iiin20240330

iiin20240330_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 March 30, 2024.

☐	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: 1-09929

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)	19,475,061

Title of Class	Number of Shares Outstanding as of April 24, 2024

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 5.	Other Information	21

Item 6.	Exhibits	22

SIGNATURES		23

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
	March 30,			April 1,			March 30,			April 1,
	2024			2023			2024			2023

Net sales	$	127,394		$	159,051		$	249,119		$	325,950
Cost of sales		111,679			145,789			227,134			294,902
Gross profit		15,715			13,262			21,985			31,048
Selling, general and administrative expense		7,875			7,506			14,242			14,632
Other expense (income), net		9			(57	)		(13	)		(3,399	)
Interest expense		28			23			57			47
Interest income		(1,147	)		(747	)		(2,806	)		(1,187	)
Earnings before income taxes		8,950			6,537			10,505			20,955
Income taxes		2,011			1,436			2,434			4,731
Net earnings	$	6,939		$	5,101		$	8,071		$	16,224


Net earnings per share:
Basic	$	0.36		$	0.26		$	0.41		$	0.83
Diluted		0.35			0.26			0.41			0.83

Weighted average shares outstanding:
Basic		19,508			19,503			19,503			19,514
Diluted		19,594			19,562			19,584			19,573

Cash dividends declared per share	$	0.03		$	0.03		$	2.56		$	2.06

Comprehensive income	$	6,939		$	5,101		$	8,071		$	16,224

See accompanying notes to consolidated financial statements.

INSTEEL INDUSTRIES INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

	(Unaudited)
	March 30,			September 30,
	2024			2023
Assets
Current assets:
Cash and cash equivalents	$	83,945		$	125,670
Accounts receivable, net		55,549			63,424
Inventories		92,530			103,306
Other current assets		7,675			6,453
Total current assets		239,699			298,853
Property, plant and equipment, net		127,534			120,014
Intangibles, net		5,716			6,090
Goodwill		9,745			9,745
Other assets		14,533			12,811
Total assets	$	397,227		$	447,513

Liabilities and shareholders' equity
Current liabilities:
Accounts payable	$	25,409		$	34,346
Accrued expenses		7,975			11,809
Total current liabilities		33,384			46,155
Other liabilities		23,222			19,853
Commitments and contingencies
Shareholders' equity:
Common stock		19,467			19,454
Additional paid-in capital		85,332			83,832
Retained earnings		236,105			278,502
Accumulated other comprehensive loss		(283	)		(283	)
Total shareholders' equity		340,621			381,505
Total liabilities and shareholders' equity	$	397,227		$	447,513

See accompanying notes to consolidated financial statements.

INSTEEL INDUSTRIES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended
	March 30,			April 1,
	2024			2023
Cash Flows From Operating Activities:
Net earnings	$	8,071		$	16,224
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		7,575			6,573
Amortization of capitalized financing costs		26			32
Stock-based compensation expense		1,395			1,113
Deferred income taxes		2,769			(1,479	)
Loss (gain) on sale and disposition of property, plant and equipment		24			(3,324	)
Increase in cash surrender value of life insurance policies over premiums paid		(1,058	)		(732	)
Net changes in assets and liabilities:
Accounts receivable, net		7,875			15,772
Inventories		10,776			61,162
Accounts payable and accrued expenses		(12,859	)		(19,451	)
Other changes		(1,383	)		3,681
Total adjustments		15,140			63,347
Net cash provided by operating activities		23,211			79,571

Cash Flows From Investing Activities:
Capital expenditures		(14,225	)		(15,400	)
Increase in cash surrender value of life insurance policies		(369	)		(327	)
Proceeds from sale of property, plant and equipment		3			9,920
Proceeds from surrender of life insurance policies		5			343
Net cash used for investing activities		(14,586	)		(5,464	)

Cash Flows From Financing Activities:
Proceeds from long-term debt		134			142
Principal payments on long-term debt		(134	)		(142	)
Cash dividends paid		(49,775	)		(40,085	)
Payment of employee tax withholdings related to net share transactions		(161	)		(187	)
Cash received from exercise of stock options		428			94
Financing costs		-			(164	)
Repurchases of common stock		(842	)		(1,925	)
Net cash used for financing activities		(50,350	)		(42,267	)

Net (decrease) increase in cash and cash equivalents		(41,725	)		31,840
Cash and cash equivalents at beginning of period		125,670			48,316
Cash and cash equivalents at end of period	$	83,945		$	80,156

Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Income taxes, net	$	724		$	4,132
Non-cash investing and financing activities:
Purchases of property, plant and equipment in accounts payable		1,824			2,123
Restricted stock units and stock options surrendered for withholding taxes payable		161			187

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 March 30, 2024*

Balance at September 30, 2023		19,454		$	19,454		$	83,832		$	278,502		$	(283	)	$	381,505
Net earnings											1,132						1,132
Stock options exercised, net		13			13			297									310
Compensation expense associated with stock-based plans								398									398
Repurchases of common stock		(19	)		(19	)		(82	)		(438	)					(539	)
Restricted stock units and stock options surrendered for withholding taxes payable								(20	)								(20	)
Cash dividends declared											(49,191	)					(49,191	)
Balance at December 30, 2023		19,448			19,448			84,425			230,005			(283	)		333,595
Net earnings											6,939						6,939
Stock options exercised, net		4			4			114									118
Vested and released restricted stock units		24			24			(24	)								-
Compensation expense associated with stock-based plans								997									997
Repurchases of common stock		(9	)		(9	)		(39	)		(255	)					(303	)
Restricted stock units and stock options surrendered for withholding taxes payable								(141	)								(141	)
Cash dividends declared											(584	)					(584	)
Balance at March 30, 2024		19,467		$	19,467		$	85,332		$	236,105		$	(283	)	$	340,621

*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
Vested and released 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

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 September 30, 2023 (“2023 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 September 30, 2023 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 2023 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

In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures”. ASU No. 2023-07 requires disclosures to include significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”), a description of other segment items by reportable segment and any additional measures of a segment's profit or loss used by the CODM when deciding how to allocate resources. The ASU requires all annual disclosures currently required by Topic 280 to be included in interim periods and is applicable to entities with a single reportable segment. ASU No. 2023-07 will be effective for us in fiscal 2025 for annual reporting and in the first quarter of fiscal 2026 for interim reporting. Retrospective application is required for all prior periods presented in the financial statements. We are currently evaluating the impact of the ASU on our disclosures within the consolidated financial statements.

In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”. ASU No. 2023-09 requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income tax paid. ASU No. 2023-09 will become effective for us in fiscal 2026. We are currently evaluating the impact of the ASU on our income tax disclosures within the consolidated financial statements.

(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
	March 30,		April 1,		March 30,		April 1,
(In thousands)	2024		2023		2024		2023
Welded wire reinforcement	$	69,750	$	91,378	$	138,552	$	187,346
Prestressed concrete strand		57,644		67,673		110,567		138,604
Total	$	127,394	$	159,051	$	249,119	$	325,950

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 March 30, 2024, and September 30, 2023.

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 credit losses 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 March 30, 2024, and September 30, 2023, 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 March 30, 2024:
Current assets:
Cash equivalents	$	80,232	$	80,232	$	-
Other assets:
Cash surrender value of life insurance policies		12,008		-		12,008
Total	$	92,240	$	80,232	$	12,008

As of September 30, 2023:
Current assets:
Cash equivalents	$	125,805	$	125,805	$	-
Other assets:
Cash surrender value of life insurance policies		10,586		-		10,586
Total	$	136,391	$	125,805	$	10,586

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 March 30, 2024, and September 30, 2023, 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 March 30, 2024:
Customer relationships		17.1	$	9,870	$	(5,103	)	$	4,767
Developed technology and know-how		20.0		1,800		(863	)		937
Non-competition agreements		5.0		60		(48	)		12
			$	11,730	$	(6,014	)	$	5,716

As of September 30, 2023:
Customer relationships		17.1	$	9,870	$	(4,779	)	$	5,091
Developed technology and know-how		20.0		1,800		(818	)		982
Non-competition agreements		5.0		400		(383	)		17
			$	12,070	$	(5,980	)	$	6,090

Amortization expense for intangibles was $187,000 for each of the three-month periods ended March 30, 2024, and April 1, 2023, and $374,000 and $382,000 for the six-month periods ended March 30, 2024, and April 1, 2023, respectively. Amortization expense for the next five years is $376,000 in 2024, $743,000 in 2025, $752,000 in 2026, $480,000 in 2027, $453,000 in 2028 and $2.9 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 11, 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 March 30, 2024, there were 362,000 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 $440,000 and $439,000 for the three-month periods ended March 30, 2024, and April 1, 2023, respectively, and $593,000 and $475,000 for the six-month periods ended March 30, 2024, and April 1, 2023, respectively. As of March 30, 2024, there was $745,000 of unrecognized compensation cost related to unvested options which is expected to be recognized over a weighted average period of 2.09 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 September 30, 2023		411		$	30.68
Granted		46			34.75
Forfeited		(8	)		41.86
Exercised		(38	)		30.79			$	194
Outstanding at March 30, 2024		411			30.91		7.13		3,183

Vested and anticipated to vest in the future at March 30, 2024		403			30.86		7.09		3,138

Exercisable at March 30, 2024		246			29.41		5.81		2,313

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 $557,000 and $544,000 for the three-month periods ended March 30, 2024, and April 1, 2023, respectively, and $802,000 and $638,000 for the six-month periods ended March 30, 2024 and April 1, 2023, respectively.

As of March 30, 2024, there was $1.4 million of unrecognized compensation cost related to unvested RSUs which is expected to be recognized over a weighted average period of 1.64 years.

The following table summarizes RSU activity:

SEC Form 10-Q filed by Insteel Industries Inc.