$	15,800

Other liabilities:
Deferred compensation	$	12,110		$	11,747
Deferred income taxes		5,607			7,086
Operating lease liability		440			572
Total	$	18,157		$	19,405

(13) 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: prestressed concrete strand and welded wire reinforcement. Based on the criteria specified in ASC Topic 280, Segment Reporting, we have one reportable segment.

(14) Contingencies

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 1, 2022 (our “2022 Annual Report”). You should carefully review these risks and uncertainties.

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. All forward-looking statements speak only to the respective dates on which such statements are made, and we do not undertake any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events, except as may be required by law.

It is not possible to anticipate and list all risks and uncertainties that may affect our business, future operations or financial performance; however, they include, but are not limited to, the following:

●

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

●

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

●

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

●

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

●

the cyclical nature of the steel and building material industries;

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

unanticipated plant outages, equipment failures or labor difficulties; and

●

the “Risk Factors” discussed in our 2022 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 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.

Results of Operations

Statements of Operations – Selected Data

(Dollars in thousands)

SEC Form 10-Q filed by Insteel Industries Inc.