10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended January 2, 2016

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 (State or other jurisdiction of incorporation or organization)	56-0674867 (I.R.S. Employer Identification No.)
1373 Boggs Drive, Mount Airy, North Carolina (Address of principal executive offices)	27030 (Zip Code)

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

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 [X] 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 [X] No [  ]

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.

Large accelerated filer [  ]	Accelerated filer [X]
Non-accelerated filer [  ] (Do not check if a smaller reporting company)	Smaller reporting company [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ] No [X]

The number of shares outstanding of the registrant’s common stock as of January 20, 2016 was 18,600,328.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
Item 1.	Unaudited Financial Statements
	Consolidated Statements of Operations and Comprehensive Income	3
	Consolidated Balance Sheets	4
	Consolidated Statements of Cash Flows	5
	Consolidated Statements of Shareholders' Equity	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4.	Controls and Procedures	22
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 6.	Exhibits	23
SIGNATURES		24
EXHIBIT INDEX		25

2

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands except for per share data)

(Unaudited)

	Three Months Ended
	January 2,			December 27,
	2016			2014
Net sales	$	92,391		$	110,628
Cost of sales		75,968			98,585
Gross profit		16,423			12,043
Selling, general and administrative expense		6,335			5,652
Restructuring recoveries, net		(75	)		-
Other income, net		(114	)		(40	)
Interest expense		41			94
Interest income		(18	)		-
Earnings before income taxes		10,254			6,337
Income taxes		3,546			2,187
Net earnings	$	6,708		$	4,150
Net earnings per share:
Basic	$	0.36		$	0.23
Diluted		0.36			0.22
Weighted average shares outstanding:
Basic		18,525			18,377
Diluted		18,883			18,820
Cash dividends declared per share	$	1.03		$	0.03
Comprehensive income	$	6,708		$	4,150

See accompanying notes to consolidated financial statements.

3

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

	(Unaudited)
	January 2,			October 3,
	2016			2015
Assets
Current assets:
Cash and cash equivalents	$	45,619		$	33,258
Accounts receivable, net		40,368			46,782
Inventories		69,065			66,009
Other current assets		2,547			5,309
Total current assets		157,599			151,358
Property, plant and equipment, net		83,144			84,178
Intangibles, net		9,931			10,220
Goodwill		6,965			6,965
Other assets		7,681			7,518
Total assets	$	265,320		$	260,239
Liabilities and shareholders' equity
Current liabilities:
Accounts payable	$	31,467		$	32,182
Accrued expenses		12,033			13,644
Dividends payable		18,600			-
Total current liabilities		62,100			45,826
Other liabilities		13,814			14,198
Commitments and contingencies
Shareholders' equity:
Common stock		18,600			18,466
Additional paid-in capital		62,475			60,967
Retained earnings		110,477			122,928
Accumulated other comprehensive loss		(2,146	)		(2,146	)
Total shareholders' equity		189,406			200,215
Total liabilities and shareholders' equity	$	265,320		$	260,239

See accompanying notes to consolidated financial statements.

4

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended
	January 2,			December 27,
	2016			2014
Cash Flows From Operating Activities:
Net earnings	$	6,708		$	4,150
Adjustments to reconcile net earnings to net cash provided by (used for) operating activities:
Depreciation and amortization		2,742			2,869
Amortization of capitalized financing costs		16			26
Stock-based compensation expense		229			442
Deferred income taxes		1,215			935
Excess tax benefits from stock-based compensation		(253	)		-
Gain on sale and disposition of property, plant and equipment		(239	)		(77	)
Increase in cash surrender value of life insurance policies over premiums paid		-			(136	)
Net changes in assets and liabilities (net of assets and liabilities acquired):
Accounts receivable, net		6,414			10,360
Inventories		(3,056	)		(5,565	)
Accounts payable and accrued expenses		(2,659	)		(22,716	)
Other changes		1,274			199
Total adjustments		5,683			(13,663	)
Net cash provided by (used for) operating activities		12,391			(9,513	)
Cash Flows From Investing Activities:
Capital expenditures		(941	)		(3,515	)
Acquisition of business		-			411
Proceeds from sale of assets held for sale		180			-
Proceeds from sale of property, plant and equipment		60			89
Proceeds from surrender of life insurance policies		40			40
Increase in cash surrender value of life insurance policies		(212	)		-
Net cash used for investing activities		(873	)		(2,975	)
Cash Flows From Financing Activities:
Proceeds from long-term debt		65			47,757
Principal payments on long-term debt		(65	)		(37,757	)
Cash dividends paid		(559	)		(551	)
Cash received from exercise of stock options		1,492			-
Excess tax benefits from stock-based compensation		253			-
Financing costs		(11	)		-
Payment of employee tax withholdings related to net share transactions		(332	)		-
Net cash provided by financing activities		843			9,449
Net increase (decrease) in cash and cash equivalents		12,361			(3,039	)
Cash and cash equivalents at beginning of period		33,258			3,050
Cash and cash equivalents at end of period	$	45,619		$	11
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest	$	-		$	16
Income taxes, net		2,194			45
Non-cash investing and financing activities:
Purchases of property, plant and equipment in accounts payable		479			206
Declaration of cash dividends to be paid		18,600			-
Restricted stock units and stock options surrendered for withholding taxes payable		332			-
Post-closing purchase price adjustment for business acquired		-			65

See accompanying notes to consolidated financial statements.

5

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 

(In thousands)

(Unaudited)

											Accumulated
					Additional						Other			Total
	Common Stock				Paid-In			Retained			Comprehensive			Shareholders'
	Shares		Amount		Capital			Earnings			Loss			Equity
Balance at October 3, 2015		18,466	$	18,466	$	60,967		$	122,928		$	(2,146	)	$	200,215
Net earnings									6,708						6,708
Stock options exercised, net		134		134		1,358									1,492
Compensation expense associated with stock-based plans						229									229
Excess tax benefits from stock-based compensation						253									253
Restricted stock units and stock options surrendered for withholding taxes payable						(332	)								(332	)
Cash dividends declared									(19,159	)					(19,159	)
Balance at January 2, 2016		18,600	$	18,600	$	62,475		$	110,477		$	(2,146	)	$	189,406

See accompanying notes to consolidated financial statements.

6

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Basis of Presentation

The accompanying unaudited interim consolidated financial statements of Insteel Industries, Inc. (“we,” “us,” “our,” “the Company” or “Insteel”) have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q. Certain information and note disclosures normally included in the audited financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. The October 3, 2015 consolidated balance sheet was derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements should therefore be read in conjunction with the consolidated financial statements and notes for the fiscal year ended October 3, 2015 included in the Company’s Annual Report on Form 10-K filed with the SEC.

The accompanying unaudited interim consolidated financial statements reflect all adjustments of a normal recurring nature that the Company considers necessary for a fair presentation of results for these interim periods. The results of operations for the three-month period ended January 2, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending October 1, 2016 or future periods.

On August 15, 2014, the Company through its wholly-owned subsidiary, Insteel Wire Products Company (“IWP”), purchased substantially all of the assets associated with the prestressed concrete strand (“PC strand”) business of American Spring Wire Corporation (“ASW”) (see Note 3 to the consolidated financial statements).

The Company has evaluated subsequent events through the time of filing this Quarterly Report on Form 10-Q and has concluded that there are no significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on the consolidated financial statements.

(2) Recent Accounting Pronouncements

In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-17 “Income Taxes (Topic 740) - Balance Sheet Classification of Deferred Taxes” to simplify the presentation of deferred income taxes. Under this update, all deferred tax assets and liabilities, along with any related valuation allowance, are required to be classified as noncurrent on the balance sheet. Effective January 2, 2016, the Company early adopted ASU No. 2015-17 on a prospective basis, which resulted in the reclassification of the Company’s current deferred tax asset as a non-current deferred tax liability on its consolidated balance sheet. No prior periods were retrospectively adjusted.

In July 2015, the FASB issued ASU No. 2015-11 “Simplifying the Measurement of Inventory,” which requires that an entity measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. ASU No. 2015-11 will become effective for the Company in the first quarter of fiscal 2018. The Company does not expect the adoption of this update will have a material effect on its consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09 “Revenue from Contracts with Customers,” which will supersede nearly all existing revenue recognition guidance under GAAP. ASU No. 2014-09 provides that an entity recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU No. 2014-09 allows for either full retrospective or modified retrospective adoption and will become effective for the Company in the first quarter of fiscal 2019. The Company is evaluating the alternative transition methods and the potential effects of the adoption of this update on its consolidated financial statements.

7

(3) Business Combination

On August 15, 2014, the Company purchased substantially all of the assets associated with the PC strand business of ASW for a final adjusted purchase price of $33.5 million, net of post-closing adjustments of $480,000 (the “ASW Acquisition”).

ASW manufactured PC strand at facilities located in Houston, Texas and Newnan, Georgia. The Company acquired, among other assets, the accounts receivable and inventories related to ASW’s PC strand business, the production equipment at its facility in Houston and its production equipment and facility in Newnan. Pursuant to an agreement with ASW, the Company is leasing the Houston facility from ASW with an option to purchase it in the future. In addition, the Company assumed certain of ASW’s accounts payable and accrued liabilities related to its PC strand business.

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 ASW Acquisition:

(In thousands)
Assets acquired:
Accounts receivable	$	7,854
Inventories		6,292
Other current assets		786
Property, plant and equipment		8,638
Intangibles		8,530
Total assets acquired	$	32,100
Liabilities assumed:
Accounts payable	$	3,240
Accrued expenses		2,362
Total liabilities assumed		5,602
Net assets acquired		26,498
Purchase price		33,463
Goodwill	$	6,965

In connection with the ASW Acquisition, the Company acquired intangible assets consisting of customer relationships, developed technology and know-how, and a non-competition agreement. The ASW Acquisition was accounted for as a business purchase pursuant to Accounting Standards Codification (“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 such costs are incurred.

Restructuring charges. Subsequent to the ASW Acquisition, in fiscal 2014, the Company incurred employee separation costs for staffing reductions associated with the acquisition. In February 2015, the Company elected to consolidate its PC strand operations with the closure of the Newnan, Georgia facility that had been acquired through the ASW Acquisition, which was completed in March 2015.

8

Following is a summary of the restructuring activities and associated costs that were incurred during the three-month periods ended January 2, 2016 and December 27, 2014:

(In thousands)	Equipment Relocation Costs			Severance and Other Employee Separation Costs			Facility Closure Costs			Gain on Sale of Equipment			Total
2016
Liability as of October 3, 2015	$	-		$	735		$	-		$	-		$	735
Restructuring charges (recoveries)		75			-			30			(180	)		(75	)
Cash payments/receipts		(75	)		(72	)		(30	)		180			3
Liability as of January 2, 2016	$	-		$	663		$	-		$	-		$	663
2015
Liability as of September 27, 2014	$	-		$	1,208		$	-		$	-		$	1,208
Cash payments		-			(53	)		-			-			(53	)
Liability as of December 27, 2014	$	-		$	1,155		$	-		$	-		$	1,155

The Company recorded restructuring liabilities of $0.7 million on its consolidated balance sheet as of January 2, 2016 and October 3, 2015, including $0.5 million in accrued expenses and $0.2 million in other liabilities. The Company does not currently expect to incur any significant restructuring charges during the remainder of fiscal 2016.

(4) Fair Value Measurements

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

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

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

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

As of January 2, 2016 and October 3, 2015, 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 at January 2, 2016		Quoted Prices in Active Markets (Level 1)		Observable Inputs (Level 2)
Current assets:
Cash equivalents	$	45,566	$	45,566	$	-
Other assets:
Cash surrender value of life insurance policies		7,366		-		7,366
Total	$	52,932	$	45,566	$	7,366

9

(In thousands)	Total at October 3, 2015		Quoted Prices in Active Markets (Level 1)		Observable Inputs (Level 2)
Current assets:
Cash equivalents	$	32,843	$	32,843	$	-
Other assets:
Cash surrender value of life insurance policies		7,194		-		7,194
Total	$	40,037	$	32,843	$	7,194

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

As of January 2, 2016 and October 3, 2015, the Company did not have any nonfinancial assets that were required to be measured at fair value on a nonrecurring basis other than the assets and liabilities that were acquired from ASW at fair value (see Note 3 to the consolidated financial statements). The carrying amounts of accounts receivable, accounts payable and accrued expenses approximates fair value due to the short-term maturities of these financial instruments.

(5) Intangible Assets

The primary components of the Company’s intangible assets and the related accumulated amortization are as follows:

(In thousands)	Gross Amount		Accumulated Amortization			Net Book Value
As of January 2, 2016:
Customer relationships	$	6,500	$	(450	)	$	6,050
Developed technology and know-how		1,800		(125	)		1,675
Non-competition agreements		3,577		(1,371	)		2,206
	$	11,877	$	(1,946	)	$	9,931

(In thousands)	Gross Amount		Accumulated Amortization			Net Book Value
As of October 3, 2015:
Customer relationships	$	6,500	$	(369	)	$	6,131
Developed technology and know-how		1,800		(102	)		1,698
Non-competition agreements		3,577		(1,186	)		2,391
	$	11,877	$	(1,657	)	$	10,220

Amortization expense for intangibles was $289,000 and $216,000 for the three-month periods ended January 2, 2016 and December 27, 2014, respectively.

(6) 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. Effective February 17, 2015, the shareholders of the Company approved the 2015 Equity Incentive Plan of Insteel Industries, Inc. (the “2015 Plan”), which authorizes up to 900,000 shares of Company common stock for future grants under the plan. The 2015 Plan, which expires on February 17, 2025, replaces the 2005 Equity Incentive Plan of Insteel Industries, Inc., which expired on February 15, 2015. As of January 2, 2016, there were 711,000 shares of Company common stock available for future grants under the 2015 Plan, which is the Company’s only active equity incentive plan.

10

Stock options. Under the Company’s equity incentive plans, employees and directors may be granted options to purchase shares of the Company’s common stock at the fair market value on the date of the grant. Options granted under these plans generally vest over three years and expire ten years from the date of the grant. Compensation expense associated with stock options for the three-month periods ended January 2, 2016 and December 27, 2014 is as follows:

	Three Months Ended
	January 2,		December 27,
(In thousands)	2016		2014
Stock options:
Compensation expense	$	83	$	173

As of January 2, 2016, the remaining unamortized compensation cost related to unvested stock option awards was $280,000, which is expected to be recognized over a weighted average period of 1.36 years.

The following table summarizes stock option activity for the three-month period ended January 2, 2016:

									Contractual	Aggregate
	Options			Exercise Price Per Share					Term -	Intrinsic
	Outstanding						Weighted		Weighted	Value
	(in thousands)			Range			Average		Average (years)	(in thousands)
Outstanding at October 3, 2015		923		$ 7.55	-	$ 21.96	$	15.14
Exercised		(176	)	7.55	-	20.50		12.32		$	2,016
Outstanding at January 2, 2016		747		7.55	-	21.96		15.80	6.31		3,882
Vested and anticipated to vest in the future at January 2, 2016		741						15.78	6.30		3,872
Exercisable at January 2, 2016		491						13.95	5.05		3,421

Stock option exercises include “net exercises,” pursuant to which the optionee received shares of common stock equal to the intrinsic value of the options (fair market value of common stock on the date of exercise less exercise price) reduced by any applicable withholding taxes.

Restricted stock units. Restricted stock units (“RSUs”) granted under the Company’s equity incentive 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 year from the date of the grant for RSUs granted to directors and three years from the date of the grant for RSUs granted to employees. RSUs do not have voting rights. RSU compensation expense for the three-month periods ended January 2, 2016 and December 27, 2014 is as follows:

	Three Months Ended
	January 2,		December 27,
(In thousands)	2016		2014
Compensation expense	$	146	$	269

As of January 2, 2016, the remaining unrecognized compensation cost related to unvested RSUs was $444,000, which is expected to be recognized over a weighted average vesting period of 1.58 years.

The following table summarizes RSU activity during the three-month period ended January 2, 2016:

			Weighted
	Restricted		Average
	Stock Units		Grant Date
(Unit amounts in thousands)	Outstanding		Fair Value
Balance, October 3, 2015		157	$	18.96
Granted		-		-
Released		-		-
Balance, January 2, 2016		157		18.96

11

(7) Income Taxes

Effective income tax rate. The Company’s effective income tax rate was 34.6% for the three-month period ended January 2, 2016 compared with 34.5% for the three-month period ended December 27, 2014. The effective income tax rates for both periods were based upon the estimated rate applicable for the entire fiscal year adjusted to reflect any significant items related specifically to interim periods.

Deferred income taxes. In November 2015, the FASB issued ASU No. 2015-17 “Income Taxes (Topic 740) - Balance Sheet Classification of Deferred Taxes” to simplify the presentation of deferred income taxes. Under this update, all deferred tax assets and liabilities, along with any related valuation allowance, are required to be classified as noncurrent on the balance sheet. Effective January 2, 2016, the Company early adopted ASU No. 2015-17 on a prospective basis, which resulted in the reclassification of the Company’s current deferred tax asset as a non-current deferred tax liability on its consolidated balance sheet. No prior periods were retrospectively adjusted.

As of January 2, 2016, the Company recorded a non-current deferred tax liability (net of valuation allowance) of $5.8 million in other liabilities on its consolidated balance sheet. The Company has $9.3 million of state net operating loss carryforwards (“NOLs”) that begin to expire in 2017, but principally expire between 2017 and 2031. The Company has also recorded $178,000 of gross deferred tax assets for various state tax credits that begin to expire in 2016, but principally expire between 2016 and 2020.

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 reserve against its deferred tax assets to the extent the Company no longer believes it is more likely than not that they will be fully realized. As of January 2, 2016 and October 3, 2015, the Company recorded a valuation allowance of $492,000 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 NOLs and tax credits against which an allowance had previously been provided or determine that such utilization was more likely than not.

Uncertainty in income taxes. As of January 2, 2016, the Company has no material, known tax exposures that require the establishment of contingency reserves for uncertain tax positions.

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 2010 remain subject to examination.

(8) 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 no longer earn additional service benefits. The Company made contributions totaling $49,000 to the Delaware Plan during the three-month period ended January 2, 2016 and expects to contribute an additional $143,000 during the remainder of the current fiscal year.

Net periodic pension costs for the Delaware Plan for the three-month periods ended January 2, 2016 and December 27, 2014 include the following components:

	Three Months Ended
	January 2,			December 27,
(In thousands)	2016			2014
Interest cost	$	37		$	33
Expected return on plan assets		(44	)		(45	)
Recognized net actuarial loss		19			13
Net periodic pension cost	$	12		$	1

Supplemental employee retirement plan. The Company maintains supplemental employee retirement plans (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.

12

Net periodic pension costs for the SERPs for the three-month periods ended January 2, 2016 and December 27, 2014 include the following components:

	Three Months Ended
	January 2,		December 27,
(In thousands)	2016		2014
Service cost	$	66	$	72
Interest cost		81		81
Recognized net actuarial loss		21		29
Net periodic pension cost	$	168	$	182

(9) Long-Term Debt

Revolving Credit Facility. The Company has a $100.0 million revolving credit facility (the “Credit Facility”) that is used to supplement its operating cash flow and fund its working capital, capital expenditure, general corporate and growth requirements. In May 2015, the Company amended the Credit Facility to, among other changes, extend the maturity date of the Credit Facility from June 2, 2016 to May 13, 2020. Advances under the Credit Facility are limited to the lesser of the revolving loan commitment amount (currently $100.0 million) or a borrowing base amount that is calculated based upon a percentage of eligible receivables and inventories. As of January 2, 2016, no borrowings were outstanding on the Credit Facility, $75.2 million of borrowing capacity was available and outstanding letters of credit totaled $1.6 million.

Interest rates on the Credit Facility are based upon (1) an index rate that is established at the highest of the prime rate, 0.50% plus the federal funds rate or the 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 Credit Facility within the range of 0.25% to 0.75% for index rate loans and 1.25% to 1.75% for LIBOR loans. In addition, the applicable interest rate margins would be increased by 2.00% upon the occurrence of certain events of default provided for under the terms of the Credit Facility. Based on the Company’s excess availability as of January 2, 2016, the applicable interest rate margins on the Credit Facility were 0.25% for index rate loans and 1.25% for LIBOR loans.

The Company’s ability to borrow available amounts under the Credit Facility will be restricted or eliminated in the event of certain covenant breaches, events of default or if the Company is unable to make certain representations and warranties provided for under the terms of the Credit Facility. The Company is required to maintain a fixed charge coverage ratio of not less than 1.10 at the end of each fiscal quarter for the twelve-month period then ended when the amount of liquidity on the Credit Facility is less than $12.5 million. In addition, the terms of the Credit Facility restrict 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. The terms of the Credit Facility also provide that 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 January 2, 2016, the Company was in compliance with all of the financial and negative covenants under the Credit Facility and there have not been any events of default.

Amortization of capitalized financing costs associated with the Credit Facility was $16,000 and $26,000 for the three-month periods ended January 2, 2016 and December 27, 2014, respectively. Accumulated amortization of capitalized financing costs was $4.5 million as of January 2, 2016 and October 3, 2015.

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(10) Earnings Per Share

The computations of basic and diluted earnings per share attributable to common shareholders for the three-month periods ended January 2, 2016 and December 27, 2014 are as follows:

	Three Months Ended
	January 2,		December 27,
(In thousands except per share amounts)	2016		2014
Net earnings available to common shareholders	$	6,708	$	4,150
Basic weighted average shares outstanding		18,525		18,377
Dilutive effect of stock-based compensation		358		443
Diluted weighted average shares outstanding		18,883		18,820
Net earnings per share:
Basic	$	0.36	$	0.23
Diluted	$	0.36	$	0.22

Options representing 86,000 and 25,000 shares for the three-month periods ended January 2, 2016 and December 27, 2014, respectively, were antidilutive and not included in the diluted earnings per share calculation.

(11) Share Repurchases

On November 18, 2008, the Company’s board of directors approved a share repurchase authorization to buy back up to $25.0 million of the Company’s outstanding common stock (the “Authorization”). Under the Authorization, repurchases may be made from time to time in the open market or in privately negotiated transactions subject to market conditions, applicable legal requirements and other factors. The Company is not obligated to acquire any particular amount of common stock and the program may be commenced or suspended at any time at the Company’s discretion without prior notice. The Authorization continues in effect until terminated by the Board of Directors. As of January 2, 2016, there was $24.8 million remaining available for future share repurchases under this authorization. No repurchases of common stock were made during the three-month periods ended January 2, 2016 and December 27, 2014.

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(12) Other Financial Data

Balance sheet information:

	January 2,			October 3,
(In thousands)	2016			2015
Accounts receivable, net:
Accounts receivable	$	40,945		$	47,420
Less allowance for doubtful accounts		(577	)		(638	)
Total	$	40,368		$	46,782
Inventories:
Raw materials	$	38,344		$	38,457
Work in process		2,636			2,968
Finished goods		28,085			24,584
Total	$	69,065		$	66,009
Other current assets:
Prepaid insurance	$	1,186		$	2,519
Current deferred tax asset		-			1,492
Other		1,361			1,298
Total	$	2,547		$	5,309
Other assets:
Cash surrender value of life insurance policies	$	7,366		$	7,194
Capitalized financing costs, net		219			227
Other		96			97
Total	$	7,681		$	7,518
Property, plant and equipment, net:
Land and land improvements	$	9,424		$	9,279
Buildings		43,032			43,016
Machinery and equipment		142,900			142,662
Construction in progress		2,454			1,715
		197,810			196,672
Less accumulated depreciation		(114,666	)		(112,494	)
Total	$	83,144		$	84,178
Accrued expenses:
Salaries, wages and related expenses	$	3,122		$	5,455
Income taxes		2,072			2,187
Customer rebates		1,973			1,760
Property taxes		1,460			1,507
Pension plan		1,222			1,263
Customer advances		665			71
Restructuring liabilities		505			505
Workers' compensation		293			294
Other		721			602
Total	$	12,033		$	13,644
Other liabilities:
Deferred compensation	$	7,853		$	7,765
Deferred income taxes		5,780			6,057
Other		181			376
Total	$	13,814		$	14,198

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(13) Business Segment Information

The Company’s 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.

(14) Contingencies

Insurance recoveries. On January 21, 2014, a fire occurred at the Company’s Gallatin, Tennessee PC strand manufacturing facility, damaging a portion of the facility and requiring the temporary curtailment of operations until the necessary repairs were completed. The Company reassigned a portion of its production requirements to its PC strand facility located in Sanderson, Florida, which was operating at a reduced utilization level. During the first quarter of fiscal 2015, the Company completed the remainder of the repairs and the Gallatin facility was fully operational.

The Company maintained general liability, business interruption and replacement cost property insurance coverage on its facilities that was sufficient to cover the losses incurred from the fire. During the three months ended December 27, 2014, the Company recorded a $257,000 receivable for the anticipated insurance proceeds related to the costs that were incurred during the period related to the fire which were recorded in cost of sales ($244,000) and selling, general and administrative expense (“SG&A expense”) ($13,000) on the consolidated statement of operations and comprehensive income. The insurance proceeds attributable to the property and equipment damaged in the fire were reported in cash flows from investing activities and all other insurance proceeds received were reported in cash flows from operating activities on the consolidated statement of cash flows. The Company reached a final settlement with its insurance carrier on this claim during the third quarter of fiscal 2015.

Legal proceedings. The Company is involved in 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 costs to resolve these matters will have a material adverse effect on its financial position, results of operations or cash flows.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

This report contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, particularly under the caption “Outlook” below. When used in this report, the words “believes,” “anticipates,” “expects,” “estimates,” “appears, “plans,” “intends,” “may,” “should,” “could” and similar expressions are intended to identify forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, they are subject to a number of risks and uncertainties, and we can provide no assurances that such plans, intentions or expectations will be implemented or achieved. Many of these risks and uncertainties are discussed in detail, and where appropriate, updated in our periodic and other reports and statements, in particular under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended October 3, 2015, filed with the U.S. Securities and Exchange Commission (“SEC”). You should carefully review these risks and uncertainties.

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. All forward-looking statements speak only to the respective dates on which such statements are made and we do not undertake 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, except as may be required by law.

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:

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

● reduced spending for nonresidential and residential construction and the impact on demand for our products;

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

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● the cyclical nature of the steel and building material industries;

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

● fluctuations in the cost and availability of our primary raw material, hot-rolled 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 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 “Risk Factors” discussed in our Annual Report on Form 10-K for the year ended October 3, 2015 and in other filings that we make with the SEC.

Overview

Insteel Industries, Inc. (“we”, “us”, “our”, “the Company” or “Insteel”) is the nation’s largest manufacturer of steel wire reinforcing products for concrete construction applications. We manufacture and market prestressed concrete strand (“PC strand”) and welded wire reinforcement, including ESM, concrete pipe reinforcement and standard welded wire reinforcement. Our products are sold primarily to manufacturers of concrete products that are used in nonresidential construction. We market our products through sales representatives who are our employees. 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. 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 the markets we currently serve or expand our geographic footprint.

On August 15, 2014, we, through our wholly-owned subsidiary, Insteel Wire Products Company (“IWP”), purchased substantially all of the assets associated with the PC strand business of American Spring Wire Corporation (“ASW”) for a final adjusted purchase price of $33.5 million (the “ASW Acquisition”). ASW manufactured PC strand at facilities located in Houston, Texas and Newnan, Georgia (see Note 3 to the consolidated financial statements). We acquired, among other assets, the accounts receivable and inventories related to ASW’s PC strand business, the production equipment at its facility in Houston and its production equipment and facility in Newnan. We also entered into an agreement to lease the Houston facility from ASW with an option to purchase it in the future. Subsequent to the acquisition, we elected to consolidate our PC strand operations with the closure of the Newnan facility, which was completed in March 2015.

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Results of Operations

Statements of Operations – Selected Data

(Dollars in thousands)

	Three Months Ended
	January 2, 2016			Change			December 27, 2014
Net sales	$	92,391			(16.5	%)	$	110,628
Gross profit		16,423			36.4	%		12,043
Percentage of net sales		17.8	%					10.9	%
Selling, general and administrative expense	$	6,335			12.1	%	$	5,652
Percentage of net sales		6.9	%					5.1	%
Restructuring recoveries, net	$	(75	)		100.0	%	$	-
Other income, net		(114	)		N/M			(40	)
Interest expense		41			(56.4	%)		94
Interest income		(18	)		100.0	%		-
Effective income tax rate		34.6	%					34.5	%
Net earnings	$	6,708			61.6	%	$	4,150

"N/M" = not meaningful

First Quarter of Fiscal 2016 Compared to First Quarter of Fiscal 2015

Net Sales

Net sales for the first quarter of 2016 decreased 16.5% to $92.4 million from $110.6 million in the prior year quarter on a 9.0% decrease in shipments and an 8.3% decrease in average selling prices. The reduction in shipments was primarily due to a more pronounced seasonal downturn in the current year quarter partially related to the Company’s fiscal calendar. Sales for both periods reflect reduced volumes relative to prerecession levels in our construction end-markets.

Gross Profit

Gross profit for the first quarter of 2016 increased 36.4% to $16.4 million, or 17.8% of net sales, from $12.0 million, or 10.9% of net sales, in the prior year quarter. The year-over-year increase was primarily due to higher spreads between average selling prices and raw material costs ($5.1 million) and, to a much lesser extent, lower unit conversion costs ($0.1 million) partially offset by the decrease in shipments ($1.2 million). The increase in spreads was driven by lower raw material ($13.1 million) and freight costs ($0.4 million) partially offset by lower average selling prices ($8.4 million). Gross profit for both periods was unfavorably impacted by reduced shipment volumes and elevated unit conversion costs relative to prerecession levels largely due to reduced operating schedules.

Selling, General and Administrative Expense

Selling, general and administrative expense (“SG&A expense”) for the first quarter of 2016 increased 12.1% to $6.3 million, or 6.9% of net sales, from $5.7 million, or 5.1% of net sales, in the same year-ago period as higher compensation expense ($0.7 million) was partially offset by lower employee benefit costs ($0.2 million). The increase in compensation expense was largely driven by higher incentive plan expense due to our improved financial results in the current year quarter. The decrease in employee benefit costs was primarily related to lower employee health insurance expense.

Restructuring Recoveries, Net

Net restructuring recoveries of $75,000 were realized in the first quarter of 2016 related to the consolidation of our PC strand facilities, reflecting a gain on the sale of equipment previously associated with the Newnan, Georgia PC strand facility ($180,000) partially offset by equipment relocation ($75,000) and facility closure costs ($30,000).

Interest Expense

Interest expense for the first quarter of 2016 decreased 56.4% to $41,000 from $94,000 in the prior year quarter primarily due to the borrowings on our revolving credit facility during the year-ago period.

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Income Taxes

Our effective income tax rate for the first quarter of 2016 was essentially unchanged at 34.6% compared with 34.5% for the prior year quarter.

Net Earnings

Net earnings for the first quarter of 2016 increased to $6.7 million ($0.36 per share) from $4.2 million ($0.22 per diluted share) in the prior year quarter primarily due to an increase in gross profit partially offset by an increase in SG&A expense.

Liquidity and Capital Resources

Selected Financial Data

(Dollars in thousands)

	Three Months Ended
	January 2, 2016			December 27, 2014
Net cash provided by (used for) operating activities	$	12,391		$	(9,513	)
Net cash used for investing activities		(873	)		(2,975	)
Net cash provided by financing activities		843			9,449
Net working capital		95,499			92,977
Total debt		-			10,000
Percentage of total capital		-			5.2	%
Shareholders' equity	$	189,406		$	182,924
Percentage of total capital		100.0	%		94.8	%
Total capital (total debt + shareholders' equity)	$	189,406		$	192,924

Operating Activities

Operating activities provided $12.4 million of cash during the first quarter of 2016 primarily from net earnings adjusted for non-cash items and a reduction in the net working capital components of accounts receivable, inventories, and accounts payable and accrued expenses. Net working capital provided $0.7 million of cash due to a $6.4 million decrease in accounts receivable partially offset by a $3.0 million increase in inventories and a $2.7 million decrease in accounts payable and accrued expenses. The decrease in accounts receivable was primarily related to the seasonal downturn in sales and lower selling prices. The increase in inventory was largely due to the seasonal downturn in sales and a higher proportion of import purchases during the quarter. The decrease in accounts payable and accrued expenses was principally due to lower accrued salaries and wages.

Operating activities used $9.5 million of cash during the first quarter of 2015 primarily due to an increase in the net working capital components of accounts receivable, inventories, and accounts payable and accrued expenses partially offset by net earnings adjusted for non-cash items. Net working capital used $17.9 million of cash due to a $22.7 million decrease in accounts payable and accrued expenses and a $5.6 million increase in inventories partially offset by a $10.4 million decrease in accounts receivable. The decrease in accounts payable and accrued expenses was largely due to lower raw material purchases during the latter portion of the quarter and changes in the mix of vendors and payment terms. The increase in inventories was primarily driven by higher raw material purchases. The decrease in accounts receivable was principally due to the usual seasonal downturn in sales.

We may elect to make adjustments in our operating activities as there are changes in the conditions in our construction end-markets, which could materially impact our cash requirements. While a downturn in the level of construction activity adversely affects sales to our customers, it generally reduces our working capital requirements.

Investing Activities

Investing activities used $0.9 million of cash during the first quarter of 2016 compared to $3.0 million during the prior year quarter. Capital expenditures for the first quarter of 2016 were $0.9 million compared with $3.5 million in the prior year period and are expected to total approximately $20.0 million for fiscal 2016, including $9.0 million of outlays related to expansion of our Houston PC strand facility. Our investing activities are largely discretionary, providing us with the ability to significantly curtail outlays should business conditions warrant that such actions be taken.

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Financing Activities

Financing activities provided $0.8 million of cash during the first quarter of 2016 compared to $9.4 million during the prior year quarter. Stock option exercises provided $1.5 million of cash during the current quarter, which was partially offset by the payment of $0.6 million of cash dividends. Additionally, in December 2015 we declared a special cash dividend totaling $18.6 million, or $1.00 per share, that was paid in the second quarter of fiscal 2016. In the prior year quarter, net borrowings on our revolving credit facility provided $10.0 million of cash, which was partially offset by the payment of $0.6 million of cash dividends.

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.

Credit Facility

We have a $100.0 million revolving credit facility (the “Credit Facility”) that is used to supplement our operating cash flow and fund our working capital, capital expenditure, general corporate and growth requirements. In May 2015, we amended the Credit Facility to, among other changes, extend the maturity date from June 2, 2016 to May 13, 2020. As of January 2, 2016, no borrowings were outstanding on the Credit Facility, $75.2 million of borrowing capacity was available and outstanding letters of credit totaled $1.6 million.

We believe that, in the absence of significant unanticipated cash demands, cash and cash equivalents, net cash generated by operating activities, and the borrowing availability provided under the Credit Facility will be sufficient to satisfy our expected requirements for working capital, capital expenditures, dividends and share repurchases, if any. We expect to have access to the amounts available under the Credit Facility as required. However, deterioration in our construction end-markets could result in reduced 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 required additional short-term liquidity, we would evaluate the alternative sources of financing that were 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 the Credit Facility position us to meet our anticipated liquidity requirements for the foreseeable future.

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 sales within the year typically occurs when weather conditions are the most conducive to construction activity. As a result, sales 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 nonresidential versus residential construction for extended periods.

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. Inflation did not have a material impact on our sales or earnings during the first fiscal quarter of 2016. The timing and magnitude of any future increases or decreases in the prices for wire rod and the impact on selling prices for our products is uncertain at this time.

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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

There have been no material changes in our contractual obligations and commitments as disclosed in our Annual Report on Form 10-K as of October 3, 2015 other than those which occur in the ordinary course of business.

Critical Accounting Policies

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our unaudited financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. The preparation of our financial statements requires the application of accounting policies 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. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” included in our Annual Report on Form 10-K for the year ended October 3, 2015 for further information regarding our critical accounting policies and estimates. As of January 2, 2016, there were no changes in the nature of our critical accounting policies or the application of those policies from those reported in our Annual Report on Form 10-K for the year ended October 3, 2015.

Recent Accounting Pronouncements 

Refer to Note 2 of the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report for recently adopted and issued accounting pronouncements since the filing of our Form 10-K for the year ended October 3, 2015, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements.

Outlook

As we look ahead to the remainder of 2016, we expect further improvement in our financial results driven by the favorable conditions in our construction end-markets, the consumption of lower cost inventory reflecting the recent decline in raw material costs and reduced unit conversion costs at our facilities. The outlook for private nonresidential construction, our primary demand driver, remains positive and we expect the ongoing recovery will result in higher shipment volumes and operating levels. The recent passage of a new five-year federal transportation funding authorization provides greater funding certainty for states and municipalities that should spur increased infrastructure construction in the coming years.

We 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 that our financial results will be favorably impacted by the realization of additional operating synergies associated with the ASW Acquisition and the related reconfiguration of our PC strand 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 pursue further acquisitions in our existing businesses that expand our penetration of markets we currently serve or expand our geographic footprint. 

Item 3. 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 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.

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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 wire rod purchases for varying periods (most recently monthly for domestic suppliers), depending upon market conditions, to manage our exposure to price fluctuations and 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 wire rod. Our ability to acquire 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 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 inventory. Based on our shipments and average wire rod cost reflected in cost of sales for the first quarter of 2016, a 10% increase in the price of steel wire rod would have resulted in a $5.0 million decrease in our pre-tax earnings for the three months ended January 2, 2016 (assuming there was not a corresponding change in our selling prices).

Interest Rates 

Although we did not have any balances outstanding on our revolving credit facility as of January 2, 2016, future borrowings under the facility are subject to a variable rate of interest and are sensitive to changes in interest rates.

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 January 2, 2016.

Item 4. Controls and Procedures

We have conducted an evaluation of the effectiveness of our disclosure controls and procedures as of January 2, 2016. This evaluation was conducted under the supervision and with the participation of management, including our principal executive officer and our principal financial officer. Based upon that evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Further, we concluded that our disclosure controls and procedures were effective to ensure that information is accumulated and communicated to management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

There has been no change in our internal control over financial reporting that occurred during the quarter ended January 2, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

During the quarter ended January 2, 2016, there were no material changes from the risk factors set forth under Part I, Item 1A., “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended October 3, 2015. You should carefully consider these factors in addition to the other information set forth in this report which could materially affect our business, financial condition or future results. The risks and uncertainties described in this report and in our Annual Report on Form 10-K for the year ended October 3, 2015, as well as other reports and statements that we file with the SEC, are not the only risks and uncertainties facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also have a material adverse effect on our financial position, results of operations or cash flows.

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

On November 18, 2008, our Board of Directors approved a share repurchase authorization to buy back up to $25.0 million of our outstanding common stock (the “Authorization”). Under the Authorization, repurchases may be made from time to time in the open market or in privately negotiated transactions subject to market conditions, applicable legal requirements and other factors. We are not obligated to acquire any particular amount of common stock and the program may be commenced or suspended at any time at our discretion without prior notice. The Authorization continues in effect until terminated by the Board of Directors. As of January 2, 2016, there was $24.8 million remaining available for future share repurchases under this authorization. No repurchases of common stock were made during the three-month periods ended January 2, 2016 and December 27, 2014.

Item 6. Exhibits

31.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following financial information from the Quarterly Report on Form 10-Q of Insteel Industries, Inc. for the quarter ended January 2, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Operations and Comprehensive Income for the three months ended January 2, 2016 and December 27, 2014, (ii) the Consolidated Balance Sheets as of January 2, 2016 and October 3, 2015, (iii) the Consolidated Statements of Cash Flows for the three months ended January 2, 2016 and December 27, 2014, (iv) the Consolidated Statements of Shareholders’ Equity as of January 2, 2016 and October 3, 2015, and (v) the Notes to Consolidated Financial Statements.

23

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

INSTEEL INDUSTRIES, INC.

Registrant

Date: January 21, 2016	By:	/s/   Michael C. Gazmarian
		Michael C. Gazmarian
		Vice President, Chief Financial Officer and Treasurer
		(Duly Authorized Officer and Principal Financial Officer)

24

EXHIBIT INDEX

Exhibit Number	Description
31.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following financial information from the Quarterly Report on Form 10-Q of Insteel Industries, Inc. for the quarter ended January 2, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Operations and Comprehensive Income for the three months ended January 2, 2016 and December 27, 2014, (ii) the Consolidated Balance Sheets as of January 2, 2016 and October 3, 2015, (iii) the Consolidated Statements of Cash Flows for the three months ended January 2, 2016 and December 27, 2014, (iv) the Consolidated Statements of Shareholders’ Equity as of January 2, 2016 and October 3, 2015, and (v) the Notes to Consolidated Financial Statements.

25

EX-31.1

Exhibit 31.1

Certification

I, H.O. Woltz III, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended January 2, 2016 of Insteel Industries, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
	(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
	(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: January 21, 2016

/s/ H. O. Woltz III

 H. O. Woltz III

 President, Chief Executive Officer and Chairman of the Board

EX-31.2

Exhibit 31.2

Certification

I, Michael C. Gazmarian, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended January 2, 2016 of Insteel Industries, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
	(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
	(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: January 21, 2016

/s/ Michael C. Gazmarian

 Michael C. Gazmarian

 Vice President, Chief Financial Officer and Treasurer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Insteel Industries, Inc. (the “Company”) for the period ended January 2, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, H. O. Woltz III, President, Chief Executive Officer and Chairman of the Board of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1)     the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)     the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/   H.O. Woltz III

H.O. Woltz III

President, Chief Executive Officer and Chairman of the Board

January 21, 2016

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Insteel Industries, Inc. (the “Company”) for the period ended January 2, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael C. Gazmarian, Vice President, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1)     the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)     the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/    Michael C. Gazmarian

Michael C. Gazmarian

Vice President, Chief Financial Officer and Treasurer

January 21, 2016

XML

Document And Entity Information - shares	3 Months Ended
	Jan. 02, 2016	Jan. 20, 2016
Entity Registrant Name	INSTEEL INDUSTRIES INC
Entity Central Index Key	0000764401
Trading Symbol	iiin
Current Fiscal Year End Date	--10-01
Entity Filer Category	Accelerated Filer
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Entity Common Stock, Shares Outstanding (in shares)		18,600,328
Document Type	10-Q
Document Period End Date	Jan. 02, 2016
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	Q1
Amendment Flag	false

XML

Consolidated Statements of Operations and Comprehensive Income (Unaudited) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended
	Jan. 02, 2016	Dec. 27, 2014
Net sales	$ 92,391	$ 110,628
Cost of sales	75,968	98,585
Gross profit	16,423	12,043
Selling, general and administrative expense	6,335	$ 5,652
Restructuring recoveries, net	(75)
Other income, net	(114)	$ (40)
Interest expense	41	$ 94
Interest income	(18)
Earnings before income taxes	10,254	$ 6,337
Income taxes	3,546	2,187
Net earnings	$ 6,708	$ 4,150
Net earnings per share:
Basic (in dollars per share)	$ 0	$ 0.23
Diluted (in dollars per share)	$ 0	$ 0.22
Weighted average shares outstanding:
Basic weighted average shares outstanding (in shares)	18,525	18,377
Diluted (in shares)	18,883	18,820
Cash dividends declared per share (in dollars per share)	$ 1.03	$ 0.03
Comprehensive income	$ 6,708	$ 4,150

XML

Consolidated Balance Sheets (Current Period Unaudited) - USD ($) $ in Thousands	Jan. 02, 2016	Oct. 03, 2015
Assets
Cash and cash equivalents	$ 45,619	$ 33,258
Accounts receivable, net	40,368	46,782
Inventories	69,065	66,009
Other current assets	2,547	5,309
Total current assets	157,599	151,358
Property, plant and equipment, net	83,144	84,178
Intangibles, net	9,931	10,220
Goodwill	6,965	6,965
Other assets	7,681	7,518
Total assets	265,320	260,239
Liabilities and shareholders' equity
Accounts payable	31,467	32,182
Accrued expenses	12,033	$ 13,644
Dividends payable	18,600
Total current liabilities	62,100	$ 45,826
Other liabilities	$ 13,814	$ 14,198
Commitments and contingencies
Shareholders' equity:
Common stock	$ 18,600	$ 18,466
Additional paid-in capital	62,475	60,967
Retained earnings	110,477	122,928
Accumulated other comprehensive loss	(2,146)	(2,146)
Total shareholders' equity	189,406	200,215
Total liabilities and shareholders' equity	$ 265,320	$ 260,239

XML

Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Jan. 02, 2016	Dec. 27, 2014
Cash Flows From Operating Activities:
Net earnings	$ 6,708	$ 4,150
Adjustments to reconcile net earnings to net cash provided by (used for) operating activities:
Depreciation and amortization	2,742	2,869
Amortization of capitalized financing costs	16	26
Stock-based compensation expense	229	442
Deferred income taxes	1,215	$ 935
Excess tax benefits from stock-based compensation	(253)
Gain on sale and disposition of property, plant and equipment	$ (239)	$ (77)
Increase in cash surrender value of life insurance policies over premiums paid		(136)
Net changes in assets and liabilities (net of assets and liabilities acquired):
Accounts receivable, net	$ 6,414	10,360
Inventories	(3,056)	(5,565)
Accounts payable and accrued expenses	(2,659)	(22,716)
Other changes	1,274	199
Total adjustments	5,683	(13,663)
Net cash provided by (used for) operating activities	12,391	(9,513)
Cash Flows From Investing Activities:
Capital expenditures	$ (941)	(3,515)
Acquisition of business		$ 411
Proceeds from sale of assets held for sale	$ 180
Proceeds from sale of property, plant and equipment	60	$ 89
Proceeds from surrender of life insurance policies	40	$ 40
Increase in cash surrender value of life insurance policies	(212)
Net cash used for investing activities	(873)	$ (2,975)
Cash Flows From Financing Activities:
Proceeds from long-term debt	65	47,757
Principal payments on long-term debt	(65)	(37,757)
Cash dividends paid	(559)	$ (551)
Cash received from exercise of stock options	1,492
Excess tax benefits from stock-based compensation	253
Financing costs	(11)
Payment of employee tax withholdings related to net share transactions	(332)
Net cash provided by financing activities	843	$ 9,449
Net increase (decrease) in cash and cash equivalents	12,361	(3,039)
Cash and cash equivalents at beginning of period	33,258	3,050
Cash and cash equivalents at end of period	$ 45,619	11
Supplemental Disclosures of Cash Flow Information:
Interest		16
Income taxes, net	$ 2,194	45
Non-cash investing and financing activities:
Purchases of property, plant and equipment in accounts payable	479	$ 206
Declaration of cash dividends to be paid	18,600
Restricted stock units and stock options surrendered for withholding taxes payable	$ 332
Post-closing purchase price adjustment for business acquired		$ 65

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Consolidated Statements of Shareholders' Equity (Unaudited) - 3 months ended Jan. 02, 2016 - USD ($) shares in Thousands	Common Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	AOCI Attributable to Parent [Member]	Total
Balance (in shares) at Oct. 03, 2015	18,466
Balance at Oct. 03, 2015	$ 18,466,000	$ 60,967,000	$ 122,928,000	$ (2,146,000)	$ 200,215,000
Net earnings			6,708,000	0	$ 6,708,000
Stock options exercised, net (in shares)	134				176
Stock options exercised, net	$ 134,000	1,358,000			$ 1,492,000
Compensation expense associated with stock-based plans		229,000			229,000
Excess tax benefits from stock-based compensation		253,000			253,000
Restricted stock units and stock options surrendered for withholding taxes payable		(332,000)			(332,000)
Cash dividends declared			(19,159,000)		(19,159,000)
Balance (in shares) at Jan. 02, 2016	18,600
Balance at Jan. 02, 2016	$ 18,600,000	$ 62,475,000	$ 110,477,000	$ (2,146,000)	$ 189,406,000

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Note 1 - Basis of Presentation

3 Months Ended

Jan. 02, 2016

Notes to Financial Statements

Business Description and Basis of Presentation [Text Block]

(1) Basis of Presentation

The accompanying unaudited interim consolidated financial statements of Insteel Industries, Inc. (“we,” “us,” “our,” “the Company” or “Insteel”) have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q. Certain information and note disclosures normally included in the audited financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. The October 3, 2015 consolidated balance sheet was derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements should therefore be read in conjunction with the consolidated financial statements and notes for the fiscal year ended October 3, 2015 included in the Company’s Annual Report on Form 10-K filed with the SEC.

The accompanying unaudited interim consolidated financial statements reflect all adjustments of a normal recurring nature that the Company considers necessary for a fair presentation of results for these interim periods. The results of operations for the three-month period ended January 2, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending October 1, 2016 or future periods.

On August 15, 2014, the Company through its wholly-owned subsidiary, Insteel Wire Products Company (“IWP”), purchased substantially all of the assets associated with the prestressed concrete strand (“PC strand”) business of American Spring Wire Corporation (“ASW”) (see Note 3 to the consolidated financial statements).

The Company hasevaluated subsequent events through the time of filing this Quarterly Report on Form 10-Q and has concluded that there are no significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on the consolidated financial statements

.

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Note 2 - Recent Accounting Pronouncements

3 Months Ended

Jan. 02, 2016

Notes to Financial Statements

New Accounting Pronouncements and Changes in Accounting Principles [Text Block]

(2) Recent Accounting Pronouncements

In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-17 “Income Taxes (Topic 740) - Balance Sheet Classification of Deferred Taxes” to simplify the presentation of deferred income taxes. Under this update, all deferred tax assets and liabilities, along with any related valuation allowance, are required to be classified as noncurrent on the balance sheet. Effective January 2, 2016, the Company early adopted ASU No. 2015-17 on a prospective basis, which resulted in the reclassification of the Company’s current deferred tax asset as a non-current deferred tax liability on its consolidated balance sheet. No prior periods were retrospectively adjusted.

In July 2015, the FASB issued ASU No. 2015-11 “Simplifying the Measurement of Inventory,” which requires that an entity measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. ASU No. 2015-11 will become effective for the Company in the first quarter of fiscal 2018. The Company does not expect the adoption of this update will have a material effect on its consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09 “Revenue from Contracts with Customers,” which will supersede nearly all existing revenue recognition guidance under GAAP. ASU No. 2014-09 provides that an entity recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU No. 2014-09 allows for either full retrospective or modified retrospective adoption and will become effective for the Company in the first quarter of fiscal 2019. The Company is evaluating the alternative transition methods and the potential effects of the adoption of this update on its consolidated financial statements.

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Note 3 - Business Combination

3 Months Ended

Jan. 02, 2016

Notes to Financial Statements

Business Combination Disclosure [Text Block]

(3) Business Combination

On August 15, 2014, the Company purchased substantially all of the assets associated with the PC strand business of ASW for a final adjusted purchase price of $33.5 million, net of post-closing adjustments of $480,000 (the “ASW Acquisition”).

ASW manufactured PC strand at facilities located in Houston, Texas and Newnan, Georgia. The Company acquired, among other assets, the accounts receivable and inventories related to ASW’s PC strand business, the production equipment at its facility in Houston and its production equipment and facility in Newnan. Pursuant to an agreement with ASW, the Company is leasing the Houston facility from ASW with an option to purchase it in the future. In addition, the Company assumed certain of ASW’s accounts payable and accrued liabilities related to its PC strand business.

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 ASW Acquisition:

(In thousands)
Assets acquired:
Accounts receivable	$	7,854
Inventories		6,292
Other current assets		786
Property, plant and equipment		8,638
Intangibles		8,530
Total assets acquired	$	32,100
Liabilities assumed:
Accounts payable	$	3,240
Accrued expenses		2,362
Total liabilities assumed		5,602
Net assets acquired		26,498
Purchase price		33,463
Goodwill	$	6,965

In connection with the ASW Acquisition, the Company acquired intangible assets consisting of customer relationships, developed technology and know-how, and a non-competition agreement. The ASW Acquisition was accounted for as a business purchase pursuant to Accounting Standards Codification (“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 such costs are incurred.

Restructuring charges.

Subsequent to the ASW Acquisition, in fiscal 2014, the Company incurred employee separation costs for staffing reductions associated with the acquisition. In February 2015, the Company elected to consolidate its PC strand operations with the closure of the Newnan, Georgia facility that had been acquired through the ASW Acquisition, which was completed in March 2015.

Following is a summary of the restructuring activities and associated costs that were incurred during the three-month periods ended January 2, 2016 and December 27, 2014:

(In thousands)	Equipment Relocation Costs			Severance and Other Employee Separation Costs			Facility Closure Costs			Gain on Sale of Equipment			Total
2016
Liability as of October 3, 2015	$	-		$	735		$	-		$	-		$	735
Restructuring charges (recoveries)		75			-			30			(180	)		(75	)
Cash payments/receipts		(75	)		(72	)		(30	)		180			3
Liability as of January 2, 2016	$	-		$	663		$	-		$	-		$	663
2015
Liability as of September 27, 2014	$	-		$	1,208		$	-		$	-		$	1,208
Cash payments		-			(53	)		-			-			(53	)
Liability as of December 27, 2014	$	-		$	1,155		$	-		$	-		$	1,155

The Company recorded restructuring liabilities of $0.7 million on its consolidated balance sheet as of January 2, 2016 and October 3, 2015, including $0.5 million in accrued expenses and $0.2 million in other liabilities. The Company does not currently expect to incur any significant restructuring charges during the remainder of fiscal 2016.

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Note 4 - Fair Value Measurements

3 Months Ended

Jan. 02, 2016

Notes to Financial Statements

Fair Value Disclosures [Text Block]

(4) Fair Value Measurements

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

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

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

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

As of January 2, 2016 and October 3, 2015, 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 at January 2, 2016		Quoted Prices in Active Markets (Level 1)		Observable Inputs (Level 2)
Current assets:
Cash equivalents	$	45,566	$	45,566	$	-
Other assets:
Cash surrender value of life insurance policies		7,366		-		7,366
Total	$	52,932	$	45,566	$	7,366

(In thousands)	Total at October 3, 2015		Quoted Prices in Active Markets (Level 1)		Observable Inputs (Level 2)
Current assets:
Cash equivalents	$	32,843	$	32,843	$	-
Other assets:
Cash surrender value of life insurance policies		7,194		-		7,194
Total	$	40,037	$	32,843	$	7,194

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

As of January 2, 2016 and October 3, 2015, the Company did not have any nonfinancial assets that were required to be measured at fair value on a nonrecurring basis other than the assets and liabilities that were acquired from ASW at fair value (see Note 3 to the consolidated financial statements). The carrying amounts of accounts receivable, accounts payable and accrued expenses approximates fair value due to the short-term maturities of these financial instruments.

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Note 5 - Intangible Assets

3 Months Ended

Jan. 02, 2016

Notes to Financial Statements

Intangible Assets Disclosure [Text Block]

(5) Intangible Assets

The primary components of the Company’s intangible assets and the related accumulated amortization are as follows:

(In thousands)	Gross Amount		Accumulated Amortization			Net Book Value
As of January 2, 2016:
Customer relationships	$	6,500	$	(450	)	$	6,050
Developed technology and know-how		1,800		(125	)		1,675
Non-competition agreements		3,577		(1,371	)		2,206
	$	11,877	$	(1,946	)	$	9,931

(In thousands)	Gross Amount		Accumulated Amortization			Net Book Value
As of October 3, 2015:
Customer relationships	$	6,500	$	(369	)	$	6,131
Developed technology and know-how		1,800		(102	)		1,698
Non-competition agreements		3,577		(1,186	)		2,391
	$	11,877	$	(1,657	)	$	10,220

Amortization expense for intangibles was $289,000 and $216,000 for the three-month periods ended January 2, 2016 and December 27, 2014, respectively.

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Note 6 - Stock-Based Compensation

3 Months Ended

Jan. 02, 2016

Notes to Financial Statements

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

(6) 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. Effective February 17, 2015, the shareholders of the Company approved the 2015 Equity Incentive Plan of Insteel Industries, Inc. (the “2015 Plan”), which authorizes up to 900,000 shares of Company common stock for future grants under the plan. The 2015 Plan, which expires on February 17, 2025, replaces the 2005 Equity Incentive Plan of Insteel Industries, Inc., which expired on February 15, 2015. As of January 2, 2016, there were 711,000 shares of Company common stock available for future grants under the 2015 Plan, which is the Company’s only active equity incentive plan.

Stock

o

ptions

.

Under the Company’s equity incentive plans, employees and directors may be granted options to purchase shares of the Company’s common stock at the fair market value on the date of the grant. Options granted under these plans generally vest over three years and expire ten years from the date of the grant. Compensation expense associated with stock options for the three-month periods ended January 2, 2016 and December 27, 2014 is as follows:

	Three Months Ended
	January 2,		December 27,
(In thousands)	2016		2014
Stock options:
Compensation expense	$	83	$	173

As of January 2, 2016, the remaining unamortized compensation cost related to unvested stock option awards was $280,000, which is expected to be recognized over a weighted average period of 1.36 years.

The following table summarizes stock option activity for the three-month period ended January 2, 2016:

									Contractual	Aggregate
	Options			Exercise Price Per Share					Term -	Intrinsic
	Outstanding						Weighted		Weighted	Value
	(in thousands)			Range			Average		Average (years)	(in thousands)
Outstanding at October 3, 2015		923		$ 7.55	-	$ 21.96	$	15.14
Exercised		(176	)	7.55	-	20.50		12.32		$	2,016
Outstanding at January 2, 2016		747		7.55	-	21.96		15.80	6.31		3,882
Vested and anticipated to vest in the future at January 2, 2016		741						15.78	6.30		3,872
Exercisable at January 2, 2016		491						13.95	5.05		3,421

Stock option exercises include “net exercises,” pursuant to which the optionee received shares of common stock equal to the intrinsic value of the options (fair market value of common stock on the date of exercise less exercise price) reduced by any applicable withholding taxes.

Restricted stock uni

t

s.

Restricted stock units (“RSUs”) granted under the Company’s equity incentive 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 year from the date of the grant for RSUs granted to directors and three years from the date of the grant for RSUs granted to employees. RSUs do not have voting rights. RSU compensation expense for the three-month periods ended January 2, 2016 and December 27, 2014 is as follows:

	Three Months Ended
	January 2,		December 27,
(In thousands)	2016		2014
Compensation expense	$	146	$	269

As of January 2, 2016, the remaining unrecognized compensation cost related to unvested RSUs was $444,000, which is expected to be recognized over a weighted average vesting period of 1.58 years.

The following table summarizes RSU activity during the three-month period ended January 2, 2016:

			Weighted
	Restricted		Average
	Stock Units		Grant Date
(Unit amounts in thousands)	Outstanding		Fair Value
Balance, October 3, 2015		157	$	18.96
Granted		-		-
Released		-		-
Balance, January 2, 2016		157		18.96

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Note 7 - Income Taxes

3 Months Ended

Jan. 02, 2016

Notes to Financial Statements

Income Tax Disclosure [Text Block]

(7) Income Taxes

Effective income tax rate

.

The Company’s effective income tax rate was 34.6% for the three-month period ended January 2, 2016 compared with 34.5% for the three-month period ended December 27, 2014. The effective income tax rates for both periods were based upon the estimated rate applicable for the entire fiscal year adjusted to reflect any significant items related specifically to interim periods.

Deferred income taxes.

In November 2015, the FASB issued ASU No. 2015-17 “Income Taxes (Topic 740) - Balance Sheet Classification of Deferred Taxes” to simplify the presentation of deferred income taxes. Under this update, all deferred tax assets and liabilities, along with any related valuation allowance, are required to be classified as noncurrent on the balance sheet. Effective January 2, 2016, the Company early adopted ASU No. 2015-17 on a prospective basis, which resulted in the reclassification of the Company’s current deferred tax asset as a non-current deferred tax liability on its consolidated balance sheet. No prior periods were retrospectively adjusted.

As of January 2, 2016, the Company recorded a non-current deferred tax liability (net of valuation allowance) of $5.8 million in other liabilities on its consolidated balance sheet. The Company has $9.3 million of state net operating loss carryforwards (“NOLs”) that begin to expire in 2017, but principally expire between 2017 and 2031. The Company has also recorded $178,000 of gross deferred tax assets for various state tax credits that begin to expire in 2016, but principally expire between 2016 and 2020.

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 reserve against its deferred tax assets to the extent the Company no longer believes it is more likely than not that they will be fully realized. As of January 2, 2016 and October 3, 2015, the Company recorded a valuation allowance of $492,000 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 NOLs and tax credits against which an allowance had previously been provided or determine that such utilization was more likely than not.

Uncertainty in income taxes

.

As of January 2, 2016, the Company has no material, known tax exposures that require the establishment of contingency reserves for uncertain tax positions.

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 2010 remain subject to examination.

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Note 8 - Employee Benefit Plans

3 Months Ended

Jan. 02, 2016

Notes to Financial Statements

Pension and Other Postretirement Benefits Disclosure [Text Block]

(8) 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 no longer earn additional service benefits.The Company made contributions totaling $49,000 to the Delaware Plan during the three-month period ended January 2, 2016 and expects to contribute an additional $143,000 during the remainder of the current fiscal year.

Net periodic pension costs for the Delaware Plan for the three-month periods ended January 2, 2016 and December 27, 2014 include the following components:

	Three Months Ended
	January 2,			December 27,
(In thousands)	2016			2014
Interest cost	$	37		$	33
Expected return on plan assets		(44	)		(45	)
Recognized net actuarial loss		19			13
Net periodic pension cost	$	12		$	1

Supplemental employee retirement plan

.

The Company maintains supplemental employee retirement plans (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.

Net periodic pension costs for the SERPs for the three-month periods ended January 2, 2016 and December 27, 2014 include the following components:

	Three Months Ended
	January 2,		December 27,
(In thousands)	2016		2014
Service cost	$	66	$	72
Interest cost		81		81
Recognized net actuarial loss		21		29
Net periodic pension cost	$	168	$	182

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Note 9 - Long-Term Debt

3 Months Ended

Jan. 02, 2016

Notes to Financial Statements

Long-term Debt [Text Block]

(9) Long-Term Debt

Revolving Credit Facility.

The Company has a $100.0 million revolving credit facility (the “Credit Facility”) that is used to supplement its operating cash flow and fund its working capital, capital expenditure, general corporate and growth requirements. In May 2015, the Company amended the Credit Facility to, among other changes, extend the maturity date of the Credit Facility from June 2, 2016 to May 13, 2020. Advances under the Credit Facility are limited to the lesser of the revolving loan commitment amount (currently $100.0 million) or a borrowing base amount that is calculated based upon a percentage of eligible receivables and inventories. As of January 2, 2016, no borrowings were outstanding on the Credit Facility, $75.2 million of borrowing capacity was available and outstanding letters of credit totaled $1.6 million.

Interest rates on the Credit Facility are based upon (1) an index rate that is established at the highest of the prime rate, 0.50% plus the federal funds rate or the 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 Credit Facility within the range of 0.25% to 0.75% for index rate loans and 1.25% to 1.75% for LIBOR loans. In addition, the applicable interest rate margins would be increased by 2.00% upon the occurrence of certain events of default provided for under the terms of the Credit Facility. Based on the Company’s excess availability as of January 2, 2016, the applicable interest rate margins on the Credit Facility were 0.25% for index rate loans and 1.25% for LIBOR loans.

The Company’s ability to borrow available amounts under the Credit Facility will be restricted or eliminated in the event of certain covenant breaches, events of default or if the Company is unable to make certain representations and warranties provided for under the terms of the Credit Facility. The Company is required to maintain a fixed charge coverage ratio of not less than 1.10 at the end of each fiscal quarter for the twelve-month period then ended when the amount of liquidity on the Credit Facility is less than $12.5 million. In addition, the terms of the Credit Facility restrict 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. The terms of the Credit Facility also provide that 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 January 2, 2016, the Company was in compliance with all of the financial and negative covenants under the Credit Facility and there have not been any events of default.

Amortization of capitalized financing costs associated with the Credit Facility was $16,000 and $26,000 for the three-month periods ended January 2, 2016 and December 27, 2014, respectively. Accumulated amortization of capitalized financing costs was $4.5 million as of January 2, 2016 and October 3, 2015.

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Note 10 - Earnings Per Share

3 Months Ended

Jan. 02, 2016

Notes to Financial Statements

Earnings Per Share [Text Block]

(

10

)

Earnings

Per Share

The computations of basic and diluted earnings per share attributable to common shareholders for the three-month periods ended January 2, 2016 and December 27, 2014 are as follows:

	Three Months Ended
	January 2,		December 27,
(In thousands except per share amounts)	2016		2014
Net earnings available to common shareholders	$	6,708	$	4,150
Basic weighted average shares outstanding		18,525		18,377
Dilutive effect of stock-based compensation		358		443
Diluted weighted average shares outstanding		18,883		18,820
Net earnings per share:
Basic	$	0.36	$	0.23
Diluted	$	0.36	$	0.22

Options representing 86,000 and 25,000 shares for the three-month periods ended January 2, 2016 and December 27, 2014, respectively, were antidilutive and not included in the diluted earnings per share calculation.

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Note 11 - Share Repurchases

3 Months Ended

Jan. 02, 2016

Notes to Financial Statements

Stockholders' Equity Note Disclosure [Text Block]

(

11

) Share Repurchases

On November 18, 2008, the Company’s board of directors approved a share repurchase authorization to buy back up to $25.0 million of the Company’s outstanding common stock (the “Authorization”). Under the Authorization, repurchases may be made from time to time in the open market or in privately negotiated transactions subject to market conditions, applicable legal requirements and other factors. The Company is not obligated to acquire any particular amount of common stock and the program may be commenced or suspended at any time at the Company’s discretion without prior notice. The Authorization continues in effect until terminated by the Board of Directors. As of January 2, 2016, there was $24.8 million remaining available for future share repurchases under this authorization. No repurchases of common stock were made during the three-month periods ended January 2, 2016 and December 27, 2014.

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Note 12 - Other Financial Data

3 Months Ended

Jan. 02, 2016

Notes to Financial Statements

Other Financial Data [Text Block]

(12

)

Other Financial Data

Balance sheet information:

	January 2,			October 3,
(In thousands)	2016			2015
Accounts receivable, net:
Accounts receivable	$	40,945		$	47,420
Less allowance for doubtful accounts		(577	)		(638	)
Total	$	40,368		$	46,782
Inventories:
Raw materials	$	38,344		$	38,457
Work in process		2,636			2,968
Finished goods		28,085			24,584
Total	$	69,065		$	66,009
Other current assets:
Prepaid insurance	$	1,186		$	2,519
Current deferred tax asset		-			1,492
Other		1,361			1,298
Total	$	2,547		$	5,309
Other assets:
Cash surrender value of life insurance policies	$	7,366		$	7,194
Capitalized financing costs, net		219			227
Other		96			97
Total	$	7,681		$	7,518
Property, plant and equipment, net:
Land and land improvements	$	9,424		$	9,279
Buildings		43,032			43,016
Machinery and equipment		142,900			142,662
Construction in progress		2,454			1,715
		197,810			196,672
Less accumulated depreciation		(114,666	)		(112,494	)
Total	$	83,144		$	84,178
Accrued expenses:
Salaries, wages and related expenses	$	3,122		$	5,455
Income taxes		2,072			2,187
Customer rebates		1,973			1,760
Property taxes		1,460			1,507
Pension plan		1,222			1,263
Customer advances		665			71
Restructuring liabilities		505			505
Workers' compensation		293			294
Other		721			602
Total	$	12,033		$	13,644
Other liabilities:
Deferred compensation	$	7,853		$	7,765
Deferred income taxes		5,780			6,057
Other		181			376
Total	$	13,814		$	14,198

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Note 13 - Business Segment Information

3 Months Ended

Jan. 02, 2016

Notes to Financial Statements

Segment Reporting Disclosure [Text Block]

(13) Business Segment Information

The Company’s 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.

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Note 14 - Contingencies

3 Months Ended

Jan. 02, 2016

Notes to Financial Statements

Commitments and Contingencies Disclosure [Text Block]

(14) Contingencies

Insurance recoveries.

On January 21, 2014, a fire occurred at the Company’s Gallatin, Tennessee PC strand manufacturing facility, damaging a portion of the facility and requiring the temporary curtailment of operations until the necessary repairs were completed. The Company reassigned a portion of its production requirements to its PC strand facility located in Sanderson, Florida, which was operating at a reduced utilization level. During the first quarter of fiscal 2015, the Company completed the remainder of the repairs and the Gallatin facility was fully operational.

The Company maintained general liability, business interruption and replacement cost property insurance coverage on its facilities that was sufficient to cover the losses incurred from the fire. During the three months ended December 27, 2014, the Company recorded a $257,000 receivable for the anticipated insurance proceeds related to the costs that were incurred during the period related to the fire which were recorded in cost of sales ($244,000) and selling, general and administrative expense (“SG&A expense”) ($13,000) on the consolidated statement of operations and comprehensive income. The insurance proceeds attributable to the property and equipment damaged in the fire were reported in cash flows from investing activities and all other insurance proceeds received were reported in cash flows from operating activities on the consolidated statement of cash flows. The Company reached a final settlement with its insurance carrier on this claim during the third quarter of fiscal 2015.

Legal proceedings

.

The Company is involved in 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 costs to resolve these matters will have a material adverse effect on its financial position, results of operations or cash flows.

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Note 3 - Business Combination (Tables)

3 Months Ended

Jan. 02, 2016

Notes Tables

Schedule of Recognized Identified Assets Acquired and Liabilities Assumed [Table Text Block]

(In thousands)
Assets acquired:
Accounts receivable	$	7,854
Inventories		6,292
Other current assets		786
Property, plant and equipment		8,638
Intangibles		8,530
Total assets acquired	$	32,100
Liabilities assumed:
Accounts payable	$	3,240
Accrued expenses		2,362
Total liabilities assumed		5,602
Net assets acquired		26,498
Purchase price		33,463
Goodwill	$	6,965

Restructuring and Related Costs [Table Text Block]

(In thousands)	Equipment Relocation Costs			Severance and Other Employee Separation Costs			Facility Closure Costs			Gain on Sale of Equipment			Total
2016
Liability as of October 3, 2015	$	-		$	735		$	-		$	-		$	735
Restructuring charges (recoveries)		75			-			30			(180	)		(75	)
Cash payments/receipts		(75	)		(72	)		(30	)		180			3
Liability as of January 2, 2016	$	-		$	663		$	-		$	-		$	663
2015
Liability as of September 27, 2014	$	-		$	1,208		$	-		$	-		$	1,208
Cash payments		-			(53	)		-			-			(53	)
Liability as of December 27, 2014	$	-		$	1,155		$	-		$	-		$	1,155

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Note 4 - Fair Value Measurements (Tables)

3 Months Ended

Jan. 02, 2016

Notes Tables

Fair Value, Assets Measured on Recurring Basis [Table Text Block]

(In thousands)	Total at January 2, 2016		Quoted Prices in Active Markets (Level 1)		Observable Inputs (Level 2)
Current assets:
Cash equivalents	$	45,566	$	45,566	$	-
Other assets:
Cash surrender value of life insurance policies		7,366		-		7,366
Total	$	52,932	$	45,566	$	7,366

(In thousands)	Total at October 3, 2015		Quoted Prices in Active Markets (Level 1)		Observable Inputs (Level 2)
Current assets:
Cash equivalents	$	32,843	$	32,843	$	-
Other assets:
Cash surrender value of life insurance policies		7,194		-		7,194
Total	$	40,037	$	32,843	$	7,194

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Note 5 - Intangible Assets (Tables)

3 Months Ended

Jan. 02, 2016

Notes Tables

Schedule of Finite-Lived Intangible Assets [Table Text Block]

(In thousands)	Gross Amount		Accumulated Amortization			Net Book Value
As of January 2, 2016:
Customer relationships	$	6,500	$	(450	)	$	6,050
Developed technology and know-how		1,800		(125	)		1,675
Non-competition agreements		3,577		(1,371	)		2,206
	$	11,877	$	(1,946	)	$	9,931

(In thousands)	Gross Amount		Accumulated Amortization			Net Book Value
As of October 3, 2015:
Customer relationships	$	6,500	$	(369	)	$	6,131
Developed technology and know-how		1,800		(102	)		1,698
Non-competition agreements		3,577		(1,186	)		2,391
	$	11,877	$	(1,657	)	$	10,220

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Note 6 - Stock-Based Compensation (Tables)

3 Months Ended

Jan. 02, 2016

Notes Tables

Schedule of Compensation Cost for Share-based Payment Arrangements, Allocation of Share-based Compensation Costs by Plan [Table Text Block]

	Three Months Ended
	January 2,		December 27,
(In thousands)	2016		2014
Stock options:
Compensation expense	$	83	$	173

Schedule of Share-based Compensation, Stock Options, Activity [Table Text Block]

									Contractual	Aggregate
	Options			Exercise Price Per Share					Term -	Intrinsic
	Outstanding						Weighted		Weighted	Value
	(in thousands)			Range			Average		Average (years)	(in thousands)
Outstanding at October 3, 2015		923		$ 7.55	-	$ 21.96	$	15.14
Exercised		(176	)	7.55	-	20.50		12.32		$	2,016
Outstanding at January 2, 2016		747		7.55	-	21.96		15.80	6.31		3,882
Vested and anticipated to vest in the future at January 2, 2016		741						15.78	6.30		3,872
Exercisable at January 2, 2016		491						13.95	5.05		3,421

Schedule of RSU Grants and Compensation Expense [Table Text Block]

	Three Months Ended
	January 2,		December 27,
(In thousands)	2016		2014
Compensation expense	$	146	$	269

Schedule of Share-based Compensation, Restricted Stock and Restricted Stock Units Activity [Table Text Block]

			Weighted
	Restricted		Average
	Stock Units		Grant Date
(Unit amounts in thousands)	Outstanding		Fair Value
Balance, October 3, 2015		157	$	18.96
Granted		-		-
Released		-		-
Balance, January 2, 2016		157		18.96

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Note 8 - Employee Benefit Plans (Tables)

3 Months Ended

Jan. 02, 2016

Notes Tables

Schedule of Net Benefit Costs [Table Text Block]

	Three Months Ended
	January 2,			December 27,
(In thousands)	2016			2014
Interest cost	$	37		$	33
Expected return on plan assets		(44	)		(45	)
Recognized net actuarial loss		19			13
Net periodic pension cost	$	12		$	1

	Three Months Ended
	January 2,		December 27,
(In thousands)	2016		2014
Service cost	$	66	$	72
Interest cost		81		81
Recognized net actuarial loss		21		29
Net periodic pension cost	$	168	$	182

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Note 10 - Earnings Per Share (Tables)

3 Months Ended

Jan. 02, 2016

Notes Tables

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

	Three Months Ended
	January 2,		December 27,
(In thousands except per share amounts)	2016		2014
Net earnings available to common shareholders	$	6,708	$	4,150
Basic weighted average shares outstanding		18,525		18,377
Dilutive effect of stock-based compensation		358		443
Diluted weighted average shares outstanding		18,883		18,820
Net earnings per share:
Basic	$	0.36	$	0.23
Diluted	$	0.36	$	0.22

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Note 12 - Other Financial Data (Tables)

3 Months Ended

Jan. 02, 2016

Notes Tables

Condensed Balance Sheet [Table Text Block]

	January 2,			October 3,
(In thousands)	2016			2015
Accounts receivable, net:
Accounts receivable	$	40,945		$	47,420
Less allowance for doubtful accounts		(577	)		(638	)
Total	$	40,368		$	46,782
Inventories:
Raw materials	$	38,344		$	38,457
Work in process		2,636			2,968
Finished goods		28,085			24,584
Total	$	69,065		$	66,009
Other current assets:
Prepaid insurance	$	1,186		$	2,519
Current deferred tax asset		-			1,492
Other		1,361			1,298
Total	$	2,547		$	5,309
Other assets:
Cash surrender value of life insurance policies	$	7,366		$	7,194
Capitalized financing costs, net		219			227
Other		96			97
Total	$	7,681		$	7,518
Property, plant and equipment, net:
Land and land improvements	$	9,424		$	9,279
Buildings		43,032			43,016
Machinery and equipment		142,900			142,662
Construction in progress		2,454			1,715
		197,810			196,672
Less accumulated depreciation		(114,666	)		(112,494	)
Total	$	83,144		$	84,178
Accrued expenses:
Salaries, wages and related expenses	$	3,122		$	5,455
Income taxes		2,072			2,187
Customer rebates		1,973			1,760
Property taxes		1,460			1,507
Pension plan		1,222			1,263
Customer advances		665			71
Restructuring liabilities		505			505
Workers' compensation		293			294
Other		721			602
Total	$	12,033		$	13,644
Other liabilities:
Deferred compensation	$	7,853		$	7,765
Deferred income taxes		5,780			6,057
Other		181			376
Total	$	13,814		$	14,198

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Note 3 - Business Combination (Details Textual) - USD ($)		9 Months Ended
	Aug. 15, 2014	Oct. 02, 2016	Jan. 02, 2016	Oct. 03, 2015	Dec. 27, 2014	Sep. 27, 2014
ASW Acquisition [Member] | Scenario, Forecast [Member]
Restructuring Charges		$ 0
ASW Acquisition [Member]
Business Combination, Consideration Transferred	$ 33,500,000
Business Combination, Provisional Information, Initial Accounting Incomplete, Adjustment, Consideration Transferred	$ 480,000
Restructuring Reserve				$ 700,000
Restructuring Reserve, Current			$ 500,000
Restructuring Reserve, Noncurrent				200,000
Restructuring Reserve			663,000	735,000	$ 1,155,000	$ 1,208,000
Restructuring Reserve, Current			$ 505,000	$ 505,000

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Note 3 - Business Combination - Purchase Price Allocation Schedule (Details) $ in Thousands	Aug. 15, 2014 USD ($)
ASW Acquisition [Member]
Assets acquired:
Accounts receivable	$ 7,854
Inventories	6,292
Other current assets	786
Property, plant and equipment	8,638
Intangibles	8,530
Total assets acquired	32,100
Liabilities assumed:
Accounts payable	3,240
Accrued expenses	2,362
Total liabilities assumed	5,602
Net assets acquired	26,498
Purchase price	33,463
Goodwill	$ 6,965

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Note 3 - Business Combination - Summaries of the Restructuring Activities and Associated Costs Incurred (Details) - USD ($) $ in Thousands	3 Months Ended
	Jan. 02, 2016	Dec. 27, 2014
Employee Severance [Member]
Liability	$ 735	$ 1,208
Cash payments/receipts	(72)	(53)
Liability	663	1,155
Equipment Relocation Costs [Member]
Restructuring charges (recoveries)	75
Cash payments/receipts	(75)
Facility Closing [Member]
Restructuring charges (recoveries)	30
Cash payments/receipts	(30)
Gain on Sale of Property and Equipment [Member]
Restructuring charges (recoveries)	(180)
Cash payments/receipts	180
Liability	735	$ 1,208
Restructuring charges (recoveries)	(75)
Cash payments/receipts	3	$ (53)
Liability	$ 663	$ 1,155

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Note 4 - Fair Value Measurements (Details Textual) - USD ($)	Jan. 02, 2016	Oct. 03, 2015
Non Financial [Member]
Assets, Fair Value Disclosure, Nonrecurring	$ 0	$ 0

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Note 4 - Fair Value Measurements - Fair Value of Financial Assets (Details) - USD ($) $ in Thousands	Jan. 02, 2016	Oct. 03, 2015
Fair Value, Inputs, Level 1 [Member]
Cash equivalents	$ 45,566	$ 32,843
Cash surrender value of life insurance policies
Total	$ 45,566	$ 32,843
Fair Value, Inputs, Level 2 [Member]
Cash equivalents
Cash surrender value of life insurance policies	$ 7,366	$ 7,194
Total	7,366	7,194
Cash equivalents	45,566	32,843
Cash surrender value of life insurance policies	7,366	7,194
Total	$ 52,932	$ 40,037

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Note 5 - Intangible Assets (Details Textual) - USD ($)	3 Months Ended
	Jan. 02, 2016	Dec. 27, 2014
Amortization of Intangible Assets	$ 289,000	$ 216,000

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Note 5 - Intangible Assets - Intangible Assets (Details) - USD ($) $ in Thousands	Jan. 02, 2016	Oct. 03, 2015
Customer Relationships [Member]
Gross Amount	$ 6,500	$ 6,500
Accumulated Amortization	(450)	(369)
Net Book Value	6,050	6,131
Technology-Based Intangible Assets [Member]
Gross Amount	1,800	1,800
Accumulated Amortization	(125)	(102)
Net Book Value	1,675	1,698
Noncompete Agreements [Member]
Gross Amount	3,577	3,577
Accumulated Amortization	(1,371)	(1,186)
Net Book Value	2,206	2,391
Gross Amount	11,877	11,877
Accumulated Amortization	(1,946)	(1,657)
Net Book Value	$ 9,931	$ 10,220

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Note 6 - Stock-Based Compensation (Details Textual) - USD ($)	3 Months Ended
	Jan. 02, 2016	Feb. 17, 2015
Employee Stock Option [Member]
Employee Service Share-based Compensation, Nonvested Awards, Compensation Not yet Recognized, Stock Options	$ 280,000
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition	1 year 131 days
Restricted Stock Units (RSUs) [Member] | Director [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period	1 year
Restricted Stock Units (RSUs) [Member] | Employees [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period	3 years
Restricted Stock Units (RSUs) [Member]
Employee Service Share-based Compensation, Nonvested Awards, Compensation Not yet Recognized, Stock Options	$ 444,000
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition	1 year 211 days
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized		900,000
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant	711,000
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period	3 years
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period	10 years

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Note 6 - Stock-Based Compensation - Compensation Expense and Excess Tax Benefits Associated with Stock Options (Details) - USD ($) $ in Thousands	3 Months Ended
	Jan. 02, 2016	Dec. 27, 2014
Employee Stock Option [Member]
Stock options:
Compensation expense	$ 83	$ 173

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Note 6 - Stock-Based Compensation - Stock Option Activity (Details) shares in Thousands, $ in Thousands	3 Months Ended
	Jan. 02, 2016 USD ($) $ / shares shares
Minimum [Member]
Outstanding (in dollars per share)	$ 7.55
Exercised (in dollars per share)	7.55
Outstanding (in dollars per share)	7.55
Maximum [Member]
Outstanding (in dollars per share)	21.96
Exercised (in dollars per share)	20.50
Outstanding (in dollars per share)	21.96
Weighted Average [Member]
Outstanding (in dollars per share)	15.14
Exercised (in dollars per share)	12.32
Outstanding (in dollars per share)	$ 15.80
Outstanding (in shares) | shares	923
Exercised (in shares) | shares	(176)
Exercised | $	$ 2,016
Outstanding (in shares) | shares	747
Outstanding	6 years 113 days
Outstanding | $	$ 3,882
Vested and anticipated to vest (in shares) | shares	741
Vested and anticipated to vest (in dollars per share)	$ 15.78
Vested and anticipated to vest	6 years 109 days
Vested and anticipated to vest | $	$ 3,872
Exercisable (in shares) | shares	491
Exercisable (in dollars per share)	$ 13.95
Exercisable at January 2, 2016	5 years 18 days
Exercisable at January 2, 2016 | $	$ 3,421

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Note 6 - Stock-Based Compensation - RSU Grants and Compensation Expense (Details) - USD ($) $ in Thousands	3 Months Ended
	Jan. 02, 2016	Dec. 27, 2014
Restricted Stock Units (RSUs) [Member]
Compensation expense	$ 146	$ 269

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Note 6 - Stock-Based Compensation - Restricted Stock and Restricted Stock Unit Activity (Details) - Restricted Stock Units (RSUs) [Member]	3 Months Ended
	Jan. 02, 2016 $ / shares shares
Balance (in shares) | shares	157,000
Balance (in dollars per share) | $ / shares	$ 18.96
Granted (in shares) | shares	0
Granted (in dollars per share) | $ / shares	$ 0
Released (in shares) | shares	0
Released (in dollars per share) | $ / shares	$ 0
Balance (in shares) | shares	157,000
Balance (in dollars per share) | $ / shares	$ 18.96

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Note 7 - Income Taxes (Details Textual) - USD ($)	3 Months Ended
	Jan. 02, 2016	Dec. 27, 2014	Oct. 03, 2015
State and Local Jurisdiction [Member]
Operating Loss Carryforwards	$ 9,300,000
Deferred Tax Assets, Tax Credit Carryforwards	178,000
Unrecognized Tax Benefits, Income Tax Penalties and Interest Expense	0
Deferred Tax Assets, Valuation Allowance	$ 492,000		$ 492,000
Effective Income Tax Rate Reconciliation, Percent	34.60%	34.50%
Deferred Tax Liabilities, Net, Noncurrent	$ 5,780,000		$ 6,057,000

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Note 8 - Employee Benefit Plans (Details Textual)	3 Months Ended
	Jan. 02, 2016 USD ($)
Minimum [Member] | Supplemental Employee Retirement Plan [Member]
Defined Benefit Plan Employment Term	30 years
Minimum [Member] | Reduced SERP [Member]
Defined Benefit Plan Employment Term	10 years
Supplemental Employee Retirement Plan [Member]
Supplemental Retirement Benefit Period	15 years
Defined Benefit Plan Percent of Highest Average Salary Base	50.00%
Defined Benefit Plan Number of Years in Average Annual Base Salary	5 years
Defined Benefit Plan Number of Years Preceding Retirement for Average Annual Base Salary Calculation	10 years
Reduced SERP [Member]
Defined Benefit Plan Retirement Age	65 years
Defined Benefit Plans, Estimated Future Employer Contributions in Current Fiscal Year	$ 49,000
Defined Benefit Plan, Expected Contributions in Current Fiscal Year	$ 143,000

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Note 8 - Employee Benefit Plans - Net Periodic Pension Costs and Related Components (Details) - USD ($) $ in Thousands	3 Months Ended
	Jan. 02, 2016	Dec. 27, 2014
Pension Plan [Member]
Interest cost	$ 37	$ 33
Expected return on plan assets	(44)	(45)
Recognized net actuarial loss	19	13
Net periodic pension cost	12	1
Supplemental Employee Retirement Plan [Member]
Interest cost	81	81
Recognized net actuarial loss	21	29
Net periodic pension cost	168	182
Service cost	$ 66	$ 72

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Note 9 - Long-Term Debt (Details Textual)	3 Months Ended
	Jan. 02, 2016 USD ($)	Dec. 27, 2014 USD ($)	Oct. 03, 2015 USD ($)	Feb. 06, 2012 USD ($)
Revolving Credit Facility [Member] | Letter of Credit [Member]
Long-term Line of Credit	$ 1,600,000
Revolving Credit Facility [Member] | Federal Funds Effective Swap Rate [Member]
Debt Instrument, Basis Spread on Variable Rate	0.50%
Revolving Credit Facility [Member] | Base Rate [Member] | Minimum [Member]
Debt Instrument, Basis Spread on Variable Rate	0.25%
Revolving Credit Facility [Member] | Base Rate [Member] | Maximum [Member]
Debt Instrument, Basis Spread on Variable Rate	0.75%
Revolving Credit Facility [Member] | Base Rate [Member]
Line of Credit Facility, Interest Rate at Period End	0.25%
Revolving Credit Facility [Member] | London Interbank Offered Rate (LIBOR) [Member] | Minimum [Member]
Debt Instrument, Basis Spread on Variable Rate	1.25%
Revolving Credit Facility [Member] | London Interbank Offered Rate (LIBOR) [Member] | Maximum [Member]
Debt Instrument, Basis Spread on Variable Rate	1.75%
Revolving Credit Facility [Member] | London Interbank Offered Rate (LIBOR) [Member]
Line of Credit Facility, Interest Rate at Period End	1.25%
Revolving Credit Facility [Member]
Long-term Line of Credit	$ 0
Line of Credit Facility, Maximum Borrowing Capacity				$ 100,000,000
Line of Credit Facility, Current Borrowing Capacity	100,000,000
Line of Credit Facility, Remaining Borrowing Capacity	$ 75,200,000
Debt Instrument, Interest Rate, Increase (Decrease)	2.00%
Fixed Charge Coverage Ratio	1.1
Credit Facility Liquidity Amount	$ 12,500,000
Amortization of Financing Costs	16,000	$ 26,000
Amortization of Financing Costs	$ 16,000	$ 26,000
Accumulated Amortization, Deferred Finance Costs			$ 4,500,000

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Note 10 - Earnings Per Share (Details Textual) - shares	3 Months Ended
	Jan. 02, 2016	Dec. 27, 2014
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	86,000	25,000

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Note 10 - Earnings Per Share - Basic and Diluted Earnings Per Share Attributable to Common Shareholders (Details) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended
	Jan. 02, 2016	Dec. 27, 2014
Net earnings	$ 6,708	$ 4,150
Basic weighted average shares outstanding (in shares)	18,525	18,377
Dilutive effect of stock-based compensation (in shares)	358	443
Diluted weighted average shares outstanding (in shares)	18,883	18,820
Basic (in dollars per share)	$ 0	$ 0.23
Diluted (in dollars per share)	$ 0	$ 0.22

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Note 11 - Share Repurchases (Details Textual) - USD ($) $ in Millions	3 Months Ended
	Jan. 02, 2016	Dec. 27, 2014	Nov. 18, 2008
Stock Repurchased During Period, Shares	0	0
Stock Repurchase Program, Authorized Amount			$ 25.0
Stock Repurchase Program, Remaining Authorized Repurchase Amount	$ 24.8

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Note 12 - Other Financial Data - Balance Sheet Information (Details) - USD ($) $ in Thousands	Jan. 02, 2016	Oct. 03, 2015
Accounts receivable, net:
Accounts receivable	$ 40,945	$ 47,420
Less allowance for doubtful accounts	(577)	(638)
Total	40,368	46,782
Inventories:
Raw materials	38,344	38,457
Work in process	2,636	2,968
Finished goods	28,085	24,584
Total	69,065	66,009
Other current assets:
Prepaid insurance	$ 1,186	2,519
Current deferred tax asset		1,492
Other	$ 1,361	1,298
Total	2,547	5,309
Other assets:
Cash surrender value of life insurance policies	7,366	7,194
Capitalized financing costs, net	219	227
Other	96	97
Total	7,681	7,518
Property, plant and equipment, net:
Land and land improvements	9,424	9,279
Buildings	43,032	43,016
Machinery and equipment	142,900	142,662
Construction in progress	2,454	1,715
Property, plant and equipment, gross	197,810	196,672
Less accumulated depreciation	(114,666)	(112,494)
Total	83,144	84,178
Accrued expenses:
Salaries, wages and related expenses	3,122	5,455
Income taxes	2,072	2,187
Customer rebates	1,973	1,760
Property taxes	1,460	1,507
Pension plan	1,222	1,263
Customer advances	665	71
Restructuring Reserve, Current	505	505
Workers' compensation	293	294
Other	721	602
Total	12,033	13,644
Other liabilities:
Deferred compensation	7,853	7,765
Deferred Tax Liabilities, Net, Noncurrent	5,780	6,057
Other	181	376
Total	$ 13,814	$ 14,198

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Note 13 - Business Segment Information (Details Textual)	3 Months Ended
	Jan. 02, 2016
Number of Reportable Segments	1

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Note 14 - Contingencies (Details Textual)	3 Months Ended
	Dec. 27, 2014 USD ($)
Cost of Sales [Member]
Insurance Recoveries	$ 244,000
Selling, General and Administrative Expenses [Member]
Insurance Recoveries	13,000
Estimated Insurance Recoveries	$ 257,000