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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 June 27, 2015

 

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 July 15, 2015 was 18,439,228.

 

 
 

 

  

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

23

     

Item 4.

Controls and Procedures

23

     

PART II – OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings   24
     

Item 1A.

Risk Factors

24

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

24

     
Item 6.

Exhibits

24

     

SIGNATURES

 

25
     

EXHIBIT INDEX

 

26

 

 
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

   

Nine Months Ended

 
   

June 27,

   

June 28,

   

June 27,

   

June 28,

 
   

2015

   

2014

   

2015

   

2014

 
                                 

Net sales

  $ 117,016     $ 113,227     $ 329,411     $ 291,881  

Cost of sales

    101,322       98,964       292,972       256,957  

Gross profit

    15,694       14,263       36,439       34,924  

Selling, general and administrative expense

    6,427       6,219       18,054       16,908  

Restructuring charges, net

    345       -       678       -  

Other expense (income), net

    601       (849 )     (1,038 )     (653 )

Interest expense

    65       56       273       169  

Interest income

    (1 )     (4 )     (5 )     (10 )

Earnings before income taxes

    8,257       8,841       18,477       18,510  

Income taxes

    2,865       3,044       6,391       6,444  

Net earnings

  $ 5,392     $ 5,797     $ 12,086     $ 12,066  
                                 
                                 

Net earnings per share:

                               

Basic

  $ 0.29     $ 0.32     $ 0.66     $ 0.66  

Diluted

    0.29       0.31       0.64       0.65  
                                 

Weighted average shares outstanding:

                               

Basic

    18,438       18,267       18,407       18,230  

Diluted

    18,828       18,683       18,823       18,636  
                                 

Cash dividends declared per share

  $ 0.03     $ 0.03     $ 0.09     $ 0.09  
                                 

Comprehensive income

  $ 5,392     $ 5,797     $ 12,086     $ 12,066  

 

See accompanying notes to consolidated financial statements.

 

 
3

 

 

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

 

   

(Unaudited)

         
   

June 27,

   

September 27,

 
   

2015

   

2014

 

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 11,433     $ 3,050  

Accounts receivable, net

    48,215       51,211  

Inventories

    70,793       81,899  

Other current assets

    3,923       6,433  

Total current assets

    134,364       142,593  

Property, plant and equipment, net

    86,642       90,386  

Intangibles, net

    10,532       9,816  

Goodwill

    6,965       6,965  

Other assets

    10,338       7,035  

Total assets

  $ 248,841     $ 256,795  
                 

Liabilities and shareholders' equity

               

Current liabilities:

               

Accounts payable

  $ 33,312     $ 52,811  

Accrued expenses

    9,775       10,375  

Total current liabilities

    43,087       63,186  

Other liabilities

    14,844       14,726  

Commitments and contingencies

               

Shareholders' equity:

               

Common stock

    18,439       18,377  

Additional paid-in capital

    60,403       58,867  

Retained earnings

    113,858       103,429  

Accumulated other comprehensive loss

    (1,790 )     (1,790 )

Total shareholders' equity

    190,910       178,883  

Total liabilities and shareholders' equity

  $ 248,841     $ 256,795  

 

See accompanying notes to consolidated financial statements.

 

 
4

 

 

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

   

Nine Months Ended

 
   

June 27,

   

June 28,

 
   

2015

   

2014

 

Cash Flows From Operating Activities:

               

Net earnings

  $ 12,086     $ 12,066  

Adjustments to reconcile net earnings to net cash provided by operating activities:

               

Depreciation and amortization

    8,704       7,481  

Amortization of capitalized financing costs

    72       77  

Stock-based compensation expense

    1,502       1,777  

Deferred income taxes

    546       (113 )

Asset impairment charges

    237       -  

Excess tax benefits from stock-based compensation

    (150 )     (222 )

Gain on sale and disposition of property, plant and equipment

    (1,755 )     (425 )

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

    (233 )     (468 )

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

               

Accounts receivable, net

    2,833       (5,535 )

Inventories

    11,106       (20,374 )

Accounts payable and accrued expenses

    (19,409 )     28,122  

Other changes

    786       (253 )

Total adjustments

    4,239       10,067  

Net cash provided by operating activities

    16,325       22,133  
                 

Cash Flows From Investing Activities:

               

Capital expenditures

    (6,767 )     (5,801 )

Acquisition of intangible asset

    (1,460 )     -  

Acquisition of business

    480       -  

Proceeds from fire loss insurance

    1,713       1,380  

Proceeds from sale of property, plant and equipment

    104       1  

Proceeds from surrender of life insurance policies

    40       160  

Increase in cash surrender value of life insurance policies

    (284 )     (304 )

Net cash used for investing activities

    (6,174 )     (4,564 )
                 

Cash Flows From Financing Activities:

               

Proceeds from long-term debt

    60,872       331  

Principal payments on long-term debt

    (60,872 )     (331 )

Cash dividends paid

    (1,657 )     (1,642 )

Cash received from exercise of stock options

    200       365  

Excess tax benefits from stock-based compensation

    150       222  

Payment of employee tax withholdings related to net share transactions

    (254 )     (505 )

Financing costs

    (207 )     -  

Net cash used for financing activities

    (1,768 )     (1,560 )
                 

Net increase in cash and cash equivalents

    8,383       16,009  

Cash and cash equivalents at beginning of period

    3,050       15,440  

Cash and cash equivalents at end of period

  $ 11,433     $ 31,449  
                 

Supplemental Disclosures of Cash Flow Information:

               

Cash paid during the period for:

               

Interest

  $ 119     $ 2  

Income taxes, net

    4,198       4,464  

Non-cash investing and financing activities:

               

Purchases of property, plant and equipment in accounts payable

    182       45  

Restricted stock units and stock options surrendered for withholding taxes payable

    254       505  

  

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 September 27, 2014

    18,377     $ 18,377     $ 58,867     $ 103,429     $ (1,790 )   $ 178,883  
                                                 

Net earnings

                            12,086               12,086  

Stock options exercised, net

    24       24       176                       200  

Vesting of restricted stock units

    38       38       (38 )                     -  

Compensation expense associated with stock-based plans

                    1,502                       1,502  

Excess tax benefits from stock-based compensation

                    150                       150  

Restricted stock units and stock options surrendered for withholding taxes payable

                    (254 )                     (254 )

Cash dividends declared

                            (1,657 )             (1,657 )

Balance at June 27, 2015

    18,439     $ 18,439     $ 60,403     $ 113,858     $ (1,790 )   $ 190,910  

 

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 September 27, 2014 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 September 27, 2014 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 nine-month period ended June 27, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending October 3, 2015 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 May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 2018. The Company is evaluating the alternative transition methods and the potential effects of the adoption of this update on its consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-03 “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” ASU No. 2015-03 provides that an entity: (1) present debt issuance costs in the balance sheet as a direct deduction from the carrying value of the associated debt liability rather than as an asset; and (2) report amortization of debt issuance costs as interest expense. ASU No. 2015-03 will become effective for the Company in the first quarter of fiscal 2017. The Company does not expect the adoption of this update will have a material impact on its consolidated financial statements.

 

(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 (the “ASW Acquisition”), net of post-closing adjustments of $480,000.

 

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, Texas and its production equipment and facility in Newnan, Georgia. 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.

 

 
7

 

 

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.

 

The following unaudited supplemental pro forma financial information reflects the combined results of operations of the Company had the ASW Acquisition occurred at the beginning of fiscal 2013. The pro forma information reflects certain adjustments related to the ASW Acquisition, including adjusted amortization and depreciation expense based on the fair value of the assets acquired and interest expense related to the borrowings on the Company’s revolving credit facility. The pro forma information does not reflect any operating efficiencies or potential cost savings that may result from the ASW Acquisition. Accordingly, this pro forma information is for illustrative purposes and is not intended to represent or be indicative of the actual results of operations of the combined company that may have been achieved had the ASW Acquisition occurred at the beginning of fiscal 2013, nor is it intended to represent or be indicative of future results of operations. The pro forma combined results of operations for the prior year three- and nine-month periods are as follows:

 

   

Three Months

   

Nine Months

 
   

Ended

   

Ended

 

(In thousands)

 

June 28, 2014

   

June 28, 2014

 

Net sales

  $ 130,802     $ 342,067  

Earnings before income taxes

    10,057       21,433  

Net earnings

    6,549       14,050  

 

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. The Newnan plant closure was completed in March 2015.

 

 
8

 

 

Following is a summary of the restructuring activity and associated costs that were incurred during the three- and nine-month periods ended June 27, 2015:

 

   

 

           

Severance and

                 
   

Asset

   

Equipment

   

Other Employee

   

 

         
    Impairment     Relocation     Separation     Facility          

(In thousands)

 

Charges

   

Costs

   

 Costs

   

Closure Costs

   

Total

 

Liability as of September 27, 2014

  $ -     $ -     $ 1,208     $ -     $ 1,208  

Cash payments

    -       -       (53 )     -       (53 )

Liability as of December 27, 2014

    -       -       1,155       -       1,155  

Restructuring charges

    237       -       75       21       333  

Cash payments

    -       -       (58 )     (4 )     (62 )

Non-cash charges

    (237 )     -       -       -       (237 )

Liability as of March 28, 2015

    -       -       1,172       17       1,189  

Restructuring charges

    -       18       -       327       345  

Cash payments

    -       -       (101 )     (312 )     (413 )

Liability as of June 27, 2015

  $ -     $ 18     $ 1,071     $ 32     $ 1,121  

 

The Company recorded restructuring liabilities of $1.1 million and $1.2 million on its consolidated balance sheet as of June 27, 2015 and September 27, 2014, respectively. As of June 27, 2015, $0.6 million of the restructuring liabilities were recorded in accrued expenses and $0.5 million in other liabilities. As of September 27, 2014, $0.5 million of the restructuring liabilities were recorded in accrued expenses and $0.7 million in other liabilities.

 

The Company currently expects to incur approximately $0.2 million of additional restructuring charges for equipment relocation and facility closure costs through 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 June 27, 2015 and September 27, 2014, 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

June 27,

2015

   

Quoted Prices

in Active

Markets

(Level 1)

   

Observable

Inputs

(Level 2)

 

Current assets:

                       

Cash equivalents

  $ 11,450     $ 11,450     $ -  
                         

Other assets:

                       

Cash surrender value of life insurance policies

    7,344       -       7,344  

Total

  $ 18,794     $ 11,450     $ 7,344  

 

 
9

 

 

(In thousands)

 

Total at

September 27,

2014

   

Quoted Prices

in Active

Markets

(Level 1)

   

Observable

Inputs

(Level 2)

 

Current assets:

                       

Cash equivalents

  $ 3,320     $ 3,320     $ -  
                         

Other assets:

                       

Cash surrender value of life insurance policies

    6,867       -       6,867  

Total

  $ 10,187     $ 3,320     $ 6,867  

 

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 June 27, 2015 and September 27, 2014, 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 Company’s intangible assets and the related accumulated amortization are as follows:

 

(In thousands)

 

Gross Amount

   

Accumulated

Amortization

   

Net Book Value

 

As of June 27, 2015:

                       

Customer relationships

  $ 6,500     $ (281 )   $ 6,219  

Developed technology and know-how

    1,800       (78 )     1,722  

Non-competition agreements

    3,577       (986 )     2,591  
    $ 11,877     $ (1,345 )   $ 10,532  

 

 

(In thousands)

 

Gross Amount

   

Accumulated

Amortization

   

Net Book Value

 

As of September 27, 2014:

                       

Customer relationships

  $ 6,500     $ (38 )   $ 6,462  

Developed technology and know-how

    1,800       (11 )     1,789  

Non-competition agreements

    2,117       (552 )     1,565  
    $ 10,417     $ (601 )   $ 9,816  

 

Amortization expense for intangibles was $289,000 and $94,000 for the three-month periods ended June 27, 2015 and June 28, 2014, respectively, and $745,000 and $283,000 for the nine-month periods ended June 27, 2015 and June 28, 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 June 27, 2015, there were 801,000 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 and excess tax benefits associated with stock options for the three- and nine-month periods ended June 27, 2015 and June 28, 2014 are as follows:

 

   

Three Months Ended

   

Nine Months Ended

 
   

June 27,

   

June 28,

   

June 27,

   

June 28,

 

(In thousands)

 

2015

   

2014

   

2015

   

2014

 

Stock options:

                               

Compensation expense

  $ 78     $ 221     $ 633     $ 744  

Excess tax benefits

    (3 )     (31 )     (150 )     (222 )

 

As of June 27, 2015, the remaining unamortized compensation cost related to unvested stock option awards was $287,000, which is expected to be recognized over a weighted average period of 1.46 years.

 

The fair value of each option award granted is estimated on the date of grant using a Monte Carlo valuation model. The estimated fair values of stock options granted during the nine-month periods ended June 27, 2015 and June 28, 2014 were $7.75 and $6.93 per share, respectively, based on the following assumptions:

 

   

Nine Months Ended

 
   

June 27,

   

June 28,

 
   

2015

   

2014

 

Risk-free interest rate

    1.77 %     1.56 %

Dividend yield

    0.55 %     0.62 %

Expected volatility

    37.39 %     41.46 %

Expected term (in years)

    5.67       4.94  

 

The assumptions utilized in the Monte Carlo valuation model are evaluated and revised, as necessary, to reflect market conditions and actual historical experience. The risk-free interest rate for periods within the contractual life of the option was based on the U.S. Treasury yield curve in effect at the time of the grant. The dividend yield was calculated based on the Company’s annual dividend as of the option grant date. The expected volatility was derived using a term structure based on historical volatility and the volatility implied by exchange-traded options on the Company’s common stock. The expected term for options was based on the results of a Monte Carlo simulation model, using the model’s estimated fair value as an input to the Black-Scholes-Merton model, and then solving for the expected term.

 

The following table summarizes stock option activity for the nine-month period ended June 27, 2015:

 

                                   

Contractual

   

 

 
                                    Term -     Aggregate  
   

Options

   

Exercise Price Per Share

   

Weighted

   

Intrinsic

 
   

Outstanding

                   

Weighted

   

Average

   

Value

 
   

(in thousands)

   

Range

   

Average

   

(years)

   

(in thousands)

 

Outstanding at September 27, 2014

    871     $ 6.89  -   $ 20.50     $ 14.23                  

Granted

    63       21.96  -     21.96       21.96                  

Exercised

    (27 )     6.89  -     11.15       9.17             $ 328  

Outstanding at June 27, 2015

    907       7.55  -     21.96       14.92       6.02       4,499  
                                                 

Vested and anticipated to vest in the future at June 27, 2015

    903                       14.91       6.01       4,491  
                                                 

Exercisable at June 27, 2015

    633                       13.35       4.87       4,005  

 

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.

 

 
11

 

 

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 grants and compensation expense for the three- and nine-month periods ended June 27, 2015 and June 28, 2014 are as follows:

 

   

Three Months Ended

   

Nine Months Ended

 
   

June 27,

   

June 28,

   

June 27,

   

June 28,

 

(In thousands)

 

2015

   

2014

   

2015

   

2014

 

Restricted stock unit grants:

                               

Units

    -       -       36       40  

Market value

  $ -     $ -     $ 790     $ 763  

Compensation expense

    151       328       869       1,033  

 

As of June 27, 2015, the remaining unrecognized compensation cost related to unvested RSUs was $621,000, which is expected to be recognized over a weighted average vesting period of 1.44 years.

 

The following table summarizes RSU activity during the nine-month period ended June 27, 2015:

 

           

Weighted

 
   

Restricted

   

Average

 
   

Stock Units

   

Grant Date

 

(Unit amounts in thousands)

 

Outstanding

   

Fair Value

 

Balance, September 27, 2014

    197     $ 15.68  

Granted

    36       21.96  

Released

    (50 )     14.99  

Balance, June 27, 2015

    183       17.09  

 

(7) Income Taxes

 

Effective income tax rate. The Company’s effective income tax rate was 34.6% for the nine-month period ended June 27, 2015 compared with 34.8% for the nine-month period ended June 28, 2014. The year-over-year reduction in the effective rate was primarily due to changes in permanent book versus tax differences. 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. As of June 27, 2015, the Company has recorded a current deferred tax asset (net of valuation allowance) of $1.5 million in other current assets and a non-current deferred tax liability of $6.5 million in other liabilities on its consolidated balance sheet. The Company has $13.3 million of state net operating loss carryforwards (“NOLs”) that begin to expire in 2017, but principally expire between 2017 and 2032. The Company has also recorded $220,000 of gross deferred tax assets for various state tax credits that begin to expire in 2015, but principally expire between 2015 and 2020.

 

In accordance with ASC Topic 740 Income Taxes, the Company evaluates its deferred tax assets to determine if a valuation allowance is required based on the consideration of all available evidence using a “more likely than not” standard, with significant weight being given to evidence that can be objectively verified. 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. Since the Company operates in multiple jurisdictions, it assesses the need for a valuation allowance on a jurisdiction-by-jurisdiction basis, considering the applicable tax laws. The Company recorded a valuation allowance of $546,000 and $547,000 as of June 27, 2015 and September 27, 2014, respectively, 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 June 27, 2015, the Company has no material, known tax exposures that require the establishment of a liability 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 together with certain state tax returns filed by the Company subsequent to 2003.

 

 

 
12

 

 

(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 Delaware Plan was frozen effective September 30, 2008 whereby participants no longer earn additional service benefits. The Company’s funding policy is to contribute amounts at least equal to those required by law. The Company made contributions totaling $84,000 and $185,000 to the Delaware Plan during the three- and nine-month periods ended June 27, 2015, respectively, and expects to contribute an additional $49,000 during the remainder of the current fiscal year.

 

Net periodic pension costs for the Delaware Plan for the three- and nine-month periods ended June 27, 2015 and June 28, 2014 are as follows:

 

   

Three Months Ended

   

Nine Months Ended

 
   

June 27,

   

June 28,

   

June 27,

   

June 28,

 

(In thousands)

 

2015

   

2014

   

2015

   

2014

 

Interest cost

  $ 32     $ 34     $ 98     $ 102  

Expected return on plan assets

    (46 )     (41 )     (136 )     (123 )

Recognized net actuarial loss

    14       11       40       33  

Net periodic pension cost

  $ -     $ 4     $ 2     $ 12  

 

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 benefit costs for the SERPs for the three- and nine-month periods ended June 27, 2015 and June 28, 2014 are as follows:

 

   

Three Months Ended

   

Nine Months Ended

 
   

June 27,

   

June 28,

   

June 27,

   

June 28,

 

(In thousands)

 

2015

   

2014

   

2015

   

2014

 

Service cost

  $ 72     $ 55     $ 216     $ 165  

Interest cost

    81       79       243       237  

Recognized net actuarial loss

    29       13       87       39  

Net periodic benefit cost

  $ 182     $ 147     $ 546     $ 441  

 

(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 June 27, 2015, no borrowings were outstanding on the Credit Facility, $85.7 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 June 27, 2015, the applicable interest rate margins on the Credit Facility were 0.25% for index rate loans and 1.25% for LIBOR loans.

 

 
13

 

 

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 June 27, 2015, 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 $21,000 and $26,000 for the three-month periods ended June 27, 2015 and June 28, 2014, respectively, and $72,000 and $77,000 for the nine-month periods ended June 27, 2015 and June 28, 2014, respectively. Accumulated amortization of capitalized financing costs was $4.5 million and $4.4 million as of June 27, 2015 and September 27, 2014, respectively.

 

(10) Earnings Per Share

 

The computations of basic and diluted earnings per share attributable to common shareholders for the three- and nine-month periods ended June 27, 2015 and June 28, 2014 are as follows:

 

   

Three Months Ended

   

Nine Months Ended

 
   

June 27,

   

June 28,

   

June 27,

   

June 28,

 

(In thousands except per share amounts)

 

2015

   

2014

   

2015

   

2014

 

Net earnings available to common shareholders

  $ 5,392     $ 5,797     $ 12,086     $ 12,066  
                                 

Basic weighted average shares outstanding

    18,438       18,267       18,407       18,230  

Dilutive effect of stock-based compensation

    390       416       416       406  

Diluted weighted average shares outstanding

    18,828       18,683       18,823       18,636  
                                 

Net earnings per share:

                               

Basic

  $ 0.29     $ 0.32     $ 0.66     $ 0.66  

Diluted

  $ 0.29     $ 0.31     $ 0.64     $ 0.65  

 

Options representing 88,000 and 105,000 shares for the three-month periods ended June 27, 2015 and June 28, 2014, respectively, were antidilutive and not included in the diluted earnings per share calculation. Options representing 67,000 and 125,000 shares for the nine-month periods ended June 27, 2015 and June 28, 2014, respectively, were antidilutive and were 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 June 27, 2015, there was $24.8 million remaining available for future share repurchases under this authorization. No repurchases of common stock were made during the three- and nine-month periods ended June 27, 2015 and June 28, 2014.

 

 
14

 

 

(12) Other Financial Data

 

Balance sheet information:

 

   

June 27,

   

September 27,

 

(In thousands)

 

2015

   

2014

 

Accounts receivable, net:

               

Accounts receivable

  $ 48,871     $ 52,099  

Less allowance for doubtful accounts

    (656 )     (888 )

Total

  $ 48,215     $ 51,211  
                 

Inventories:

               

Raw materials

  $ 38,142     $ 49,200  

Work in process

    2,821       3,789  

Finished goods

    29,830       28,910  

Total

  $ 70,793     $ 81,899  
                 

Other current assets:

               

Current deferred tax asset

  $ 1,458     $ 2,122  

Prepaid insurance

    1,132       1,890  

Income tax receivable

    -       760  

Other

    1,333       1,661  

Total

  $ 3,923     $ 6,433  
                 

Other assets:

               

Cash surrender value of life insurance policies

  $ 7,344     $ 6,867  

Assets held for sale

    2,655       -  

Capitalized financing costs, net

    242       69  

Other

    97       99  

Total

  $ 10,338     $ 7,035  
                 

Property, plant and equipment, net:

               

Land and land improvements

  $ 9,279     $ 9,704  

Buildings

    42,721       42,047  

Machinery and equipment

    142,424       133,699  

Construction in progress

    1,873       7,648  
      196,297       193,098  

Less accumulated depreciation

    (109,655 )     (102,712 )

Total

  $ 86,642     $ 90,386  
                 

Accrued expenses:

               

Salaries, wages and related expenses

  $ 3,887     $ 4,659  

Customer rebates

    1,240       1,530  

Property taxes

    991       1,242  

Accrued income taxes

    737       -  

Pension plan

    642       825  

Restructuring liabilities

    520       481  

Workers' compensation

    284       290  

Deferred revenues

    211       525  

Interest

    24       28  

Other

    1,239       795  

Total

  $ 9,775     $ 10,375  
                 

Other liabilities:

               

Deferred compensation

  $ 7,759     $ 7,426  

Deferred income taxes

    6,454       6,572  

Other

    631       728  

Total

  $ 14,844     $ 14,726  

 

 
15

 

 

(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. The fire damaged a portion of the facility, 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 as of December 27, 2014.

 

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- and nine-month periods ended June 27, 2015, the Company received $0.1 million and $2.0 million of insurance proceeds, respectively, related to the expenses that were incurred and capital outlays that were required to replace property and equipment damaged in the fire. During the nine-month period ended June 27, 2015, the insurance proceeds attributable to the additional expenses incurred were recorded in cost of sales ($244,000) and selling, general and administrative expense (“SG&A expense”) ($69,000) on the consolidated statement of operations and comprehensive income. During the three- and nine-month periods ended June 28, 2014 the Company received $2.7 million and $4.0 million of insurance proceeds, respectively, related to the expenses that were incurred and capital outlays that were required to replace property and equipment damaged in the fire. During the three-month period ended June 28, 2014, the insurance proceeds attributable to the additional expenses incurred were recorded in cost of sales ($1.4 million) and SG&A expense ($73,000) on the consolidated statement of operations and comprehensive income. During the nine-month period ended June 28, 2014, the insurance proceeds attributable to the additional expenses incurred were recorded in cost of sales ($2.5 million) and SG&A expense ($98,000). 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.

 

Customer dispute. During the three-month period ended June 27, 2015, the Company settled a dispute with a customer resulting in a $0.7 million charge that was recorded in other expense on the consolidated statement of operations and comprehensive income.

 

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,” “plans,” “intends,” “will,” “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, such forward-looking statements 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. All forward-looking statements are based on information that is current as of the date of this report. 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 September 27, 2014, 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.

 

 
16

 

 

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;

 

 

the continuation of 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;

 

 

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 September 27, 2014 and in other filings that we make with the SEC.

 

Overview

 

Insteel Industries, Inc. 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, Texas and its production equipment and facility in Newnan, Georgia. We also entered into an agreement to lease the Houston facility from ASW with an option to purchase it in the future.

 

 
17

 

 

Results of Operations

 

Statements of Operations – Selected Data

(Dollars in thousands)

 

   

Three Months Ended

   

Nine Months Ended

 
   

June 27,

           

June 28,

   

June 27,

           

June 28,

 
   

2015

   

Change

   

2014

   

2015

   

Change

   

2014

 
                                                 

Net sales

  $ 117,016       3.3 %   $ 113,227     $ 329,411       12.9 %   $ 291,881  

Gross profit

    15,694       10.0 %     14,263       36,439       4.3 %     34,924  

Percentage of net sales

    13.4 %             12.6 %     11.1 %             12.0 %

Selling, general and administrative expense

  $ 6,427       3.3 %   $ 6,219     $ 18,054       6.8 %   $ 16,908  

Percentage of net sales

    5.5 %             5.5 %     5.5 %             5.8 %

Restructuring charges, net

  $ 345    

N/M

    $ -     $ 678    

N/M

    $ -  

Other expense (income), net

    601    

N/M

      (849 )     (1,038 )     59.0 %     (653 )

Interest expense

    65       16.1 %     56       273       61.5 %     169  

Interest income

    (1 )     (75.0 %)     (4 )     (5 )     (50.0 %)     (10 )

Effective income tax rate

    34.7 %             34.4 %     34.6 %             34.8 %

Net earnings

  $ 5,392       (7.0 %)   $ 5,797     $ 12,086       0.2 %   $ 12,066  
                                                 

"N/M" = not meaningful

                                               

  

Third Quarter of Fiscal 2015 Compared to Third Quarter of Fiscal 2014

 

Net Sales

 

Net sales for the third quarter of 2015 increased 3.3% to $117.0 million from $113.2 million in the same year-ago period. Shipments for the quarter increased 5.1% while average selling prices decreased 1.7% from the prior year levels. The increase in shipments was primarily driven by the ASW Acquisition, which offset the unfavorable impact of the excessive rainfall and flooding in the central region of the country. Sales for both periods reflect depressed volumes on an absolute basis relative to prerecession levels in our construction end-markets.

 

Gross Profit

 

Gross profit for the third quarter of 2015 increased 10.0% to $15.7 million, or 13.4% of net sales, from $14.3 million, or 12.6% of net sales, in the same year-ago period. The year-over-year increase was primarily due to higher spreads between average selling prices and raw material costs ($2.2 million) and higher shipments ($0.8 million) partially offset by higher unit conversion costs ($1.7 million). The increase in spreads was driven by lower raw material costs ($3.9 million) and freight costs ($0.4 million) partially offset by lower average selling prices ($2.1 million). Unit conversion costs in the current year quarter were unfavorably impacted by higher health and workers’ compensation insurance expense. Gross profit for both periods was adversely affected by depressed shipment volumes and elevated unit conversion costs largely driven by reduced operating schedules.

 

Selling, General and Administrative Expense

 

Selling, general and administrative expense (“SG&A expense”) for the third quarter of 2015 increased 3.3% to $6.4 million, or 5.5% of net sales from $6.2 million, or 5.5% of net sales in the same year-ago period as increases in employee benefit costs ($219,000), amortization expense associated with intangible assets ($217,000) and the relative year-over-year change in the cash surrender value of life insurance policies ($160,000) were offset by lower compensation expense ($298,000). The increase in employee benefit costs was primarily related to higher employee health insurance expense during the current year quarter. The increase in amortization expense was primarily associated with the intangible assets that were acquired in connection with the ASW Acquisition. The cash surrender value of life insurance policies decreased $50,000 in the current year quarter compared with an increase of $110,000 in the prior year quarter due to the changes in the value of the underlying investments. The decrease in compensation expense was primarily due to lower stock-based compensation expense.

 

Restructuring Charges, Net

 

Net restructuring charges of $345,000 were incurred in the third quarter of 2015 related to the closure of the Newnan, Georgia PC strand facility, which had been acquired through the ASW Acquisition. Restructuring charges included $327,000 for facility closure costs and $18,000 for equipment relocation costs.

 

 
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Other Expense (Income)

 

Other expense for the third quarter of 2015 was $0.6 million compared to other income of $0.8 million in the same year-ago period. The expense for the current year quarter was primarily due to a $0.7 million charge related to the settlement of a customer dispute. The income for the prior year quarter was primarily related to a $0.8 million net gain from insurance proceeds attributable to the replacement of property and equipment damaged in the fire at our Gallatin, Tennessee PC strand facility.

 

Interest Expense

 

Interest expense for the third quarter of 2015 increased 16.1% to $65,000 from $56,000 in the same year-ago period primarily due to the higher average borrowings on our revolving credit facility during the current year quarter.

 

Income Taxes

 

Our effective income tax rate for the third quarter of 2015 increased to 34.7% from 34.4% in the same year-ago period primarily due to changes in permanent book versus tax differences.

 

Net Earnings

 

Net earnings for the third quarter of 2015 decreased to $5.4 million ($0.29 per share) from $5.8 million ($0.31 per diluted share) in the same year-ago period primarily due to increases in SG&A expense, restructuring charges and other expense partially offset by the increase in gross profit.

 

First Nine Months of Fiscal 2015 Compared to First Nine Months of Fiscal 2014

 

Net Sales

 

Net sales for the first nine months of 2015 increased 12.9% to $329.4 million from $291.9 million in the same year-ago period. Shipments for the period increased 11.6% while average selling prices increased 1.1% from the prior year levels. The increase in shipments was primarily due to the ASW Acquisition, which offset the unfavorable impact of the adverse weather conditions during the current year period. Sales for both periods reflect depressed volumes on an absolute basis relative to prerecession levels in our construction end-markets.

 

Gross Profit

 

Gross profit for the first nine months of 2015 increased 4.3% to $36.4 million, or 11.1% of net sales, from $34.9 million, or 12.0% of net sales, in the same year-ago period. The year-over-year increase was primarily due to higher shipments ($4.4 million) and wider spreads between average selling prices and raw material costs ($4.4 million) partially offset by higher unit conversion costs ($7.3 million). The increase in spreads was driven by higher average selling prices ($3.5 million), lower raw material costs ($0.6 million) and lower freight expense ($0.3 million). Unit conversion costs in the current year period were unfavorably impacted by the unusually severe winter weather at most of our facilities during the first half of the year, which depressed operating volumes, and higher health and workers’ compensation insurance expense. Gross profit for both periods was adversely affected by depressed shipment volumes and elevated unit conversion costs resulting from reduced operating schedules.

 

Selling, General and Administrative Expense

 

SG&A expense for the first nine months of 2015 increased 6.8% to $18.1 million, or 5.5% of net sales, from $16.9 million, or 5.8% of net sales, in the same year-ago period primarily due to increases in employee benefit costs ($544,000), amortization expense associated with intangible assets ($516,000), and travel expense ($150,000) together with the relative year-over-year change in the cash surrender value of life insurance policies ($235,000), which were partially offset by lower compensation expense ($303,000). The increase in employee benefit costs was primarily related to higher employee health insurance expense during the current year period. The increase in amortization expense was primarily associated with the intangible assets that were acquired in connection with the ASW Acquisition. The cash surrender value of life insurance policies increased $233,000 in the current year period compared with an increase of $468,000 in the prior year period due to the changes in the value of the underlying investments. The decrease in compensation expense was primarily driven by lower incentive plan expense in the current year period.

 

 
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Restructuring Charges, Net

 

Net restructuring charges of $678,000 were incurred in the first nine months of 2015 related to the closure of the Newnan, Georgia PC strand facility, which had been acquired through the ASW Acquisition. Restructuring charges include $348,000 for facility closure costs, $237,000 for impairment charges related to the decommissioning of equipment, $75,000 for employee separation costs associated with the plant closure and $18,000 for equipment relocation costs.

 

Other Expense (Income)

 

Other income for the first nine months of 2015 was $1.0 million compared to $0.7 million in the same year-ago period. Other income for the current year period was primarily related to a $1.7 million net gain from insurance proceeds attributable to the replacement of property and equipment damaged in the fire at our Gallatin, Tennessee PC strand facility in 2014, partially offset by a $0.7 million charge related to the settlement of a customer dispute. Other income for the prior year period was primarily related to a net gain from insurance proceeds attributable to the replacement of property and equipment damaged in the fire at our Gallatin facility.

 

Interest Expense

 

Interest expense for the first nine months of 2015 increased 61.5% to $273,000 from $169,000 in the same year-ago period primarily due to higher average borrowings on our revolving credit facility during the current year period.

 

Income Taxes

 

Our effective income tax rate for the first nine months of 2015 decreased to 34.6% from 34.8% in the prior year period due to changes in permanent book versus tax differences.

 

Net Earnings

 

Net earnings for the first nine months of 2015 was essentially unchanged from the prior year period at $12.1 million ($0.64 per diluted share in the current year period compared with $0.65 per diluted share in the prior year period) as the increase in gross profit was offset by increases in SG&A expense and restructuring charges.

 

Liquidity and Capital Resources

 

Selected Financial Data

(Dollars in thousands)

 

   

Nine Months Ended

 
   

June 27,

   

June 28,

 
   

2015

   

2014

 

Net cash provided by operating activities

  $ 16,325     $ 22,133  

Net cash used for investing activities

    (6,174 )     (4,564 )

Net cash used for financing activities

    (1,768 )     (1,560 )
                 

Net working capital

    91,277       98,621  

Total debt

    -       -  

Percentage of total capital

    -       -  

Shareholders' equity

  $ 190,910     $ 173,339  

Percentage of total capital

    100.0 %     100.0 %

Total capital (total debt + shareholders' equity)

  $ 190,910     $ 173,339  

 

Operating Activities

 

Operating activities provided $16.3 million of cash during the first nine months of 2015 primarily from net earnings adjusted for non-cash items partially offset by a decrease in the net working capital components of accounts receivable, inventories, and accounts payable and accrued expenses. Net working capital used $5.5 million of cash due to a $19.4 million decrease in accounts payable and accrued expenses partially offset by an $11.1 million decrease in inventories and a $2.8 million decrease in accounts receivable. The decrease in accounts payable and accrued expenses was largely due to lower raw material purchases near the end of the period and lower unit costs. The decrease in inventory was primarily driven by lower raw material purchases and unit costs. The decrease in accounts receivable was primarily related to lower selling prices.

 

 
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Operating activities provided $22.1 million of cash during the first nine months of 2014 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 $2.2 million of cash due to a $28.1 million increase in accounts payable and accrued expenses partially offset by a $20.4 million increase in inventories and a $5.5 million increase in accounts receivable. The increase in accounts payable and accrued expenses was largely due to higher raw material purchases and changes in the mix of vendor payments and terms. The increase in inventories was primarily driven by higher receipts of imported raw materials which are purchased in larger quantities. The increase in accounts receivable was principally due to the increase 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 $6.2 million of cash during the first nine months of 2015 compared to $4.6 million during the same period last year. Capital expenditures increased to $6.8 million for the first nine months of 2015 from $5.8 million in the prior year period. Current year outlays include $1.5 million for the acquisition of an intangible asset from a competitor, which was offset by the receipt of $1.7 million of insurance proceeds related to the Gallatin fire and $0.5 million of post-closing adjustments associated with the ASW Acquisition. Capital expenditures for fiscal 2015 are not expected to exceed $11.0 million. Our investing activities are largely discretionary, providing us with the ability to significantly curtail outlays should business conditions warrant that such actions be taken.

 

Financing Activities

 

Financing activities used $1.8 million of cash during the first nine months of 2015 compared to $1.6 million during the same period last year. The primary use of cash for both periods related to our regular quarterly dividend payments. Current year outlays include $0.2 million of financing costs that were incurred in connection with the amendment of our credit facility. While we intend to pay regular quarterly cash dividends for the foreseeable future, the declaration and payment of future dividends, if any, are discretionary and will be subject to determination by the board of directors each quarter after taking into account various factors.

 

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 June 27, 2015, no borrowings were outstanding on the Credit Facility, $85.7 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.

 

 
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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 third fiscal quarter of 2015. 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.

 

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 September 27, 2014 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 September 27, 2014 for further information regarding our critical accounting policies and estimates. As of June 27, 2015, 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 September 27, 2014.

 

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 September 27, 2014, 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 2015, we expect further improvement in our financial results driven by the favorable conditions in our construction end-markets and the consumption of lower cost inventory reflecting the recent decline in raw material costs. We expect the recovery in private nonresidential construction, our primary demand driver, will regain momentum following the adverse weather conditions we have experienced over the past two quarters, which should result in higher shipment volumes and operating levels at our facilities. The outlook for infrastructure construction is less clear pending the enactment of a new multi-year federal transportation funding authorization.

 

 
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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 we are not a party to any leveraged derivatives. We monitor our underlying market risk exposures on an ongoing basis and believe that we can modify or adapt our hedging strategies as necessary.