NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED
SEPTEMBER 29, 2018,
SEPTEMBER 30, 2017
AND
OCTOBER 1, 2016
(1) Description of Business
Insteel Industries, Inc. (“we,” “us,” “our,” “Insteel” or “the Company”) is the nation’s largest manufacturer of steel wire reinforcing products for concrete construction applications. Insteel is the parent holding company for two wholly-owned subsidiaries, Insteel Wire Products Company (“IWP”), an operating subsidiary, and Intercontinental Metals Corporation, an inactive subsidiary. We manufacture and market prestressed concrete strand (“PC strand”) and welded wire reinforcement (“WWR”), including engineered structural mesh, concrete pipe reinforcement and standard welded wire reinforcement. Our products are primarily sold to manufacturers of concrete products and, to a lesser extent, distributors, rebar fabricators and contractors. We sell our products nationwide across the U.S. and, to a much lesser extent, into Canada, Mexico, and Central and South America.
We have evaluated all subsequent events that occurred after the balance sheet date through
the time of filing this Annual Report on Form 10-K and concluded there were no events or transactions during this period that required additional recognition or disclosure in our financial statements.
(2) Summary of Significant Accounting Policies
Fiscal year.
Our fiscal year is the 52 or 53 weeks ending on the Saturday closest to September 30. Fiscal years 2018, 2017 and 2016 were 52-week periods. All references to years relate to fiscal years rather than calendar years.
Principles of consolidation
.
The consolidated financial statements include the accounts of Insteel and our subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation.
Use of estimates.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S.” and such accounting principles, “GAAP”) requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. There is no assurance that actual results will not differ from these estimates.
Cash equivalents
.
We consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.
Concentration of
c
redit
r
isk
.
Financial instruments that subject us to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. Our cash is principally concentrated at one financial institution, which at times exceeds federally insured limits. We are exposed to credit risk in the event of default by institutions in which our cash and cash equivalents are held and by customers to the extent of the amounts recorded on the balance sheet. We invest excess cash primarily in money market funds, which are highly liquid securities.
The majority of our accounts receivable are due from customers that are located in the U.S. and are generally not secured by collateral depending upon the creditworthiness of the account. We provide an allowance for doubtful accounts based upon our assessment of the credit risk of specific customers, historical trends and other information. We write off accounts receivable when they become uncollectible. There is no disproportionate concentration of credit risk.
Stock-based compensation.
We account for stock-based compensation in accordance with the fair value recognition provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, Compensation – Stock Compensation, which requires stock-based compensation expense to be recognized in net earnings based on the fair value of the award on the date of the grant. We account for forfeitures as they occur. We determine the fair value of stock options issued by using a Monte Carlo valuation model at the grant date, which considers a range of assumptions including the expected term, volatility, dividend yield and risk-free interest rate.
Revenue recognition
.
We recognize revenue from product sales when products are shipped and risk of loss and title has passed to the customer. Sales taxes collected from customers are excluded from revenues and recorded on a net basis.
Shipping and handling costs
.
We include all of the outbound freight, shipping and handling costs associated with the shipment of products to customers in cost of sales. Any amounts paid by customers to us for shipping and handling are recorded in net sales on the consolidated statements of operations.
Inventories
.
Inventories are valued at the lower of weighted average cost (which approximates computation on a first-in, first-out basis) and net realizable value. The valuation of inventory includes the costs for material, labor and manufacturing overhead.
Property, plant and equipment.
Property, plant and equipment are recorded at cost or fair market value in the case of the assets acquired through acquisitions, or otherwise at reduced values to the extent there have been asset impairment write-downs. Expenditures for maintenance and repairs are charged directly to expense when incurred, while major improvements are capitalized. Depreciation is computed for financial reporting purposes principally by use of the straight-line method over the following estimated useful lives: machinery and equipment, 3 - 15 years; buildings, 10 - 30 years; and land improvements, 5 - 15 years. Depreciation expense was approximately $11.6 million in 2018, $10.5 million in 2017 and $10.4 million in 2016 and reflected in cost of sales and selling, general and administrative expense (“SG&A expense”) in the consolidated statements of operations. Capitalized software is amortized over the shorter of the estimated useful life or 5 years and reflected in SG&A expense in the consolidated statements of operations. No interest costs were capitalized in 2018, 2017 and 2016.
Goodwill
.
Goodwill is the excess of cost over the fair value of net assets of businesses acquired. Goodwill is not amortized but is tested annually for impairment and whenever events or circumstances change that would make it more likely than not that an impairment may have occurred. We perform our annual impairment analysis as of the first day of the fourth quarter each year. The evaluation of impairment involves comparing the current estimated fair value of the reporting unit to its recorded value, including goodwill. We perform a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. It may be necessary to perform a quantitative analysis where a discounted cash flow model is used to determine the current estimated fair value of the reporting unit. Key assumptions used to determine the fair value of the reporting unit as part of our annual testing (and any required interim testing) include: (a) expected cash flows for the five-year period following the testing date; (b) an estimated terminal value using a terminal year growth rate based on the growth prospects of the reporting unit; (c) a discount rate based on our estimated after-tax weighted average cost of capital; and (d) a probability-weighted scenario approach by which varying cash flows are assigned to alternative scenarios based on their likelihood of occurrence. In developing these assumptions, we consider historical and anticipated future results, general economic and market conditions, the impact of planned business and operational strategies and all available information at the time the fair value of the reporting unit is estimated. Assumptions in estimating future cash flows are subject to a high degree of judgment and complexity. Changes in assumptions and estimates may affect the fair value of goodwill and could result in impairment charges in future periods. Based on the results of our impairment analysis, no goodwill impairment losses were recognized in the consolidated statements of operations for 2018. Subsequent to the analysis, there have been no events or circumstances that indicate any potential impairment of goodwill.
Other assets.
Other assets consist principally of capitalized financing costs related to our revolving credit facility and the cash surrender value of life insurance policies. Capitalized financing costs are amortized using the straight-line method, which approximates the effective interest method over the term of the related credit agreement, and reflected in interest expense in the consolidated statements of operations.
Long-lived assets
.
Long-lived assets include property, plant and equipment and identifiable intangible assets with definite useful lives. Finite-lived intangible assets are amortized over their estimated useful lives. Our intangible assets consist of customer relationships, developed technology and know-how, non-competition agreements and a trade name, and are being amortized on a straight-line basis over their finite useful lives (see Note 6 to the consolidated financial statements). We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be fully recoverable. When we determine that the carrying value of such assets may not be recoverable, we measure recoverability based on the undiscounted cash flows expected to be generated by the related asset or asset group. If it is determined that an impairment loss has occurred, the loss is recognized in the period in which it is incurred and is calculated as the difference between the carrying value and the present value of estimated future net cash flows or comparable market values.
There were no impairment losses in 2018 and 2017. During 2016, we recorded $20,000 of impairment charges related to long-lived assets resulting from the consolidation of our PC strand operations with the closure of the Newnan, Georgia facility (see Note 4 to the consolidated financial statements).
Fair value of financial instruments
.
The carrying amounts for cash and cash equivalents, accounts receivable, and accounts payable and accrued expenses approximate fair value because of their short maturities.
Income taxes.
Income taxes are based on pretax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. We assess the need to establish a valuation allowance against deferred tax assets to the extent we no longer believe it is more likely than not that the tax assets will be fully realized.
Earnings per share.
Basic earnings per share (“EPS”) are computed by dividing earnings available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted EPS are computed by dividing earnings available to common shareholders by the weighted average number of shares of common stock and other dilutive equity securities outstanding during the period. Securities that have the effect of increasing EPS are considered to be antidilutive and are not included in the computation of diluted EPS.
(3
)
Recent Accounting Pronouncements
Current Adoptions
In February 2018, the FASB issued Accounting Standards Update (“ASU”) No. 2018-02 “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” ASU No. 2018-02 provides for the reclassification of stranded income tax effects resulting from the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. ASU 2018-02 is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. We elected to early adopt ASU 2018-02 during our fourth fiscal quarter. The amount of the stranded income tax effect was determined under the specific identification approach and derived from the deferred tax balance associated with our supplemental employee retirement plan. The adoption of the guidance resulted in the transfer of $0.3 million from accumulated other comprehensive loss to retained earnings, with no impact to total shareholders’ equity or net earnings.
In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting," which is intended to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. We adopted this update during our first quarter. ASU No. 2016-09 requires that excess income tax benefits and deficiencies related to share-based payments be recognized within income tax expense as a discrete event in the period in which they occur, rather than within additional paid-in capital on our consolidated balance sheet on a prospective basis. There was no material impact from this provision on income tax expense in the current year. The impact of this provision on our future results of operations is difficult to predict as it will depend in part on the market prices for the shares of our common stock on the dates there are taxable events related to the share-based awards. In connection with another provision within ASU No. 2016-09, we have elected to account for forfeitures of share-based awards as an estimate of the number of awards that are expected to vest, which is consistent with our accounting policy prior to adoption. We also adopted the provisions related to changes on the consolidated statements of cash flows on a retrospective basis. As a result, we no longer classify excess income tax benefits as a financing activity, which increased net cash provided by operating activities and reduced net cash provided by financing activities by $0.5 million and $1.7 million for 2017 and 2016, respectively.
In July 2015, the FASB issued ASU No. 2015-11 “Simplifying the Measurement of Inventory,” which requires that an entity measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. We adopted ASU No. 2015-11 during our first quarter. The adoption of this update did not have a material effect on our consolidated financial statements.
Future Adoptions
In May 2017, the FASB issued ASU No. 2017-09 “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” ASU No. 2017-09 was issued to clarify and reduce both (i) diversity in practice and (ii) cost and complexity when applying its guidance to changes in the terms and conditions of a share-based payment award. ASU No. 2017-09 will become effective for us in the first quarter of fiscal 2020. We are evaluating the impact that the adoption of this update will have on our consolidated financial statements.
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 will become effective for us in the first quarter of fiscal 2021. Early adoption is permitted. We are evaluating the impact that the adoption of this update will have on our consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15 “Statement of Cash Flows Topic 230: Classification of Certain Cash Receipts and Cash Payments.” ASU No. 2016-15 addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows with the objective of reducing existing differences in the presentation of these items. The amendments in ASU No. 2016-15 are to be adopted retrospectively and will become effective for us in the first quarter of fiscal 2019. We do not expect the adoption of this update will have a material effect on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02 “Leases,” which will replace the guidance in ASC Topic 840. ASU No. 2016-02 was issued to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset. ASU No. 2016-02 will become effective for us in the first quarter of fiscal 2020. We are evaluating the impact that the adoption of this update will have on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09 “Revenue from Contracts with Customers,” as subsequently amended, which will supersede nearly all existing revenue recognition guidance under GAAP. ASU No. 2014-09 provides that an entity recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU No. 2014-09 allows for either full retrospective or modified retrospective adoption and will become effective for us in the first quarter of fiscal 2019. We have substantially completed our evaluation of the impact this update will have on our consolidated financial statements and plan on using the modified retrospective method upon adoption. We have not identified any material changes in the timing of revenue recognition that will result from the adoption of this guidance, but expect it will have a material impact on the disclosures required in our notes to the consolidated financial statements.
(
4
)
Restructuring Charges
In 2014 we purchased substantially all of the assets associated with the PC strand business of American Spring Wire Corporation (“ASW Acquisition”). Subsequent to the ASW Acquisition, in 2014, we incurred employee separation costs for staffing reductions associated with the acquisition. In February 2015, we elected to consolidate our PC strand operations with the closure of the Newnan, Georgia facility that had been acquired through the ASW Acquisition, which was completed in March 2015.
Following is a summary of the restructuring activities and associated costs that were incurred during 2017 and 2016:
|
|
Asset
|
|
|
|
|
|
|
Severance and
|
|
|
|
|
|
|
Gain on Sale
|
|
|
|
|
|
(In thousands)
|
|
Impairment
|
|
|
Equipment
|
|
|
Other Employee
|
|
|
Facility
|
|
|
of Property
|
|
|
|
|
|
|
|
Charges
|
|
|
Relocation Costs
|
|
|
Separation Costs
|
|
|
Closure Costs
|
|
|
and Equipment
|
|
|
Total
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability as of October 1, 2016
|
|
$
|
-
|
|
|
$
|
31
|
|
|
$
|
239
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
270
|
|
Restructuring charges
|
|
|
-
|
|
|
|
164
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
164
|
|
Cash payments
|
|
|
-
|
|
|
|
(195
|
)
|
|
|
(239
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(434
|
)
|
Non-cash charges
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Liability as of September 30, 2017
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability as of October 3, 2015
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
735
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
735
|
|
Restructuring charges (recoveries)
|
|
|
20
|
|
|
|
186
|
|
|
|
-
|
|
|
|
89
|
|
|
|
(180
|
)
|
|
|
115
|
|
Cash payments
|
|
|
-
|
|
|
|
(155
|
)
|
|
|
(496
|
)
|
|
|
(89
|
)
|
|
|
-
|
|
|
|
(740
|
)
|
Non-cash charges
|
|
|
(20
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
180
|
|
|
|
160
|
|
Liability as of October 1, 2016
|
|
$
|
-
|
|
|
$
|
31
|
|
|
$
|
239
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
270
|
|
(
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 September 29, 2018 and September 30, 2017, 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)
|
|
Year ended September 29, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
44,257
|
|
|
$
|
44,257
|
|
|
$
|
-
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash surrender value of life insurance policies
|
|
|
9,769
|
|
|
|
-
|
|
|
|
9,769
|
|
Total
|
|
$
|
54,026
|
|
|
$
|
44,257
|
|
|
$
|
9,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
31,659
|
|
|
$
|
31,659
|
|
|
$
|
-
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash surrender value of life insurance policies
|
|
|
9,026
|
|
|
|
-
|
|
|
|
9,026
|
|
Total
|
|
$
|
40,685
|
|
|
$
|
31,659
|
|
|
$
|
9,026
|
|
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 September 29, 2018 and September 30, 2017, we had no nonfinancial assets that are required to be measured at fair value on a nonrecurring basis. The carrying amounts of accounts receivable, accounts payable and accrued expenses approximates fair value due to the short-term maturities of these financial instruments.
(
6
)
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
|
|
Year ended September 29, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
16.9
|
|
|
$
|
9,070
|
|
|
$
|
(1,598
|
)
|
|
$
|
7,472
|
|
Developed technology and know-how
|
|
|
20.0
|
|
|
|
1,800
|
|
|
|
(371
|
)
|
|
|
1,429
|
|
Non-competition agreements
|
|
|
5.0
|
|
|
|
3,687
|
|
|
|
(2,994
|
)
|
|
|
693
|
|
Trade name
|
|
|
4.0
|
|
|
|
140
|
|
|
|
(31
|
)
|
|
|
109
|
|
|
|
|
|
|
|
$
|
14,697
|
|
|
$
|
(4,994
|
)
|
|
$
|
9,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
20.0
|
|
|
$
|
6,500
|
|
|
$
|
(1,018
|
)
|
|
$
|
5,482
|
|
Developed technology and know-how
|
|
|
20.0
|
|
|
|
1,800
|
|
|
|
(283
|
)
|
|
|
1,517
|
|
Non-competition agreements
|
|
|
4.8
|
|
|
|
3,577
|
|
|
|
(2,663
|
)
|
|
|
914
|
|
|
|
|
|
|
|
$
|
11,877
|
|
|
$
|
(3,964
|
)
|
|
$
|
7,913
|
|
Amortization expense for intangibles was $1.3 million in 2018 and $1.2 million in 2017 and 2016. Amortization expense for the next five years, assuming no change in the estimated useful lives of identified intangible assets, is $1.1 million in 2019, $924,000 in 2020, $809,000 in 2021, $770,000 in 2022 and $705,000 in 2023. We completed the acquisition of a business during 2018, and the effects of the purchase price allocation for this transaction on the accompanying consolidated financial statements are not material.
(
7
)
Long-Term Debt
Revolving Credit Facility.
We have a $100.0 million revolving credit facility (the “Credit Facility”) maturing May 13, 2020 that is used to supplement our operating cash flow and fund our working capital, capital expenditure, general corporate and growth requirements. 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 September 29, 2018, no borrowings were outstanding on the Credit Facility, $98.2 million of borrowing capacity was available and outstanding letters of credit totaled $1.8 million. As of September 30, 2017, there were no borrowings outstanding on the Credit Facility.
Interest rates on the Credit Facility are based upon (1) an index rate that is established at the highest of the prime rate, 0.50% plus the federal funds rate or the LIBOR rate plus the excess of the then-applicable margin for LIBOR loans over the then-applicable margin for index rate loans, or (2) at our election, a LIBOR rate, plus in either case, an applicable interest rate margin. The applicable interest rate margins are adjusted on a quarterly basis based upon the amount of excess availability on the Credit Facility within the range of 0.25% to 0.75% for index rate loans and 1.25% to 1.75% for LIBOR loans. In addition, the applicable interest rate margins would be increased by 2.00% upon the occurrence of certain events of default provided for under the terms of the Credit Facility. Based on our excess availability as of September 29, 2018, the applicable interest rate margins on the Credit Facility were 0.25% for index rate loans and 1.25% for LIBOR 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 1.10 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 $12.5 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 September 29, 2018, 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 $65,000 in 2018, 2017 and 2016. Accumulated amortization of capitalized financing costs was $4.7 million as of September 29, 2018 and $4.6 million as of September 30, 2017. We expect the amortization of capitalized financing costs to approximate the following amounts for the next five fiscal years:
Fiscal year
|
|
In thousands
|
|
2019
|
|
$
|
65
|
|
2020
|
|
|
41
|
|
2021
|
|
|
-
|
|
2022
|
|
|
-
|
|
2023
|
|
|
-
|
|
(
8
) 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 17, 2015, our shareholders approved the 2015 Equity Incentive Plan of Insteel Industries, Inc. (the “2015 Plan”), which authorizes up to 900,000 shares of our common stock for future grants under the plan. The 2015 Plan, which expires on February 17, 2025, replaces the 2005 Equity Incentive Plan of Insteel Industries, Inc., which expired on February 15, 2015. As of September 29, 2018, there were 334,000 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 the plan generally vest over three years and expire ten years from the date of the grant. Compensation expense associated with stock options was $906,000 in 2018, $1.0 million in 2017 and $988,000 in 2016. As of September 29, 2018, there was $262,000 of unrecognized compensation cost related to unvested options which is expected to be recognized over a weighted average period of 1.66 years.
The fair value of each option award granted is estimated on the date of grant using a Monte Carlo valuation model. The weighted-average estimated fair values of stock options granted during 2018, 2017 and 2016 were $12.06, $11.08 and $9.92 per share, respectively, based on the following weighted-average assumptions:
|
|
Year Ended
|
|
|
|
Septem
ber
29
,
|
|
|
Septem
ber
30
,
|
|
|
Octo
ber
1
,
|
|
|
|
201
8
|
|
|
201
7
|
|
|
201
6
|
|
Expected term (in years)
|
|
|
4.79
|
|
|
|
5.14
|
|
|
|
5.45
|
|
Risk-free interest rate
|
|
|
2.71
|
%
|
|
|
1.98
|
%
|
|
|
1.30
|
%
|
Expected volatility
|
|
|
37.32
|
%
|
|
|
38.32
|
%
|
|
|
39.00
|
%
|
Expected dividend yield
|
|
|
0.37
|
%
|
|
|
0.37
|
%
|
|
|
0.48
|
%
|
The assumptions utilized in the Monte Carlo valuation model are evaluated and revised, as necessary, to reflect market conditions and actual historical experience. 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 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 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 dividend yield was calculated based on our annual dividend as of the option grant date.
The following table summarizes stock option activity:
|
|
|
|
|
|
Exercise Price
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Per Share
|
|
|
Term -
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Value
|
|
(Share amounts in thousands)
|
|
Outstanding
|
|
|
Range
|
|
|
Average
|
|
|
Average
(in years)
|
|
|
(in thousands)
|
|
Outstanding at October 3, 2015
|
|
|
923
|
|
|
|
$7.55
|
-
|
$21.96
|
|
|
$
|
15.14
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
99
|
|
|
|
23.95
|
-
|
34.49
|
|
|
|
28.47
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(651
|
)
|
|
|
7.55
|
-
|
21.96
|
|
|
|
13.93
|
|
|
|
|
|
|
$
|
8,718
|
|
Outstanding at October 1, 2016
|
|
|
371
|
|
|
|
9.16
|
-
|
34.49
|
|
|
|
20.81
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
88
|
|
|
|
26.75
|
-
|
37.06
|
|
|
|
30.93
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(67
|
)
|
|
|
9.16
|
-
|
23.95
|
|
|
|
19.05
|
|
|
|
|
|
|
|
1,212
|
|
Outstanding at September 30, 2017
|
|
|
392
|
|
|
|
9.16
|
-
|
37.06
|
|
|
|
23.40
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
77
|
|
|
|
29.69
|
-
|
41.85
|
|
|
|
34.84
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(196
|
)
|
|
|
9.16
|
-
|
37.06
|
|
|
|
19.68
|
|
|
|
|
|
|
|
3,866
|
|
Forfeited
|
|
|
(9
|
)
|
|
|
23.95
|
-
|
37.06
|
|
|
|
29.88
|
|
|
|
|
|
|
|
|
|
Outstanding at September 29, 2018
|
|
|
264
|
|
|
|
10.23
|
-
|
41.85
|
|
|
|
29.25
|
|
|
|
7.64
|
|
|
|
1,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and anticipated to vest in the future at September 29, 2018
|
|
|
262
|
|
|
|
|
|
|
|
|
|
29.22
|
|
|
|
7.69
|
|
|
|
1,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 29, 2018
|
|
|
109
|
|
|
|
|
|
|
|
|
|
24.73
|
|
|
|
5.98
|
|
|
|
1,228
|
|
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 uni
t
s.
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. RSU grants and compensation expense are as follows:
|
|
Year Ended
|
|
|
|
September 29,
|
|
|
September 30,
|
|
|
October 1,
|
|
(In thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Restricted stock unit grants:
|
|
|
|
|
|
|
|
|
|
Units
|
|
|
35
|
|
|
|
37
|
|
|
|
57
|
|
Market value
|
|
$
|
1,175
|
|
|
$
|
1,180
|
|
|
$
|
1,516
|
|
Compensation expense
|
|
|
1,172
|
|
|
|
1,238
|
|
|
|
1,451
|
|
As of September 29, 2018, there was $451,000 of unrecognized compensation cost related to unvested RSUs which is expected to be recognized over a weighted average period of 1.74 years.
The following table summarizes RSU activity:
|
|
|
|
|
|
Weighted
|
|
|
|
Restricted
|
|
|
Average
|
|
|
|
Stock Units
|
|
|
Grant Date
|
|
(Unit amounts in thousands)
|
|
Outstanding
|
|
|
Fair Value
|
|
Balance, October 3, 2015
|
|
|
157
|
|
|
$
|
18.96
|
|
Granted
|
|
|
57
|
|
|
|
26.57
|
|
Forfeited
|
|
|
(2
|
)
|
|
|
23.95
|
|
Released
|
|
|
(67
|
)
|
|
|
17.95
|
|
Balance, October 1, 2016
|
|
|
145
|
|
|
|
22.35
|
|
Granted
|
|
|
37
|
|
|
|
31.95
|
|
Released
|
|
|
(54
|
)
|
|
|
20.43
|
|
Balance, September 30, 2017
|
|
|
128
|
|
|
|
25.92
|
|
Granted
|
|
|
35
|
|
|
|
33.52
|
|
Forfeited
|
|
|
(3
|
)
|
|
|
29.60
|
|
Released
|
|
|
(57
|
)
|
|
|
22.26
|
|
Balance, September 29, 2018
|
|
|
103
|
|
|
|
30.40
|
|
(
9
) Income Taxes
The components of the provision for income taxes are as follows:
|
|
Year Ended
|
|
|
|
September 29,
|
|
|
September 30,
|
|
|
October 1,
|
|
(Dollars in thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
8,265
|
|
|
$
|
8,269
|
|
|
$
|
17,075
|
|
State
|
|
|
906
|
|
|
|
848
|
|
|
|
1,434
|
|
|
|
|
9,171
|
|
|
|
9,117
|
|
|
|
18,509
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,862
|
)
|
|
|
2,455
|
|
|
|
396
|
|
State
|
|
|
55
|
|
|
|
48
|
|
|
|
140
|
|
|
|
|
(2,807
|
)
|
|
|
2,503
|
|
|
|
536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
6,364
|
|
|
$
|
11,620
|
|
|
$
|
19,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
14.9
|
%
|
|
|
34.0
|
%
|
|
|
33.8
|
%
|
The reconciliation between income taxes computed at the federal statutory rate and the provision for income taxes is as follows:
|
|
Year Ended
|
|
(Dollars in thousands)
|
|
September 29, 2018
|
|
|
September 30, 2017
|
|
|
October 1, 2016
|
|
Provision for income taxes at federal statutory rate
|
|
$
|
10,444
|
|
|
|
24.5
|
%
|
|
$
|
11,959
|
|
|
|
35.0
|
%
|
|
$
|
19,701
|
|
|
|
35.0
|
%
|
Change in federal tax rate - Tax Cuts and Jobs Act
|
|
|
(3,307
|
)
|
|
|
(7.8
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Qualified production activities deduction
|
|
|
(832
|
)
|
|
|
(2.0
|
)
|
|
|
(768
|
)
|
|
|
(2.2
|
)
|
|
|
(1,596
|
)
|
|
|
(2.8
|
)
|
Excess tax benefits of stock-based compensation
|
|
|
(634
|
)
|
|
|
(1.5
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Valuation allowance
|
|
|
(18
|
)
|
|
|
(0.0
|
)
|
|
|
(29
|
)
|
|
|
(0.1
|
)
|
|
|
(213
|
)
|
|
|
(0.4
|
)
|
State income taxes, net of federal tax benefit
|
|
|
739
|
|
|
|
1.7
|
|
|
|
598
|
|
|
|
1.8
|
|
|
|
1,093
|
|
|
|
1.9
|
|
Other, net
|
|
|
(28
|
)
|
|
|
(0.0
|
)
|
|
|
(140
|
)
|
|
|
(0.5
|
)
|
|
|
60
|
|
|
|
0.1
|
|
Provision for income taxes
|
|
$
|
6,364
|
|
|
|
14.9
|
%
|
|
$
|
11,620
|
|
|
|
34.0
|
%
|
|
$
|
19,045
|
|
|
|
33.8
|
%
|
The components of deferred tax assets and liabilities are as follows:
|
|
September 29,
|
|
|
September 30,
|
|
(In thousands)
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Defined benefit plans
|
|
$
|
2,302
|
|
|
$
|
3,556
|
|
Accrued expenses and asset reserves
|
|
|
1,939
|
|
|
|
3,069
|
|
Stock-based compensation
|
|
|
1,120
|
|
|
|
1,907
|
|
State net operating loss carryforwards and tax credits
|
|
|
233
|
|
|
|
284
|
|
Valuation allowance
|
|
|
(233
|
)
|
|
|
(251
|
)
|
Deferred tax assets
|
|
|
5,361
|
|
|
|
8,565
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Plant and equipment
|
|
|
(9,490
|
)
|
|
|
(15,093
|
)
|
Prepaid insurance and other reserves
|
|
|
(1,211
|
)
|
|
|
(1,575
|
)
|
Deferred tax liabilities
|
|
|
(10,701
|
)
|
|
|
(16,668
|
)
|
Net deferred tax liability
|
|
$
|
(5,340
|
)
|
|
$
|
(8,103
|
)
|
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was enacted, which, among other changes, reduced the federal statutory corporate tax rate from 35% to 21% effective January 1, 2018. Since our fiscal year ends on the Saturday closest to September 30 rather than the calendar year, we are subject to IRS rules relating to transitional income tax rates. Based on these rules, our federal statutory rate was 24.5% for fiscal 2018 and will be 21% for fiscal 2019 and beyond. Based on the provisions of the Act, we remeasured our deferred tax assets and liabilities and adjusted our estimated annual federal income tax rate to incorporate the lower corporate tax rate into our tax provision during our first fiscal quarter which resulted in a $3.3 million reduction of income tax expense. We are still in process of evaluating the income tax effect of the Act on the executive compensation limitations that will be effective for our fiscal year 2019.
As of September 29, 2018, we recorded a deferred tax liability (net of valuation allowance) of $5.3 million in other liabilities on our consolidated balance sheet. As of September 30, 2017, we recorded a deferred tax liability (net of valuation allowance) of $8.1 million in other liabilities on our consolidated balance sheet. We have $6.6 million of state net operating loss carryforwards (“NOLs”) that begin to expire in 2019, but principally expire between 2019 and 2032. We have also recorded deferred tax assets of $16,000 for various state tax credits that begin to expire in 2019, but principally expire between 2019 and 2020.
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 September 29, 2018, we recorded a valuation allowance of $233,000 pertaining to various state NOLs and tax credits 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 and tax credits against which an allowance had previously been provided or determine that such utilization was more likely than not. The $18,000 decrease in the valuation allowance during 2018 is primarily due to the expiration of state NOLs for which an allowance had been previously recorded.
As of September 29, 2018, we had no material, known tax exposures that required the establishment of contingency reserves for uncertain tax positions.
We classify interest and penalties related to unrecognized tax benefits as part of income tax expense. There were no interest and penalties related to unrecognized tax benefits incurred during 2018, 2017 and 2016.
We file U.S. federal income tax returns as well as state and local income tax returns in various jurisdictions. Federal and various state tax returns filed subsequent to 2013 remain subject to examination.
(
1
0
) Employee Benefit Plans
Retirement plans
.
We had one defined benefit pension plan, the Insteel Wire Products Company Retirement Income Plan for Hourly Employees, Wilmington, Delaware (the “Delaware Plan”). The Delaware Plan provided benefits for eligible employees based primarily upon years of service and compensation levels. The Delaware Plan was frozen effective September 30, 2008 whereby participants no longer earned additional benefits.
During 2016, we terminated the Delaware Plan and settled plan liabilities through either lump sum distributions to plan participants or annuity contracts purchased from a third-party insurance company that provided for the payment of vested benefits to those participants that did not elect the lump sum option. We made contributions totaling $1.9 million to the Delaware Plan during 2016.
As a result of the pension termination, unrecognized losses, which previously were recorded in accumulated other comprehensive loss on our consolidated balance sheets, were recognized as expense and a pension plan settlement loss of $2.5 million was recorded on our consolidated statements of operations for the year ended October 1, 2016.
The reconciliation of the projected benefit obligation, plan assets, funded status and amounts recognized in our consolidated balance sheets for the Delaware Plan is as follows:
|
|
Year Ended
|
|
|
|
October 1,
|
|
(In thousands)
|
|
2016
|
|
Change in benefit obligation:
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
3,463
|
|
Interest cost
|
|
|
147
|
|
Actuarial loss
|
|
|
324
|
|
Plan settlement
|
|
|
290
|
|
Distributions
|
|
|
(4,224
|
)
|
Benefit obligation at end of year
|
|
$
|
-
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
2,201
|
|
Actual return on plan assets
|
|
|
104
|
|
Employer contributions
|
|
|
1,919
|
|
Plan settlement
|
|
|
(4,003
|
)
|
Distributions
|
|
|
(221
|
)
|
Fair value of plan assets at end of year
|
|
$
|
-
|
|
|
|
|
|
|
Reconciliation of funded status to net amount recognized:
|
|
Funded status
|
|
$
|
-
|
|
Net amount recognized
|
|
$
|
-
|
|
|
|
|
|
|
Amounts recognized on the consolidated balance sheet:
|
|
Accrued benefit liability
|
|
$
|
-
|
|
Accumulated other comprehensive loss (net of tax)
|
|
|
-
|
|
Net amount recognized
|
|
$
|
-
|
|
|
|
|
|
|
Amounts recognized in accumulated other
comprehensive loss:
|
|
|
|
|
Unrecognized net loss
|
|
$
|
-
|
|
Net amount recognized
|
|
$
|
-
|
|
|
|
|
|
|
Other changes in plan assets and benefit obligations
recognized in other comprehensive loss:
|
|
|
|
|
Net loss
|
|
$
|
685
|
|
Amortization of net loss
|
|
|
(76
|
)
|
Settlement loss
|
|
|
(2,539
|
)
|
Total recognized in other comprehensive income loss
|
|
$
|
(1,930
|
)
|
Net periodic pension cost for the Delaware Plan includes the following components:
|
|
Year Ended
|
|
|
|
October 1,
|
|
(In thousands)
|
|
2016
|
|
Interest cost
|
|
$
|
147
|
|
Expected return on plan assets
|
|
|
(175
|
)
|
Settlement loss recognized
|
|
|
2,539
|
|
Amortization of net loss
|
|
|
76
|
|
Net periodic pension cost
|
|
$
|
2,587
|
|
The assumed discount rate used for the valuation of the Delaware Plan was 3.75% as of October 1, 2016. In establishing the discount rate, we reviewed published market indices of high-quality debt securities, adjusted as appropriate for duration, and high-quality bond yield curves applicable to the expected benefit payments of the Delaware Plan.
Supplemental employee retirement plan.
We have Retirement Security Agreements (each, a “SERP”) with certain of our employees (each, a “Participant”). Under the SERPs, 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.
The reconciliation of the projected benefit obligation, plan assets, funded status and amounts recognized for the SERPs in our consolidated balance sheets is as follows:
|
|
Year Ended
|
|
|
|
September 29,
|
|
|
September 30,
|
|
|
October 1,
|
|
(In thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
9,389
|
|
|
$
|
9,159
|
|
|
$
|
7,821
|
|
Service cost
|
|
|
310
|
|
|
|
344
|
|
|
|
263
|
|
Interest cost
|
|
|
345
|
|
|
|
338
|
|
|
|
326
|
|
Actuarial loss (gain)
|
|
|
(33
|
)
|
|
|
(162
|
)
|
|
|
1,039
|
|
Distributions
|
|
|
(262
|
)
|
|
|
(290
|
)
|
|
|
(290
|
)
|
Benefit obligation at end of year
|
|
$
|
9,749
|
|
|
$
|
9,389
|
|
|
$
|
9,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual employer contributions
|
|
$
|
262
|
|
|
$
|
290
|
|
|
$
|
290
|
|
Actual distributions
|
|
|
(262
|
)
|
|
|
(290
|
)
|
|
|
(290
|
)
|
Plan assets at fair value at end of year
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of funded status to net amount recognized:
|
|
Funded status
|
|
$
|
(9,749
|
)
|
|
$
|
(9,389
|
)
|
|
$
|
(9,159
|
)
|
Net amount recognized
|
|
$
|
(9,749
|
)
|
|
$
|
(9,389
|
)
|
|
$
|
(9,159
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other
comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized net loss
|
|
$
|
1,966
|
|
|
$
|
2,149
|
|
|
$
|
2,485
|
|
Net amount recognized
|
|
$
|
1,966
|
|
|
$
|
2,149
|
|
|
$
|
2,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other changes in plan assets and benefit obligations
recognized in other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss (gain)
|
|
$
|
(33
|
)
|
|
$
|
(162
|
)
|
|
$
|
1,039
|
|
Amortization of net loss
|
|
|
(150
|
)
|
|
|
(174
|
)
|
|
|
(85
|
)
|
Total recognized in other comprehensive income (loss)
|
|
$
|
(183
|
)
|
|
$
|
(336
|
)
|
|
$
|
954
|
|
Net periodic pension cost for the SERPs includes the following components:
|
|
Year Ended
|
|
|
|
September 29,
|
|
|
September 30,
|
|
|
October 1,
|
|
(In thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Service cost
|
|
$
|
310
|
|
|
$
|
344
|
|
|
$
|
263
|
|
Interest cost
|
|
|
345
|
|
|
|
338
|
|
|
|
326
|
|
Amortization of net loss
|
|
|
150
|
|
|
|
174
|
|
|
|
85
|
|
Net periodic pension cost
|
|
$
|
805
|
|
|
$
|
856
|
|
|
$
|
674
|
|
The estimated net loss that will be amortized from accumulated other comprehensive loss into net periodic pension cost during 2019 is $140,000.
The assumptions used in the valuation of the SERPs are as follows:
|
|
Measurement Date
|
|
|
|
September 29,
|
|
|
September 30,
|
|
|
October 1,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Assumptions at year-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.00
|
%
|
|
|
3.75
|
%
|
|
|
3.75
|
%
|
Rate of increase in compensation levels
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
The assumed discount rate is established as of our fiscal year-end measurement date. In establishing the discount rate, we review published market indices of high-quality debt securities, adjusted as appropriate for duration, and high-quality bond yield curves applicable to the expected benefit payments of the SERPs. The SERPs expected rate of increase in compensation levels is based on the anticipated increases in annual compensation.
The projected benefit payments under the SERPs are as follows:
Fiscal year(s)
|
|
In thousands
|
|
2019
|
|
$
|
325
|
|
2020
|
|
|
278
|
|
2021
|
|
|
278
|
|
2022
|
|
|
553
|
|
2023
|
|
|
553
|
|
2024 - 2028
|
|
|
4,083
|
|
Retirement savings plan.
In 1996, we adopted the Retirement Savings Plan of Insteel Industries, Inc. (the “Plan”) to provide retirement benefits and stock ownership for our employees. The Plan is an amendment and restatement of our Employee Stock Ownership Plan. As allowed under Sections 401(a) and 401(k) of the Internal Revenue Code, the Plan provides for tax-deferred salary deductions for eligible employees.
The Plan allows for discretionary contributions to be made by us as determined by the Board of Directors, which are allocated among eligible participants based on their compensation relative to the total compensation of all participants
.
Employees are permitted to contribute up to 75% of their annual compensation to the Plan, limited to a maximum annual amount as set periodically by the Internal Revenue Code. We match employee contributions up to 100% of the first 1% and 50% of the next 5% of eligible compensation that is contributed by employees. Our contributions to the Plan were $1.1 million in 2018 and 2017 and $1.0 million in 2016.
Voluntary Employee Beneficiary Associations (“
VEBA
”
)
. We have a VEBA which allows both us and our employees to make contributions to pay for medical costs. Our contributions to the VEBA were $5.1 million in 2018, $5.6 million in 2017 and $5.4 million in 2016. We are primarily self-insured for our employee’s healthcare costs, carrying stop-loss insurance coverage for individual claims in excess of $175,000 per benefit plan year. Our self-insurance liabilities are based on the total estimated costs of claims filed and claims incurred but not reported, less amounts paid against such claims. We review current and historical claims data in developing our estimates.
(
1
1
) Commitments and Contingencies
Insurance recoveries.
We maintain general liability, business interruption and replacement cost property insurance coverage on our facilities.
In August 2018, a transformer outage and electrical fire occurred at our Dayton, Texas manufacturing facility, which resulted in the temporary curtailment of operations. Alternative power arrangements for the facility were subsequently made, allowing for operations to continue until permanent repairs could be completed. We are in the process of preparing the supporting analysis for the insurance claim related to the business interruption and property damage resulting from the fire. During 2018, we received $183,000 of insurance proceeds related to the claim and recorded a $462,000 receivable for the anticipated insurance proceeds associated with the expenses incurred as of the end of the year. The insurance proceeds attributable to the additional expenses incurred were recorded in cost of sales ($645,000) on the consolidated statements of operations.
In August 2017, operations at our manufacturing facility located in Dayton, Texas were adversely affected by hurricane Harvey. We are in the process of finalizing the supporting analysis for insurance claims relating to the business interruption and property damage resulting from the storm. During 2018, we received $439,000 of insurance proceeds related to the claim and recorded a $52,000 receivable for the anticipated insurance proceeds associated with the expenses that were incurred and capital outlays required to replace property and equipment damaged in the storm. The insurance proceeds attributable to the additional expenses incurred were recorded in cost of sales ($439,000), SG&A expense ($26,000) and other income ($26,000) on the consolidated statements of operations.
We believe the coverage provided for under our insurance policies is sufficient to cover the losses incurred from these claims.
Leases
and
p
urchase
c
ommitments
.
We lease a portion of our equipment under operating leases that expire at various dates through 2023. Additionally, we leased our facility in Houston, Texas through September 30, 2017 and subsequently exercised the $4.9 million purchase option under the lease in October 2017. Under most lease agreements, we pay insurance, taxes and maintenance. Rental expense for operating leases was $1.5 million in 2018 and $1.8 million in 2017 and 2016. As of September 29, 2018, minimum rental commitments under all non-cancelable leases with an initial term in excess of one year are payable as follows: 2019, $1.0 million; 2020 $543,000; 2021, $185,000; 2022, $22,000 and 2023 and beyond, $16,000.
As of September 29, 2018, we had $75.1 million in non-cancelable purchase commitments for raw material extending as long as approximately 100 days and $9.6 million of contractual commitments for the purchase of certain equipment that had not been fulfilled and are not reflected in the consolidated financial statements.
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.
Seve
rance
and change of control
a
greements.
We have entered into severance agreements with our Chief Executive Officer and Chief Financial Officer that provide them with certain termination benefits in the event their employment with us is terminated without cause. The initial term of each agreement is two years and they automatically renew for successive one year terms unless we or the executive provide notice of termination as specified in the agreement. In the event of termination of the executive’s employment without cause, these agreements provide that they would receive termination benefits equal to one and one-half times their annual base salary in effect on the termination date and the continuation of health and welfare benefits for eighteen months. In addition, all of the executive’s stock options and restricted stock would vest immediately, and outplacement services would be provided.
We have also entered into change in control agreements with key members of management, including our executive officers, which specify the terms of separation in the event that termination of their employment followed a change in control. The initial term of each agreement is two years and they automatically renew for successive one year terms unless we or the executive provide notice of termination as specified in the agreement. The agreements do not provide assurances of continued employment or specify the terms of an executive’s termination should one occur in the absence of a change in control. The compensation payable under the terms of these agreements differs between the Chief Executive Officer and Chief Financial Officer, and the other covered executives. In the event of termination of the Chief Executive Officer or the Chief Financial Officer within two years of a change of control, they would receive severance benefits equal to two times base compensation, two times the average bonus for the prior three years and the continuation of health and welfare benefits for two years. In the event of such a termination of the other key members of management, including our other two executive officers, within two years of a change of control, they would receive severance benefits equal to one times base compensation, one times the average bonus for the prior three years and the continuation of health and welfare benefits for one year. In addition, for any covered executive that is terminated within two years of a change of control, all of their stock options and restricted stock would vest immediately, and outplacement services would be provided.
(
1
2
) Earnings
Per Share
The computation of basic and diluted earnings per share attributable to common shareholders is as follows:
|
|
Year Ended
|
|
|
|
September 29,
|
|
|
September 30,
|
|
|
October 1,
|
|
(In thousands, except per share amounts)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net earnings
|
|
$
|
36,266
|
|
|
$
|
22,548
|
|
|
$
|
37,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
19,079
|
|
|
|
19,011
|
|
|
|
18,754
|
|
Dilutive effect of stock-based compensation
|
|
|
198
|
|
|
|
206
|
|
|
|
301
|
|
Diluted weighted average shares outstanding
|
|
|
19,277
|
|
|
|
19,217
|
|
|
|
19,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.90
|
|
|
$
|
1.19
|
|
|
$
|
1.99
|
|
Diluted
|
|
|
1.88
|
|
|
|
1.17
|
|
|
|
1.95
|
|
Options and RSUs that were antidilutive and not included in the diluted EPS calculation amounted to 83,000 shares in 2018, 76,000 shares in 2017 and 51,000 shares in 2016.
(
1
3
) 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 WWR. Based on the criteria specified in ASC Topic 280,
Segment Reporting
, we have one reportable segment.
Our net sales and long-lived assets (consisting of net property, plant and equipment, the cash surrender value of life insurance policies, goodwill and intangible assets) by geographic region are as follows:
|
|
Year Ended
|
|
|
|
September 29,
|
|
|
September 30,
|
|
|
October 1,
|
|
(In thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
451,418
|
|
|
$
|
387,199
|
|
|
$
|
416,391
|
|
Foreign
|
|
|
1,799
|
|
|
|
1,672
|
|
|
|
2,156
|
|
Total
|
|
$
|
453,217
|
|
|
$
|
388,871
|
|
|
$
|
418,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
133,913
|
|
|
$
|
122,574
|
|
|
$
|
112,130
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
133,913
|
|
|
$
|
122,574
|
|
|
$
|
112,130
|
|
Our net sales by product line are as follows:
|
|
Year Ended
|
|
|
|
September 29,
|
|
|
September 30,
|
|
|
October 1,
|
|
(In thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Welded wire reinforcement
|
|
$
|
273,658
|
|
|
$
|
239,522
|
|
|
$
|
256,801
|
|
Prestressed concrete strand
|
|
|
179,559
|
|
|
|
149,349
|
|
|
|
161,746
|
|
Total
|
|
$
|
453,217
|
|
|
$
|
388,871
|
|
|
$
|
418,547
|
|
There were no customers that accounted for 10% or more of our net sales in 2018, 2017 and 2016.
(
1
4
) Related Party Transactions
Sales to a company affiliated with one of our directors amounted to $699,000 in 2018, $622,000 in 2017 and $420,000 in 2016.
(
1
5
)
Other Financial Data
Balance sheet information:
|
|
September 29,
|
|
|
September 30,
|
|
(In thousands)
|
|
2018
|
|
|
2017
|
|
Accounts receivable, net:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
51,779
|
|
|
$
|
40,485
|
|
Less allowance for doubtful accounts
|
|
|
(295
|
)
|
|
|
(201
|
)
|
Total
|
|
$
|
51,484
|
|
|
$
|
40,284
|
|
|
|
|
|
|
|
|
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
61,008
|
|
|
$
|
51,808
|
|
Work in process
|
|
|
4,779
|
|
|
|
2,637
|
|
Finished goods
|
|
|
28,370
|
|
|
|
27,408
|
|
Total
|
|
$
|
94,157
|
|
|
$
|
81,853
|
|
|
|
|
|
|
|
|
|
|
Other current assets:
|
|
|
|
|
|
|
|
|
Prepaid insurance
|
|
$
|
3,845
|
|
|
$
|
3,796
|
|
Income taxes receivable
|
|
|
-
|
|
|
|
925
|
|
Other
|
|
|
2,050
|
|
|
|
1,228
|
|
Total
|
|
$
|
5,895
|
|
|
$
|
5,949
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Cash surrender value of life insurance policies
|
|
$
|
9,769
|
|
|
$
|
9,026
|
|
Capitalized financing costs, net
|
|
|
40
|
|
|
|
105
|
|
Other
|
|
|
104
|
|
|
|
203
|
|
Total
|
|
$
|
9,913
|
|
|
$
|
9,334
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net:
|
|
|
|
|
|
|
|
|
Land and land improvements
|
|
$
|
14,438
|
|
|
$
|
12,177
|
|
Buildings
|
|
|
54,684
|
|
|
|
50,373
|
|
Machinery and equipment
|
|
|
160,068
|
|
|
|
153,484
|
|
Construction in progress
|
|
|
9,672
|
|
|
|
5,641
|
|
|
|
|
238,862
|
|
|
|
221,675
|
|
Less accumulated depreciation
|
|
|
(132,714
|
)
|
|
|
(123,005
|
)
|
Total
|
|
$
|
106,148
|
|
|
$
|
98,670
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses:
|
|
|
|
|
|
|
|
|
Salaries, wages and related expenses
|
|
$
|
6,775
|
|
|
$
|
5,520
|
|
Property taxes
|
|
|
1,585
|
|
|
|
1,384
|
|
Customer rebates
|
|
|
1,531
|
|
|
|
1,015
|
|
Sales allowance reserves
|
|
|
804
|
|
|
|
21
|
|
Income taxes
|
|
|
469
|
|
|
|
-
|
|
Workers' compensation
|
|
|
113
|
|
|
|
116
|
|
Other
|
|
|
652
|
|
|
|
611
|
|
Total
|
|
$
|
11,929
|
|
|
$
|
8,667
|
|
|
|
|
|
|
|
|
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
$
|
10,541
|
|
|
$
|
9,276
|
|
Deferred income taxes
|
|
|
5,340
|
|
|
|
8,103
|
|
Total
|
|
$
|
15,881
|
|
|
$
|
17,379
|
|
(
1
6
)
Rights Agreement
On April 26, 1999, our Board of Directors declared a dividend distribution of one right per share of our outstanding common stock as of May 17, 1999 pursuant to a Rights Agreement, dated as of April 27, 1999. The Rights Agreement also provides that one right will attach to each share of our common stock issued after May 17, 1999. On April 21, 2009, effective April 25, 2009, our Board of Directors amended the Rights Agreement to, among other changes, extend the final expiration date and adjust the purchase price payable upon exercise of a right.
The rights are not currently exercisable but trade with our common stock shares and become exercisable on the distribution date. The distribution date will occur upon the earliest of 10 business days following a public announcement that either a person or group of affiliated or associated persons (an “acquiring person”) has acquired, or obtained the right to acquire, beneficial ownership of 20% or more (after adjustment for certain derivative transactions) of the outstanding shares of common stock (the “stock acquisition date”), or of a tender offer or exchange offer that would, if consummated, result in an acquiring person beneficially owning 20% or more of such outstanding shares of common stock, subject to certain limitations.
Each right will entitle the holder, other than the acquiring person or group, to purchase one two-hundredths of a share (a “Unit”) of our Series A Junior Participating Preferred Stock (“Preferred Stock”) at a purchase price of $46 per Unit, subject to adjustment as described in the Rights Agreement (the “purchase price”). At the time specified, each holder of a right will have the right to receive in lieu of Preferred Stock, upon exercise and payment of the purchase price, common stock (or, in certain circumstances, cash, property or other securities of the Company) having a value equal to two times the purchase price or, at the discretion of the Board, upon exercise and without payment of the purchase price, common stock (or, in certain circumstances, cash, property or other securities of the Company) having a value equal to the difference between the purchase price and the value of the consideration which a person exercising the right and paying the purchase price would receive. Rights that are or (under specified circumstances) were, beneficially owned by any acquiring person will be null and void. The purchase price payable and the number of Units of Preferred Stock or other securities or property issuable upon exercise of the rights are subject to adjustment from time to time. At any time after any person becomes an acquiring person, we may exchange all or part of the rights for shares of common stock at an exchange ratio of one share per right, as appropriately adjusted to reflect any stock dividend, stock split or similar transaction.
In addition, each rights holder, other than an acquiring person, upon exercise of rights will have the right to receive shares of the common stock of the acquiring corporation having a value equal to two times the purchase price for such holder’s rights if we engage in a merger or other business combination where we are not the surviving entity or where we are the surviving entity and all or part of our common stock is exchanged for the stock or other securities of the other company, or if 50% or more of our assets or earning power is sold or transferred.
The rights will expire on April 24, 2019, and may be redeemed by us at any time prior to the distribution date at a price of $0.005 per right.
(
1
7
)
Product Warranties
Our products are used in applications which are subject to inherent risks including performance deficiencies, personal injury, property damage, environmental contamination or loss of production. We warrant our products to meet certain specifications, and actual or claimed deficiencies from these specifications may give rise to claims. We do not maintain a reserve for warranties as the historical claims have been immaterial. We maintain product liability insurance coverage to minimize our exposure to such risks.
(
1
8
) 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 particular amount of common stock and the program may be commenced or suspended at any time at our discretion without prior notice. The Authorization continues in effect until terminated by the Board of Directors. As of September 29, 2018, there was $24.8 million remaining available for future share repurchases under this Authorization. There were no share repurchases during 2018, 2017 and 2016.