UNITED STATES SECURITIES AND EXCHANGE COMMISSION

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

For the quarterly period ended July 2, 2022

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

For the transition period from ________ to ________

(Exact name of registrant as specified in its charter)

(State or other jurisdiction of

1373 Boggs Drive, Mount Airy, North Carolina

(Address of principal executive offices)

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

Securities registered subject to Section 12(b) of the Exchange Act:

Name of Each Exchange on Which Registered

Common Stock (No Par Value)

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.

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of July 21, 2022, 19,505,808 shares of the registrant's common stock were outstanding.

Consolidated Statements of Operations and Comprehensive Income

Consolidated Statements of Cash Flows

Consolidated Statements of Shareholders' Equity

Notes to Consolidated Financial Statements

Management's Discussion and Analysis of Financial Condition and Results of Operations

Quantitative and Qualitative Disclosures About Market Risk

PART II - OTHER INFORMATION

Unregistered Sales of Equity Securities and Use of Proceeds

PART I - FINANCIAL INFORMATION

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except per share amounts)

Selling, general and administrative expense

Cash dividends declared per share

See accompanying notes to consolidated financial statements.

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

Property, plant and equipment, net

Total liabilities and shareholders' equity

See accompanying notes to consolidated financial statements.

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Cash Flows From Operating Activities:

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

Amortization of capitalized financing costs

(Gain) loss on sale of property, plant and equipment and assets held for sale

Gain from life insurance proceeds

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

Net changes in assets and liabilities:

Accounts payable and accrued expenses

Net cash provided by operating activities

Cash Flows From Investing Activities:

Decrease (increase) in cash surrender value of life insurance policies

Proceeds from sale of assets held for sale

Proceeds from life insurance claims

Proceeds from surrender of life insurance policies

Net cash used for investing activities

Cash Flows From Financing Activities:

Principal payments on long-term debt

Payment of employee tax withholdings related to net share transactions

Cash received from exercise of stock options

Net cash used for financing activities

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Supplemental Disclosures of Cash Flow Information:

Cash paid during the period for:

Non-cash investing and financing activities:

Purchases of property, plant and equipment in accounts payable

Restricted stock units and stock options surrendered for withholding taxes payable

See accompanying notes to consolidated financial statements.

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

Compensation expense associated with stock-based plans

Restricted stock units and stock options surrendered for withholding taxes payable

Vesting of restricted stock units

Compensation expense associated with stock-based plans

Restricted stock units and stock options surrendered for withholding taxes payable

Compensation expense associated with stock-based plans

Restricted stock units and stock options surrendered for withholding taxes payable

For the three and nine months ended July 3, 2021

Compensation expense associated with stock-based plans

Restricted stock units and stock options surrendered for withholding taxes payable

Vesting of restricted stock units

Compensation expense associated with stock-based plans

Restricted stock units and stock options surrendered for withholding taxes payable

Compensation expense associated with stock-based plans

Restricted stock units and stock options surrendered for withholding taxes payable

See accompanying notes to consolidated financial statements.

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the U.S. ("GAAP") on a basis consistent with that used in the Annual Report on Form 10-K for the year ended October 2, 2021 ("2021 Form 10-K") filed by us with the Securities and Exchange Commission (the "SEC"). These statements include all normal recurring adjustments necessary to present fairly the consolidated balance sheets and the statements of operations and comprehensive income, cash flows and shareholders' equity for the periods indicated. The October 2, 2021 consolidated balance sheet was derived from audited consolidated financial statements but does not include all the disclosures required by GAAP. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2021 Form 10-K. The results of operations for the periods indicated are not necessarily indicative of the results that may be expected for the full fiscal year or any future periods.

In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2019-12 "Simplifying the Accounting for Income Taxes (Topic 740)". ASU No. 2019-12 removes certain exceptions to the general principles in Accounting Standards Codification ("ASC") 740 and also clarifies and amends existing guidance to provide for more consistent application. We adopted ASU No. 2019-12 in the first quarter. The adoption of this guidance did not have a material impact on our consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting". ASU No. 2020-04 provides optional expedients and exceptions to account for contracts, hedging relationships and other transactions that reference LIBOR or another reference rate if certain criteria are met. ASU No. 2020-04 is effective March 12, 2020 through December 31, 2022. The adoption of this guidance will not have a material impact on our consolidated financial statements and disclosures.

On March 16, 2020, we purchased substantially all of the assets of Strand-Tech Manufacturing, Inc. ("STM") for an adjusted purchase price of $19.4 million, reflecting certain post-closing adjustments (the "STM Acquisition"). STM was a leading manufacturer of prestressed concrete strand ("PC strand") for concrete construction applications. We acquired, among other assets, STM's accounts receivable, inventories, production equipment and facility located in Summerville, South Carolina, and assumed certain of its accounts payable and accrued liabilities.

In connection with the STM acquisition, we elected to consolidate our PC strand operations through the closure of the Summerville facility and the redeployment of its equipment to our other three PC strand production facilities located in Gallatin, Tennessee; Houston, Texas; and Sanderson, Florida. Operations at the Summerville facility ceased during the third quarter of fiscal 2020, and the facility was sold during the second quarter of the current year.

Following is a summary of the restructuring activity during the three- and nine-month periods ended July 2, 2022 and July 3, 2021:

We recognize revenues when performance obligations under the terms of a contract with our customers are satisfied, which generally occurs when products are shipped and control is transferred. We enter into contracts that pertain to products, which are accounted for as separate performance obligations and typically one year or less in duration. We do not exercise significant judgment in determining the timing for the satisfaction of performance obligations or the transaction price. Revenue is measured as the amount of consideration expected to be received in exchange for our products. We present revenue net of amounts collected from customers for sales tax.

Variable consideration that may affect the total transaction price, including contractual discounts, rebates, returns and credits are included in net sales. Estimates for variable consideration are based on historical experience, anticipated performance and management's judgment and are updated as of each reporting date. Shipping and related expenses associated with outbound freight are accounted for as fulfillment costs and included in cost of sales. We do not have significant financing components. Contract costs are not significant and are recognized as incurred.

Our net sales by product line are as follows:

Our net sales by geographic region are as follows:

Contract assets primarily relate to our rights to consideration for products that are delivered but not billed as of the reporting date and are reclassified to receivables when the customer is invoiced. Contract liabilities primarily relate to performance obligations that are to be satisfied in the future and arise when we collect from the customer in advance of shipments. Contract assets and liabilities were not material as of July 2, 2022 and October 2, 2021.

Accounts receivable includes amounts billed and currently due from customers stated at their net estimated realizable value. Customer payment terms are generally 30 days. We maintain an allowance for doubtful accounts to provide for the estimated receivables that will not be collected, which is based upon our assessment of customer creditworthiness, historical payment experience and the age of outstanding receivables. Past-due trade receivable balances are written off when our collection efforts have been unsuccessful.

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 July 2, 2022 and October 2, 2021, we held financial assets that are required to be measured at fair value on a recurring basis, which are summarized below:

Cash surrender value of life insurance policies

Cash surrender value of life insurance policies

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

As of July 2, 2022 and October 2, 2021, we had no nonfinancial assets that were required to be measured at fair value on a nonrecurring basis. The carrying amounts of accounts receivable, accounts payable and accrued expenses approximate fair value due to the short-term maturities of these financial instruments.

The primary components of our intangible assets and the related accumulated amortization are as follows:

Amortization expense for intangibles was $205,000 and $213,000 for the three-month periods ended July 2, 2022 and July 3, 2021, respectively, and $617,000 and $685,000 for the nine-month periods ended July 2, 2022 and July 3, 2021, respectively. Amortization expense for the next five years is $204,000 in 2022, $756,000 in 2023, $750,000 in 2024, $743,000 in 2025, $752,000 in 2026 and $3.8 million thereafter.

Under our equity incentive plan, employees and directors may be granted stock options, restricted stock, restricted stock units and performance awards. Effective February 28, 2020, our shareholders approved an amendment to the 2015 Equity Incentive Plan of Insteel Industries, Inc. (the "2015 Plan"), which authorizes up to an additional 750,000 shares of our common stock for future grants under the plan and expires on February 17, 2025. As of July 2, 2022, there were 620,000 shares of our common stock available for future grants under the 2015 Plan, which is our only active equity incentive plan.

Stock option awards. Under our equity incentive plan, employees and directors may be granted options to purchase shares of common stock at the fair market value on the date of the grant. Options granted under these plans generally vest over three years and expire ten years from the date of the grant. Compensation expense associated with stock options was $115,000 and $89,000 for the three-month periods ended July 2, 2022 and July 3, 2021, respectively, and $594,000 and $489,000 for the nine-month periods ended July 2, 2022 and July 3, 2021, respectively. As of July 2, 2022, there was $530,000 of unrecognized compensation cost related to unvested options which is expected to be recognized over a weighted average period of 1.92 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 July 2, 2022 and July 3, 2021 was $15.45 and $12.33 per share, respectively, based on the following assumptions:

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 our 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 our 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:

Vested and anticipated to vest in the future at July 2, 2022

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

Restricted stock units.Restricted stock units ("RSUs") granted under our equity incentive 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. Compensation expense associated with RSUs was $178,000 and $151,000 for the three-month periods ended July 2, 2022 and July 3, 2021, respectively, and $801,000 and $685,000 for the nine-month periods ended July 2, 2022 and July 3, 2021, respectively.

As of July 2, 2022, there was $965,000 of unrecognized compensation cost related to unvested RSUs which is expected to be recognized over a weighted average period of 1.48 years

The following table summarizes RSU activity:

Effective income tax rate. Our effective income tax rate was 22.6% for each of the nine-month periods ended July 2, 2022 and July 3, 2021. 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 July 2, 2022 and October 2, 2021, we recorded a deferred tax liability (net of valuation allowance) of $6.9 million and $6.3 million, respectively, in other liabilities on our consolidated balance sheets. We have $5.6 million of state net operating loss carryforwards ("NOLs") that begin to expire in 2031, but principally expire between 2031 and 2037.

The realization of our deferred tax assets is entirely dependent upon our ability to generate future taxable income in applicable jurisdictions. GAAP requires that we periodically assess the need to establish a reserve against our deferred tax assets to the extent we no longer believe it is more likely than not that they will be fully realized. As of July 2, 2022 and October 2, 2021, we recorded a valuation allowance of $32,000 and $73,000, respectively, pertaining to various state NOLs that were not expected to be utilized. The valuation allowance is subject to periodic review and adjustment based on changes in facts and circumstances and would be reduced should we utilize the state NOLs against which an allowance had previously been provided or determine that such utilization was more likely than not.

Uncertainty in income taxes. We establish contingency reserves for material, known tax exposures based on our assessment of the estimated liability that would be incurred in connection with the settlement of such matters. As of July 2, 2022, we had no material, known tax exposures that required the establishment of contingency reserves for uncertain tax positions.

We file U.S. federal, state and local income tax returns in various jurisdictions. Federal and various state tax returns filed subsequent to 2016 remain subject to examination.

Supplemental retirement benefit plan.We have Supplemental Retirement Benefit Agreements (each, a "SRBA") with certain of our employees (each, a "Participant"). Under the SRBAs, if the Participant remains in continuous service with us for a period of at least 30 years, we will pay the Participant a supplemental retirement benefit for the 15-year period following the Participant's retirement equal to 50% of the Participant's highest average annual base salary for five consecutive years in the 10-year period preceding the Participant's retirement. If the Participant retires prior to the later of age 65 or the completion of 30 years of continuous service with us, but has completed at least 10 years of continuous service, the amount of the Participant's supplemental retirement benefit will be reduced by 1/360 th for each month short of 30 years that the Participant was employed by us.

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

Revolving Credit Facility. We have a $100.0 million revolving credit facility (the "Credit Facility") that is used to supplement our operating cash flow and fund our working capital, capital expenditure, general corporate and growth requirements. In May 2019, we entered into a new credit agreement, which amended and restated in its entirety the previous agreement pertaining to the revolving credit facility that had been in effect since June 2010. The new credit agreement, among other changes, extended the maturity date of the Credit Facility from May 13, 2020 to May 15, 2024 and provided for an accordion feature whereby its size may be increased by up to $50.0 million, subject to our lender's approval. Advances under the Credit Facility are limited to the lesser of the revolving loan commitment amount (currently $100.0 million) or a borrowing base amount that is calculated based upon a percentage of eligible receivables and inventories. As of July 2, 2022, no borrowings were outstanding on the Credit Facility, $98.6 million of borrowing capacity was available and outstanding letters of credit totaled $1.4 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 our election, a LIBOR rate, plus in either case, an applicable interest rate margin. The applicable interest rate margins are adjusted on a quarterly basis based upon the amount of excess availability on the Credit Facility within the range of 0.25% to 0.50% for index rate loans and 1.25% to 1.50% for LIBOR loans. In addition, the applicable interest rate margins would be increased by 2.00% upon the occurrence of certain events of default provided for under the terms of the Credit Facility. Based on our excess availability as of July 2, 2022, the applicable interest rate margins on the Credit Facility were 0.25% for index rate loans and 1.25% for LIBOR loans.

Our ability to borrow available amounts under the Credit Facility will be restricted or eliminated in the event of certain covenant breaches, events of default or if we are unable to make certain representations and warranties provided for under the terms of the Credit Facility. We are required to maintain a fixed charge coverage ratio of not less than 1.0 at the end of each fiscal quarter for the twelve-month period then ended when the amount of liquidity on the Credit Facility is less than $10.0 million. In addition, the terms of the Credit Facility restrict our ability to, among other things: engage in certain business combinations or divestitures; make investments in or loans to third parties, unless certain conditions are met with respect to such investments or loans; pay cash dividends or repurchase shares of our stock subject to certain minimum borrowing availability requirements; incur or assume indebtedness; issue securities; enter into certain transactions with our affiliates; or permit liens to encumber our property and assets. The terms of the Credit Facility also provide that an event of default will occur upon the occurrence of, among other things: defaults or breaches under the loan documents, subject in certain cases to cure periods; defaults or breaches by us or any of our subsidiaries under any agreement resulting in the acceleration of amounts above certain thresholds or payment defaults above certain thresholds; certain events of bankruptcy or insolvency; certain entries of judgment against us or any of our subsidiaries, which are not covered by insurance; or a change of control. As of July 2, 2022, we were in compliance with all of the financial and negative covenants under the Credit Facility, and there have not been any events of default.

Amortization of capitalized financing costs associated with the Credit Facility was $16,000 and $17,000 for the three-month periods ended July 2, 2022 and July 3, 2021, respectively, and $49,000 for each of the nine-month periods ended July 2, 2022 and July 3, 2021.

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

(In thousands, except per share amounts)

Basic weighted average shares outstanding

Dilutive effect of stock-based compensation

Diluted weighted average shares outstanding

Options that were antidilutive and not included in the dilutive earnings per share calculation amounted to 14,000 and 83,000 shares for the three-month periods ended July 2, 2022 and July 3, 2021, respectively, and 46,000 and 151,000 shares for the nine-month periods ended July 2, 2022 and July 3, 2021, respectively.

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 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 July 2, 2022, there was $24.8 million remaining available for future share repurchases under this Authorization. There were no share repurchases during the three- and nine-month periods ended July 2, 2022 and July 3, 2021.

Less allowance for doubtful accounts

Cash surrender value of life insurance policies

Property, plant and equipment, net:

Salaries, wages and related expenses

State sales and use taxes

Our operations are entirely focused on the manufacture and marketing of steel wire reinforcing products for concrete construction applications. Our concrete reinforcing products consist of two product lines: PC strand and welded wire reinforcement. Based on the criteria specified in ASC Topic 280, Segment Reporting, we have one reportable segment.

We have operating leases for certain equipment, office space and vehicles. We determine whether an arrangement is a lease at its inception if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Leases with an initial term of twelve months or less are not recorded on our consolidated balance sheets. Lease expense for operating leases with original terms of more than twelve months was $355,000 and $357,000 for the three-month periods ended July 2, 2022 and July 3, 2021, respectively, and $1.1 million for each of the nine-month periods ended July 2, 2022 and July 3, 2021.

Most of our leases include options to extend or terminate the leases which are exercised at our sole discretion. As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate, which approximates the rate to borrow on a collateralized basis, as of the commencement date in determining the present value of lease payments.

Supplemental cash flow and non-cash information related to leases is as follows:

Cash paid for operating leases included in operating cash flows

Right-of-use assets obtained in exchange for new lease obligations

Supplemental balance sheet information related to leases is as follows:

The weighted average remaining lease terms and discount rates for operating leases are as follows:

Weighted average lease term (years)

Aggregate future operating lease payments as of July 2, 2022 are as follows:

Total future operating lease payments

Present value of lease liabilities

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

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," "continue," "outlook," "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 numerous risks and uncertainties and involve certain assumptions. Actual results may differ materially from those expressed in forward-looking statements, 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 filings with the U.S. Securities and Exchange Commission ("SEC"), in particular in our Annual Report on Form 10-K for the fiscal year ended October 2, 2021 (our "2021 Annual Report"). 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 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 business, future operations or financial performance; however, they include, but are not limited to, the following:

the impact of COVID-19 on the economy, demand for our products and our operations, including the measures taken by governmental authorities to address it, which may precipitate or exacerbate other risks and/or uncertainties;

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

changes in the spending levels 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 carbon steel wire rod, from domestic and foreign suppliers;

competitive pricing pressures and our ability to raise selling prices in order to recover increases in raw material or operating costs;

changes in U.S. or foreign trade policy affecting imports or exports of steel wire rod or our products;

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

the impact of fluctuations in demand and 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, geopolitical or regulatory developments that significantly impact our business or operating costs;

unanticipated plant outages, equipment failures or labor difficulties; and

the "Risk Factors" discussed in our 2021 Annual Report and in other filings made by us with the SEC.

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. We sell our products nationwide across the U.S. and, to a much lesser extent, into Canada, Mexico and Central and South America, delivering them 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 in our industry; and (3) pursuing growth opportunities within our core businesses that further our penetration of the markets we currently serve or expand our footprint.

The COVID-19 pandemic has had a limited impact on our financial position and results of operation to date. We continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business and the potential effect on our financial position, results of operations and cash flows. There are many uncertainties regarding the future and ultimate impact that COVID-19 will have on all aspects of our business. We will continue to assess and make adjustments as necessary.

Statements of Operations - Selected Data

Selling, general and administrative expense

Third Quarter of Fiscal 2022 Compared to Third Quarter of Fiscal 2021

Net sales for the third quarter of 2022 increased 41.3% to $227.2 million from $160.7 million in the prior year quarter, reflecting a 53.9% increase in average selling prices partially offset by an 8.2% decrease in shipments. The increase in average selling prices was driven by price increases implemented to recover the escalation in raw material costs together with strong demand for our products. The decrease in shipments was due to inventory management measures pursued by our customers of the standard welded wire product line in the current year quarter along with reduced labor availability constraining production levels. Shipments in the current and prior year quarter were not materially impacted by the COVID-19 pandemic.

Gross profit for the third quarter of 2022 increased 84.1% to $58.1 million, or 25.6% of net sales, from $31.5 million, or 19.6% of net sales, in the prior year quarter due to higher spreads between average selling prices and raw material costs ($30.0 million) partially offset by a decrease in shipments ($2.6 million) and higher manufacturing costs ($0.8 million). The increase in spreads was driven by higher average selling prices ($79.0 million) partially offset by higher raw material costs ($47.1 million) and freight expense ($1.9 million).

Selling, General and Administrative Expense

Selling, general and administrative expense ("SG&A expense") for the third quarter of 2022 increased 33.2% to $8.2 million, or 3.6% of net sales, from $6.2 million, or 3.8% of net sales, in the prior year quarter primarily due to the relative year-over-year changes in the cash surrender value of life insurance policies ($1.3 million), higher compensation ($450,000), employee benefit ($243,000) and travel ($93,000) expense partially offset by lower legal ($486,000) expense. The cash surrender value of life insurance policies decreased $977,000 in the current year quarter compared with an increase of $367,000 in the prior year quarter due to the corresponding changes in the value of the underlying investments. The increase in compensation expense was largely driven by higher incentive plan expense. The increase in employee benefit expense was primarily related to higher employee health insurance costs in the current year quarter. The decrease in legal expense was due to costs associated with trade matters incurred in the prior year quarter.

Net restructuring charges of $1.6 million were incurred in the third quarter of 2021 related to the closure of the Summerville, South Carolina facility, which had been acquired through the Strand-Tech Manufacturing, Inc. ("STM") acquisition, and consolidation of our PC strand operations. Net restructuring charges included asset impairment charges ($1.4 million), facility closure ($176,000) and equipment relocation ($35,000) costs.

Our effective tax rate for the third quarter of 2022 increased to 22.7% from 22.4% for the prior year quarter primarily due to changes in book versus tax differences.

Net earnings for the third quarter of 2022 increased to $38.6. million ($1.96 per diluted share) from $18.4 million ($0.94 per diluted share) in the prior year quarter primarily due to the increase in gross profit and the change in net restructuring charges (recoveries) partially offset by higher SG&A expense.

First Nine Months of Fiscal 2022 Compared to First Nine Months of Fiscal 2021

Net sales for the first nine months of 2022 increased 47.6% to $618.8 million from $419.3 million in the same year-ago period, reflecting a 62.2% increase in average selling prices partially offset by a 9.1% decrease in shipments. The increase in average selling prices was driven by price increases implemented to recover the escalation in raw material costs together with strong demand for our products. The decrease in shipments was due to the impact of tight supply conditions for raw materials, inventory management measures pursued by our customers of the standard welded wire product line and labor availability constraining production levels during the current year period. Shipments for both periods were not materially impacted by the COVID-19 pandemic.

Gross profit for the first nine months of 2022 increased 93.0% to $157.5 million, or 25.5% of net sales, from $81.6 million, or 19.5% 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 ($89.3 million) partially offset by a decrease in shipments ($7.1 million) and higher manufacturing costs ($6.3 million). The increase in spreads was driven by higher average selling prices ($236.5 million) partially offset by higher raw material costs ($142.5 million) and freight expense ($4.7 million).

Selling, General and Administrative Expense

SG&A expense for the first nine months of 2022 increased 10.6% to $27.7 million, or 4.5% of net sales, from $25.1 million, or 6.0% of net sales, in the same year-ago period primarily due to the relative year-over-year changes in the cash surrender value of life insurance policies ($2.9 million), higher compensation ($650,000), travel ($315,000) and insurance ($211,000) expense partially offset by lower legal ($1.8 million) and employee benefit ($178,000) expense. The cash surrender value of life insurance policies decreased $1.4 million in the current year period compared with an increase of $1.5 million in the prior year period due to the corresponding changes in the value of the underlying investments. The increase in compensation expense was largely driven by higher incentive plan expense. The decrease in legal expense was primarily related to costs associated with trade matters incurred in the prior year period. The decrease in employee benefits expense was due to a net gain on the settlement of life insurance policies ($364,000) in the current year period.

Net restructuring recoveries of $318,000 were incurred in the first nine months of 2022 related to the closure of the Summerville, South Carolina facility, which had been acquired through the STM acquisition, and consolidation of our PC strand operations. Net restructuring recoveries for the current period included a gain on sale of the Summerville facility ($622,000) partially offset by facility closure ($304,000) costs. Net restructuring charges of $2.8 million were incurred in the prior year period which included asset impairment charges ($1.4 million), facility closure ($987,000), equipment relocation ($409,000) and employee separation ($13,000) costs.

Our effective income tax rate was 22.6% for each of the nine-month periods ended July 2, 2022 and July 3, 2021.

Net earnings for the first nine months of 2022 increased to $100.7 million ($5.13 per diluted share) from $41.5 million ($2.13 per diluted share) in the same year-ago period primarily due to the increase in gross profit and the change in net restructuring charges (recoveries) partially offset by higher SG&A expense.

Net cash provided by operating activities

Net cash used for investing activities

Net cash used for financing activities

Total capital (total debt + shareholders' equity)

Operating activities provided $15.1 million of cash during the first nine months of 2022 primarily from net earnings adjusted for non-cash items together with a net increase in working capital. Working capital used $99.5 million of cash due to a $113.4 million increase in inventories and a $13.3 million increase in accounts receivable partially offset by a $27.2 million increase in accounts payable and accrued expenses. The increase in inventories was the result of higher raw material purchases during the period together with higher average unit costs. The increase in accounts receivable was due to higher average selling prices. The increase in accounts payable and accrued expenses was largely due to higher raw material purchases during the period and the timing of payments.

Operating activities provided $65.5 million of cash during the first nine months of 2021 primarily from net earnings adjusted for non-cash items together with a net decrease in working capital. Working capital provided $11.9 million of cash due to a $19.6 million increase in accounts payable and accrued expenses partially offset by a $5.5 million increase in accounts receivable and a $2.2 million increase in inventories. The increase in accounts payable and accrued expenses was related to higher raw material purchases near the end of the period along with higher unit costs. The increase in accounts receivable was largely driven by higher average selling prices. The increase in inventories was due to higher unit costs partially offset by a decrease in unit volumes.

We may elect to adjust our operating activities as there are changes 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 used $2.7 million of cash during the first nine months of 2022 compared to $13.9 million during the prior year period primarily due to the receipt of proceeds from the sale of assets held for sale ($6.9 million), life insurance claims ($1.5 million), lower capital expenditures ($1.4 million) and a decrease in cash surrender value of life insurance policies ($1.3 million). Capital expenditures decreased to $12.3 million from $13.7 million in the prior year period and are expected to total up to $20.0 million for fiscal 2022 due to extended delivery timelines for capital equipment purchases. Capital expenditures for fiscal 2022 are to advance the growth of our engineered structural mesh business and support cost and productivity improvement initiatives in addition to recurring maintenance requirements.

Our investing activities are largely discretionary, providing us with the ability to significantly curtail outlays when warranted based on business conditions.

Financing activities used $39.2 million of cash during the first nine months of 2022 compared to $30.4 million during the prior year period. During the first nine months of 2022, we declared and paid a special dividend totaling $38.8 million, or $2.00 per share, and regular quarterly dividend totaling $1.8 million, or $0.09 per share. During the first nine months of 2021, we declared and paid a special dividend totaling $29.0 million, or $1.50 per share, and a regular quarterly dividend totaling $1.7 million, or $0.09 per share.

Our cash is principally concentrated 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.

We have a $100.0 million revolving credit facility (the "Credit Facility") that is used to supplement our operating cash flow and fund our working capital, capital expenditure, general corporate and growth requirements. In May 2019, we entered into a new credit agreement, which amended and restated in its entirety the previous agreement pertaining to the revolving credit facility that had been in effect since June 2010. The new credit agreement, among other changes, extended the maturity date of the Credit Facility from May 13, 2020 to May 15, 2024 and provided for an accordion feature whereby its size may be increased by up to $50.0 million, subject to our lender's approval. Advances under the Credit Facility are limited to the lesser of the revolving loan commitment amount (currently $100.0 million) or a borrowing base amount that is calculated based upon a percentage of eligible receivables and inventories. As of July 2, 2022, no borrowings were outstanding on the Credit Facility, $98.6 million of borrowing capacity was available and outstanding letters of credit totaled $1.4 million (see Note 10 to the consolidated financial statements).

We believe that, in the absence of significant unanticipated funding requirements, 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, should we experience future reductions in our operating cash flows due to weakening conditions in our construction end-markets and reduced demand from our customers, we may need to curtail capital and operating expenditures, cease dividend payments, delay or restrict share repurchases and/or realign our working capital requirements.

Should we determine, at any time, that we require additional short-term liquidity, we would evaluate the alternative sources of financing that would be 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 and borrowing capacity available to us under our Credit Facility position us to meet our anticipated liquidity requirements for the foreseeable future, including the next 12 months.

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, shipments typically reach their highest level of the year when weather conditions are the most conducive to construction activity. As a result, assuming normal seasonal weather patterns, shipments and profitability are usually higher in the third and fourth quarters of the fiscal year and lower in the first and second quarters. From a cyclical standpoint, construction activity and demand for our products is generally correlated with general economic conditions, although there can be significant differences between the relative strength of nonresidential and residential construction for extended periods.

We are subject to inflationary risks arising from fluctuations in the market prices for our primary raw material, hot-rolled carbon steel wire rod, and, to a much lesser extent, freight, energy and other consumables that are used in our manufacturing processes. We have generally been able to adjust our selling prices to pass through increases in these costs or offset them through various cost reduction and productivity improvement initiatives. However, our ability to raise our selling prices depends on market conditions and competitive dynamics, and there may be periods during which we are unable to fully recover increases in our costs. During the first nine months of 2022, we were successful in implementing price increases sufficient to recover the escalation in our raw material costs that occurred over the course of the period. The timing and magnitude of any future increases in our raw material costs and the selling prices for our products is uncertain at this time.

There have been no material changes in our contractual obligations and commitments as disclosed in our 2021 Annual Report other than those which occur in the ordinary course of business.

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 U.S. for interim financial information. The preparation of our financial statements requires the application of these accounting principles in addition to certain estimates and judgments based on current available information, actuarial estimates, historical results and other assumptions believed to be reasonable. These estimates, assumptions and judgments are affected by our application of accounting policies, which are discussed in our 2021 Annual Report. Estimates are used for, but not limited to, determining the net carrying value of trade accounts receivable, inventories, recording self-insurance liabilities and other accrued liabilities. Actual results could differ from these estimates. Please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates" included in our 2021 Annual Report for further information regarding our critical accounting policies and estimates. As of July 2, 2022, none of our accounting estimates were deemed to be critical for the accounting periods presented, which is consistent with our assessment of critical accounting estimates disclosed in our 2021 Annual Report.

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 including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements.

Looking ahead to the remainder of the fiscal 2022, we expect another period of strong financial performance during our fourth quarter. Customer sentiment remains positive, and the leading indicators for our nonresidential construction end markets remain at expansionary levels, signaling a continuation of the robust demand environment across our customer base. While we have experienced some demand softness in our standard welded wire reinforcement product line, we have not detected any similar trends in the rest of the Company's product lines. The softening is believed to have resulted from slowing new home construction together with distribution channels that had recovered from supply shortfalls earlier in the fiscal year, which caused companies to more tightly manage inventories, thereby unfavorably affecting our production and shipments.

While inadequate supplies of domestically produced hot rolled steel wire rod, our principal raw material, have been alleviated though foreign sources, our operations are managing through unusually tight labor markets that have resulted in less than full capacity operating schedules at certain facilities. To mitigate this impact in the near term, we have instituted innovative work schedules and higher pay levels, which we believe will support increased production through the balance of calendar year 2022. Longer term, one of the benefits of our capital investment plan will be a reduction in our overall labor intensity and operating costs.

We will continue to focus on those factors that we can reasonably control including closely managing expenses; aligning our production schedules with demand to minimize our cash operating costs; and pursuing further improvements in the productivity and effectiveness of all our manufacturing, selling and administrative activities. We also expect gradually increasing contributions from the substantial investments we have made in recent years and expect to continue to make in our facilities in the form of reduced operating costs and additional capacity to support future growth. Also, we will continue to pursue acquisitions opportunistically to expand our penetration of markets we currently serve or to expand our 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 appropriate, 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 we can modify or adapt our hedging strategies as necessary.

We are subject to significant fluctuations in the cost and availability of our primary raw material, hot-rolled carbon 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 to ensure adequate availability of material consistent with our requirements. We do not use derivative commodity instruments to hedge our exposure to changes in prices as such instruments are not currently available for 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, quotas and other trade actions. Although changes in our wire rod costs and selling prices tend to be correlated, in weaker market environments, we may be unable to fully recover increased wire rod costs through higher selling prices, which would reduce our earnings and cash flows. Additionally, when raw material costs decline, our financial results may be negatively impacted if the selling prices for our products decrease to an even greater extent and if we are consuming higher cost material from inventory. Based on our shipments and average wire rod cost reflected in cost of sales for the first nine months of 2022, a 10% increase in the price of wire rod would have resulted in a $35.5 million decrease in our pre-tax earnings (assuming there was not a corresponding change in our selling prices).

Although we did not have any balances outstanding on our Credit Facility as of July 2, 2022, future borrowings under the facility are subject to a variable rate of interest and are sensitive to changes in interest rates.

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 July 2, 2022.

We have conducted an evaluation of the effectiveness of our disclosure controls and procedures as of July 2, 2022. 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, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Further, they 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 July 2, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

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

During the quarter ended July 2, 2022, there have been no material changes from the risk factors set forth under Part I, Item 1A. "Risk Factors" in our 2021 Annual Report. 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 2021 Annual Report, 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.

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"). 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 common stock and may commence or suspend the program at any time at our discretion without prior notice. The Authorization continues in effect until terminated by our Board of Directors. As of July 2, 2022, there was $24.8 million remaining available for future share repurchases under the Authorization. There were no share repurchases during the three- and nine-month periods ended July 2, 2022 and July 3, 2021.

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.

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.

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.

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.

The following financial information from the Quarterly Report on Form 10-Q of Insteel Industries, Inc. for the quarter ended July 2, 2022, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended July 2, 2022 and July 3, 2021, (ii) the Consolidated Balance Sheets as of July 2, 2022 and October 2, 2021, (iii) the Consolidated Statements of Cash Flows for the nine months ended July 2, 2022 and July 3, 2021, (iv) the Consolidated Statements of Shareholders' Equity for the three and nine months ended July 2, 2022 and July 3, 2021, and (v) the Notes to Consolidated Financial Statements.

The cover page from our Quarterly Report on Form 10-Q for the quarter ended July 2, 2022, formatted in iXBRL and contained in Exhibit 101.

Our SEC file number reference for documents filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended, is 1-09929.

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.

Senior Vice President, Chief Financial Officer and Treasurer

(Duly Authorized Officer and Principal Financial Officer)

Insteel Industries Inc. published this content on 21 July 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 21 July 2022 15:13:02 UTC.