NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 3, 2020, SEPTEMBER 28, 2019 AND SEPTEMBER 29, 2018
(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.
On March 16, 2020, we, through our wholly-owned subsidiary, IWP, purchased substantially all of the assets of Strand-Tech Manufacturing, Inc. (“STM”) (see Note 5 to the consolidated financial statements).
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 consolidated 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 year 2020 was a 53-week period, and fiscal years 2019 and 2018 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 credit risk. 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.
Employee benefit plan. We account for our supplemental retirement benefit agreements (each, a “SRBA”) in accordance with ASC Topic 715, Compensation - Retirement Benefits. Under the provisions of ASC Topic 715, we recognize net periodic pension cost and value liabilities based on certain actuarial assumptions, principally the assumed discount rate.
The discount rate we utilize for determining net periodic pension cost and the related benefit obligation for the SRBAs is based, in part, on current interest rates earned on long-term bonds that receive one of the two highest ratings assigned by recognized rating agencies. Our discount rate assumptions are adjusted as of each valuation date to reflect current interest rates on such long-term bonds. The discount rate is used to determine the actuarial present value of the benefit obligations as of the valuation date as well as the interest component of the net periodic pension cost for the following year. We currently expect net periodic pension cost for 2021 to be $843,000 for the SRBAs. Cash contributions to the SRBAs during 2021 are expected to be $255,000.
The assumed discount rate is reevaluated annually. A reduction in the assumed discount rate generally results in an actuarial loss, as the actuarially-determined present value of estimated future benefit payments will increase. Conversely, an increase in the assumed discount rate generally results in an actuarial gain. However, any actuarial gains generated in future periods reduce the negative amortization effect of any cumulative unamortized actuarial losses, while any actuarial losses generated in future periods reduce the favorable amortization effect of any cumulative unamortized actuarial gains.
The projected benefit obligations and net periodic pension cost for the SRBAs are based in part on expected increases in future compensation levels. Our assumption for the expected increase in future compensation levels is based upon our average historical experience and our intentions regarding future compensation increases, which generally approximates average long-term inflation rates. A 0.25% decrease in the assumed discount rate for our SRBAs would have increased our projected and accumulated benefit obligations as of October 3, 2020 by approximately $320,000 and $277,000, respectively, and our expected net periodic pension cost for 2021 by approximately $35,000.
Revenue recognition. We recognize revenues when obligations under the terms of a contract with our customers are satisfied, which generally occurs when products are shipped and control is transferred. Revenue is measured as the amount of consideration expected to be received in exchange for our products.
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 $13.2 million in 2020, $12.5 million in 2019 and $11.6 million in 2018 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. No interest costs were capitalized in 2020, 2019 and 2018.
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 2020. Subsequent to the analysis, there have been no events or circumstances that indicate any potential impairment of goodwill.
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 trade names, and are being amortized on a straight-line basis over their finite useful lives (see Note 7 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. During 2020, we recorded $0.3 million of impairment charges related to long-lived assets resulting from the consolidation of our PC strand operations with the closure of our Summerville, South Carolina facility (see Note 5 to the consolidated financial statements). There were no impairment losses in 2019 and 2018.
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. We recognize uncertain tax positions when we have determined it is more likely than not that a tax position will be sustained upon examination. However, new information may become available, or applicable laws or regulations may change, thereby resulting in a favorable or unfavorable adjustment to amounts recorded.
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 2016, the FASB issued Accounting Standard Update (“ASU”) No. 2016-02 “Leases (Topic 842),” which requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet for leases with terms greater than twelve months. We adopted the new lease standard in the first quarter of 2020 using the modified retrospective method, which allows for the recognition of a cumulative effect adjustment to the beginning balance of retained earnings in the period of adoption without adjusting the comparative periods prior to adoption. We elected the package of practical expedients permitted under the new lease standard, which among other things, allowed us to carry forward historical lease classification. We also elected the short-term lease exemption such that the new lease standard was applied to leases greater than one year in duration. We did not elect the hindsight practical expedient to determine the lease term for existing leases. The adoption of the new lease standard had a material effect on our consolidated financial statements as it resulted in a $1.9 million increase in total assets and total liabilities on our consolidated balance sheet as of September 29, 2019. The new lease standard did not have a material impact on our consolidated earnings or cash flows.
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 became effective for us in the first quarter of 2020. The adoption of this update did not impact our consolidated financial statements.
Future Adoptions
In June 2016, the FASB issued ASU No. 2016-13 “Credit Losses - Measurement of Credit Losses on Financial Instruments.” ASU No. 2016-13 significantly changes how entities will measure credit losses for most financial assets, including accounts and notes receivables, by replacing today’s “incurred loss” approach with an “expected loss” model under which allowances will be recognized based on expected rather than incurred losses. ASU No. 2016-13 will become effective for us in the first quarter of 2021. The adoption of this update will not have a material impact 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 2021 and early adoption is permitted. The adoption of this update will not have a material impact on our consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12 "Simplifying the Accounting for Income Taxes (Topic 740)." ASU No. 2019-12 removes certain exceptions to the general principles in ASC740 and also clarifies and amends existing guidance to provide for more consistent application. ASU 2019-12 will become effective for us in the first quarter of 2021. The adoption of this update will not have a material impact on our consolidated financial statements.
(4) Revenue Recognition
We recognize revenues when performance obligations under the terms of a contract with our customers are satisfied, which generally occurs when products are shipped and control is transferred. We enter into contracts that pertain to products, which are accounted for as separate performance obligations and typically one year or less in duration. We do not exercise significant judgment in determining the timing for the satisfaction of performance obligations or the transaction price. Revenue is measured as the amount of consideration expected to be received in exchange for our products. We have elected to apply the practical expedient provided for in ASU No. 2014-09 and not disclose information regarding remaining performance obligations that have original expected durations of one year or less.
Variable consideration that may affect the total transaction price, including contractual discounts, rebates, returns and credits are included in net sales. Estimates for variable consideration are based on historical experience, anticipated performance and management's judgment and are updated as of each reporting date. Shipping and related expenses associated with outbound freight are accounted for as fulfillment costs and included in cost of sales. We do not have significant financing components.
Contract assets primarily relate to our rights to consideration for products that are delivered but not billed as of the reporting date and are reclassified to receivables when the customer is invoiced. Contract liabilities primarily relate to performance obligations that are to be satisfied in the future and arise when we bill the customer in advance of shipments. Contract costs are not significant and are recognized as incurred. Contract assets and liabilities were not material as of October 3, 2020.
Accounts receivable includes amounts billed and currently due from customers stated at their net estimated realizable value. Customer payment terms are generally 30 days. We maintain an allowance for doubtful accounts to provide for the estimated amount of 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.
See Note 15 for the disaggregation of our net sales by product line and geography.
(5) Business Combination
On March 16, 2020, we purchased substantially all of the assets of STM for an adjusted purchase price of $19.4 million, reflecting certain post-closing adjustments (the “STM Acquisition”), which included a $1.0 million holdback that is payable one year from the acquisition date.
STM was a leading manufacturer of PC strand for concrete construction applications. We acquired, among other assets, STM’s accounts receivable, inventories, production equipment and facility located in Summerville, South Carolina, and assumed certain of its accounts payable and accrued liabilities. The STM Acquisition serves to strengthen our competitive position as we contend with increased low-priced import competition.
Following is a summary of our final allocation of the adjusted purchase price to the fair values of the assets acquired and liabilities assumed as of the acquisition date:
(In thousands)
|
|
|
|
|
Assets acquired:
|
|
|
|
|
Accounts receivable
|
|
$
|
3,829
|
|
Inventories
|
|
|
3,172
|
|
Other current assets
|
|
|
178
|
|
Property, plant and equipment
|
|
|
10,919
|
|
Intangibles
|
|
|
970
|
|
Total assets acquired
|
|
$
|
19,068
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
Accounts payable
|
|
$
|
852
|
|
Accrued expenses
|
|
|
312
|
|
Total liabilities assumed
|
|
|
1,164
|
|
Net assets acquired
|
|
|
17,904
|
|
Adjusted purchase price
|
|
|
19,356
|
|
Goodwill
|
|
$
|
1,452
|
|
In connection with the STM Acquisition, we acquired certain intangible assets including customer relationships, a trade name and non-competition agreement. Goodwill associated with the STM Acquisition, which is deductible for tax purposes, consists largely of the synergies we expect to realize through the integration of the acquired assets with our operations.
The STM Acquisition was accounted for as a business purchase pursuant to ASC Topic 805, Business Combinations (“ASC 805”). Under the provisions of ASC 805, acquisition and integration costs are recorded as expenses in the period in which such costs are incurred rather than included as components of consideration transferred.
Following the STM Acquisition, net sales of the STM facility in 2020 were approximately $3.0 million. The actual net sales specifically attributable to the STM Acquisition, however, cannot be quantified due to our integration efforts which involved the reassignment of business between the former STM facility and our existing PC strand facilities. As a result, we have determined that the presentation of STM’s earnings for 2020 is impractical due to the integration of STM’s operations following the STM Acquisition.
The following unaudited supplemental pro forma financial information reflects our combined results of operations had the STM Acquisition occurred at the beginning of 2019. The pro forma information reflects certain adjustments related to the STM Acquisition, including adjusted amortization and depreciation expense based on the fair values of the assets acquired. The pro forma information does not reflect any potential operating efficiencies or cost savings that may result from the STM Acquisition. Accordingly, this pro forma information is for illustrative purposes and is not intended to represent the actual results of operations of the combined company that would have been achieved had the STM Acquisition occurred at the beginning of 2019, nor is it intended to indicate future results of operations. The pro forma combined results of operations for the current and comparative prior year periods are as follows:
|
|
Years Ended
|
|
|
|
October 3,
|
|
|
September 28,
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
Net sales
|
|
$
|
485,121
|
|
|
$
|
487,467
|
|
Earnings before income taxes
|
|
|
22,628
|
|
|
|
6,085
|
|
Net earnings
|
|
|
16,950
|
|
|
|
4,542
|
|
Restructuring charges. In connection with the STM acquisition, we elected to consolidate our PC strand operations through the closure of the Summerville facility and the redeployment of its equipment to our other three PC strand production facilities located in Gallatin, Tennessee; Houston, Texas; and Sanderson, Florida. Operations at the Summerville facility ceased during the third quarter of 2020. Following is a summary of the restructuring activity during 2020:
|
|
Employee
|
|
|
Equipment
|
|
|
Facility
|
|
|
|
|
|
|
Loss (Gain)
|
|
|
|
|
|
(In thousands)
|
|
Separation
|
|
|
Relocation
|
|
|
Closure
|
|
|
Asset
|
|
|
on Sale of
|
|
|
|
|
|
|
|
Costs
|
|
|
Costs
|
|
|
Costs
|
|
|
Impairments
|
|
|
Equipment
|
|
|
Total
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges, net
|
|
$
|
182
|
|
|
$
|
482
|
|
|
$
|
806
|
|
|
$
|
343
|
|
|
$
|
(118
|
)
|
|
$
|
1,695
|
|
Cash payments
|
|
|
(182
|
)
|
|
|
(462
|
)
|
|
|
(655
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,299
|
)
|
Non-cash charges
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(343
|
)
|
|
|
118
|
|
|
|
(225
|
)
|
Liability as of October 3, 2020
|
|
$
|
-
|
|
|
$
|
20
|
|
|
$
|
151
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
171
|
|
As of October 3, 2020, we recorded a liability of $171,000 for restructuring liabilities in accrued expenses on our consolidated balance sheet. We currently expect to incur approximately $700,000 of additional restructuring charges for equipment relocation and facility closure costs.
Acquisition costs. During 2020, we recorded $195,000 of acquisition-related costs associated with the STM Acquisition for accounting, legal and other professional fees.
(6) 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 October 3, 2020 and September 28, 2019, 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 October 3, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
72,234
|
|
|
$
|
72,234
|
|
|
$
|
-
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash surrender value of life insurance policies
|
|
|
10,584
|
|
|
|
-
|
|
|
|
10,584
|
|
Total
|
|
$
|
82,818
|
|
|
$
|
72,234
|
|
|
$
|
10,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 28, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
37,826
|
|
|
$
|
37,826
|
|
|
$
|
-
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash surrender value of life insurance policies
|
|
|
10,211
|
|
|
|
-
|
|
|
|
10,211
|
|
Total
|
|
$
|
48,037
|
|
|
$
|
37,826
|
|
|
$
|
10,211
|
|
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 October 3, 2020 and September 28, 2019, we had no nonfinancial assets that are required to be measured at fair value on a nonrecurring basis other than the assets and liabilities that were acquired from STM at fair value in the current year (see Note 5 to the consolidated financial statements). The carrying amounts of accounts receivable, accounts payable and accrued expenses approximates fair value due to the short-term maturities of these financial instruments.
(7) 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 October 3, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
17.1
|
|
|
$
|
9,870
|
|
|
$
|
(2,837
|
)
|
|
$
|
7,033
|
|
Developed technology and know-how
|
|
|
20.0
|
|
|
|
1,800
|
|
|
|
(551
|
)
|
|
|
1,249
|
|
Non-competition agreements
|
|
|
5.0
|
|
|
|
1,860
|
|
|
|
(1,663
|
)
|
|
|
197
|
|
Trade name
|
|
|
2.7
|
|
|
|
250
|
|
|
|
(162
|
)
|
|
|
88
|
|
|
|
|
|
|
|
$
|
13,780
|
|
|
$
|
(5,213
|
)
|
|
$
|
8,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 28, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
16.9
|
|
|
$
|
9,070
|
|
|
$
|
(2,207
|
)
|
|
$
|
6,863
|
|
Developed technology and know-how
|
|
|
20.0
|
|
|
|
1,800
|
|
|
|
(461
|
)
|
|
|
1,339
|
|
Non-competition agreements
|
|
|
5.0
|
|
|
|
1,800
|
|
|
|
(1,466
|
)
|
|
|
334
|
|
Trade name
|
|
|
4.0
|
|
|
|
140
|
|
|
|
(66
|
)
|
|
|
74
|
|
|
|
|
|
|
|
$
|
12,810
|
|
|
$
|
(4,200
|
)
|
|
$
|
8,610
|
|
Amortization expense for intangibles was $1.0 million in 2020, $1.1 million in 2019 and $1.3 million in 2018. Amortization expense for the next five years, assuming no change in the estimated useful lives of identified intangible assets, is $910,000 in 2021, $822,000 in 2022, $757,000 in 2023, $751,000 in 2024 and $744,000 in 2025.
(8) 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 May 2019, we entered into a new credit agreement, which amended and restated in its entirety the previous agreement pertaining to the revolving credit facility that had been in effect since June 2010. The new credit agreement, among other changes, extended the maturity date of the Credit Facility from May 13, 2020 to May 15, 2024 and provided for an accordion feature whereby its size may be increased by up to $50.0 million, subject to our lender’s approval. Advances under the Credit Facility are limited to the lesser of the revolving loan commitment amount (currently $100.0 million) or a borrowing base amount that is calculated based upon a percentage of eligible receivables and inventories. As of October 3, 2020, no borrowings were outstanding on the Credit Facility, $90.0 million of borrowing capacity was available and outstanding letters of credit totaled $1.5 million. As of September 28, 2019, 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 0.50% for index rate loans and 1.25% to 1.50% 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 October 3, 2020, 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 1.0 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 October 3, 2020, 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 $66,000 in 2020, and $65,000 in 2019 and 2018. We expect the amortization of capitalized financing costs to approximate the following amounts for the next five fiscal years:
Fiscal year
|
|
In thousands
|
|
2021
|
|
$
|
65
|
|
2022
|
|
|
65
|
|
2023
|
|
|
65
|
|
2024
|
|
|
41
|
|
(9) 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 October 3, 2020, there were 738,000 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 $810,000 in 2020, $889,000 in 2019 and $906,000 in 2018. As of October 3, 2020, there was $367,000 of unrecognized compensation cost related to unvested options which is expected to be recognized over a weighted average period of 1.69 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 2020, 2019 and 2018 were $8.05, $7.15 and $12.06 per share, respectively, based on the following weighted-average assumptions:
|
|
Year Ended
|
|
|
|
October 3,
|
|
|
September 28,
|
|
|
September 29,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Expected term (in years)
|
|
|
4.81
|
|
|
|
4.59
|
|
|
|
4.79
|
|
Risk-free interest rate
|
|
|
2.75
|
%
|
|
|
2.03
|
%
|
|
|
2.71
|
%
|
Expected volatility
|
|
|
47.18
|
%
|
|
|
42.79
|
%
|
|
|
37.32
|
%
|
Expected dividend yield
|
|
|
0.59
|
%
|
|
|
0.56
|
%
|
|
|
0.37
|
%
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
|
|
|
|
|
|
|
|
|
|
|
|
Exercise Price
|
|
|
Term -
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Per Share
|
|
|
Weighted
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Value
|
|
(Share amounts in thousands)
|
|
Outstanding
|
|
|
Range
|
|
|
Average
|
|
|
(in years)
|
|
|
(in thousands)
|
|
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
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
129
|
|
|
18.25
|
-
|
21.57
|
|
|
|
19.74
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(5
|
)
|
|
18.05
|
-
|
26.75
|
|
|
|
23.95
|
|
|
|
|
|
|
|
21
|
|
Outstanding at September 28, 2019
|
|
|
388
|
|
|
10.23
|
-
|
41.85
|
|
|
|
26.16
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
121
|
|
|
19.86
|
-
|
22.09
|
|
|
|
21.08
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(27
|
)
|
|
18.05
|
-
|
41.85
|
|
|
|
25.88
|
|
|
|
|
|
|
|
|
|
Outstanding at October 3, 2020
|
|
|
482
|
|
|
10.23
|
-
|
41.85
|
|
|
|
24.90
|
|
|
|
6.50
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and anticipated to vest in the future at October 3, 2020
|
|
|
477
|
|
|
|
|
|
|
|
|
24.95
|
|
|
|
6.47
|
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at October 3, 2020
|
|
|
283
|
|
|
|
|
|
|
|
|
26.99
|
|
|
|
4.69
|
|
|
|
133
|
|
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. RSU grants and compensation expense are as follows:
|
|
Year Ended
|
|
|
|
October 3,
|
|
|
September 28,
|
|
|
September 29,
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Restricted stock unit grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
Units
|
|
|
68
|
|
|
|
61
|
|
|
|
35
|
|
Market value
|
|
$
|
1,444
|
|
|
$
|
1,225
|
|
|
$
|
1,175
|
|
Compensation expense
|
|
|
1,218
|
|
|
|
1,168
|
|
|
|
1,172
|
|
As of October 3, 2020, there was $589,000 of unrecognized compensation cost related to unvested RSUs which is expected to be recognized over a weighted average period of 1.86 years.
The following table summarizes RSU activity:
|
|
|
|
|
|
Weighted
|
|
|
|
Restricted
|
|
|
Average
|
|
|
|
Stock Units
|
|
|
Grant Date
|
|
(Unit amounts in thousands)
|
|
Outstanding
|
|
|
Fair Value
|
|
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
|
|
Granted
|
|
|
61
|
|
|
|
20.18
|
|
Released
|
|
|
(49
|
)
|
|
|
27.64
|
|
Balance, September 28, 2019
|
|
|
115
|
|
|
|
26.16
|
|
Granted
|
|
|
68
|
|
|
|
21.29
|
|
Forfeited
|
|
|
(6
|
)
|
|
|
25.49
|
|
Released
|
|
|
(55
|
)
|
|
|
27.07
|
|
Balance, October 3, 2020
|
|
|
122
|
|
|
|
23.07
|
|
(10) Income Taxes
The components of the provision for income taxes are as follows:
|
|
Year Ended
|
|
|
|
October 3,
|
|
|
September 28,
|
|
|
September 29,
|
|
(Dollars in thousands)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
5,056
|
|
|
$
|
(126
|
)
|
|
$
|
8,265
|
|
State
|
|
|
529
|
|
|
|
185
|
|
|
|
906
|
|
|
|
|
5,585
|
|
|
|
59
|
|
|
|
9,171
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(288
|
)
|
|
|
1,649
|
|
|
|
(2,862
|
)
|
State
|
|
|
(136
|
)
|
|
|
149
|
|
|
|
55
|
|
|
|
|
(424
|
)
|
|
|
1,798
|
|
|
|
(2,807
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
5,161
|
|
|
$
|
1,857
|
|
|
$
|
6,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
21.4
|
%
|
|
|
24.9
|
%
|
|
|
14.9
|
%
|
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)
|
|
October 3, 2020
|
|
|
September 28, 2019
|
|
|
September 29, 2018
|
|
Provision for income taxes at federal statutory rate
|
|
$
|
5,076
|
|
|
|
21.0
|
%
|
|
$
|
1,566
|
|
|
|
21.0
|
%
|
|
$
|
10,444
|
|
|
|
24.5
|
%
|
State income taxes, net of federal tax benefit
|
|
|
319
|
|
|
|
1.3
|
|
|
|
297
|
|
|
|
4.0
|
|
|
|
739
|
|
|
|
1.7
|
|
Stock-based compensation
|
|
|
128
|
|
|
|
0.5
|
|
|
|
90
|
|
|
|
1.2
|
|
|
|
(634
|
)
|
|
|
(1.5
|
)
|
Net operating loss carryback - CARES Act
|
|
|
(223
|
)
|
|
|
(0.9
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Valuation allowance
|
|
|
(50
|
)
|
|
|
(0.2
|
)
|
|
|
24
|
|
|
|
0.3
|
|
|
|
(18
|
)
|
|
|
(0.0
|
)
|
Federal tax return true-up
|
|
|
-
|
|
|
|
-
|
|
|
|
(142
|
)
|
|
|
(1.9
|
)
|
|
|
(147
|
)
|
|
|
(0.3
|
)
|
Change in federal tax rate - Tax Cuts and Jobs Act
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,307
|
)
|
|
|
(7.8
|
)
|
Qualified production activities deduction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(832
|
)
|
|
|
(2.0
|
)
|
Other, net
|
|
|
(89
|
)
|
|
|
(0.3
|
)
|
|
|
22
|
|
|
|
0.3
|
|
|
|
119
|
|
|
|
0.3
|
|
Provision for income taxes
|
|
$
|
5,161
|
|
|
|
21.4
|
%
|
|
$
|
1,857
|
|
|
|
24.9
|
%
|
|
$
|
6,364
|
|
|
|
14.9
|
%
|
The components of deferred tax assets and liabilities are as follows:
|
|
October 3,
|
|
|
September 28,
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Defined benefit plans
|
|
$
|
2,727
|
|
|
$
|
2,661
|
|
Accrued expenses and asset reserves
|
|
|
1,885
|
|
|
|
1,207
|
|
Stock-based compensation
|
|
|
1,328
|
|
|
|
1,259
|
|
Operating lease liability
|
|
|
568
|
|
|
|
-
|
|
State net operating loss carryforwards and tax credits
|
|
|
92
|
|
|
|
120
|
|
Federal net operating loss carryforward
|
|
|
-
|
|
|
|
363
|
|
Valuation allowance
|
|
|
(207
|
)
|
|
|
(257
|
)
|
Deferred tax assets
|
|
|
6,393
|
|
|
|
5,353
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Plant and equipment
|
|
|
(10,766
|
)
|
|
|
(10,625
|
)
|
Prepaid insurance
|
|
|
(1,217
|
)
|
|
|
(1,311
|
)
|
Right of use assets
|
|
|
(566
|
)
|
|
|
-
|
|
Goodwill
|
|
|
(412
|
)
|
|
|
(317
|
)
|
Deferred tax liabilities
|
|
|
(12,961
|
)
|
|
|
(12,253
|
)
|
Net deferred tax liability
|
|
$
|
(6,568
|
)
|
|
$
|
(6,900
|
)
|
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 2018 and is 21% for 2019 and beyond. We remeasured our deferred tax assets and liabilities and adjusted our estimated annual federal income tax rate to incorporate the lower corporate tax rate provided for under the Act in our first quarter tax provision for 2018, which resulted in a $3.3 million reduction in income tax expense for 2018.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law. The CARES Act includes several changes impacting business, including, but not limited to, enhanced business interest deductibility, net operating loss ("NOL") carryback provisions, payroll tax deferral provisions and employee retention tax credits. We recorded a $223,000 tax benefit in 2020 resulting from the NOL carryback provisions of the CARES Act.
As of October 3, 2020 and September 28, 2019, we recorded deferred tax liabilities (net of valuation allowances) of $6.6 million and $6.9 million, respectively, in other liabilities on our consolidated balance sheet. We have $2.5 million of state NOLs that begin to expire in 2022, but principally expire between 2022 and 2035.
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 October 3, 2020, we recorded a valuation allowance of $207,000 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 and tax credits against which an allowance had previously been provided or determine that such utilization was more likely than not. The $50,000 decrease in the valuation allowance during 2020 is primarily due to the utilization of state NOLs for which an allowance had been recorded together with the expiration of state tax credits for which an allowance had been previously recorded.
As of October 3, 2020, 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 2020, 2019 and 2018.
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 2015 remain subject to examination.
(11) Employee Benefit Plans
Supplemental retirement benefit plan. We have SRBAs 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.
The reconciliation of the projected benefit obligation, plan assets, funded status and amounts recognized for the SRBAs in our consolidated balance sheets is as follows:
|
|
Year Ended
|
|
|
|
October 3,
|
|
|
September 28,
|
|
|
September 29,
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
11,278
|
|
|
$
|
9,749
|
|
|
$
|
9,389
|
|
Service cost
|
|
|
338
|
|
|
|
297
|
|
|
|
310
|
|
Interest cost
|
|
|
334
|
|
|
|
384
|
|
|
|
345
|
|
Actuarial loss (gain)
|
|
|
(91
|
)
|
|
|
1,133
|
|
|
|
(33
|
)
|
Distributions
|
|
|
(249
|
)
|
|
|
(285
|
)
|
|
|
(262
|
)
|
Benefit obligation at end of year
|
|
$
|
11,610
|
|
|
$
|
11,278
|
|
|
$
|
9,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual employer contributions
|
|
$
|
249
|
|
|
$
|
285
|
|
|
$
|
262
|
|
Actual distributions
|
|
|
(249
|
)
|
|
|
(285
|
)
|
|
|
(262
|
)
|
Plan assets at fair value at end of year
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of funded status to net amount recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(11,610
|
)
|
|
$
|
(11,278
|
)
|
|
$
|
(9,749
|
)
|
Net amount recognized
|
|
$
|
(11,610
|
)
|
|
$
|
(11,278
|
)
|
|
$
|
(9,749
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized net loss
|
|
$
|
2,574
|
|
|
$
|
2,958
|
|
|
$
|
1,966
|
|
Net amount recognized
|
|
$
|
2,574
|
|
|
$
|
2,958
|
|
|
$
|
1,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss (gain)
|
|
$
|
(91
|
)
|
|
$
|
1,133
|
|
|
$
|
(33
|
)
|
Amortization of net loss
|
|
|
(294
|
)
|
|
|
(140
|
)
|
|
|
(150
|
)
|
Total recognized in other comprehensive income (loss)
|
|
$
|
(385
|
)
|
|
$
|
993
|
|
|
$
|
(183
|
)
|
Net periodic pension cost for the SRBAs includes the following components:
|
|
Year Ended
|
|
|
|
October 3,
|
|
|
September 28,
|
|
|
September 29,
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Service cost
|
|
$
|
338
|
|
|
$
|
297
|
|
|
$
|
310
|
|
Interest cost
|
|
|
334
|
|
|
|
384
|
|
|
|
345
|
|
Amortization of net loss
|
|
|
294
|
|
|
|
140
|
|
|
|
150
|
|
Net periodic pension cost
|
|
$
|
966
|
|
|
$
|
821
|
|
|
$
|
805
|
|
The estimated net loss that will be amortized from accumulated other comprehensive loss into net periodic pension cost during 2021 is $215,000.
The assumptions used in the valuation of the SRBAs are as follows:
|
|
Measurement Date
|
|
|
|
October 3,
|
|
|
September 28,
|
|
|
September 29,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Assumptions at year-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
2.75
|
%
|
|
|
3.00
|
%
|
|
|
4.00
|
%
|
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 SRBAs. The SRBAs expected rate of increase in compensation levels is based on the anticipated increases in annual compensation.
The projected benefit payments under the SRBAs are as follows:
Fiscal year(s)
|
|
In thousands
|
|
2021
|
|
$
|
255
|
|
2022
|
|
|
570
|
|
2023
|
|
|
570
|
|
2024
|
|
|
530
|
|
2025
|
|
|
892
|
|
2026 - 2030
|
|
|
4,109
|
|
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 $1.3 million in 2020, $1.2 million in 2019 and $1.1 million in 2018.
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 $6.0 million in 2020, $5.8 million in 2019 and $5.1 million in 2018. 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.
(12) 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 that allowed operations to continue until permanent repairs were completed during the first quarter of 2019. We reached a final settlement on the property damage and business interruption claim with our insurance carrier in the prior year. During 2019, we received $2.2 million of insurance proceeds related to the claim that was partially applied against the beginning receivable balance of $462,000 with the remainder recorded in other income ($1.1 million), cost of sales ($645,000) and SG&A expense ($48,000) on the consolidated statements of operations. 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.
In August 2017, operations at our manufacturing facility located in Dayton, Texas were adversely affected by hurricane Harvey. We reached a final settlement on the property damage and business interruption claim with our insurance carrier in the first quarter of 2019. During 2019, we received $150,000 of proceeds related to this claim of which $98,000 was recorded in other income on the consolidated statements of operations. 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.
The insurance proceeds attributable to the property and equipment damaged are reported in cash flows from investing activities and all other insurance proceeds received are reported in cash flows from operating activities on the consolidated statements of cash flows.
Purchase commitments. As of October 3, 2020, we had $32.8 million in non-cancelable purchase commitments for raw material extending as long as approximately 100 days and $9.7 million of contractual commitments for the purchase of certain equipment that had not been fulfilled and are not reflected in our 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.
Severance and change of control agreements. We have entered into a severance agreement with our Chief Executive Officer that provides him with certain termination benefits in the event his employment with us is terminated without cause. The initial term of the agreement was two years and it automatically renews for successive one year terms unless we or our Chief Executive Officer provide notice of termination as specified in the agreement. In the event of termination of the Chief Executive Officer’s employment without cause, this agreement provides that he would receive termination benefits equal to one and one-half times his annual base salary in effect on the termination date and the continuation of health and welfare benefits for eighteen months. In addition, all of his 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 the other covered executives. In the event of termination of the Chief Executive Officer within two years of a change of control, he 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 three 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.
(13) Leases
We have operating leases for certain equipment, office space and vehicles. We determine whether an arrangement is a lease at its inception if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Leases with an initial term of twelve months or less are not recorded on our consolidated balance sheet. Lease expense for operating leases with original terms of more than twelve months was $1.3 million in 2020, $1.6 million in 2019 and $1.5 million in 2018.
Most of our leases include options to extend or terminate the leases which are exercised at our sole discretion. As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate as of the commencement date in determining the present value of lease payments, which represents an estimate of the interest rate we would incur at the lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term.
Supplemental cash flow and non-cash information related to leases is as follows:
|
|
Year Ended
|
|
(In thousands)
|
|
October 3, 2020
|
|
Cash paid for operating leases included in operating cash flows
|
|
$
|
1,301
|
|
Right-of-use assets obtained in exchange for new lease obligations
|
|
|
1,771
|
|
Supplemental balance sheet information related to leases is as follows:
(In thousands)
|
|
October 3, 2020
|
|
Right-of-use assets:
|
|
|
|
|
Other assets
|
|
$
|
2,522
|
|
|
|
|
|
|
Lease liabilities:
|
|
|
|
|
Accrued expenses
|
|
|
1,230
|
|
Other liabilities
|
|
|
1,300
|
|
Total operating lease liabilities
|
|
$
|
2,530
|
|
As of October 3, 2020, our operating leases had a weighted average remaining lease term of 2.3 years and a weighted average discount rate of 4.4%. Aggregate future operating lease payments as of October 3, 2020 are as follows:
(In thousands)
|
|
|
|
|
2021
|
|
$
|
1,290
|
|
2022
|
|
|
874
|
|
2023
|
|
|
408
|
|
2024
|
|
|
59
|
|
2025
|
|
|
2
|
|
Thereafter
|
|
|
-
|
|
Total future operating lease payments
|
|
|
2,633
|
|
Less: imputed interest
|
|
|
(103
|
)
|
Present value of lease liabilities
|
|
$
|
2,530
|
|
(14) Earnings Per Share
The computation of basic and diluted earnings per share attributable to common shareholders is as follows:
|
|
Year Ended
|
|
|
|
October 3,
|
|
|
September 28,
|
|
|
September 29,
|
|
(In thousands, except per share amounts)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Net earnings
|
|
$
|
19,009
|
|
|
$
|
5,598
|
|
|
$
|
36,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
19,278
|
|
|
|
19,243
|
|
|
|
19,079
|
|
Dilutive effect of stock-based compensation
|
|
|
105
|
|
|
|
97
|
|
|
|
198
|
|
Diluted weighted average shares outstanding
|
|
|
19,383
|
|
|
|
19,340
|
|
|
|
19,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.99
|
|
|
$
|
0.29
|
|
|
$
|
1.90
|
|
Diluted
|
|
|
0.98
|
|
|
|
0.29
|
|
|
|
1.88
|
|
Options and RSUs that were antidilutive and not included in the diluted EPS calculation amounted to 369,000 shares in 2020, 240,000 shares in 2019 and 83,000 shares in 2018.
(15) 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, assets held for sale, the cash surrender value of life insurance policies, right of use assets, goodwill and intangible assets) by geographic region are as follows:
|
|
Year Ended
|
|
|
|
October 3,
|
|
|
September 28,
|
|
|
September 29,
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
470,420
|
|
|
$
|
454,373
|
|
|
$
|
451,418
|
|
Foreign
|
|
|
2,198
|
|
|
|
1,340
|
|
|
|
1,799
|
|
Total
|
|
$
|
472,618
|
|
|
$
|
455,713
|
|
|
$
|
453,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
140,588
|
|
|
$
|
132,074
|
|
|
$
|
133,913
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
140,588
|
|
|
$
|
132,074
|
|
|
$
|
133,913
|
|
Our net sales by product line are as follows:
|
|
Year Ended
|
|
|
|
October 3,
|
|
|
September 28,
|
|
|
September 29,
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Welded wire reinforcement
|
|
$
|
294,129
|
|
|
$
|
290,423
|
|
|
$
|
273,658
|
|
Prestressed concrete strand
|
|
|
178,489
|
|
|
|
165,290
|
|
|
|
179,559
|
|
Total
|
|
$
|
472,618
|
|
|
$
|
455,713
|
|
|
$
|
453,217
|
|
There were no customers that accounted for 10% or more of our net sales in 2020, 2019 and 2018.
(16) Related Party Transactions
Sales to a company affiliated with one of our former directors amounted to $716,000 in 2019 and $699,000 in 2018. There were no related party transactions in 2020.
(17) Other Financial Data
Balance sheet information:
|
|
October 3,
|
|
|
September 28,
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
Accounts receivable, net:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
54,108
|
|
|
$
|
44,436
|
|
Less allowance for doubtful accounts
|
|
|
(291
|
)
|
|
|
(254
|
)
|
Total
|
|
$
|
53,817
|
|
|
$
|
44,182
|
|
|
|
|
|
|
|
|
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
31,553
|
|
|
$
|
27,667
|
|
Work in process
|
|
|
3,813
|
|
|
|
4,885
|
|
Finished goods
|
|
|
33,597
|
|
|
|
38,299
|
|
Total
|
|
$
|
68,963
|
|
|
$
|
70,851
|
|
|
|
|
|
|
|
|
|
|
Other current assets:
|
|
|
|
|
|
|
|
|
Prepaid insurance
|
|
$
|
4,096
|
|
|
$
|
4,545
|
|
Income taxes receivable
|
|
|
-
|
|
|
|
1,215
|
|
Other
|
|
|
1,474
|
|
|
|
1,610
|
|
Total
|
|
$
|
5,570
|
|
|
$
|
7,370
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Cash surrender value of life insurance policies
|
|
$
|
10,584
|
|
|
$
|
10,211
|
|
Assets held for sale
|
|
|
7,778
|
|
|
|
-
|
|
Right-of-use assets
|
|
|
2,522
|
|
|
|
-
|
|
Capitalized financing costs, net
|
|
|
170
|
|
|
|
237
|
|
Other
|
|
|
106
|
|
|
|
114
|
|
Total
|
|
$
|
21,160
|
|
|
$
|
10,562
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net:
|
|
|
|
|
|
|
|
|
Land and land improvements
|
|
$
|
14,520
|
|
|
$
|
14,548
|
|
Buildings
|
|
|
52,462
|
|
|
|
56,404
|
|
Machinery and equipment
|
|
|
172,617
|
|
|
|
165,609
|
|
Construction in progress
|
|
|
3,978
|
|
|
|
5,285
|
|
|
|
|
243,577
|
|
|
|
241,846
|
|
Less accumulated depreciation
|
|
|
(142,185
|
)
|
|
|
(136,886
|
)
|
Total
|
|
$
|
101,392
|
|
|
$
|
104,960
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses:
|
|
|
|
|
|
|
|
|
Salaries, wages and related expenses
|
|
$
|
4,971
|
|
|
$
|
2,463
|
|
Property taxes
|
|
|
1,726
|
|
|
|
1,820
|
|
Customer rebates
|
|
|
1,581
|
|
|
|
1,381
|
|
Operating lease liabilities
|
|
|
1,230
|
|
|
|
-
|
|
Income taxes
|
|
|
1,201
|
|
|
|
-
|
|
Holdback for business acquired
|
|
|
1,000
|
|
|
|
-
|
|
State sales and use taxes
|
|
|
544
|
|
|
|
136
|
|
Sales allowance reserves
|
|
|
-
|
|
|
|
544
|
|
Other
|
|
|
2,464
|
|
|
|
474
|
|
Total
|
|
$
|
14,717
|
|
|
$
|
6,818
|
|
|
|
|
|
|
|
|
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
$
|
11,553
|
|
|
$
|
11,679
|
|
Deferred income taxes
|
|
|
6,568
|
|
|
|
6,900
|
|
Operating lease liabilities
|
|
|
1,300
|
|
|
|
-
|
|
Total
|
|
$
|
19,421
|
|
|
$
|
18,579
|
|
(18) 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.
(19) 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 October 3, 2020, there was $24.8 million remaining available for future share repurchases under this Authorization. There were no share repurchases during 2020, 2019 and 2018.