10-K 1 d237672d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

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

For the fiscal year ended October 1, 2011

OR

 

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

For the transition period from                          to                     

Commission file number 1-9929

INSTEEL INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

 

North Carolina   56-0674867

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1373 Boggs Drive, Mount Airy, North Carolina 27030

(Address of principal executive offices) (Zip Code)

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock (No Par Value) (Preferred Share Purchase   The NASDAQ Stock Market LLC
Rights are attached to and trade with the Common Stock)   (NASDAQ Global Select Market)

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Preferred Share Purchase Rights (attached to and trade with the Common Stock)

Title of Class

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. þ

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

 

Large accelerated filer ¨   Accelerated filer þ   Non-accelerated filer ¨    Smaller reporting company ¨
    (Do not check if a smaller reporting company)   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ

As of April 1, 2011 (the last business day of the registrant’s most recently completed second quarter), the aggregate market value of the common stock held by non-affiliates of the registrant was $215,086,348 based upon the closing sale price as reported on the NASDAQ Global Select Market. As of November 9, 2011, there were 17,609,324 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrant’s proxy statement to be delivered to shareholders in connection with the 2011 Annual Meeting of Shareholders are incorporated by reference as set forth in Part III hereof.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

Cautionary Note Regarding Forward-Looking Statements      3   
PART I   
Item 1. Business      4   
Item 1A. Risk Factors      7   
Item 1B. Unresolved Staff Comments      10   
Item 2. Properties      10   
Item 3. Legal Proceedings      10   
Item 4. (Removed and Reserved)      11   
PART II   
Item 5. Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities      11   
Item 6. Selected Financial Data      12   
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations      12   
Item 7A. Quantitative and Qualitative Disclosures About Market Risk      21   
Item 8. Financial Statements and Supplementary Data      22   
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      52   
Item 9A. Controls and Procedures      52   
Item 9B. Other Information      54   
PART III   
Item 10. Directors, Executive Officers and Corporate Governance      54   
Item 11. Executive Compensation      54   
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      54   
Item 13. Certain Relationships and Related Transactions, and Director Independence      54   
Item 14. Principal Accounting Fees and Services      55   
PART IV   
Item 15. Exhibits, Financial Statement Schedules      55   
SIGNATURES      56   
EXHIBIT INDEX      57   

 

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Cautionary Note Regarding Forward-Looking Statements

This report contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, particularly in the “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this report. When used in this report, the words “believes,” “anticipates,” “expects,” “estimates,” “intends,” “may,” “should” and similar expressions are intended to identify forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, they are subject to a number of risks and uncertainties, and we can provide no assurances that such plans, intentions or expectations will be achieved. Many of these risks are discussed herein under the caption “Risk Factors” and are updated from time to time in our filings with the U.S. Securities and Exchange Commission (“SEC”). You should read these risk factors carefully.

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

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

 

  potential difficulties in realizing the anticipated synergies, including reduced operating costs, associated with the acquisition of certain of the assets of Ivy Steel and Wire, Inc. (“Ivy Acquisition”);

 

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

 

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

 

  the continuation of reduced spending for nonresidential construction, particularly commercial construction, and the impact on demand for our products;

 

  the duration and magnitude of a new federal transportation funding authorization and the amount of the infrastructure-related funding provided for that requires the use of our products;

 

  the severity and duration of the downturn in residential construction and the impact on those portions of our business that are correlated with the housing sector;

 

  the cyclical nature of the steel and building material industries;

 

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

 

  competitive pricing pressures and our ability to raise selling prices in order to recover increases in wire rod costs;

 

  changes in United States (“U.S.”) or foreign trade policy affecting imports or exports of steel wire rod or our products;

 

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

 

  the impact of weak demand and reduced capacity utilization levels on our unit manufacturing costs;

 

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

 

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

 

  unanticipated plant outages, equipment failures or labor difficulties;

 

  continued escalation in certain of our operating costs; and

 

  the risks and uncertainties discussed herein under the caption “Risk Factors.”

 

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PART I

Item 1. Business

General

Insteel Industries, Inc. (“we,” “us,” “our,” “the Company” or “Insteel”) is one of the nation’s largest manufacturers of steel wire reinforcing products for concrete construction applications. We manufacture and market prestressed concrete strand (“PC strand”) and welded wire reinforcement (“WWR”) products, including concrete pipe reinforcement (“CPR”), ESM and standard welded wire reinforcement (“SWWR”). Our products are primarily sold to manufacturers of concrete products that are used in nonresidential construction. For fiscal 2011, we estimate that approximately 90% of our sales were related to nonresidential construction and 10% were related to residential construction.

Insteel is the parent holding company for two wholly-owned subsidiaries, Insteel Wire Products Company (“IWP”), its operating subsidiary, and Intercontinental Metals Corporation, an inactive subsidiary. We were incorporated in 1958 in the State of North Carolina.

Our business strategy is focused on: (1) achieving leadership positions in our markets; (2) operating as the lowest cost producer; and (3) pursuing growth opportunities in our core businesses that further our penetration of current markets served or expand our geographic footprint. Headquartered in Mount Airy, North Carolina, we operate nine manufacturing facilities that are located in the U.S. in close proximity to our customers. Our growth initiatives are focused on organic opportunities as well as acquisitions in existing or related markets that leverage our infrastructure and core competencies in the manufacture and marketing of concrete reinforcing products.

Our exit from the industrial wire business in June 2006 (see Note 10 to the consolidated financial statements) was the last in a series of divestitures which served to narrow our strategic and operational focus to concrete reinforcing products. The results of operations for the industrial wire business have been reported as discontinued operations for all periods presented.

On November 19, 2010, we, through our wholly-owned subsidiary, IWP, purchased certain of the assets of Ivy Steel and Wire, Inc. (“Ivy”) for approximately $50.3 million, after giving effect to post-closing adjustments. Ivy was one of the nation’s largest producers of WWR and wire products for concrete construction applications (see Note 4 to the consolidated financial statements). Among other assets, we acquired Ivy’s production facilities located in Arizona, Florida, Missouri and Pennsylvania; the production equipment located at a leased facility in Texas; and certain related inventories. We also entered into a short-term sublease with Ivy for the Texas facility. Subsequent to the acquisition, we elected to consolidate certain of our WWR operations in order to reduce our operating costs, which involved the closure of facilities in Wilmington, Delaware and Houston, Texas. These actions were taken in response to the close proximity of Ivy’s facilities in Hazleton, Pennsylvania and Houston, Texas to our existing facilities in Wilmington, Delaware and Dayton, Texas.

Internet Access to Company Information

Additional information about us and our filings with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments thereto, are available at no cost on our web site at http://investor.insteel.com/sec.cfm and the SEC’s web site at www.sec.gov as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information available on our web site and the SEC’s web site is not part of this report and shall not be deemed incorporated into any of our SEC filings.

Products

Our concrete reinforcing products consist of PC strand and WWR.

PC strand is a high strength seven-wire strand that is used to impart compression forces into precast concrete elements and structures, which may be either pretensioned or posttensioned, providing reinforcement for bridges, parking decks, buildings and other concrete structures. Pretensioned or “prestressed” concrete elements or structures are primarily used in nonresidential construction while posttensioned concrete elements or structures are used in both nonresidential and residential construction. For 2011, 2010 and 2009, PC strand sales represented 38%, 48% and 47%, respectively, of our consolidated net sales.

WWR is produced as either a standard or a specially engineered reinforcing product for use in nonresidential and residential construction. We produce a full range of WWR products, including CPR, ESM and SWWR. CPR is an engineered made-to-order product that is used as the primary reinforcement in concrete pipe, box culverts and precast manholes for drainage and sewage systems, water treatment facilities and other related applications. ESM is an engineered made-to-order product that is used as the primary reinforcement for concrete elements or structures, frequently serving as a replacement for hot-rolled rebar due to the cost advantages that it offers. SWWR is a secondary reinforcing product that is produced in standard styles for crack control applications in residential and light nonresidential construction, including driveways, sidewalks and various slab-on-grade applications. For 2011, 2010 and 2009, WWR sales represented 62%, 52% and 53%, respectively, of our consolidated net sales.

 

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Marketing and Distribution

We market our products through sales representatives who are our employees. Our sales force is organized by product line and trained in the technical applications of our products. Our products are sold nationwide as well as into Canada, Mexico, and Central and South America, and delivered primarily by truck, using common or contract carriers. The delivery method selected is dependent upon backhaul opportunities, comparative costs and scheduling requirements.

Customers

We sell our products to a broad range of customers that includes manufacturers of concrete products, and to a lesser extent, distributors and rebar fabricators. In fiscal 2011, we estimate that approximately 70% of our net sales were to manufacturers of concrete products and 30% were to distributors and rebar fabricators. In many cases we are unable to identify the specific end use for our products as a high percentage of our customers sell into both the nonresidential and residential construction sectors. There were no customers that represented 10% or more of our net sales in fiscal years 2011, 2010 and 2009.

Backlog

Backlog is not a significant measurement for our business because of the relatively short lead times that are required by our customers. We believe that the majority of our firm orders existing on October 1, 2011 will be shipped prior to the end of the first quarter of fiscal 2012.

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, although 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.

Seasonality and Cyclicality

Demand in our markets is both seasonal and cyclical, driven by the level of construction activity, but can also be impacted by fluctuations in the inventory positions of our customers. From a seasonal standpoint, the highest level of shipments within the year typically occurs when weather conditions are the most conducive to construction activity. As a result, shipments and profitability are usually higher in the third and fourth quarters of the fiscal year and lower in the first and second quarters. From a cyclical standpoint, the level of construction activity tends to be correlated with general economic conditions although there can be significant differences between the relative performance of the nonresidential versus residential construction sectors for extended periods.

Raw Materials

The primary raw material used to manufacture our products is hot-rolled carbon steel wire rod, which we purchase from both domestic and foreign suppliers. Wire rod can generally be characterized as a commodity product. We purchase several different grades and sizes of wire rod with varying specifications based on the diameter, chemistry, mechanical properties and metallurgical characteristics that are required for our end products. High carbon grades of wire rod are required for the production of PC strand while low carbon grades are used to manufacture WWR.

Pricing for wire rod tends to fluctuate based on both domestic and global market conditions. In most economic environments, domestic demand for wire rod exceeds domestic production capacity and imports of wire rod are necessary to satisfy the supply requirements of the U.S. market. Trade actions initiated by domestic wire rod producers can significantly impact the pricing and availability of imported wire rod, which during fiscal years 2011 and 2010 represented approximately 15% and 29%, respectively, of our total wire rod purchases. We believe that the substantial volume and desirable mix of grades represented by our wire rod requirements constitutes a competitive advantage by making us a more attractive customer to our suppliers relative to our competitors.

Domestic wire rod producers have invested heavily in recent years to improve their quality capabilities and augment their product mix by increasing the proportion of higher value-added products. This evolution toward higher value-added products has generally benefited us in our sourcing of wire rod for PC strand as this grade is more metallurgically and technically sophisticated. At the same time, domestic producers have deemphasized the production of the less sophisticated, low carbon grades of wire rod due to the more intense competitive conditions that prevail in this market. As a result, we typically rely more heavily on imports for supplies of lower grade wire rod. Historically, when traditional offshore suppliers have withdrawn from the domestic market following the filing of trade cases by the domestic industry, new suppliers have filled the resulting gaps in supply.

 

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Our ability to source wire rod from overseas suppliers is limited by domestic content requirements generally referred to as “Buy America” or “Buy American” laws that exist at both the federal and state levels. These laws generally require a domestic “melt and cast” standard for purposes of compliance. Certain segments of the PC strand market and the majority of our CPR and ESM products are certified to customers to be in compliance with the domestic content regulations.

Selling prices for our products tend to be correlated with changes in wire rod prices. However, the timing of the relative price changes varies depending upon market conditions and competitive factors. The relative supply and demand conditions in our markets determine whether our margins expand or contract during periods of rising or falling wire rod prices.

During fiscal 2009, wire rod prices collapsed in response to the recessionary conditions in the economy and resulting inventory imbalances that developed throughout the supply chain, which led to a dramatic decline in demand for steel products. Consequently, selling prices for our products also declined through most of fiscal 2009 in response to the weakening in demand, resulting in inventory write-downs as we reduced inventory carrying values to reflect the decrease in estimated net realizable values. In July and September 2009, two U.S. rod mills representing over 20% of total domestic capacity closed in response to the weak market conditions.

Wire rod prices increased through most of fiscal 2010 due to the escalation in the cost of scrap and other raw materials for wire rod producers before moderating later in the year as a result of the weakening demand environment. Competitive pricing pressures intensified over the course of the year, which resulted in narrowing spreads between average selling prices and raw material costs. One of the U.S. rod mills that closed operations during fiscal 2009 resumed production in early 2011which enhanced our sourcing alternatives in that the mill is located in close proximity to a number of our manufacturing facilities.

During fiscal 2011, wire rod prices increased through most of the year driven by the continued escalation in the cost of scrap and other raw materials for wire rod producers and increased demand from non-construction applications before moderating towards the end of the year. Competitive pricing pressures remained intense through the year due to the ongoing weakness in our construction end-markets.

Competition

The markets in which our business is conducted are highly competitive. Some of our competitors, such as Nucor Corporation, Keystone Steel & Wire Co. and Gerdau Ameristeel Corporation, are vertically integrated companies that produce both wire rod and concrete reinforcing products and offer multiple product lines over broad geographic areas. Other competitors are smaller independent companies that offer limited competition in certain markets. Market participants compete on the basis of price, quality and service. Our primary competitors for WWR products are Nucor Corporation, Gerdau Ameristeel Corporation, Engineered Wire Products, Inc., Davis Wire Corporation, Oklahoma Steel & Wire Co., Inc. and Concrete Reinforcements Inc. Our primary competitors for PC strand are American Spring Wire Corporation, Sumiden Wire Products Corporation and Strand-Tech Martin, Inc. Import competition is also a significant factor in certain segments of the PC strand market. We believe that we are the largest domestic producer of PC strand and WWR.

Quality and service expectations of customers have risen substantially over the years and are key factors that impact their selection of suppliers. Technology has become a critical factor in remaining competitive from the standpoint of conversion costs and quality. In view of our sophisticated information systems, technologically advanced manufacturing facilities, low cost production capabilities, strong market positions, and broad product offering and geographic reach, we believe that we are well-positioned to compete favorably with other producers of our concrete reinforcing products.

Employees

As of October 1, 2011, we employed 725 people. We have not experienced any work stoppages and believe that our relationship with our employees is good. However, should we experience a disruption of production, we have contingency plans in place that we believe would enable us to continue serving our customers, although there can be no assurances that a work slowdown or stoppage would not adversely impact our operating costs and overall financial results.

Financial Information

For information with respect to revenue, operating profitability and identifiable assets attributable to our business and geographic areas, see the items referenced in Item 6, Selected Financial Data; Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations; and Note 14 to the consolidated financial statements.

 

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Environmental Matters

We believe that we are in compliance in all material respects with applicable environmental laws and regulations. We have experienced no material difficulties in complying with legislative or regulatory standards and believe that these standards have not materially impacted our financial position or results of operations. Although our future compliance with additional environmental requirements could necessitate capital outlays, we do not believe that these expenditures would ultimately have a material adverse effect on our financial position or results of operations. We do not expect to incur material capital expenditures for environmental control facilities during fiscal years 2012 and 2013.

Executive Officers of the Company

Our executive officers are as follows:

 

Name

    

      Age      

    

Position

H.O. Woltz III

     55      President, Chief Executive Officer and Chairman of the Board

Michael C. Gazmarian

     52      Vice President, Chief Financial Officer and Treasurer

James F. Petelle

     61      Vice President — Administration and Secretary

Richard T. Wagner

     52      Vice President and General Manager of IWP

H. O. Woltz III, 55, was elected Chief Executive Officer in 1991and has been employed by us and our subsidiaries in various capacities since 1978. He was named President and Chief Operating Officer in 1989. He served as our Vice President from 1988 to 1989 and as President of Rappahannock Wire Company, formerly a subsidiary of our Company, from 1981 to 1989. Mr. Woltz has been a Director since 1986 and also serves as President of Insteel Wire Products Company. Mr. Woltz served as President of Florida Wire and Cable, Inc. until its merger with Insteel Wire Products Company in 2002. Mr. Woltz serves on the Executive Committee of our Board of Directors and was elected Chairman of the Board in 2009.

Michael C. Gazmarian, 52, was elected Vice President, Chief Financial Officer and Treasurer in February 2007. He had previously served as Chief Financial Officer and Treasurer since 1994, the year he joined us. Before joining us, Mr. Gazmarian had been employed by Guardian Industries Corp., a privately-held manufacturer of glass, automotive and building products, since 1986, serving in various financial capacities.

James F. Petelle, 61, joined us in October 2006. He was elected Vice President and Assistant Secretary on November 14, 2006 and Vice President — Administration and Secretary on January 12, 2007. He was previously employed by Andrew Corporation, a publicly-held manufacturer of telecommunications infrastructure equipment, having served as Secretary from 1990 to May 2006, and Vice President - Law from 2000 to October 2006.

Richard T. Wagner, 52, joined us in 1992 and has served as Vice President and General Manager of the Concrete Reinforcing Products Business Unit of the Company’s subsidiary, Insteel Wire Products Company, since 1998. In February 2007, Mr. Wagner was appointed Vice President of the parent company, Insteel Industries, Inc. Prior to 1992, Mr. Wagner served in various positions with Florida Wire and Cable, Inc., a manufacturer of PC strand and galvanized strand products, since 1977.

The executive officers listed above were elected by our Board of Directors at its annual meeting held February 8, 2011 for a term that will expire at the next annual meeting of the Board of Directors or until their successors are elected and qualify. The next meeting at which officers will be elected is expected to be February 21, 2012.

Item 1A. Risk Factors

You should carefully consider all of the information set forth in this annual report on Form 10-K, including the following risk factors, before investing in any of our securities. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that are currently unknown to us or that we currently consider to be immaterial may also impair our business or adversely affect our financial condition and results of operations. We may amend or supplement these risk factors from time to time by other future reports and statements that we file with the SEC.

Our business is cyclical and can be negatively impacted by prolonged economic downturns or tightening in the credit markets that reduce the level of construction activity and demand for our products.

Demand for our concrete reinforcing products is cyclical in nature and sensitive to changes in the economy and in the availability of financing in the credit markets. Our products are sold primarily to manufacturers of concrete products for the construction industry and used for a broad range of nonresidential and residential construction applications. Demand in these markets is driven by the level of construction activity, which tends to be correlated with conditions in the general economy as well as other factors beyond our control. The tightening in the credit markets that occurred during fiscal 2009 and persisted into

 

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2011 could continue to unfavorably impact demand for our products by reducing the availability of financing to our customers and the construction industry as a whole. Future prolonged periods of economic weakness or reduced availability of financing could have a material adverse impact on our business, results of operations, financial condition and cash flows.

Our operations are subject to seasonal fluctuations that may impact our cash flow.

Our shipments are generally lower in the first and second quarters primarily due to the reduced level of construction activity resulting from winter weather conditions together with customer plant shutdowns associated with holidays. As a result, our cash flow from operations may vary from quarter to quarter due to these seasonal factors.

Demand for our products is highly variable and difficult to forecast due to our minimal backlog and the unanticipated changes that can occur in customer order patterns or inventory levels.

Demand for our products is highly variable. The short lead times for customer orders and minimal backlog that characterize our business make it difficult to forecast the future level of demand for our products. In some cases, unanticipated downturns in demand have been exacerbated by inventory reduction measures pursued by our customers. The combination of these factors may cause significant fluctuations in our sales, profitability and cash flows.

Our customers may be adversely affected by the continued negative macroeconomic conditions and tightening in the credit markets.

Current negative macroeconomic conditions and the tightening in the credit markets could limit the ability of our customers to fund their financing requirements, thereby reducing their purchasing volume with us. Further, the reduction in the availability of credit may increase the risk of customers defaulting on their payment obligations to us. The continuation or occurrence of these events could materially and adversely impact our business, financial condition and results of operations.

Demand for our products could be significantly impacted by the timing in resolving a new federal transportation funding authorization and the magnitude of the infrastructure-related funding that is provided for requiring the use of our products.

The previous federal transportation funding authorization, SAFETEA-LU, expired in September 2009 and has subsequently been extended through a series of interim measures, the most recent of which expires in March 2012. The additional federal funding provided for under the American Recovery and Reinvestment Act (“ARRA”) has not had a significant impact on the demand for our products as a high proportion of the projects funded have been for pavement resurfacing and repairs, which do not require the use of our products, and any favorable impact has been offset by reduced spending at the state and local government level due to fiscal constraints. Failure to enact a new multi-year federal funding authorization in a timely manner could have a negative impact on demand for our products.

Our financial results can be negatively impacted by the volatility in the cost and availability of our primary raw material, hot-rolled carbon steel wire rod.

The primary raw material used to manufacture our products is hot-rolled carbon steel wire rod, which we purchase from both domestic and foreign suppliers. We do not use derivative commodity instruments to hedge our exposure to changes in the price of wire rod as such instruments are currently unavailable in the financial markets. Beginning in fiscal 2004, a tightening of supply in the rod market together with fluctuations in the raw material costs of rod producers resulted in increased price volatility which has continued through fiscal 2011. In response to the increased pricing volatility, wire rod producers have resorted to increasing the frequency of price adjustments, typically on a monthly basis as well as unilaterally changing the terms of prior commitments.

Although changes in our wire rod costs and selling prices tend to be correlated, depending upon market conditions, there may be periods during which we are unable to fully recover increased rod costs through higher selling prices, which would reduce gross profit and cash flow from operations. Additionally, should raw material costs decline, our financial results may be negatively impacted if the selling prices for our products decrease to an even greater degree and to the extent that we are consuming higher cost material from inventory, as we experienced during certain periods of fiscal 2009 and 2010.

Our financial results can also be significantly impacted if raw material supplies are inadequate to satisfy our purchasing requirements. Trade actions by domestic wire rod producers against offshore suppliers can also have a substantial impact on the availability and cost of imported wire rod. The imposition of anti-dumping or countervailing duty margins by the U.S. Department of Commerce (the “DOC”) against exporting countries can have the effect of reducing or eliminating their activity in the domestic market, which is of increasing significance in view of the reductions in domestic wire rod production capacity that have occurred in recent years. If we were unable to obtain adequate and timely delivery of our raw material requirements, we may be unable to manufacture sufficient quantities of our products or operate our manufacturing facilities in an efficient manner, which could result in lost sales and higher operating costs.

 

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We may not be successful in fully realizing the anticipated synergies from the Ivy Acquisition, which could have a negative impact on our financial results.

Although we essentially completed the integration of the Ivy Acquisition during fiscal 2011 and are realizing a substantial portion of the anticipated synergies, there could be delays, disruptions or other unexpected challenges arise in connection with the completion of the remaining reconfiguration activities at certain of the Ivy facilities. If these delays, disruptions or other challenges occur and not be effectively resolved, we could fail to realize the remainder of the anticipated synergies from the Ivy Acquisition which may have a material adverse impact on our operating results and financial condition.

Foreign competition could adversely impact our financial results.

Our PC strand business is subject to offshore import competition on an ongoing basis in that in most market environments, domestic production capacity is insufficient to satisfy domestic demand. If we are unable to purchase raw materials and achieve manufacturing costs that are competitive with those of foreign producers, or if the margin and return requirements of foreign producers are substantially lower, our market share and profit margins could be negatively impacted. In response to irrationally-priced import competition from offshore PC strand suppliers, we have pursued trade cases when necessary as a means of ensuring that foreign producers were complying with the applicable trade laws and regulations.

In 2003, we, together with a coalition of domestic producers of PC strand, obtained a favorable determination from the DOC in response to the petitions we had filed alleging that imports of PC strand from Brazil, India, Korea, Mexico and Thailand were being “dumped” or sold in the U.S. at a price that was lower than fair value and had injured the domestic PC strand industry. The DOC imposed anti-dumping duties ranging from 12% up to 119%, which had the effect of limiting the participation of these countries in the domestic market.

In 2010, we, together with a coalition of domestic producers of PC strand, obtained favorable determinations from the DOC in response to the petitions we had filed alleging that imports of PC strand from China were being “dumped” or sold in the U.S. at a price that was lower than fair value and that subsidies were being provided to Chinese PC strand producers by the Chinese government, both of which had injured the domestic PC strand industry. The DOC imposed final countervailing duty margins ranging from 9% to 46% and anti-dumping margins ranging from 43% to 194%, which had the effect of limiting the continued participation of Chinese producers in the domestic market.

Our manufacturing facilities are subject to unexpected equipment failures, operational interruptions and casualty losses.

Our manufacturing facilities are subject to risks that may limit our ability to manufacture products, including unexpected equipment failures and catastrophic losses due to other unanticipated events such as fires, explosions, accidents, adverse weather conditions and transportation interruptions. Any such equipment failures or events can subject us to material plant shutdowns, periods of reduced production or unexpected downtime. Furthermore, the resolution of certain operational interruptions may require significant capital expenditures. Although our insurance coverage could offset the losses or expenditures relating to some of these events, our results of operations and cash flows could be negatively impacted to the extent that such claims were not covered or only partially covered by our insurance.

Our financial results could be adversely impacted by the continued escalation in certain of our operating costs.

Our employee benefit costs, particularly our medical and workers’ compensation costs, have increased substantially in recent years and are expected to continue to rise. In March 2010, Congress passed and the President signed The Patient Protection and Affordable Care Act. This legislation may have a significant impact on health care providers, insurers and others associated with the health care industry. If the implementation of this legislation significantly increases the costs attributable to our self-insured health plans, it may negatively impact our business, financial condition and results of operations.

In addition, higher prices for natural gas, electricity, fuel and consumables increase our manufacturing and distribution costs. Most of our sales are made under terms whereby we incur the fuel costs and surcharges associated with the delivery of products to our customers. Although we have implemented numerous measures to offset the impact of the ongoing escalation in these costs, there can be no assurance that such actions will be effective. If we are unable to pass these additional costs through by raising selling prices, our financial results could be adversely impacted.

Our capital resources may not be adequate to provide for our capital investment and maintenance expenditures if we were to experience a substantial downturn in our financial performance.

Our operations are capital intensive and require substantial recurring expenditures for the routine maintenance of our equipment and facilities. Although we expect to finance our business requirements through internally generated funds or from borrowings under our $75.0 million revolving credit facility, we cannot provide any assurances these resources will be sufficient to support our business. A material adverse change in our operations or financial condition could limit our ability to borrow funds under our credit facility, which could further adversely impact our liquidity and financial condition. Any significant future acquisitions could require additional financing from external sources that may not be available on favorable terms, which could adversely impact our operations, growth plans, financial condition and results of operations.

 

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Environmental compliance and remediation could result in substantially increased capital investments and operating costs.

Our business is subject to numerous federal, state and local laws and regulations pertaining to the protection of the environment that could result in substantially increased capital investments and operating costs. These laws and regulations, which are constantly evolving, are becoming increasingly stringent and the ultimate impact of compliance is not always clearly known or determinable because regulations under some of these laws have not yet been promulgated or are undergoing revision.

Our stock price can be volatile, often in connection with matters beyond our control.

Equity markets in the U.S. have been increasingly volatile in recent years. During fiscal 2011, our common stock traded as high as $15.10 and as low as $8.22. There are numerous factors that could cause the price of our common stock to fluctuate significantly, several of which are beyond our control, including: variations in our quarterly and annual operating results; changes in our business outlook; changes in market valuations of companies in our industry; changes in the expectations for nonresidential and residential construction; and announcements by us, our competitors or industry participants that may be perceived to impact us or our operations.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Insteel’s corporate headquarters and IWP’s sales and administrative offices are located in Mount Airy, North Carolina. At October 1, 2011, we operated nine manufacturing facilities located in Dayton, Texas; Gallatin, Tennessee; Hazleton, Pennsylvania; Hickman, Kentucky; Jacksonville, Florida; Kingman, Arizona; Mount Airy, North Carolina; Sanderson, Florida; and St. Joseph, Missouri.

We own all of our real estate with the exception of a non-operating facility located in Houston, Texas, which is leased from Ivy through November 2011. We believe that our properties are in good operating condition and that our machinery and equipment have been well maintained. We also believe that our manufacturing facilities are suitable for their intended purposes and have capacities adequate for the current and projected needs for our existing products.

Item 3. Legal Proceedings.

On November 19, 2007, Dwyidag Systems International, Inc (“DSI”) filed a third-party lawsuit in the Ohio Court of Claims alleging that certain epoxy-coated strand sold by us to DSI in 2002, and supplied by DSI to the Ohio Department of Transportation (“ODOT”) for a bridge project, was defective. The third-party action sought recovery of any damages which could have been assessed against DSI in the action filed against it by ODOT, which allegedly could have been in excess of $8.3 million, plus $2.7 million in damages allegedly incurred by DSI. In 2009, the Ohio court granted our motion for summary judgment as to the third-party claim against us on the grounds that the statute of limitations had expired, but DSI filed an interlocutory appeal of that ruling. In addition, we previously filed a lawsuit against DSI in the North Carolina Superior Court in Surry County seeking recovery of $1.4 million (plus interest) owed for other products sold by us to DSI, which action was removed by DSI to the U.S. District Court for the Middle District of North Carolina.

On October 7, 2010, we participated in a structured mediation with ODOT and DSI which led to settlement of all of the above legal matters. The parties dismissed the action in the Middle District of North Carolina on December 23, 2010, and the Ohio Court of Claims action was dismissed on January 21, 2011. Pursuant to the settlement agreement, which was approved by the Ohio Court of Claims on January 5, 2011, the parties released each other from all liability arising out of the sale of strand for the bridge project. In connection with the settlement, we reserved the remaining outstanding balance that we were owed by DSI and agreed to make a cash payment of $600,000 to ODOT. During fiscal 2011, we paid the $600,000 settlement to ODOT and wrote off the DSI receivables against the previously established reserve. The resolution of this matter has enabled us to restore our commercial relationship with DSI that had existed prior to the initiation of the legal proceedings. Our fiscal 2010 results reflect a $1.5 million charge relating to the net effect of the settlement.

We are also, from time to time, involved in various other lawsuits, claims, investigations and proceedings, including commercial, environmental and employment matters, which arise in the ordinary course of business. We do not anticipate that the ultimate cost to resolve these other matters will have a material adverse effect on our financial position, results of operations or cash flows.

 

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Item 4. (Removed and Reserved).

PART II

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.

Our common stock is listed on the NASDAQ Global Select Market under the symbol “IIIN” and has been trading on NASDAQ since September 28, 2004. As of November 2, 2011, there were 910 shareholders of record. The following table summarizes the high and low sales prices as reported on the NASDAQ Global Select Market and the cash dividend per share declared in fiscal 2011 and fiscal 2010:

 

     Fiscal 2011      Fiscal 2010
             High                    Low            Cash
    Dividends     
             High                    Low            Cash
    Dividends     

First Quarter

   $12.88    $8.22    $0.03      $13.63    $10.34    $0.03

Second Quarter

     14.42    11.24      0.03        13.36        9.26      0.03

Third Quarter

     15.10    11.58      0.03        13.05      10.55      0.03

Fourth Quarter

     12.62      8.80      0.03        12.29        7.73      0.03

On November 18, 2008, our Board of Directors approved a new share repurchase authorization to buy back up to $25.0 million of our outstanding common stock in the open market or in privately negotiated transactions. 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 may commence or suspend the program at any time at our discretion without prior notice. The share repurchase authorization continues in effect until terminated by the Board of Directors. As of October 1, 2011, there was $24.8 million remaining available for future share repurchases under this authorization. During 2011 and 2010, we repurchased $143,000 or 12,633 shares and $79,000 or 8,486 shares, respectively, of our common stock through restricted stock net-share settlements.

The following table summarizes the repurchases of common stock during the quarter ended October 1, 2011:

 

(In thousands except share and per share amounts)   Total Number of
Shares Purchased
  Average Price
Paid per Share
  Total Number of
Shares Purchased as
Part of Publicly
Announced Plan or
Program
  Maximum Number (or Approximate
Dollar Value) of Shares That May Yet
Be Purchased Under the Plan or
Program
 

 

July 3, 2011 - August 6, 2011

      —       —       —       $24,812(1)

August 7, 2011 - September 3, 2011 (2)

  5,876   $9.58   5,876           24,756(1)

September 4, 2011 - October 1, 2011

      —       —       —           24,756(1)
 

 

   

 

 
  5,876     5,876  
 

 

   

 

 

 

(1) Under the $25.0 million share repurchase authorization announced on November 18, 2008, which continues in effect until terminated by the Board of Directors.

 

(2) Represents 5,876 shares surrendered by employees to satisfy tax withholding obligations upon the vesting of restricted stock awards.

In July 2005, we resumed our quarterly cash dividend of $0.03 per share. On August 12, 2008, our Board of Directors approved a special cash dividend of $0.50 per share that was paid on October 3, 2008. While we intend to pay regular quarterly cash dividends for the foreseeable future, the declaration and payment of future dividends, if any, are discretionary and will be subject to determination by the Board of Directors each quarter after taking into account various factors, including general business conditions and our financial condition, operating results, cash requirements and expansion plans. See Note 7 of the consolidated financial statements for additional discussion with respect to dividend payments.

On April 21, 2009, the Board of Directors adopted Amendment No. 1 to Rights Agreement, effective April 25, 2009, amending the Rights Agreement dated as of April 27, 1999 between us and American Stock Transfer & Trust Company, LLC, successor to First Union National Bank. Amendment No. 1 and the Rights Agreement are hereinafter collectively referred to as the “Rights Agreement.” In connection with adopting the Rights Agreement, on April 26, 1999, the Board of Directors declared a dividend distribution of one right per share of our outstanding common stock as of May 17, 1999. The Rights Agreement also provides that one right will attach to each share of our common stock issued after May 17, 1999. Each right entitles the registered holder to purchase from us on certain dates described in the Rights Agreement one two-hundredths of a share (a “Unit”) of our Series A Junior Participating Preferred Stock at a purchase price of $46 per Unit, subject to adjustment as described in the Rights Agreement. For more information regarding our Rights Agreement, see Note 18 to the consolidated financial statements.

 

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Item 6. Selected Financial Data.

Financial Highlights

(In thousands, except per share amounts)

 

     Year Ended
     (52 weeks)
October 1,
2011
   (52 weeks)
October 2,
2010
   (53 weeks)
    October 3,    
2009
   (52 weeks)
    September 27,    
2008
   (52 weeks)
    September 29,    
2007

Net sales

   $336,909    $211,586    $230,236    $353,862    $297,806

Earnings (loss) from continuing operations

           (387)            458      (20,940)        43,717        24,284

Net earnings (loss)

           (387)            473      (22,086)        43,752        24,162

Earnings (loss) per share from continuing operations (basic)

           (0.02)          0.03          (1.20)          2.47            1.33

Earnings (loss) per share from continuing operations (diluted)

           (0.02)          0.03          (1.20)          2.44            1.32

Net earnings (loss) per share (basic)

           (0.02)          0.03          (1.27)          2.47            1.32

Net earnings (loss) per share (diluted)

           (0.02)          0.03          (1.27)          2.44            1.31

Cash dividends declared

           0.12          0.12          0.12          0.62            0.12

Total assets

     216,530    182,505    182,117    228,220      173,529

Total debt

       14,156            —            —            —                —

Shareholders’ equity

     148,474    147,876    147,070    169,847      143,850

In the first quarter of fiscal 2010, we adopted and retrospectively applied new accounting guidance related to the calculation of earnings per share which resulted in the following reductions in basic and diluted earnings per share:

 

     2009    2008   2007
         Basic            Diluted            Basic           Diluted           Basic           Diluted    

Continuing operations

         $(0.02)   $(0.03)   $(0.01)   $(0.01)

Net earnings

           (0.02)     (0.03)     (0.01)     (0.01)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The matters discussed in this section include forward-looking statements that are subject to numerous risks. You should carefully read the “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” in this Form 10-K.

Overview

Following our exit from the industrial wire business (see Note 10 to the consolidated financial statements), our operations are entirely focused on the manufacture and marketing of concrete reinforcing products for the concrete construction industry. The results of operations for the industrial wire business have been reported as discontinued operations for all periods presented. Our business strategy is focused on: (1) achieving leadership positions in our markets; (2) operating as the lowest cost producer; and (3) pursuing growth opportunities within our core businesses that further our penetration of current markets served or expand our geographic footprint.

On November 19, 2010, we, through our wholly-owned subsidiary, IWP, purchased certain of the assets of Ivy for approximately $50.3 million, after giving effect to post-closing adjustments. Ivy was one of the nation’s largest producers of WWR and wire products for concrete construction applications (see Note 4 to the consolidated financial statements). Among other assets, we acquired Ivy’s production facilities located in Arizona, Florida, Missouri and Pennsylvania; the production equipment located at a leased facility in Texas; and certain related inventories. We also entered into a short-term sublease with Ivy for the Texas facility. Subsequent to the acquisition, we elected to consolidate certain of our WWR operations in order to reduce our operating costs, which involved the closure of facilities in Wilmington, Delaware and Houston, Texas. These actions were taken in response to the close proximity of Ivy’s facilities in Hazleton, Pennsylvania and Houston, Texas to our existing facilities in Wilmington, Delaware and Dayton, Texas.

Critical Accounting Policies

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). Our discussion and analysis of our financial condition and results of operations are based on these financial statements. The preparation of our financial statements requires the application of these accounting principles in addition to certain estimates and judgments based on current available information, actuarial estimates, historical results and other assumptions believed to be reasonable. Actual results could differ from these estimates.

Following is a discussion of our most critical accounting policies, which are those that are both important to the depiction of our financial condition and results of operations and that require judgments, assumptions and estimates.

 

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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 recorded on a net basis and as such, are excluded from revenue.

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 concentrated primarily 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 that bear minimal risk.

Most of our accounts receivable are due from customers that are located in the U.S. and we generally require no 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. There is no disproportionate concentration of credit risk.

Allowance for doubtful accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the potential inability of our customers to make required payments on outstanding balances owed to us. Significant management judgments and estimates are used in establishing the allowances. These judgments and estimates consider such factors as customers’ financial position, cash flows and payment history as well as current and expected business conditions. It is reasonably likely that actual collections will differ from our estimates, which may result in increases or decreases in the allowances. Adjustments to the allowances may also be required if there are significant changes in the financial condition of our customers.

Inventory valuation. We periodically evaluate the carrying value of our inventory. This evaluation includes assessing the adequacy of allowances to cover losses in the normal course of operations, providing for excess and obsolete inventory, and ensuring that inventory is valued at the lower of cost or estimated net realizable value. Our evaluation considers such factors as the cost of inventory, future demand, our historical experience and market conditions. In assessing the realization of inventory values, we are required to make judgments and estimates regarding future market conditions. Because of the subjective nature of these judgments and estimates, it is reasonably likely that actual outcomes will differ from our estimates. Adjustments to these reserves may be required if actual market conditions for our products are substantially different than the assumptions underlying our estimates.

Long-lived assets. We review long-lived assets, which consist principally of property, plant and equipment, for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be fully recoverable. Recoverability of long-lived assets to be held and used is measured based on the future net undiscounted cash flows expected to be generated by the related asset or asset group. If it is determined that an impairment loss has been incurred, the impairment loss is recognized during the period incurred and is calculated based on the difference between the carrying value and the present value of estimated future net cash flows or comparable market values. Assets to be disposed of by sale are recorded at the lower of the carrying value or fair value less cost to sell when we have committed to a disposal plan, and are reported separately as assets held for sale on our consolidated balance sheet. Unforeseen events and changes in circumstances and market conditions could negatively affect the value of assets and result in an impairment charge.

Self-insurance. We are self-insured for certain losses relating to medical and workers’ compensation claims. Self-insurance claims filed and claims incurred but not reported are accrued based upon management’s estimates of the discounted ultimate cost for uninsured claims incurred using actuarial assumptions followed by the insurance industry and historical experience. These estimates are subject to a high degree of variability based upon future inflation rates, litigation trends, changes in benefit levels and claim settlement patterns. Because of uncertainties related to these factors as well as the possibility of changes in the underlying facts and circumstances, future adjustments to these reserves may be required.

Litigation. From time to time, we may be involved in claims, lawsuits and other proceedings. Such matters involve uncertainty as to the eventual outcomes and the potential losses that we may ultimately incur. We record expenses for litigation when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We estimate the probability of such losses based on the advice of legal counsel, the outcome of similar litigation, the status of the lawsuits and other factors. Due to the numerous factors that enter into these judgments and assumptions, it is reasonably likely that actual outcomes will differ from our estimates. We monitor our potential exposure to these contingencies on a regular basis and may adjust our estimates as additional information becomes available or as there are significant developments.

Stock-based compensation. We account for stock-based compensation arrangements, including stock option grants, restricted stock awards and restricted stock units, in accordance with the provisions of Financial Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, Compensation — Stock Compensation. Under these provisions, compensation cost is recognized based on the fair value of equity awards on the date of grant. The compensation cost is then amortized on a straight-line basis over the vesting period. We use the Monte Carlo valuation model to determine the fair value of stock options at the date of grant. This model requires us to make assumptions such as expected term, volatility and forfeiture

 

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rates that determine the stock options’ fair value. These key assumptions are based on historical information and judgment regarding market factors and trends. If actual results differ from our assumptions and judgments used in estimating these factors, future adjustments to compensation expense may be required.

Assumptions for employee benefit plans. We account for our defined employee benefit plans, the Insteel Wire Products Company Retirement Income Plan for Hourly Employees, Wilmington, Delaware (the “Delaware Plan”) and the supplemental employee retirement plans (each, a “SERP”) in accordance with FASB ASC Topic 715, Compensation — Retirement Benefits. Under the provisions of ASC Topic 715, we recognize net periodic pension costs and value pension assets or liabilities based on certain actuarial assumptions, principally the assumed discount rate and the assumed long-term rate of return on plan assets.

The discount rates we utilize for determining net periodic pension costs and the related benefit obligations for our plans are 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 rates are 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. The discount rate for the Delaware Plan and SERPs was 4.75%, 5.25% and 5.50% for 2011, 2010 and 2009, respectively.

The assumed long-term rate of return on plan assets for the Delaware Plan represents the estimated average rate of return expected to be earned on the funds invested or to be invested in the plan’s assets to fund the benefit payments inherent in the projected benefit obligations. Unlike the discount rate, which is adjusted each year based on changes in current long-term interest rates, the assumed long-term rate of return on plan assets will not necessarily change based upon the actual short-term performance of the plan assets in any given year. The amount of net periodic pension cost that is recorded each year is based on the assumed long-term rate of return on plan assets for the plan and the actual fair value of the plan assets as of the beginning of the year. We regularly review our actual asset allocation and, when appropriate, rebalance the investments in the plan to more accurately reflect the targeted allocation.

For 2011, 2010 and 2009, the assumed long-term rate of return utilized for plan assets of the Delaware Plan was 8%. We currently expect to use the same assumed rate for the long-term return on plan assets in 2012. In determining the appropriateness of this assumption, we considered the historical rate of return of the plan assets, the current and projected asset mix, our investment objectives and information provided by our third-party investment advisors.

The projected benefit obligations and net periodic pension cost for the SERPs 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 management’s intentions regarding future compensation increases, which generally approximates average long-term inflation rates.

Assumed discount rates and rates of return on plan assets are reevaluated annually. Changes in these assumptions can result in the recognition of materially different pension costs over different periods and materially different asset and liability amounts in our consolidated financial statements. 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. In addition, an actual return on plan assets for a given year that is greater than the assumed return on plan assets results in an actuarial gain, while an actual return on plan assets that is less than the assumed return results in an actuarial loss. Other actual outcomes that differ from previous assumptions, such as individuals living longer or shorter lives than assumed in the mortality tables that are also used to determine the actuarially-determined present value of estimated future benefit payments, changes in such mortality tables themselves or plan amendments will also result in actuarial losses or gains. Under GAAP, actuarial gains and losses are deferred and amortized into income over future periods based upon the expected average remaining service life of the active plan participants (for plans for which benefits are still being earned by active employees) or the average remaining life expectancy of the inactive participants (for plans for which benefits are not still being earned by active employees). 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 amounts recognized as net periodic pension cost and as pension assets or liabilities are based upon the actuarial assumptions discussed above. We believe that all of the actuarial assumptions used for determining the net periodic pension costs and pension assets or liabilities related to the Delaware Plan are reasonable and appropriate. The funding requirements for the Delaware Plan are based upon applicable regulations, and will generally differ from the amount of pension cost recognized under ASC Topic 715 for financial reporting purposes. During 2011, we made contributions totaling $478,000 to the Delaware Plan. No contributions were required to be made to the Delaware Plan during 2010 and 2009.

We currently expect net periodic pension costs for 2012 to be $772,000 for the Delaware Plan and $68,000 for the SERPs. Cash contributions to the plans during 2012 are expected to be $265,000 for the Delaware Plan and $244,000 for the SERPs.

 

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A 0.25% decrease in the assumed discount rate for the Delaware Plan would have increased our projected and accumulated benefit obligations as of October 1, 2011 by approximately $82,000 and have no impact to the expected net periodic pension cost for 2012. A 0.25% decrease in the assumed discount rate for our SERPs would have increased our projected and accumulated benefit obligations as of October 1, 2011 by approximately $209,000 and $163,000, respectively, and increased the net periodic pension cost for 2012 by approximately $19,000.

A 0.25% decrease in the assumed long-term rate of return on plan assets for the Delaware Plan would have increased the expected net periodic pension cost for 2012 by approximately $4,000.

Recent Accounting Pronouncements.

Current Adoptions

In December 2010, the FASB issued an update that clarifies the guidance provided in ASC Topic 805, Business Combinations, regarding the disclosure requirements for the pro forma presentation of revenue and earnings related to a business combination. We elected to early adopt this guidance during the first quarter of fiscal 2011.

Future Adoptions

In June 2011, the FASB issued an update that amends the guidance provided in ASC Topic 220, Comprehensive Income, by requiring that all nonowner changes in shareholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This update becomes effective in the first quarter of fiscal 2013.

In May 2011, the FASB issued an update that amends the guidance provided in ASC Topic 820, Fair Value Measurement, by clarifying some existing concepts, eliminating wording differences between GAAP and International Financial Reporting Standards (“IFRS”), and in some limited cases, changing some principles to achieve convergence between GAAP and IFRS. The update results in a consistent definition of fair value, establishes common requirements for the measurement of and disclosure about fair value between GAAP and IFRS, and expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This update becomes effective in the second quarter of fiscal 2012. We do not expect the adoption of this update to have a material impact on our consolidated financial statements.

Results of Operations

Statements of Operations — Selected Data

(Dollars in thousands)

 

     Year Ended  
     October 1,
    2011    
         Change          October 2,
    2010    
         Change          October 3,
    2009    
 

Net sales

   $ 336,909              59.2%         $ 211,586              (8.1%)         $ 230,236        

Gross profit (loss)

     31,743              76.4%           17,991              N/M               (15,093)       

Percentage of net sales

     9.4%              8.5%              (6.6%)     

Selling, general and administrative expense

   $ 19,608              22.4%         $ 16,024              (7.1%)         $ 17,243        

Percentage of net sales

     5.8%              7.6%              7.5%     

Other income, net

   $ (222)             N/M             $ (291)             N/M             $ (135)       

Restructuring charges, net

     8,318              N/M               —               N/M               —         

Acquisition costs

     3,518              N/M               —               N/M               —         

Bargain purchase gain

     (500)             N/M               —               N/M               —         

Legal settlement

     —               (100.0%)           1,487              N/M               —         

Interest expense

     958              111.5%           453              (29.3%)           641        

Interest income

     (38)             (62.7%)           (102)             (29.2%)           (144)       

Effective income tax rate

     N/M                  N/M                  36.0%     

Earnings (loss) from continuing operations

   $ (387)             N/M             $ 458              N/M             $ (20,940)       

Earnings (loss) from discontinued operations

     —               N/M               15              N/M               (1,146)       

Net earnings (loss)

     (387)             N/M               473              N/M               (22,086)       

“N/M” = not meaningful

              

2011 Compared with 2010

Net Sales

Net sales increased 59.2% to $336.9 million in 2011 from $211.6 million in 2010. Shipments for the year increased 33.7% and average selling prices increased 17.7% from the prior year levels. The increase in shipments was primarily due to the addition of the Ivy facilities in the current year. The increase in average selling prices was driven by price increases that were implemented during the current year to recover higher raw material costs. Sales for both years reflect severely depressed volumes due to the continuation of recessionary conditions in our construction end-markets.

 

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Gross Profit

Gross profit for 2011 was $31.7 million, or 9.4% of net sales, compared to $18.0 million, or 8.5% of net sales, in 2010. The year-over-year improvement was primarily due to the addition of the Ivy facilities in the current year. Gross profit for the current year benefited from higher spreads between selling prices and raw material costs partially offset by the sale of the higher cost inventory acquired from Ivy that was valued at fair value in accordance with purchase accounting requirements. Gross profit for the prior year includes a $1.9 million charge for inventory write-downs to reduce the carrying value of inventory to the lower of cost or market. Gross profit for both years was unfavorably impacted by depressed shipment volumes and elevated unit conversion costs resulting from reduced operating schedules.

Selling, General and Administrative Expense

Selling, general and administrative expense (“SG&A expense”) increased 22.4% to $19.6 million, or 5.8% of net sales in 2011 from $16.0 million, or 7.6% of net sales in 2010 primarily due to staffing additions ($1.3 million) and other transition-related costs ($151,000) largely related to the Ivy Acquisition, the relative year-over-year changes in the cash surrender value of life insurance policies ($595,000) and increases in stock-based compensation ($638,000), employee benefit costs ($312,000), travel expense ($239,000) and professional services costs ($167,000). The cash surrender of life insurance policies decreased $265,000 in the current year compared with an increase of $330,000 in the prior year due to the related changes in the value of the underlying investments. The increase in stock-based compensation expense was largely due to the full vesting of awards for plan participants that became retirement eligible in the current year. The increase in employee benefit costs was primarily related to higher employee medical expense during the current year. These increases in SG&A expense were partially offset by a net gain on the settlement of life insurance policies ($357,000) and a reduction in legal expenses ($393,000) primarily due to the prior year costs associated with the PC strand trade cases.

Restructuring Charges, Net

Net restructuring charges of $8.3 million were recorded in 2011, including $3.8 million for impairment charges related to plant closures and the decommissioning of equipment, $2.3 million for employee separation costs associated with plant closures and other staffing reductions, $1.2 million for equipment relocation costs, $533,000 for the future lease obligations associated with the closed Houston, Texas facility and $464,000 for facility closure costs. The plant closure costs were incurred in connection with the consolidation of our Texas and Northeast operations, which involved the closure of facilities in Houston, Texas and Wilmington, Delaware, and the absorption of the business by other Insteel facilities. The plant closure costs are net of a $1.6 million gain on the sale of the Wilmington, Delaware facility. The employee separation costs were related to the staffing reductions that were implemented across our sales, administration and manufacturing support functions to address the redundancies resulting from the Ivy Acquisition and in connection with the plant closures. The Company currently expects the remainder of the restructuring activities to be completed by the end of the first quarter of fiscal 2012.

Acquisition Costs

Acquisition costs of $3.5 million were incurred in 2011 for the advisory, accounting, legal and other professional fees directly related to the Ivy Acquisition. The accounting requirements for business combinations require the expensing of acquisition costs in the period in which they are incurred. We do not expect to incur any additional acquisition costs related to the Ivy Acquisition.

Bargain Purchase Gain

A bargain purchase gain of $500,000 was recorded in 2011 based on the excess of the fair value of the net assets acquired in the Ivy Acquisition over the purchase price.

Interest Expense

Interest expense for 2011 increased $505,000 or 111.5% to $958,000 from $453,000 in 2010 primarily due to the interest on the secured subordinated promissory note associated with the Ivy Acquisition, which was partially offset by lower amortization of capitalized financing costs.

 

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Income Taxes

Our effective income tax rate on continuing operations for 2011 was distorted by the impact of changes in permanent book versus tax differences largely related to non-deductible stock-based compensation expense and the establishment of a valuation allowance against certain state net operating losses and tax credits that we do not expect to realize. The effective income tax rate for the prior year was (9.0%) which reflects the favorable impact of a $500,000 increase in a tax refund as the result of changes in the federal tax regulations regarding the carryback of net operating losses partially offset by $200,000 of net reserves recorded pertaining to known tax exposures in accordance with ASC 740 together with changes in permanent book versus tax differences largely related to lower non-deductible life insurance expense.

Earnings (Loss) From Continuing Operations

The loss from continuing operations for 2011 was $387,000 ($0.02 per share) compared with earnings of $458,000 ($0.03 per share) in 2010 with the year-over-year change primarily due to the restructuring charges and acquisition costs incurred in connection with the Ivy Acquisition and higher SG&A expense partially offset by the increase in gross profit and the bargain purchase gain.

Earnings From Discontinued Operations

Earnings from discontinued operations were $15,000 in the prior year, which had no effect on earnings per share, and were primarily related to the gain on the sale of the real estate associated with the industrial wire business partially offset by facility-related costs incurred prior to the sale and income tax expense.

Net Earnings (Loss)

The net loss for 2011 was $387,000 ($0.02 per share) compared with earnings of $473,000 ($0.03 per share) in 2010 with the year-over-year change primarily due to the restructuring charges and acquisition costs incurred in connection with the Ivy Acquisition and higher SG&A expense partially offset by the increase in gross profit and the bargain purchase gain.

2010 Compared with 2009

Net Sales

Net sales decreased 8.1% to $211.6 million in 2010 from $230.2 million in 2009. Shipments for the year increased 5.6% while average selling prices declined 12.9% from the prior year levels. The increase in shipments during 2010 was primarily driven by customer inventory restocking together with the favorable effect of the PC strand trade cases against China, which partially offset the negative effect of the reduced level of construction activity. The year-over-year increase in shipments was relative to severely depressed volumes in the prior year resulting from the recessionary conditions in the economy, reduced level of construction activity and inventory destocking measures that were pursued by our customers. The decrease in average selling prices was due to lower raw material costs and competitive pricing pressures resulting from the weak market environment.

Gross Profit (Loss)

Gross profit for 2010 was $18.0 million, or 8.5% of net sales compared to a gross loss of $15.1 million, or (6.6%) of net sales in 2009. Gross profit (loss) includes charges of $2.3 million in 2010 and $25.9 million in 2009 for inventory write-downs to reduce the carrying value of inventory to the lower of cost or market resulting from declining selling prices for certain products relative to higher raw material costs under the first–in, first-out (“FIFO”) method of accounting. Gross profit (loss) for both years was unfavorably impacted by depressed shipment volumes, compressed spreads between average selling prices and raw material costs, and elevated unit conversion costs resulting from reduced operating schedules. The year-over-year improvement was primarily due to lower inventory write-downs in 2010, higher shipments and spreads between average selling prices and raw material costs, and lower unit conversion costs resulting from higher production volumes.

Selling, General and Administrative Expense

Selling, general and administrative expense (“SG&A expense”) decreased 7.1% to $16.0 million, or 7.6% of net sales in 2010 from $17.2 million, or 7.5% of net sales in 2009. The decrease was primarily due to increases in the cash surrender value of life insurance policies ($557,000) together with reductions in consulting expense ($207,000), employee benefit costs ($172,000), bad debt expense ($154,000), payroll taxes ($115,000), and labor expense ($102,000). The cash surrender value of life insurance polices increased $330,000 during 2010 compared with a decrease of $227,000 in the prior year due to the related changes in value of the underlying investments. The decreases in consulting and labor expense were primarily due to the implementation of various cost reduction measures. The reduction in employee benefit costs was primarily due to lower employee medical expense during 2010. The decrease in payroll taxes was due to the taxes incurred associated with the payment of the fiscal 2008 employee incentive plan bonuses during the prior year. These reductions were partially offset by higher stock-based compensation expense ($222,000) in 2010.

 

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Legal Settlement

In 2010, we recorded a $1.5 million charge in connection with the settlement of litigation with a customer. The charge included the write-off of the remaining outstanding balance that was owed to us by the customer and certain cash payments.

Interest Expense

Interest expense for 2010 decreased $188,000, or 29.3%, to $453,000 from $641,000 in 2009 primarily due to prior year borrowings on our revolver and lower amortization of capitalized financing costs in 2010.

Interest Income

Interest income for 2010 decreased $42,000, or 29.2%, to $102,000 from $144,000 in 2009 primarily due to lower rates of return on cash investments in 2010.

Income Taxes

Our effective income tax rate on continuing operations decreased to (9.0%) in 2010 from 36.0% in 2009 primarily due to changes in the federal tax regulations regarding the carry-back of net operating losses, which increased the anticipated tax refund related to the prior year loss by $500,000. The favorable impact from the increase in the tax refund was partially offset by $200,000 of net reserves that were recorded pertaining to known tax exposures in accordance with ASC 740 together with changes in permanent book versus tax differences.

Earnings (Loss) From Continuing Operations

Earnings from continuing operations for 2010 were $458,000 ($0.03 per diluted share) compared with a loss from continuing operations of $20.9 million ($1.20 per share) in 2009 due to the increase in gross profit and decrease in SG&A expense, which was partially offset by the litigation settlement in 2010.

Earnings (Loss) From Discontinued Operations

Earnings from discontinued operations for 2010 were $15,000, which had no effect on earnings per share compared with a loss of $1.1 million ($0.07 per share) in 2009. The earnings for 2010 were primarily due to the gain on the sale of the real estate associated with the industrial wire business, which was partially offset by facility-related costs that were incurred prior to the sale together with income tax expense. The prior year loss was primarily due to a $1.8 million impairment charge to write down the carrying value of the real estate that was subsequently sold in 2010.

Net Earnings (Loss)

Net earnings for 2010 were $473,000 ($0.03 per diluted share) compared to a net loss of $22.1 million ($1.27 per share) in 2009 primarily due to the increase in gross profit and decrease in SG&A expense, which was partially offset by the $1.5 million litigation settlement in 2010.

 

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Liquidity and Capital Resources

Selected Financial Data

(Dollars in thousands)

 

     Year Ended  
             October 1,         
2011
         October 2,    
2010
         October 3,    
2009
 

Net cash provided by (used for) operating activities of continuing operations

     $  (2,907)             $  13,037              $  22,092        

Net cash used for investing activities of continuing operations

     (41,389)             (1,938)             (2,166)       

Net cash used for financing activities of continuing operations

     (1,629)             (2,466)             (11,347)       

Net cash provided by (used for) operating activities of discontinued operations

     —               (158)             30         

Net cash provided by investing activities of discontinued operations

     —               2,358              —         

Cash and cash equivalents

     10               45,935               35,102         

Working capital

     75,789               91,927               82,252         

Total debt

     14,156               —               —         

Percentage of total capital

     9%           —               —         

Shareholders’ equity

     $148,474               $147,876               $147,070         

Percentage of total capital

     91%           100%           100%     

Total capital (total debt + shareholders’ equity)

     $162,630               $147,876               $147,070         

Cash Flow Analysis

Operating activities of continuing operations used $2.9 million of cash during 2011 while providing $13.0 million in 2010 and $22.1 million in 2009. The year-over-year change in 2011 was primarily due to the prior year receipt of a $13.3 million income tax refund associated with the carryback of net operating losses and the $2.5 million increase in the cash used by the net working capital components of accounts receivable, inventories, and accounts payable and accrued expenses. Depreciation and amortization expense increased $2.6 million in 2011 from the prior year largely due to the assets acquired in the Ivy Acquisition. The current year loss includes a $3.8 million asset impairment charge related to restructuring activities and the prior year earnings include a $2.3 million charge for inventory write-downs. Net working capital used $16.4 million of cash in the current year and $13.9 million in 2010. The cash used by working capital in 2011 was due to a $17.0 million increase in accounts receivable that resulted from the increased sales associated with the Ivy Acquisition and higher selling prices, and the $11.9 million increase in inventory due to higher raw material purchases and unit costs, which were partially offset by the $12.4 million increase in accounts payable and accrued expenses also related to the increases in raw material purchases and unit costs. Net working capital used $13.9 million of cash in 2010 while providing $20.3 million in 2009. The cash used by net working capital in 2010 was due to the $7.7 million increase in inventories (excluding the impact of the inventory write-downs) as a result of higher raw material costs, a $3.7 million increase in accounts receivable resulting from higher current year shipments together with a $2.5 million decrease in accounts payable and accrued expenses due to changes in the mix of vendor payments. The cash provided by working capital in 2009 was due to the $28.3 million decrease in accounts receivable resulting from reductions in shipments and selling prices, and the $6.7 million decrease in inventories (excluding the impact of the inventory write-downs) resulting from our inventory reduction initiatives. These decreases were partially offset by the $14.8 million decrease in accounts payable and accrued expenses that was primarily due to the payment of $10.9 million of accrued income taxes payable, and lower raw material purchases. We may elect to make additional adjustments in our operating activities should the current recessionary conditions in our construction end markets persist, which could materially impact our cash requirements. While a downtown in the level of construction activity affects sales to our customers, it generally reduces our working capital requirements

Investing activities of continuing operations used $41.4 million of cash during 2011 compared to $1.9 million during 2010 and $2.2 million during 2009. The increase in cash used in the current year was primarily related to the Ivy Acquisition. Capital expenditures amounted to $7.9 million, $1.5 million and $2.4 million in 2011, 2010 and 2009, respectively, and are expected to total less than $10 million for fiscal 2012. Current year investing activities also include $2.4 million of proceeds from the sale of the Wilmington, Delaware facility and $1.1 million of proceeds from life insurance claims. Investing activities of discontinued operations provided $2.4 million of cash during 2010 due to the proceeds received from the sale of the real estate associated with our discontinued industrial wire business. Our investing activities are largely discretionary, which gives us the ability to significantly curtail outlays should future business conditions warrant that such actions be taken.

Financing activities used $1.6 million of cash during 2011 compared to $2.5 million and $11.3 million during 2010 and 2009, respectively. During the current year, $2.1 million of cash dividends were paid compared to $2.1 million and $11.4 million during 2010 and 2009, respectively. Prior year financing activities also include $409,000 of financing costs that were incurred in connection with the amendment of our credit facility.

Cash Management

Our cash is concentrated primarily at one financial institution, which at times exceeds federally insured limits. We invest excess cash primarily in money market funds, which are highly liquid securities that bear minimal risk.

 

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Credit Facility

We have a $75.0 million revolving credit facility in place, which matures in June 2015 and supplements our operating cash flow in funding our working capital, capital expenditure and general corporate requirements. As of October 1, 2011, $656,000 was outstanding on the revolving credit facility, $73.2 million of additional borrowing capacity was available and outstanding letters of credit totaled $1.1 million (see Note 7 to the consolidated financial statements). During the year, ordinary course borrowings on our revolving credit facility were as high as $8.8 million. As of October 2, 2010, no borrowings were outstanding on the credit facility, $49.6 million of borrowing capacity was available and outstanding letters of credit totaled $919,000.

As part of the consideration for purchasing certain assets of Ivy on November 19, 2010 (See Note 4 to the consolidated financial statements), we entered into a $13.5 million secured subordinated promissory note (the “Note”) payable to Ivy over five years. The Note requires semi-annual interest payments in arrears, and annual principal payments payable on November 19 of each year during the period 2011 - 2015. The Note bears interest on the unpaid principal balance at a fixed rate of 6.0% per annum and is collateralized by certain of the real property and equipment acquired from Ivy. Based on the terms of the Note, we expect to make cash payments of approximately $775,000 for interest and a principal payment of $675,000 during fiscal 2012.

We believe that, in the absence of significant unanticipated cash demands, cash generated by operating activities will be sufficient to satisfy our expected requirements for working capital, capital expenditures, dividends, principal and interest payments on the Note and share repurchases, if any. We also expect to have access to the amounts available under our revolving credit facility. However, further deterioration of market conditions in the construction sector could result in additional reductions in demand from our customers, which would likely reduce our operating cash flows. Under such circumstances, we may need to curtail capital and operating expenditures, delay or restrict share repurchases, cease dividend payments and/or realign our working capital requirements.

Should we determine, at any time, that we require additional short-term liquidity, we would evaluate the alternative sources of financing that are potentially available to provide such funding. There can be no assurance that any such financing, if pursued, would be obtained, or if obtained, would be adequate or on terms acceptable to us. However, we believe that our strong balance sheet, flexible capital structure and borrowing capacity available to us under our revolving credit facility position us to meet our anticipated liquidity requirements for the foreseeable future.

Impact of Inflation

We are subject to inflationary risks arising from fluctuations in the market prices for our primary raw material, hot-rolled steel wire rod, and, to a much lesser extent, freight, energy and other consumables that are used in our manufacturing processes. We have generally been able to adjust our selling prices to pass through increases in these costs or offset them through various cost reduction and productivity improvement initiatives. However, our ability to raise our selling prices depends on market conditions and competitive dynamics, and there may be periods during which we are unable to fully recover increases in our costs. During 2009, selling prices for our products declined dramatically in response to softening demand and the inventory destocking measures pursued by our customers, which negatively impacted our financial results as we consumed higher cost inventory that was purchased prior to the collapse in steel prices. During 2010 and 2011, wire rod prices have risen due to the escalation in the cost of scrap and other raw materials for wire rod producers and increased demand from non-construction applications. Our ability to fully recover higher wire rod prices during this period has been mitigated by competitive pricing pressures resulting from the ongoing weakness in our construction end-markets. The timing and magnitude of any future increases in the prices for wire rod and the impact on selling prices for our products is uncertain at this time.

Off-Balance Sheet Arrangements

We do not have any material transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons, as defined by Item 303(a)(4) of Regulation S-K of the SEC, that have or are reasonably likely to have a material current or future impact on our financial condition, results of operations, liquidity, capital expenditures, capital resources or significant components of revenues or expenses.

Contractual Obligations

Our contractual obligations and commitments at October 1, 2011 are as follows:

 

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Payments Due by Period

(In thousands)

 

$83,056 $83,056 $83,056 $83,056 $83,056
     Total      Less Than
1 Year
     1 - 3 Years      3 – 5 Years      More Than
5 Years
 

Contractual obligations:

              

Raw material purchase commitments(1)

   $ 36,183       $ 36,183       $       $       $   

Supplemental employee retirement plan obligations

     17,923         244         487         536         16,656   

Note payable (principal and interest)

     16,807         1,468         4,161         11,178           

Pension benefit obligations

     5,660         192         473         391         4,604   

Operating leases

     1,632         618         537         134         343   

Commitment fee on unused portion of credit facility

     1,487         397         794         296           

Trade letters of credit

     1,093         1,093                           

Borrowings on revolving credit facility

     656                         656           

Unrecognized tax benefit obligations

     67         33         34         

Other unconditional purchase obligations(2)

     1,548         1,548                           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 83,056       $ 41,776       $ 6,486       $ 13,191       $ 21,603   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

(1)

Non-cancelable purchase commitments for raw materials.

(2)

Contractual commitments for capital expenditures.

Outlook

As we look ahead to 2012, our visibility remains limited due to the continued uncertainty regarding the prospects for a recovery in the economy and employment market, the availability of financing in the credit markets and the duration and magnitude of the next federal transportation funding authorization. Conditions in our construction end-markets appear to have stabilized in recent months following the steep decline in demand that we have experienced in recent years. However, we have yet to see any signs of a pronounced recovery taking hold in our markets and believe that construction activity is likely to continue trending at depressed levels during the year.

In spite of the ongoing weakness in market conditions, prices for our primary raw material, hot-rolled steel wire rod, have risen through most of 2011 driven by the sharp escalation in the cost of scrap and other raw materials for steel producers. Our ability to recover additional increases in these costs in our markets and the net impact on margins is uncertain at this time.

In response to the challenges facing us, we will continue to focus on the operational fundamentals of our business: closely managing and controlling our expenses; aligning our production schedules with demand in a proactive manner as there are changes in market conditions to minimize our cash operating costs; and pursuing further improvements in the productivity and effectiveness of all of our manufacturing, selling and administrative activities. We expect the contributions from the Ivy Acquisition to increase during the year through the realization of the remainder of the anticipated operational synergies and the completion of the reconfiguration of our combined WWR operations. As market conditions improve, we also expect gradually increasing contributions from the substantial investments we have made in our facilities in the form of reduced operating costs and additional capacity to support future growth (see “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors”). In addition, we will continue to evaluate further potential acquisitions in our existing businesses that expand our penetration of markets we currently serve or expand our geographic footprint.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Our cash flows and earnings are subject to fluctuations resulting from changes in commodity prices, interest rates and foreign exchange rates. We manage our exposure to these market risks through internally established policies and procedures and, when deemed appropriate, through the use of derivative financial instruments. We do not use financial instruments for trading purposes and we are not a party to any leveraged derivatives. We monitor our underlying market risk exposures on an ongoing basis and believe that we can modify or adapt our hedging strategies as necessary.

Commodity Prices

We are subject to significant fluctuations in the cost and availability of our primary raw material, hot-rolled steel wire rod, which we purchase from both domestic and foreign suppliers. We negotiate quantities and pricing for both domestic and foreign steel wire rod purchases for varying periods (most recently monthly for domestic suppliers), depending upon market conditions, to manage our exposure to price fluctuations and to ensure adequate availability of material consistent with our requirements. We do not use derivative commodity instruments to hedge our exposure to changes in prices as such instruments are not currently available for steel wire rod. Our ability to acquire steel wire rod from foreign sources on favorable terms is impacted by fluctuations in foreign currency exchange rates, foreign taxes, duties, tariffs and other trade actions. Although changes in wire rod costs and our selling prices may be correlated over extended periods of time, depending upon market

 

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conditions and competitive dynamics, there may be periods during which we are unable to fully recover increased wire rod costs through higher selling prices, which would reduce our gross profit and cash flow from operations. Additionally, should wire rod costs decline, our financial results may be negatively impacted if the selling prices for our products decrease to an even greater degree and to the extent that we are consuming higher cost material from inventory. Based on our 2011 shipments and average wire rod cost reflected in cost of sales, a 10% increase in the price of steel wire rod would have resulted in a $22.7 million decrease in our annual pre-tax earnings (assuming there was not a corresponding change in our selling prices).

Interest Rates

Borrowings under our revolving credit facility are subject to a variable rate of interest and sensitive to changes in interest rates while the interest rate on our Note is fixed. However, unless our borrowings were to materially increase, we do not expect that changes in interest rates would have a material impact on our results of operations or cash flows as the outstanding balance on the credit facility was $656,000 as of October 1, 2011.

Foreign Exchange Exposure

We have not typically hedged foreign currency exposures related to transactions denominated in currencies other than U.S. dollars, as such transactions have not been material historically. We will occasionally hedge firm commitments for certain equipment purchases that are denominated in foreign currencies. The decision to hedge any such transactions is made by us on a case-by-case basis. There were no forward contracts outstanding as of October 1, 2011. During fiscal 2011, a 10% increase or decrease in the value of the U.S. dollar relative to foreign currencies to which we are typically exposed would not have had a material impact on our financial position, results of operations or cash flows.

Item 8. Financial Statements and Supplementary Data.

(a) Financial Statements

 

Consolidated Statements of Operations for the years ended October 1, 2011, October  2, 2010 and October 3, 2009

     24   

Consolidated Balance Sheets as of October 1, 2011 and October 2, 2010

     25   

Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss) for the years ended October 1, 2011, October 2, 2010 and October 3, 2009

     26   

Consolidated Statements of Cash Flows for the years ended October 1, 2011, October  2, 2010 and October 3, 2009

     27   

Notes to Consolidated Financial Statements

     28   

Report of Independent Registered Public Accounting Firm — Consolidated Financial Statements

     50   

Schedule II – Valuation and Qualifying Accounts for the years ended October 1, 2011,  October 2, 2010 and October 3, 2009

     51   

Report of Independent Registered Public Accounting Firm — Internal Control Over Financial Reporting

     53   

 

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(b) Supplementary Data

Selected quarterly financial data for 2011 and 2010 is as follows:

Financial Information by Quarter (Unaudited)

(In thousands, except for per share and price data)

 

     Quarter Ended
         January 1           April 2           July 2           October 1    

2011

        

Operating Results

        

Net sales

   $52,306   $86,933   $98,579   $99,091

Gross profit (loss)

         (135)     11,603     12,529       7,746

Earnings (loss) from continuing operations

       (7,628)       2,619       3,650          972

Net earnings (loss)

       (7,628)       2,619       3,650          972

Per share data:

        

Basic:

        

Earnings (loss) from continuing operations

         (0.44)        0.15         0.21        0.06

Net earnings (loss)

         (0.44)        0.15         0.21        0.06

Diluted:

        

Earnings (loss) from continuing operations

         (0.44)        0.15         0.20        0.05

Net earnings (loss)

         (0.44)        0.15         0.20        0.05
     Quarter Ended
         January 2           April 3           July 3           October 2    

2010

        

Operating Results

        

Net sales

   $41,201   $52,268   $61,956   $56,161

Gross profit

       1,742       6,219       7,690       2,340

Earnings (loss) from continuing operations

      (1,123)       1,644       1,624      (1,687)

Earnings (loss) from discontinued operations

           (13)            (10)            (19)           57

Net earnings (loss)

       (1,136)       1,634       1,605     (1,630)

Per share data:

        

Basic:

        

Earnings (loss) from continuing operations

         (0.07)         0.09       0.09        (0.09)

Earnings (loss) from discontinued operations

             —           —         —             —

Net earnings (loss)

         (0.07)         0.09       0.09         (0.09)

Diluted:

        

Earnings (loss) from continuing operations

         (0.07)         0.09     0.09         (0.09)

Earnings (loss) from discontinued operations

             —           —         —             —

Net earnings (loss)

         (0.07)         0.09       0.09         (0.09)

 

 

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INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except for per share amounts)

 

     Year Ended  
     October 1,
2011
    October 2,
2010
    October 3,
2009
 

Net sales

   $ 336,909      $ 211,586      $ 230,236   

Cost of sales

     305,166        191,262        219,388   

Inventory write-downs

            2,333        25,941   
  

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     31,743        17,991        (15,093

Selling, general and administrative expense

     19,608        16,024        17,243   

Restructuring charges, net

     8,318                 

Acquisition costs

     3,518                 

Bargain purchase gain

     (500              

Other income, net

     (222     (291     (135

Legal settlement

            1,487          

Interest expense

     958        453        641   

Interest income

     (38     (102     (144
  

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations before income taxes

     101        420        (32,698

Income taxes

     488        (38     (11,758
  

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations

     (387     458        (20,940

Earnings (loss) from discontinued operations net of of income taxes of $- , $217 and ($729)

            15        (1,146
  

 

 

   

 

 

   

 

 

 

Net earnings (loss)

   $ (387   $ 473      $ (22,086
  

 

 

   

 

 

   

 

 

 

Per share amounts:

      

Basic:

      

Earnings (loss) from continuing operations

   $ (0.02   $ 0.03      $ (1.20

Earnings (loss) from discontinued operations

                   (0.07
  

 

 

   

 

 

   

 

 

 

Net earnings (loss)

   $ (0.02   $ 0.03      $ (1.27
  

 

 

   

 

 

   

 

 

 

Diluted:

      

Earnings (loss) from continuing operations

   $ (0.02   $ 0.03      $ (1.20

Earnings (loss) from discontinued operations

                   (0.07
  

 

 

   

 

 

   

 

 

 

Net earnings (loss)

   $ (0.02   $ 0.03      $ (1.27
  

 

 

   

 

 

   

 

 

 

Cash dividends declared

   $ 0.12      $ 0.12      $ 0.12   
  

 

 

   

 

 

   

 

 

 

Weighted shares outstanding:

      

Basic

     17,562        17,466        17,380   
  

 

 

   

 

 

   

 

 

 

Diluted

     17,562        17,564        17,380   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except for per share amounts)

 

     October 1,
2011
     October 2,
2010
 

Assets:

     

Current assets:

     

Cash and cash equivalents

   $ 10       $ 45,935   

Accounts receivable, net

     41,971         24,970   

Inventories, net

     76,374         43,919   

Other current assets

     4,093         3,931   
  

 

 

    

 

 

 

Total current assets

     122,448         118,755   

Property, plant and equipment, net

     89,484         58,653   

Other assets

     4,598         5,097   
  

 

 

    

 

 

 

Total assets

   $ 216,530       $ 182,505   
  

 

 

    

 

 

 

Liabilities and shareholders’ equity:

     

Current liabilities:

     

Accounts payable

   $ 38,607       $ 20,689   

Accrued expenses

     7,377         5,929   

Current portion of long-term debt

     675           

Current liabilities of discontinued operations

             210   
  

 

 

    

 

 

 

Total current liabilities

     46,659         26,828   

Long-term debt

     13,481           

Other liabilities

     7,916         7,521   

Long-term liabilities of discontinued operations

             280   

Commitments and contingencies

     

Shareholders’ equity:

     

Preferred stock, no par value

     

Authorized shares: 1,000

     

None issued

               

Common stock, $1 stated value

     

Authorized shares: 50,000

     

Issued and outstanding shares: 2011, 17,609; 2010, 17,579

     17,609         17,579   

Additional paid-in capital

     48,723         45,950   

Retained earnings

     84,157         86,656   

Accumulated other comprehensive loss

     (2,015      (2,309
  

 

 

    

 

 

 

Total shareholders’ equity

     148,474         147,876   
  

 

 

    

 

 

 

Total liabilities and shareholders’ equity

   $ 216,530       $ 182,505   
  

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

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INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)

(In thousands)

 

                 Additional
Paid-In
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)(1)
    Total
Shareholders’
Equity
 
                      
     Common Stock          
     Shares     Amount          

Balance at September 27, 2008

     17,507      $ 17,507      $ 41,746      $ 112,479      $ (1,885   $ 169,847   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss:

            

Net loss

           (22,086       (22,086

Adjustment to defined benefit plan liability(1)

             (635     (635
            

 

 

 

Comprehensive loss(1)

               (22,721

Stock options exercised

     20        20        46            66   

Compensation expense associated with stock-based plans

         2,036            2,036   

Excess tax deficiencies from stock-based compensation

         (32         (32

Restricted stock surrendered for withholding taxes payable

     (2     (2     (22         (24

Cash dividends declared

           (2,102       (2,102
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at October 3, 2009

     17,525      $ 17,525      $ 43,774      $ 88,291      $ (2,520   $ 147,070   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income:

            

Net earnings

           473          473   

Adjustment to defined benefit plan liability(1)

             211        211   
            

 

 

 

Comprehensive income(1)

               684   

Stock options exercised

     26        26        114            140   

Vesting of restricted stock units

     37        37        (37           

Compensation expense associated with stock-based plans

         2,258            2,258   

Excess tax deficiencies from stock-based compensation

         (89         (89

Restricted stock surrendered for withholding taxes payable

     (9     (9     (70         (79

Cash dividends declared

           (2,108       (2,108
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at October 2, 2010

     17,579      $ 17,579      $ 45,950      $ 86,656      $ (2,309   $ 147,876   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss:

            

Net loss

           (387       (387

Adjustment to defined benefit plan liability(1)

             294        294   
            

 

 

 

Comprehensive loss(1)

               (93

Stock options exercised

     13        13        8            21   

Vesting of restricted stock units

     30        30        (30           

Compensation expense associated with stock-based plans

         2,917            2,917   

Excess tax benefits from stock-based compensation

         8            8   

Restricted stock surrendered for withholding taxes payable

     (13     (13     (130         (143

Cash dividends declared

           (2,112       (2,112
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at October 1, 2011

     17,609      $ 17,609      $ 48,723      $ 84,157      $ (2,015   $ 148,474   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1)

Activity within accumulated other comprehensive income (loss) is reported net of related income taxes: 2009 $389, 2010 ($130), 2011 ($180).

See accompanying notes to consolidated financial statements.

 

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INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     Year Ended  
     October 1,
2011
    October 2,
2010
    October 3,
2009
 

Cash Flows From Operating Activities:

      

Net earnings (loss)

   $ (387   $ 473      $ (22,086

Loss (earnings) from discontinued operations

            (15     1,146   
  

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations

     (387     458        (20,940

Adjustments to reconcile earnings (loss) from continuing operations to net cash provided by (used for) operating activities of continuing operations:

      

Depreciation and amortization

     9,573        7,009        7,377   

Amortization of capitalized financing costs

     81        363        508   

Stock-based compensation expense

     2,917        2,258        2,036   

Asset impairment charges

     3,825                 

Inventory write-downs

            2,333        25,941   

Excess tax deficiencies (benefits) from stock-based compensation

     (8     89        32   

Loss (gain) on sale of property, plant and equipment

     (1,618     39        24   

Deferred income taxes

     209        (1,121     997   

Gain from life insurance proceeds

     (357              

Increase in cash surrender value of life insurance policies over premiums paid

            (330       

Net changes in assets and liabilities (net of assets and liabilities acquired):

      

Accounts receivable, net

     (17,001     (3,687     28,298   

Inventories

     (11,870     (7,710     6,737   

Accounts payable and accrued expenses

     12,439        (2,489     (14,761

Other changes

     (710     15,825        (14,157
  

 

 

   

 

 

   

 

 

 

Total adjustments

     (2,520     12,579        43,032   
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used for) operating activities — continuing operations

     (2,907     13,037        22,092   

Net cash provided by (used for) operating activities — discontinued operations

            (158     30   
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used for) operating activities

     (2,907     12,879        22,122   
  

 

 

   

 

 

   

 

 

 

Cash Flows From Investing Activities:

      

Acquisition of business

     (37,308              

Capital expenditures

     (7,937     (1,493     (2,377

Proceeds from sale of assets held for sale

     2,403                 

Proceeds from life insurance claims

     1,063                 

Proceeds from sale of property, plant and equipment

     518        11        13   

Increase in cash surrender value of life insurance policies

     (147     (456     (215

Proceeds from surrender of life insurance policies

     19               413   
  

 

 

   

 

 

   

 

 

 

Net cash used for investing activities — continuing operations

     (41,389     (1,938     (2,166
  

 

 

   

 

 

   

 

 

 

Net cash provided by investing activities — discontinued operations

            2,358          
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used for) investing activities

     (41,389     420        (2,166
  

 

 

   

 

 

   

 

 

 

Cash Flows From Financing Activities:

      

Proceeds from long-term debt

     52,806        338        22,920   

Principal payments on long-term debt

     (52,150     (338     (22,920

Financing costs

            (409       

Cash received from exercise of stock options

     21        140        66   

Excess tax benefits (deficiencies) from stock-based compensation

     8        (89     (32

Cash dividends paid

     (2,112     (2,108     (11,381

Other

     (202              
  

 

 

   

 

 

   

 

 

 

Net cash used for financing activities — continuing operations

     (1,629     (2,466     (11,347
  

 

 

   

 

 

   

 

 

 

Net cash used for financing activities

     (1,629     (2,466     (11,347
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (45,925     10,833        8,609   

Cash and cash equivalents at beginning of period

     45,935        35,102        26,493   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 10      $ 45,935      $ 35,102   
  

 

 

   

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information:

      

Cash paid during the period for:

      

Interest

   $ 356      $ 90      $ 133   

Income taxes, net

     (489     189        11,454   

Non-cash investing and financing activities:

      

Purchases of property, plant and equipment in accounts payable

     384        15        136   

Restricted stock surrendered for withholding taxes payable

     143        79        24   

Note payable issued as consideration for business acquired

     13,500                 

Post-closing purchase price adjustment for business acquired

     500                 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED OCTOBER 1, 2011, OCTOBER 2, 2010 AND OCTOBER 3, 2009

(1) Description of Business

Insteel Industries, Inc. (“Insteel” or “the Company”) is one of the nation’s largest manufacturers 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. The Company manufactures and markets PC strand and welded wire reinforcement products, including concrete pipe reinforcement, engineered structural mesh and standard welded wire reinforcement. The Company’s products are primarily sold to manufacturers of concrete products and, to a lesser extent, distributors and rebar fabricators that are located nationwide as well as in Canada, Mexico, and Central and South America.

In 2006, the Company exited the industrial wire business in order to narrow its strategic and operational focus to concrete reinforcing products (see Note 10 to the consolidated financial statements). The results of operations for the industrial wire business have been reported as discontinued operations for all periods presented.

On November 19, 2010, the Company purchased certain of the assets and assumed certain of the liabilities of Ivy Steel and Wire, Inc. (“Ivy”) (see Note 4 to the consolidated financial statements).

The Company has 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 occurring during this period that required recognition or disclosure in its financial statements.

(2) Summary of Significant Accounting Policies

Fiscal year. The Company’s fiscal year is the 52 or 53 weeks ending on the Saturday closest to September 30. Fiscal years 2011 and 2010 were 52-week fiscal years, and fiscal year 2009 was a 53-week fiscal year. All references to years relate to fiscal years rather than calendar years.

Principles of consolidation. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.

Use of estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management 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. The Company considers 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 the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. The Company’s cash is concentrated primarily at one financial institution, which at times exceeds federally insured limits. The Company is 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. The Company invests excess cash primarily in money market funds, which are highly liquid securities.

The majority of the Company’s accounts receivable are due from customers that are located in the United States (“U.S.”) and the Company generally requires no collateral depending upon the creditworthiness of the account. The Company provides an allowance for doubtful accounts based upon its assessment of the credit risk of specific customers, historical trends and other information. The Company writes off accounts receivable when they become uncollectible. There is no disproportionate concentration of credit risk.

Stock-based compensation. The Company accounts 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. The Company determines the fair value of stock options issued by using a Monte Carlo valuation model at the grant date. The Monte Carlo valuation model considers a range of assumptions including the expected term, volatility, dividend yield and risk-free interest rate. Excess tax deficiencies (benefits) generated from option exercises during 2011, 2010 and 2009 were $(8,000), $89,000 and $32,000, respectively.

Revenue recognition. The Company recognizes 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 recorded on a net basis and are thus excluded from revenue.

 

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Shipping and handling costs. The Company includes 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 the Company for shipping and handling are recorded in net sales on the consolidated statement of operations.

Inventories. Inventories are valued at the lower of weighted average cost (which approximates computation on a first-in, first-out basis) or market (net realizable value or replacement cost). Costs utilized for inventory valuation purposes include 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 from Ivy, 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; land improvements, 5 — 15 years. Depreciation expense was approximately $9.6 million in 2011, $7.0 million in 2010 and $7.4 million in 2009 and reflected in cost of sales and selling, general and administrative expense (“SG&A expense”) in the consolidated statement 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 statement of operations. No interest costs were capitalized in 2011, 2010 or 2009.

Other assets. Other assets consist principally of non-current deferred tax assets, capitalized financing costs, the cash surrender value of life insurance policies and assets held for sale. 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 statement of operations.

Long-lived assets. Long-lived assets include property, plant and equipment and identifiable intangible assets with definite useful lives. The Company assesses the impairment of long-lived assets whenever events or changes in circumstance indicate that the carrying value may not be fully recoverable. When the Company determines that the carrying value of such assets may not be recoverable, it measures 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 during the period 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 2011, the Company recorded a $3.8 million impairment charge resulting from the consolidation of its northeast and Texas operations and overall integration of the purchased Ivy facilities (see Note 5 to the consolidated financial statements). During 2009, the Company recorded a $1.8 million impairment loss to write-down the value of the real estate held for sale associated with its industrial wire business, which is included within the results of discontinued operations for fiscal 2009 (see Note 10 to the consolidated financial statements). The property was subsequently sold in 2010. There were no impairment losses in 2010.

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. The Company believes that the carrying amount of the $13.5 million secured subordinated promissory note approximates fair value based on comparable debt with similar terms, conditions and proximity to the issuance date.

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. The Company assesses the need to establish a valuation allowance against its deferred tax assets to the extent the Company no longer believes 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.

 

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

(3) Recent Accounting Pronouncements

Current Adoptions

In December 2010, the FASB issued an update that clarifies the guidance provided in ASC Topic 805, Business Combinations, regarding the disclosure requirements for the pro forma presentation of revenue and earnings related to a business combination. The Company elected to early adopt this guidance during the first quarter of fiscal 2011.

Future Adoptions

In June 2011, the FASB issued an update that amends the guidance provided in ASC Topic 220, Comprehensive Income, by requiring that all nonowner changes in shareholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This update becomes effective in the first quarter of 2013.

In May 2011, the FASB issued an update that amends the guidance provided in ASC Topic 820, Fair Value Measurement, by clarifying some existing concepts, eliminating wording differences between Generally Accepted Accounting Principals (“GAAP”) and International Financial Reporting Standards (“IFRS”), and in some limited cases, changing some principles to achieve convergence between GAAP and IFRS. The update results in a consistent definition of fair value, establishes common requirements for the measurement of and disclosure about fair value between GAAP and IFRS, and expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This update becomes effective in the second quarter of 2012. The Company does not expect the adoption of this update to have a material impact on its consolidated financial statements.

(4) Business Combination

On November 19, 2010, the Company purchased certain of the assets and assumed certain of the liabilities of Ivy for a preliminary purchase price of approximately $51.1 million, consisting of $37.6 million of cash and a $13.5 million secured subordinated promissory note payable to Ivy (see Note 7 to the consolidated financial statements) (the “Ivy Acquisition”). Subsequent to the date of the Ivy Acquisition, the Company recorded $780,000 of post-closing adjustments which reduced the final adjusted purchase price to $50.3 million.

Ivy was one of the nation’s largest producers of welded wire reinforcement and wire products for concrete construction applications. The Company believes the addition of Ivy’s facilities will enhance the Company’s competitiveness in its Northeast, Midwest and Florida markets, in addition to providing a platform to serve the West Coast markets more effectively. The assets purchased included Ivy’s production facilities in Arizona, Florida, Missouri and Pennsylvania; the production equipment at a leased facility in Texas; and certain related inventories. In addition, the Company assumed certain of Ivy’s accounts payable and employee benefit obligations.

Following is a summary of the Company’s final allocation of the adjusted purchase price to the fair values of the assets acquired and liabilities assumed as of the date of the Ivy Acquisition:

 

(In thousands)       

Assets acquired:

  

Inventories

   $ 20,585   

Property, plant and equipment

     37,211   
  

 

 

 

Total assets acquired

   $ 57,796   
  

 

 

 

Liabilities assumed:

  

Accounts payable

   $ 6,263   

Accrued expenses

     725   
  

 

 

 

Total liabilities assumed

     6,988   
  

 

 

 

Net assets acquired

     50,808   

Purchase price

     50,308   
  

 

 

 

Bargain purchase gain

   $ 500   
  

 

 

 

 

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Accounting standards require that when the fair value of the net assets acquired exceeds the purchase price, resulting in a bargain purchase gain, the acquirer must reassess the reasonableness of the values assigned to all of the assets acquired, liabilities assumed and consideration transferred. The Company has performed such a reassessment and has concluded that the values assigned for the Ivy Acquisition are reasonable. Consequently, the Company has recorded a $500,000 bargain purchase gain on the Ivy Acquisition.

The Ivy Acquisition was accounted for as a business purchase pursuant to ASC Topic 805, Business Combinations. Acquisition and integration costs are not included as components of consideration transferred, but are recorded as expenses in the period in which the costs are incurred (See Note 5 to the consolidated financial statements).

Following the Ivy Acquisition, net sales of the Ivy facilities for the year ended October 1, 2011 were approximately $83.4 million. The actual amount of net sales specifically attributable to the Ivy Acquisition, however, cannot be quantified due to the integration actions that have been taken by the Company involving the transfer of business between the former Ivy facilities and the Company’s existing facilities. The Company has determined that the presentation of Ivy’s earnings for the year ended October 1, 2011 is impractical due to the extent that Ivy’s operations have been integrated into the Company following the Ivy Acquisition.

The following unaudited supplemental pro forma financial information reflects the combined results of operations of the Company had the Ivy Acquisition occurred at the beginning of fiscal 2010. The pro forma information reflects certain adjustments related to the Ivy Acquisition, including adjusted depreciation expense based on the fair value of the assets acquired, interest expense related to the secured subordinated promissory note and an appropriate adjustment in the current period for the acquisition-related costs. The pro forma information does not reflect any operating efficiencies or potential cost savings which may result from the Ivy Acquisition. Accordingly, this pro forma information is for illustrative purposes and is not intended to represent or be indicative of the actual results of operations of the combined company that may have been achieved had the Ivy Acquisition occurred at the beginning of fiscal 2010, nor is it intended to represent or be indicative of 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 1,            October 2,    
(In thousands)    2011    2010

Net sales

   $353,620    $310,957

Earnings (loss) from continuing operations before income taxes

            867         (18,881)

Net earnings (loss)

            182         (11,448)

(5) Restructuring Charges and Acquisition Costs

Restructuring charges. Subsequent to the Ivy Acquisition, the Company elected to consolidate certain of its welded wire reinforcement operations in order to reduce its operating costs, which involved the closure of facilities in Wilmington, Delaware and Houston, Texas. These actions were taken in response to the close proximity of Ivy’s facilities in Hazleton, Pennsylvania and Houston, Texas to the Company’s existing facilities in Wilmington, Delaware and Dayton, Texas. The Houston plant closure was completed in December 2010 and the Wilmington plant closure was completed in May 2011.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Following is a summary of the restructuring activities and associated costs that were incurred during the current year:

 

(In thousands)    Severance and
other employee
separation costs
    Asset
impairment
charges
    Facility
closure costs
    Equipment
relocation costs
    Total  

Liability as of October 2, 2010

   $      $      $      $      $   

Restructuring charges

     2,263        3,825        2,606        1,233        9,927   

Gain on sale of assets held for sale

                   (1,609            (1,609
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Restructuring charges, net

     2,263        3,825        997        1,233        8,318   

Cash payments

     (2,198            (920     (1,121     (4,239

Non-cash charges

            (3,825                   (3,825
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liability as of October 1, 2011

   $ 65      $      $ 77      $ 112      $ 254   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Included within asset impairment charges are the proceeds received from the scrapping of certain machinery and equipment that were previously impaired. Also, within facility closure costs, the Company recorded a $1.6 million gain from the sale of the Wilmington, Delaware facility which had been closed in May 2011. As of October 1, 2011, the Company recorded restructuring liabilities amounting to $254,000 on its consolidated balance sheet, including $112,000 in accounts payable and $142,000 in accrued expenses. The Company currently expects the remaining restructuring activities to be completed by the end of the first quarter of 2012.

Acquisition costs. During the current year, the Company recorded $3.5 million of acquisition-related costs associated with the Ivy Acquisition for advisory, accounting, legal and other professional fees. The Company does not expect to incur any additional acquisition costs related to the Ivy Acquisition in future periods.

(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 1, 2011, the Company held financial assets that are required to be measured at fair value on a recurring basis. The financial assets held by the Company and the fair value hierarchy used to determine their fair values are as follows:

 

(In thousands)    Total      Quoted Prices
in Active
Markets
(Level 1)
     Observable
Inputs
(Level 2)
 

Other assets:

        

Cash surrender value of life insurance policies

   $ 4,006       $       $ 4,006   
  

 

 

    

 

 

    

 

 

 

Total

   $ 4,006       $       $ 4,006   
  

 

 

    

 

 

    

 

 

 

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 the Company would receive upon surrender of these policies as of October 1, 2011.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

As of October 1, 2011, the Company had no nonfinancial assets that are required to be measured at fair value on a nonrecurring basis other than the assets and liabilities acquired from Ivy (see Note 4 to the consolidated financial statements) that were acquired at fair value. The carrying amounts of accounts receivable, accounts payable and accrued expenses approximates fair value due to the short-term maturities of these financial instruments. The Company believes that the carrying amount of the $13.5 million secured subordinated promissory note payable to Ivy approximates fair value based on comparable debt with similar terms, conditions and proximity to the issuance date, which would be considered a level 2 input.

(7) Long-Term Debt

Revolving Credit Facility. On June 2, 2010, the Company and each of its wholly-owned subsidiaries entered into the Second Amended and Restated Credit Agreement (the “Credit Agreement”) which amends and restates in its entirety the previous agreement pertaining to its revolving credit facility that had been in effect since January 2006. The Credit Agreement, which matures on June 2, 2015, provides the Company with up to $75.0 million of financing on the credit facility to supplement its operating cash flow and fund its working capital, capital expenditure, general corporate and growth requirements. As of October 1, 2011, $656,000 was outstanding on the credit facility, $73.2 million of additional borrowing capacity was available and outstanding letters of credit totaled $1.1 million. As of October 2, 2010, no borrowings were outstanding on the credit facility, $49.6 million of borrowing capacity was available and outstanding letters of credit totaled $919,000.

Advances under the credit facility are limited to the lesser of the revolving credit commitment or a borrowing base amount that is calculated based upon a percentage of eligible receivables and inventories. Interest rates on the revolver 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 the election of the Company, 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 revolver within the range of 0.75% - 1.50% for index rate loans and 2.25% - 3.00% 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 in the Credit Agreement. Based on the Company’s excess availability as of October 1, 2011, the applicable interest rate margins on the revolver were 0.75% for index rate loans and 2.25% for LIBOR loans.

The Company’s ability to borrow available amounts under the revolving credit facility will be restricted or eliminated in the event of certain covenant breaches, events of default or if the Company is unable to make certain representations and warranties provided for in the Credit Agreement.

Financial Covenants

The terms of the Credit Agreement require the Company to maintain a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of not less than 1.10 at the end of each fiscal quarter for the twelve-month period then ended when the amount of excess availability on the revolving credit facility is less than $10.0 million. As of October 1, 2011, the Company was in compliance with all of the financial covenants under the credit facility.

Negative Covenants

In addition, the terms of the Credit Agreement restrict the Company’s 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 the Company’s stock subject to certain minimum borrowing availability requirements; incur or assume indebtedness; issue securities; enter into certain transactions with affiliates of the Company; or permit liens to encumber the Company’s property and assets. As of October 1, 2011, the Company was in compliance with all of the negative covenants under the credit facility.

Events of Default

Under the terms of the Credit Agreement, an event of default will occur with respect to the Company 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 the Company or any of its 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 with respect to the Company; certain entries of judgment against the Company or any of its subsidiaries, which are not covered by insurance; or a change of control of the Company. As of October 1, 2011, there have not been any events of default by the Company.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Amortization of capitalized financing costs associated with the credit facility was $81,000 in 2011, $363,000 in 2010 and $508,000 in 2009. Accumulated amortization of capitalized financing costs was $4.1 million and $4.0 million as of October 1, 2011 and October 2, 2010, respectively. The Company expects the amortization of capitalized financing costs to approximate the following amounts for the next five fiscal years:

 

    Fiscal year    

   In thousands

2012

       $82  

2013

         82  

2014

         82  

2015

         55  

2016

         —  

Subordinated Note. As part of the consideration for the Ivy Acquisition, on November 19, 2010 (see Note 4 to the consolidated financial statements) the Company entered into a $13.5 million secured subordinated promissory note (the “Note”) payable to Ivy over five years. The Note requires semi-annual interest payments in arrears, and annual principal payments payable on November 19 of each year during the period 2011 — 2015. The Note bears interest on the unpaid principal balance at a fixed rate of 6.0% per annum and is collateralized by certain of the real property and equipment acquired from Ivy. As of October 1, 2011, $675,000 of the outstanding balance on the Note is recorded as the current portion of long-term debt on the Company’s consolidated balance sheet.

As of October 1, 2011, the aggregate maturities of the Note are as follows:

 

    Fiscal years(s)    

   (In thousands)

2012

       $ 675

2013

          675

2014

          675

2015

       5,737

2016

       5,738
  

 

Total future maturities

   $13,500

Less: current portion

          (675)
  

 

Long-term portion

   $12,825
  

 

(8) Stock-Based Compensation

Under the Company’s equity incentive plans, employees and directors may be granted stock options, restricted stock, restricted stock units and performance awards. As of October 1, 2011 there were 142,000 shares available for future grants under the plans.

Stock option awards. Under the Company’s equity incentive plans, employees and directors may be granted options to purchase shares of common stock at the fair market value on the date of the grant. Options granted under these plans generally vest over three years and expire ten years from the date of the grant. Compensation expense and excess tax benefits associated with stock options are as follows:

 

     Year Ended
(In thousands)        October 1,    
2011
      October 2,    
2010
       October 3,    
2009

Stock options:

       

Compensation expense

   $1,203   $958    $937

Excess tax deficiencies (benefits)

            (8)       89        32

The remaining unrecognized compensation cost related to unvested options at October 1, 2011 was $587,000, which is expected to be recognized over a weighted average period of 1.61 years.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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 2011, 2010 and 2009 were $5.31, $4.54 and $5.43 per share, respectively, based on the following weighted-average assumptions:

 

     Year Ended
         October 1,    
2011
      October 2,    
2010
      October 3,    
2009

Expected term (in years)

     5.19        5.74        4.92   

Risk-free interest rate

     1.78%     2.28%     2.64%

Expected volatility

   55.15%   61.12%   74.53%

Expected dividend yield

     1.05%     1.31%     1.31%

The assumptions utilized in the Monte Carlo valuation model are evaluated and revised, as necessary, to reflect market conditions and actual historical experience. 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 dividend yield was calculated based on the Company’s annual dividend as of the option grant date. The expected volatility was derived using a term structure based on historical volatility and the volatility implied by exchange-traded options on the Company’s stock. 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 following table summarizes stock option activity:

 

          

Exercise Price

Per Share

     Contractual
Term -
    Aggregate
Intrinsic
 
  

 

 

   

 

 

    

 

 

   

 

 

 
(Share amounts in thousands)    Options
Outstanding
    Range      Weighted
Average
     Weighted
Average
   

Value

(in thousands)

 
  

 

 

   

 

 

    

 

 

   

 

 

 

Outstanding at September 27, 2008

     531      $ 0.18 – $20. 27       $ 11.17        
  

 

 

           

Granted

     171        7.55 – 11.60         9.27        

Exercised

     (20     3.28 – 3.28         3.28           120      

Forfeited

     (9     15.64 – 20.27         18.07        
  

 

 

           

Outstanding at October 3, 2009

     673        0.18 – 20.27         10.83        
  

 

 

           

Granted

     200        9.16 – 9.39         9.27        

Exercised

     (26     4.19 – 11.15         5.41           146   
  

 

 

           

Outstanding at October 2, 2010

     847        0.18 – 20.27         10.63        
  

 

 

           

Granted

     171        10.72 – 12.43         11.49        

Exercised

     (13     1.06 –  7.55         1.60           143   

Forfeited

     (11     11.15 – 11.15         11.15        
  

 

 

           

Outstanding at October 1, 2011

     994        0.18 – 20.27         10.89         6.99 ye ars      1,005   
  

 

 

           

Vested and anticipated to vest in future at October 1, 2011

     972           10.91         6.95 ye ars      992   

Exercisable at October 1, 2011

     634           11.21         5.89 ye ars      816   

Restricted Stock Awards. Under the Company’s equity incentive plans, employees and directors may be granted restricted stock awards which are valued based upon the fair market value on the date of the grant. Restricted stock granted under these plans generally vests one to three years from the date of the grant. There were no restricted stock grants in 2011, 2010 and 2009. Amortization expense for restricted stock is as follows:

 

     Year Ended  
(In thousands)        October 1,    
2011
         October 2,    
2010
         October 3,    
2009
 

Amortization expense

   $ 166       $ 470       $ 756   

There were no unvested restricted stock awards as of October 1, 2011.

During 2011, 2010 and 2009, 67,693, 48,141 and 25,254 shares, respectively, of employee restricted stock awards vested with a fair value of $771,000, $439,000 and $238,000, respectively. Upon vesting, employees have the option of remitting payment for the minimum tax obligation to the Company or net-share settling such that the Company will withhold shares with a value equivalent to the employees’ minimum tax obligation. During 2011, 2010 and 2009, a total of 12,633, 8,486 and 2,497 shares, respectively, were withheld to satisfy employees’ minimum tax obligations.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

The following table summarizes restricted stock activity:

 

(Share amounts in thousands)    Restricted
Stock Awards
Outstanding
    Weighted Average
Grant Date Fair
Value

Balance, September 27, 2008

     165      $15.16
  

 

 

   

Granted

                  —

Released

     (50       14.40
  

 

 

   

Balance, October 3, 2009

     115          15.50
  

 

 

   

Granted

                  —

Released

     (48       18.53
  

 

 

   

Balance, October 2, 2010

     67          13.37
  

 

 

   

Granted

                  —

Released

     (67       13.37
  

 

 

   

Balance, October 1, 2011

                  —
  

 

 

   

Restricted stock units. On January 21, 2009, the Executive Compensation Committee of the Board of Directors approved a change in the equity compensation program such that awards of restricted stock units (“RSUs”) to employees and directors would be made in lieu of awards of restricted stock. RSUs granted under these plans 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 to three years from the date of the grant. RSUs do not have voting rights. RSU grants and amortization expense are as follows:

 

     Year Ended
(In thousands)    October 1,
2011
   October 2,
2010
   October 3,
2009

Restricted stock unit grants:

              

Units

       119          140          136  

Market value

       $1,441          $1,298          $1,185  

Amortization expense

       1,548          830          343  

The remaining unrecognized compensation cost related to unvested RSUs on October 1, 2011 was $1.1 million which is expected to be recognized over a weighted average period of 1.79 years.

The following table summarizes RSU activity:

 

(Unit amounts in thousands)    Restricted
Stock Units
Outstanding
    Weighted Average
Grant Date Fair
Value

Balance, September 27, 2008

          $      —
  

 

 

   

Granted

     136            8.71

Released

                —
  

 

 

   

Balance, October 3, 2009

     136            8.71
  

 

 

   

Granted

     140            9.29

Released

     (37         7.55
  

 

 

   

Balance, October 2, 2010

     239            9.23
  

 

 

   

Granted

     119          12.08

Released

     (30         9.39
  

 

 

   

Balance, October 1, 2011

     328          10.25
  

 

 

   

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

(9) Income Taxes

The components of the provision for income taxes on continuing operations are as follows:

 

     Year Ended  
(Dollars in thousands)    October 1,
2011
    October 2,
2010
    October 3,
2009
 

Provision for income taxes:

      

Current:

      

Federal

   $ 207      $ 668      $ (12,708

State

     72        415        (47
  

 

 

   

 

 

   

 

 

 
     279        1,083        (12,755

Deferred:

      

Federal

     (12     (880     1,686   

State

     221        (241     (689
  

 

 

   

 

 

   

 

 

 
     209        (1,121     997   
  

 

 

   

 

 

   

 

 

 

Income taxes

   $ 488      $ (38   $ (11,758
  

 

 

   

 

 

   

 

 

 

Effective income tax rate

     483.2     (9.0 %)      36.0
  

 

 

   

 

 

   

 

 

 

The reconciliation between income taxes computed at the federal statutory rate and the provision for income taxes on continuing operations is as follows:

 

       Year Ended  
(Dollars in thousands)          October 1, 2011              October 2, 2010              October 3, 2009      

Provision for income taxes at federal statutory rate

     $ 35           34.7    $ 147           35.0    $ (11,444        35.0

State income taxes, net of federal tax benefit

       (20        (19.8      180           42.9         (479        1.5   

Valuation allowance

       263           260.4         (142        (33.9                  

Stock option expense benefit

       189           187.1         180           42.9         203           (0.6

Revisions to estimates based on filing of final tax return

       (5        (4.9      (24        (5.7      33           (0.1

Qualified production activities deduction

                         (30        (7.1                  

Additional refund due to tax law change

                         (502        (119.5                  

Other, net

       26           25.7         153           36.4         (71        0.2   
    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

      

 

 

 

Provision for income taxes

     $ 488           483.2    $ (38        (9.0 %)     $ (11,758        36.0
    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

      

 

 

 

The components of deferred tax assets and liabilities are as follows:

 

(In thousands)    October 1,
2011
    October 2,
2010
 

Deferred tax assets:

    

Accrued expenses, asset reserves and state tax credits

   $ 3,495      $ 4,005   

Goodwill, amortizable for tax purposes

     1,812        1,963   

Stock-based compensation

     1,683        628   

State net operating loss carryforwards

     1,368        1,336   

Defined benefit plans

     1,235        1,415   

Federal net operating loss carryforward

     679          

Valuation allowance

     (727     (461
  

 

 

   

 

 

 

Gross deferred tax assets

     9,545        8,886   

Deferred tax liabilities:

    

Plant and equipment

     (9,078     (7,769

Other reserves

     (22     (283
  

 

 

   

 

 

 

Gross deferred tax liabilities

     (9,100     (8,052
  

 

 

   

 

 

 

Net deferred tax asset

   $ 445      $ 834   
  

 

 

   

 

 

 

As of October 1, 2011, the Company recorded a current deferred tax asset (net of valuation allowance) of $2.1 million on its consolidated balance sheet in other current assets and a non-current deferred tax liability (net of valuation allowance) of $1.7 million in other liabilities. As of October 2, 2010, the Company recorded a current deferred tax asset (net of valuation allowance) of $2.6 million in other current assets and a non-current deferred tax liability (net of valuation allowance) of $1.8 million in other liabilities. The Company has $27.7 million of state operating loss carryforwards that begin to expire in 2017, but

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

principally expire in 2017 — 2031. The Company has $1.9 million of federal operating loss carryforwards that expire in 2031. The Company has also recorded deferred tax assets for various state tax credits of $300,000, which will begin to expire in 2014 and principally expire between 2014 and 2019.

The realization of the Company’s deferred tax assets is entirely dependent upon the Company’s ability to generate future taxable income in applicable jurisdictions. GAAP requires that the Company periodically assess the need to establish a valuation allowance against its deferred tax assets to the extent the Company no longer believes it is more likely than not that they will be fully utilized. As of October 1, 2011, the Company had recorded a valuation allowance of $727,000 pertaining to various state NOLs and tax credits that were not expected to be utilized. The valuation allowance established by the Company is subject to periodic review and adjustment based on changes in facts and circumstances and would be reduced should the Company utilize the state net operating loss carryforwards against which an allowance had previously been provided or determine that such utilization is more likely than not. The increase in the valuation allowance during fiscal 2011 is primarily due to a change in the Company’s expectations regarding the future realization of deferred tax assets related to certain state NOL carryforwards and tax credits.

The Company has established contingency reserves for material, known tax exposures based on management’s judgment as to the estimated liabilities that would be incurred in connection with the resolution of these matters. As of October 1, 2011, the Company had approximately $34,000 of gross unrecognized tax benefits classified in accrued expenses and $33,000 of gross unrecognized tax benefits classified as other liabilities on its consolidated balance sheet, of which $55,000, if recognized, would reduce its income tax expense in future periods. As of October 2, 2010, the Company had approximately $728,000 of gross unrecognized tax benefits which reduce income taxes receivable and are classified as other current assets on its consolidated balance sheet, and $34,000 of gross unrecognized tax benefits classified as other liabilities, of which $61,000, if recognized, would reduce its income tax expense in future periods. The Company anticipates the gross unrecognized tax benefits of $34,000 will be resolved during the next twelve months and otherwise does not expect its unrecognized tax benefits to change significantly over that time.

A reconciliation of the beginning and ending balance of total unrecognized tax benefits for 2011 is as follows:

 

(Dollars in thousands)        2011             2010      

Balance at beginning of year

   $ 762      $   

Increase in tax positions of prior years

     8        760   

Increase in tax position for current year

     4        2   

Settlement of tax position in current year

     (707       
  

 

 

   

 

 

 

Balance at end of year

   $ 67      $ 762   
  

 

 

   

 

 

 

The Company classifies interest and penalties related to unrecognized tax benefits as part of income tax expense. The accrued interest and penalties related to unrecognized tax benefits was $50,000 and $208,000, respectively, as of October 1, 2011 and October 2, 2010. The decrease in accrued interest and penalties during 2011 is due to the settlement of a U.S. Internal Revenue Service audit and various outstanding federal and state tax issues. There was no expense incurred during 2011 related to interest and penalties. During 2010, the Company recorded $213,000 of expense related to interest and penalties.

The Company files 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 by the Company subsequent to fiscal year 2007 remain subject to examination together with certain state tax returns filed by the Company subsequent to fiscal year 2003.

(10) Discontinued Operations

In April 2006, the Company decided to exit the industrial wire business with the closure of its Fredericksburg, Virginia facility which manufactured tire bead wire and other industrial wire for commercial and industrial applications. The Company’s decision was based on the weakening in the business outlook for the facility and the expected continuation of difficult market conditions and reduced operating levels. Manufacturing activities at the Virginia facility ceased in June 2006 and the Company liquidated the remaining assets of the business in 2010.

The results of operations and related non-recurring closure costs associated with the industrial wire business have been reported as discontinued operations for all prior periods presented. Additionally, the assets and liabilities of the discontinued operations have been segregated in the accompanying consolidated balance sheets.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

The Company reviews its assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company recorded a $1.8 million impairment charge during the year ended October 3, 2009 to write down the carrying value of the real estate associated with the industrial wire business. During 2010 the Company sold the real estate for $2.5 million resulting in a $478,000 gain.

The results of discontinued operations are as follows:

 

     Year Ended  
(In thousands)    October 2,
2010
    October 3,
2009
 

Earnings (loss) before income taxes

   $ 232      $ (1,875

Income taxes

     (217     729   
  

 

 

   

 

 

 

Net earnings (loss)

   $ 15      $ (1,146
  

 

 

   

 

 

 

Liabilities of discontinued operations are as follows:

 

(In thousands)    October 2,
2010
 

Liabilities:

  

Current liabilities:

  

Accounts payable

   $   

Accrued expenses

     210   
  

 

 

 

Total current liabilities

     210   

Other liabilities

     280   
  

 

 

 

Total liabilities

   $ 490   
  

 

 

 

At October 2, 2010 there was approximately $315,000, of accrued expenses and other liabilities related to ongoing lease obligations and closure-related liabilities incurred as a result of the Company’s exit from the industrial wire business.

(11) Employee Benefit Plans

Retirement plans. The Company has one defined benefit pension plan, the Insteel Wire Products Company Retirement Income Plan for Hourly Employees, Wilmington, Delaware (“the Delaware Plan”). The Delaware Plan provides benefits for eligible employees based primarily upon years of service and compensation levels. The Company’s funding policy is to contribute amounts at least equal to those required by law. The Delaware Plan was frozen effective September 30, 2008 whereby participants will no longer earn additional benefits. In February 2011, as part of the planned closure of the Wilmington, Delaware facility, the Company amended the Delaware Plan granting certain participants additional service credit. The amendment resulted in a one-time charge of $306,000 that was recorded during 2011 within restructuring charges on the consolidated statement of operations. The Company made contributions totaling $478,000 to the Delaware Plan during 2011 and expects to make contributions of $265,000 during 2012.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

The reconciliation of the projected benefit obligation, plan assets, funded status of the plan and amounts recognized in the Company’s consolidated balance sheets for the Delaware Plan is as follows:

 

     Year Ended  
(In thousands)    October 1,
2011
    October 2,
2010
    October 3,
2009
 

Change in benefit obligation:

      

Benefit obligation at beginning of year

   $ 4,280      $ 4,289      $ 4,377   

Amendments

     306                 

Interest cost

     193        211        250   

Actuarial loss

     69        182        150   

Settlement

     (1,423              

Distributions

     (194     (402     (488
  

 

 

   

 

 

   

 

 

 

Benefit obligation at end of year

   $ 3,231      $ 4,280      $ 4,289   
  

 

 

   

 

 

   

 

 

 

Change in plan assets:

      

Fair value of plan assets at beginning of year

   $ 3,017      $ 3,053      $ 3,764   

Actual return on plan assets

     10        366        (223

Employer contributions

     477                 

Settlement

     (1,651              

Distributions

     (193     (402     (488
  

 

 

   

 

 

   

 

 

 

Fair value of plan assets at end of year

   $ 1,660      $ 3,017      $ 3,053   
  

 

 

   

 

 

   

 

 

 

Reconciliation of funded status to net amount recognized:

      

Funded status

   $ (1,571   $ (1,263   $ (1,236
  

 

 

   

 

 

   

 

 

 

Net amount recognized

   $ (1,571   $ (1,263   $ (1,236
  

 

 

   

 

 

   

 

 

 

Amounts recognized on the consolidated balance sheet:

      

Accrued benefit liability

   $ (1,571   $ (1,263   $ (1,236

Accumulated other comprehensive loss (net of tax)

     909        1,225        1,336   
  

 

 

   

 

 

   

 

 

 

Net amount recognized

   $ (662   $ (38   $ 100   
  

 

 

   

 

 

   

 

 

 

Amounts recognized in accumulated other comprehensive loss:

      

Unrecognized net loss

   $ 1,466      $ 1,975      $ 2,155   
  

 

 

   

 

 

   

 

 

 

Net amount recognized

   $ 1,466      $ 1,975      $ 2,155   
  

 

 

   

 

 

   

 

 

 

Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss):

      

Net loss (gain)

   $ (206   $ 16      $ 509   

Amortization of net loss

     (304     (195     (113
  

 

 

   

 

 

   

 

 

 

Total recognized in other comprehensive income (loss)

   $ (510   $ (179   $ 396   
  

 

 

   

 

 

   

 

 

 

Net periodic pension cost for the Delaware Plan includes the following components:

 

     Year Ended  
(In thousands)    October 1,
2011
    October 2,
2010
    October 3,
2009
 

Service cost

   $      $      $   

Interest cost

     193        211        250   

Expected return on plan assets

     (211     (200     (262

Recognized net actuarial loss

     304        195        113   
  

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $ 286      $ 206      $ 101   
  

 

 

   

 

 

   

 

 

 

The Company incurred settlement losses of $704,000 and $126,000 during 2011 and 2009, respectively, for lump-sum distributions to plan participants.

The estimated net loss that will be amortized from accumulated other comprehensive income into net periodic pension cost during 2012 is $58,000.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

The projected benefit payments under the Delaware Plan are as follows:

 

Fiscal year(s)

         In thousands    

2012

         $    192  

2013

               195  

2014

               279  

2015

               193  

2016

               198  

2017 - 2021

               949  

The assumptions used in the valuation of the Delaware Plan are as follows:

 

                      Measurement Date                  
         October 1,    
2011
         October 2,    
2010
         October 3,    
2009
 

Assumptions at year-end:

        

Discount rate

     4.75%         5.25%         5.50%   

Rate of increase in compensation levels

     N/A            N/A            N/A      

Expected long-term rate of return on assets

     8.00%         8.00%         8.00%   

The assumed discount rate is established as of the Company’s fiscal year-end measurement date. In establishing the discount rate, the Company reviews 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 plan. To develop the expected long-term rate of return on asset assumption, the Company considers the historical returns and the future expectations of returns for each asset class, as well as the target asset allocation of the Delaware Plan portfolio.

The fundamental goal underlying the investment policy for the Delaware Plan is to ensure that its assets are invested in a prudent manner to meet the obligations of the plan as such obligations come due. The primary investment objectives include providing a total return that will promote the goal of benefit security by attaining an appropriate ratio of plan assets to plan obligations, diversifying investments across and within asset classes, minimizing the impact of losses in single investments and adhering to investment practices that comply with applicable laws and regulations. The investment strategy for equities emphasizes U.S. large cap equities with the portfolio’s performance measured against the S&P 500 index or other applicable indices. The investment strategy for fixed income investments is focused on maintaining an overall portfolio with a minimum credit rating of A-1 as well as a minimum rating of any security at the time of purchase of Baa/BBB by Moody’s or Standard & Poor’s, if rated.

The Delaware Plan has a long-term target asset mix of 60% equities and 40% fixed income. The asset allocation for the Delaware Plan is as follows:

 

         Target Allocation       Percentage of Plan Assets at Measurement Date
     October 1,
2011
      October 1,    
2011
      October 2,    
2010
      October 3,    
2009

Large-cap equities

       35.0 %       38.6 %       26.1 %       26.1 %

Mid-cap equities

       8.0 %       9.1 %       9.0 %       10.3 %

Small-cap equities

       9.0 %       6.1 %       8.7 %       8.5 %

International equities

       8.0 %       6.0 %       16.8 %       16.8 %

Fixed income securities

       40.0 %       39.3 %       38.1 %       38.3 %

Cash and cash equivalents

       0.0 %       0.9 %       1.3 %       0.0 %

 

41


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

As of October 1, 2011, the Delaware Plan’s assets include cash and cash equivalents, equity securities and fixed income securities and were required to be measured at fair value. The Company uses a three-tier hierarchy, which prioritizes the inputs used in measuring fair value, defined as follows: Level 1 — observable inputs such as quoted prices in active markets for identical assets and liabilities; Level 2 — inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3 — unobservable inputs in which little or no market data exists, thereby requiring the development of valuation assumptions. The fair values of the Delaware Plan’s assets as of October 1, 2011 are as follows:

 

(In thousands)    Total      Quoted Prices
in Active
Markets
(Level 1)
     Observable
Inputs
(Level 2)
     Unobservable
Inputs (Level
3)
 

Large-cap equities

   $ 641       $ 641       $       $   

Mid-cap equities

     151         151                   

Small-cap equities

     101         101                   

International equities

     100         100                   

Fixed income securities

     652         652                   

Cash and cash equivalents

     15         15                   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,660       $ 1,660       $       $   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities. Primarily consists of direct investment in the stock of publicly-traded companies that are valued based on the closing price reported in an active market on which the individual securities are traded. As such, the direct investments are classified as Level 1.

Fixed income securities. Government and corporate debt securities that are valued based on the closing price reported in an active market on which the individual securities are traded. As such, these securities are classified as Level 1.

Cash and cash equivalents. Direct cash holdings that are valued based on cost, which approximates fair value and as such, are classified as Level 1.

Supplemental employee retirement plan. The Company has Retirement Security Agreements (each, a “SERP”) with certain of its employees (each, a “Participant”). Under the SERPs, if the Participant remains in continuous service with the Company for a period of at least 30 years, the Company will pay to 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 the Company, but has completed at least 10 years of continuous service with the Company, the amount of the supplemental retirement benefit will be reduced by 1/360th for each month short of 30 years that the Participant was employed by the Company. In 2005, the Company revised the SERPs to add Participants and increase benefits to existing Participants.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

The reconciliation of the projected benefit obligation, plan assets, funded status of the plan and amounts recognized in the Company’s consolidated balance sheets for the SERPs is as follows:

 

     Year Ended  
(In thousands)    October 1,
2011
    October 2,
2010
    October 3,
2009
 

Change in benefit obligation:

      

Benefit obligation at beginning of year

   $ 5,590      $ 5,218      $ 4,121   

Service cost

     176        165        123   

Interest cost

     282        278        279   

Actuarial loss

     297        95        855   

Distributions

     (243     (166     (160
  

 

 

   

 

 

   

 

 

 

Benefit obligation at end of year

   $ 6,102      $ 5,590      $ 5,218   
  

 

 

   

 

 

   

 

 

 

Change in plan assets:

      

Actual employer contributions

   $ 244      $ 166      $ 160   

Actual distributions

     (244     (166     (160
  

 

 

   

 

 

   

 

 

 

Plan assets at fair value at end of year

   $      $      $   
  

 

 

   

 

 

   

 

 

 

Reconciliation of funded status to net amount recognized:

      

Funded status

   $ (6,102   $ (5,590   $ (5,218
  

 

 

   

 

 

   

 

 

 

Net amount recognized

   $ (6,102   $ (5,590   $ (5,218
  

 

 

   

 

 

   

 

 

 

Amounts recognized in accumulated other comprehensive loss:

      

Unrecognized net loss

   $ 1,330      $ 1,067      $ 1,002   

Unrecognized prior service cost

     454        681        908   
  

 

 

   

 

 

   

 

 

 

Net amount recognized

   $ 1,784      $ 1,748      $ 1,910   
  

 

 

   

 

 

   

 

 

 

Other changes in plan assets and benefit obligations recognized in other
comprehensive income (loss):

      

Net loss

   $ 297      $ 95      $ 855   

Prior service costs

   $ (227   $ (227   $ (227

Amortization of net loss

     (34     (30       
  

 

 

   

 

 

   

 

 

 

Total recognized in other comprehensive income (loss)

   $ 36      $ (162   $ 628   
  

 

 

   

 

 

   

 

 

 

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

 

     Year Ended  
(In thousands)    October 1,
2011
     October 2,
2010
     October 3,
2009
 

Service cost

   $ 176       $ 165       $ 123   

Interest cost

     282         278         278   

Prior service cost

     227         227         227   

Amortization of net loss

     34         31           
  

 

 

    

 

 

    

 

 

 

Net periodic pension cost

   $ 719       $ 701       $ 628   
  

 

 

    

 

 

    

 

 

 

The estimated net loss and prior service costs that will be amortized from accumulated other comprehensive income into net periodic pension cost during 2012 are $61,000 and $227,000, respectively.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

The assumptions used in the valuation of the SERPs are as follows:

 

     Measurement Date  
     October 1,
2011
     October 2,
2010
     October 3,
2009
 

Assumptions at year-end:

        

Discount rate

     4.75%         5.25%         5.50%   

Rate of increase in compensation levels

     3.00%         3.00%         3.00%   

The assumed discount rate is established as of the Company’s fiscal year-end measurement date. In establishing the discount rate, the Company reviews 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 plan. 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)    

2012

       $       244  

2013

                 244  

2014

                 244  

2015

                 244  

2016

                 292  

2017- 2021

               1,346  

As noted above, the SERPs were revised in 2005 to add Participants and increase benefits to certain existing Participants. However, for certain Participants the Company still maintains the benefits of the respective SERPs that were in effect prior to the 2005 changes, which entitles them to fixed cash benefits upon retirement at age 65, payable annually for 15 years. These SERPs are supported by life insurance polices on the Participants purchased and owned by the Company. The cash benefits paid under these SERPs were $74,000 in 2011, $74,000 in 2010 and $76,000 in 2009. The expense attributable to these SERPs was $14,000 in 2011, $13,000 in 2010 and $12,000 in 2009.

Retirement savings plan. In 1996, the Company adopted the Retirement Savings Plan of Insteel Industries, Inc. (“the Plan”) to provide retirement benefits and stock ownership for its employees. The Plan is an amendment and restatement of the Company’s 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.

During 2009 - 2011, employees were 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. The Plan allows for discretionary contributions to be made by the Company as determined by the Board of Directors. Such contributions to the Plan are allocated among eligible participants based on their compensation relative to the total compensation of all participants. During 2009 - 2011, the Company matched employee contributions up to 100% of the first 1% and 50% of the next 5% of eligible compensation that was contributed by employees. Company contributions to the Plan were $604,000 in 2011, $439,000 in 2010 and $465,000 in 2009.

Voluntary Employee Beneficiary Associations (“VEBA”). The Company has a VEBA under which both employees and the Company may make contributions to pay for medical costs. Company contributions to the VEBA were $3.3 million in 2011, $2.2 million in 2010 and $2.9 million in 2009. The Company is primarily self-insured for each employee’s healthcare costs, carrying stop-loss insurance coverage for individual claims in excess of $125,000 per benefit plan year. The Company’s 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. Management reviews current and historical claims data in developing its estimates.

(12) Commitments and Contingencies

Leases and purchase commitments. The Company leases a portion of its equipment and an idle facility in Houston, Texas that ceased operations during 2011 under operating leases that expire at various dates through 2016. Under most lease agreements, the Company pays insurance, taxes and maintenance. Rental expense for operating leases was $1.5 million in 2011, $889,000 in 2010 and $939,000 in 2009. Minimum rental commitments under all non-cancelable leases with an initial term in excess of one year are payable as follows: 2012, $618,000; 2013, $358,000; 2014, $179,000; 2015, $90,000; 2016 and beyond, $387,000.

 

44


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

As of October 1, 2011, the Company had $36.2 million in non-cancelable purchase commitments for raw material extending as long as approximately 100 days. In addition, the Company has contractual commitments for the purchase of certain equipment. Portions of such equipment contracts not completed at year-end are not reflected in the consolidated financial statements and amounted to $1.6 million as of October 1, 2011.

Legal proceedings. On November 19, 2007, Dwyidag Systems International, Inc (“DSI”) filed a third-party lawsuit in the Ohio Court of Claims alleging that certain epoxy-coated strand sold by the Company to DSI in 2002, and supplied by DSI to the Ohio Department of Transportation (“ODOT”) for a bridge project, was defective. The third-party action sought recovery of any damages which could have been assessed against DSI in the action filed against it by ODOT, which allegedly could have been in excess of $8.3 million, plus $2.7 million in damages allegedly incurred by DSI. In 2009, the Ohio court granted the Company’s motion for summary judgment as to the third-party claim against it on the grounds that the statute of limitations had expired, but DSI filed an interlocutory appeal of that ruling. In addition, the Company previously filed a lawsuit against DSI in the North Carolina Superior Court in Surry County seeking recovery of $1.4 million (plus interest) owed for other products sold by the Company to DSI, which action was removed by DSI to the U.S. District Court for the Middle District of North Carolina.

On October 7, 2010, the Company participated in a structured mediation with ODOT and DSI which led to settlement of all of the above legal matters. The parties dismissed the action in the Middle District of North Carolina on December 23, 2010, and the Ohio Court of Claims action was dismissed on January 21, 2011. Pursuant to the settlement agreement, which was approved by the Ohio Court of Claims on January 5, 2011, the parties released each other from all liability arising out of the sale of strand for the bridge project. In connection with the settlement, the Company reserved the remaining outstanding balance that it was owed by DSI and agreed to make a cash payment of $600,000 to ODOT. During fiscal 2011, the Company paid the $600,000 settlement to ODOT and wrote off the DSI receivables against the previously established reserve. The resolution of this matter has enabled the Company to restore its commercial relationship with DSI that had existed prior to the initiation of the legal proceedings. The Company’s fiscal 2010 results reflect a $1.5 million charge relating to the net effect of the settlement.

The Company also is involved in various other lawsuits, claims, investigations and proceedings, including commercial, environmental and employment matters, which arise in the ordinary course of business. The Company does not expect that the ultimate cost to resolve these other matters will have a material adverse effect on its financial position, results of operations or cash flows.

Severance and change of control agreements. The Company has entered into severance agreements with its Chief Executive Officer and Chief Financial Officer that provide certain termination benefits to these executives in the event that an executive’s employment with the Company is terminated without cause. The initial term of each agreement is two years and the agreements provide for an automatic renewal of one year unless the Company or the executive provides notice of termination as specified in the agreement. Under the terms of these agreements, in the event of termination without cause, the executives would receive termination benefits equal to one and one-half times the executive’s 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.

The Company has also entered into change in control agreements with key members of management, including its executive officers, which specify the terms of separation in the event that termination of employment followed a change in control of the Company. The initial term of each agreement is two years and the agreements provide for an automatic renewal of one year unless the Company or the executive provides notice of termination as specified in the agreement. The agreements do not provide assurances of continued employment, nor do they specify the terms of an executive’s termination should the termination occur in the absence of a change in control. Under the terms of these agreements, in the event of termination within two years of a change of control, the Chief Executive Officer and Chief Financial Officer 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. The other key members of management, including the Company’s other two executive officers, 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, all of the executive’s stock options and restricted stock would vest immediately and outplacement services would be provided.

 

45


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

(13) Earnings Per Share

Effective October 4, 2009, the Company adopted certain provisions of ASC Topic 260, Earnings Per Share, which requires unvested share-based payment awards that contain non-forfeitable rights to dividends (whether paid or unpaid) to be treated as participating securities and included in the computation of basic earnings per share. The Company’s participating securities are its unvested restricted stock awards (“RSAs”). As required under the provisions that were adopted, prior period amounts have been retrospectively adjusted to reflect the impact of the allocation to participating securities. Because the Company’s unvested RSAs do not contractually participate in its losses, the Company has not allocated such losses to the unvested RSAs in computing basic earnings per share using the two-class method for the fiscal year ended October 3, 2009.

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

 

     Year Ended  
(In thousands, except per share amounts)    October 1,
2011
    October 2,
2010
    October 3,
2009
 

Earnings (loss) from continuing operations

   $ (387   $ 458      $ (20,940

Less allocation to participating securities

            (2       
  

 

 

   

 

 

   

 

 

 

Available to Insteel common shareholders

   $ (387   $ 456      $ (20,940
  

 

 

   

 

 

   

 

 

 

Earnings (loss) from discontinued operations net of income taxes

   $      $ 15      $ (1,146

Less allocation to participating securities

                     
  

 

 

   

 

 

   

 

 

 

Available to Insteel common shareholders

   $      $ 15      $ (1,146
  

 

 

   

 

 

   

 

 

 

Net earnings (loss)

   $ (387   $ 473      $ (22,086

Less allocation to participating securities

            (2       
  

 

 

   

 

 

   

 

 

 

Available to Insteel common shareholders

   $ (387   $ 471      $ (22,086
  

 

 

   

 

 

   

 

 

 

Basic weighted average shares outstanding

     17,562        17,466        17,380   

Dilutive effect of stock-based compensation

            98          
  

 

 

   

 

 

   

 

 

 

Diluted weighted average shares outstanding

     17,562        17,564        17,380   
  

 

 

   

 

 

   

 

 

 

Per share basic:

      

Earnings (loss) from continuing operations

   $ (0.02   $ 0.03      $ (1.20

Loss from discontinued operations

                   (0.07
  

 

 

   

 

 

   

 

 

 

Net earnings (loss)

   $ (0.02   $ 0.03      $ (1.27
  

 

 

   

 

 

   

 

 

 

Per share diluted:

      

Earnings (loss) from continuing operations

   $ (0.02   $ 0.03      $ (1.20

Loss from discontinued operations

                   (0.07
  

 

 

   

 

 

   

 

 

 

Net earnings (loss)

   $ (0.02   $ 0.03      $ (1.27
  

 

 

   

 

 

   

 

 

 

Options, restricted stock awards and RSUs representing 582,000 shares in 2011, 577,000 shares in 2010 and 668,000 shares in 2009 were antidilutive and were not included in the diluted EPS computation. Options and restricted stock awards representing 223,000 shares and 130,000 shares were not included in the diluted EPS calculation in 2011 and 2009, respectively, due to the net losses that were incurred.

(14) Business Segment Information

Following the Company’s exit from the industrial wire business (see Note 10 to the consolidated financial statements), its operations are entirely focused on the manufacture and marketing of concrete reinforcing products for the concrete construction industry. The Company’s concrete reinforcing products consist of welded wire reinforcement and PC strand. Based on the criteria specified in ASC Topic 280, Segment Reporting, the Company has one reportable segment. The results of operations for the industrial wire business have been reported as discontinued operations for all periods presented.

 

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

The Company’s net sales and long-lived assets (consisting of net property, plant and equipment and the cash surrender value of life insurance policies ) for continuing operations by geographic region are as follows:

 

     Year Ended  
(In thousands)    October 1,
2011
     October 2,
2010
     October 3,
2009
 

Net sales:

        

United States

   $ 329,168       $ 205,444       $ 225,286   

Foreign

     7,741         6,142         4,950   
  

 

 

    

 

 

    

 

 

 

Total

   $ 336,909       $ 211,586       $ 230,236   
  

 

 

    

 

 

    

 

 

 

Long-lived assets:

        

United States

   $ 93,490       $ 63,178       $ 67,943   

Foreign

                       
  

 

 

    

 

 

    

 

 

 

Total

   $ 93,490       $ 63,178       $ 67,943   
  

 

 

    

 

 

    

 

 

 

The Company’s net sales for continuing operations by product line are as follows:

 

     Year Ended  
(In thousands)    October 1,
2011
     October 2,
2010
     October 3,
2009
 

Net sales:

        

Welded wire reinforcement

   $ 208,741       $ 109,551       $ 122,942   

PC strand

     128,168         102,035         107,294   
  

 

 

    

 

 

    

 

 

 

Total

   $ 336,909       $ 211,586       $ 230,236   
  

 

 

    

 

 

    

 

 

 

There were no customers that accounted for 10% or more of the Company’s net sales in 2011, 2010 and 2009.

(15) Related Party Transactions

Sales to a company affiliated with one of the Company’s directors amounted to $475,000 in 2011, $423,000 in 2010 and $585,000 in 2009. Purchases from a company affiliated with one of the Company’s directors amounted to $6,000 in 2011. There were no such related party purchases in 2010 and 2009.

(16) Comprehensive Loss

The accumulated other comprehensive loss was comprised of the adjustment to the defined benefit plan liability as follows:

 

     Year Ended  
(In thousands)    October 1,
2011
    October 2,
2010
    October 3,
2009
 

Adjustment to defined benefit plan liability

   $ (2,015   $ (2,309   $ (2,520
  

 

 

   

 

 

   

 

 

 

Total accumulated other comprehensive loss

   $ (2,015   $ (2,309   $ (2,520
  

 

 

   

 

 

   

 

 

 

 

47


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

(17) Other Financial Data

Balance sheet information:

 

(In thousands)    October 1,
2011
     October 2,
2010
 

Accounts receivable, net:

     

Accounts receivable

   $ 42,732       $ 27,266   

Less allowance for doubtful accounts

     (761      (2,296
  

 

 

    

 

 

 

Total

   $ 41,971       $ 24,970   
  

 

 

    

 

 

 

Inventories, net:

     

Raw materials

   $ 40,536       $ 23,817   

Work in process

     3,771         1,899   

Finished goods

     32,067         18,203   
  

 

 

    

 

 

 

Total

   $ 76,374       $ 43,919   
  

 

 

    

 

 

 

Other current assets:

     

Current deferred tax asset

   $ 2,156       $ 2,612   

Capitalized financing costs, net

     82         82   

Income taxes receivable

             547   

Other

     1,855         690   
  

 

 

    

 

 

 

Total

   $ 4,093       $ 3,931   
  

 

 

    

 

 

 

Other assets:

     

Cash surrender value of life insurance policies, net of loans of $446 and $505

   $ 4,006       $ 4,525   

Capitalized financing costs, net

     218         300   

Other

     374         272   
  

 

 

    

 

 

 

Total

   $ 4,598       $ 5,097   
  

 

 

    

 

 

 

Property, plant and equipment, net:

     

Land and land improvements

   $ 8,586       $ 5,571   

Buildings

     40,773         32,433