UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒

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

For the quarterly period ended ~~December~~June 287, ~~201~~20920

☐

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

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

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock (No Par Value)

IIIN

The Nasdaq Stock Market LLC

(Nasdaq Global Select Market)

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 ☒

No ☐

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).

Yes ☒

No ☐

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.

Large accelerated filer ☐	Accelerated filer ☒
Non-accelerated filer ☐	Smaller reporting company ☐
	Emerging growth company ☐

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).

Yes ☐

No ☒

~~The number~~As of July 16, 2020, 19,260,725 shares ~~outstanding~~ of the registrant’s common stock ~~as of January 15, 2020 was 19,260,725.~~were outstanding.

~~Table of Contents~~

TABLE OF CONTENTS


PART I 1 –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 18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22 25

Item 4.	Controls and Procedures	22 26

	PART II – OTHER INFORMATION

~~Item 1.~~		~~Legal Proceedings~~	23

Item ~~1A.~~ 1.	~~Risk Factors~~ Legal Proceedings	23 26

Item 1A.	Risk Factors	26

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23 26

Item 6.	Exhibits	23 27

SIGNATURES		2428

~~Table of Contents~~

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended						Nine Months Ended
	June 27,			June 29,			June 27,			June 29,
	2020			2019			2020			2019

Net sales	$	121,959		$	126,252		$	334,387		$	342,310
Cost of sales		107,154			118,016			298,062			316,077
Gross profit		14,805			8,236			36,325			26,233
Selling, general and administrative expense		6,694			5,516			22,040			18,606
Acquisition costs		8			-			195			-
Restructuring charges		808			-			957			-
Other income, net		(1,240	)		(23	)		(1,283	)		(1,823	)
Interest expense		26			62			78			137
Interest income		(22	)		(9	)		(452	)		(176	)
Earnings before income taxes		8,531			2,690			14,790			9,489
Income taxes		1,867			500			3,207			2,124
Net earnings	$	6,664		$	2,190		$	11,583		$	7,365


Net earnings per share:
Basic	$	0.35		$	0.11		$	0.60		$	0.38
Diluted		0.34			0.11			0.60			0.38

Weighted average shares outstanding:
Basic		19,283			19,252			19,272			19,239
Diluted		19,377			19,334			19,378			19,336

Cash dividends declared per share	$	0.03		$	0.03		$	0.09		$	0.09

Comprehensive income	$	6,664		$	2,190		$	11,583		$	7,365

See accompanying notes to consolidated financial statements.

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)

	(Unaudited)
	June 27,			September 28,
	2020			2019
Assets
Current assets:
Cash and cash equivalents	$	61,371		$	38,181
Accounts receivable, net		54,901			44,182
Inventories		74,269			70,851
Other current assets		6,245			7,370
Total current assets		196,786			160,584
Property, plant and equipment, net		101,089			104,960
Intangibles, net		8,810			8,610
Goodwill		9,745			8,293
Other assets		20,260			10,562
Total assets	$	336,690		$	293,009

Liabilities and shareholders' equity
Current liabilities:
Accounts payable	$	47,891		$	21,595
Accrued expenses		11,839			6,818
Total current liabilities		59,730			28,413
Other liabilities		19,894			18,579
Commitments and contingencies
Shareholders' equity:
Common stock		19,283			19,261
Additional paid-in capital		75,811			74,632
Retained earnings		164,220			154,372
Accumulated other comprehensive loss		(2,248	)		(2,248	)
Total shareholders' equity		257,066			246,017
Total liabilities and shareholders' equity	$	336,690		$	293,009

See accompanying notes to consolidated financial statements.

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ~~OPERATIONS AND COMPREHENSIVE INCOME~~

~~(In thousands, except per share amounts)~~

~~(Unaudited)~~

Three Months Ended

December 28,

December 29,

2019

2018

Net sales
$ 97,569 $ 104,110
Cost of sales
91,332 93,134
Gross profit
6,237 10,976
Selling, general and administrative expense
5,744 6,534
Other income, net
(25 ) (829 )
Interest expense
26 30
Interest income
(226 ) (155 )
Earnings before income taxes
718 5,396
Income taxes
163 1,270
Net earnings
$ 555 $ 4,126

Net earnings per share:

Basic
$ 0.03 $ 0.21
Diluted
0.03 0.21

Weighted average shares outstanding:

Basic
19,261 19,223
Diluted
19,370 19,336

Cash dividends declared per share
$ 0.03 $ 0.03

Comprehensive income
$ 555 $ 4,126

~~See accompanying notes to consolidated financial statements.~~

~~Table of Contents~~

~~INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES~~

~~CONSOLIDATED BALANCE SHEETS~~CASH FLOWS

(In thousands)

(Unaudited)

(Unaudited)

December 28,

September 28,

2019

2019

Assets

Current assets:

Cash and cash equivalents
$ 67,114 $ 38,181
Accounts receivable, net
35,405 44,182
Inventories
65,252 70,851
Other current assets
6,470 7,370
Total current assets
174,241 160,584
Property, plant and equipment, net
102,665 104,960
Intangibles, net
8,337 8,610
Goodwill
8,293 8,293
Other assets
12,915 10,562
Total assets
$ 306,451 $ 293,009

Liabilities and shareholders' equity

Current liabilities:

Accounts payable
$ 31,919 $ 21,595
Accrued expenses
8,363 6,818
Total current liabilities
40,282 28,413
Other liabilities
19,989 18,579
Commitments and contingencies

Shareholders' equity:

Common stock
19,261 19,261
Additional paid-in capital
74,818 74,632
Retained earnings
154,349 154,372
Accumulated other comprehensive loss
(2,248 ) (2,248 )
Total shareholders' equity
246,180 246,017
Total liabilities and shareholders' equity
$ 306,451 $ 293,009

	Nine Months Ended
	June 27,			June 29,
	2020			2019
Cash Flows From Operating Activities:
Net earnings	$	11,583		$	7,365
Adjustments to reconcile net earnings to net cash provided by (used for) operating activities:
Depreciation and amortization		10,626			10,084
Amortization of capitalized financing costs		49			48
Stock-based compensation expense		1,277			1,201
Deferred income taxes		392			2,193
Asset impairment charges		343			-
Gain on sale and disposition of property, plant and equipment		(1,031	)		(1,760	)
Gain from life insurance proceeds		(200	)
Increase in cash surrender value of life insurance policies over premiums paid		-			(204	)
Net changes in assets and liabilities (net of assets and liabilities acquired):
Accounts receivable, net		(6,890	)		741
Inventories		(246	)		(10,467	)
Accounts payable and accrued expenses		26,281			(33,640	)
Other changes		2,444			(1,500	)
Total adjustments		33,045			(33,304	)
Net cash provided by (used for) operating activities		44,628			(25,939	)

Cash Flows From Investing Activities:
Acquisition of business		(18,356	)		-
Capital expenditures		(3,448	)		(9,380	)
Increase in cash surrender value of life insurance policies		(133	)		(305	)
Proceeds from sale of assets held for sale		1,875			-
Proceeds from property insurance		-			1,192
Proceeds from life insurance death benefit		200			-
Proceeds from surrender of life insurance policies		195			67
Proceeds from sale of property, plant and equipment		40			17
Net cash used for investing activities		(19,627	)		(8,409	)

Cash Flows From Financing Activities:
Proceeds from long-term debt		223			44,239
Principal payments on long-term debt		(223	)		(44,239	)
Cash dividends paid		(1,735	)		(1,732	)
Payment of employee tax withholdings related to net share transactions		(76	)		(175	)
Financing costs		-			(237	)
Net cash used for financing activities		(1,811	)		(2,144	)

Net increase (decrease) in cash and cash equivalents		23,190			(36,492	)
Cash and cash equivalents at beginning of period		38,181			43,941
Cash and cash equivalents at end of period	$	61,371		$	7,449

Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest	$	-		$	49
Income taxes, net		342			1,759
Non-cash investing and financing activities:
Purchases of property, plant and equipment in accounts payable		712			518
Restricted stock units and stock options surrendered for withholding taxes payable		76			175
Accrued liability related to holdback for business acquired		1,000			-

See accompanying notes to consolidated financial statements.

~~Table of Contents~~

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~SHAREHOLDERS' EQUITY

(In thousands)

~~(In thousands)~~

(Unaudited)

Three Months Ended

December 28,

December 29,

2019

2018

Cash Flows From Operating Activities:

Net earnings
$ 555 $ 4,126
Adjustments to reconcile net earnings to net cash provided by (used for) operating activities:
Depreciation and amortization
3,478 3,242
Amortization of capitalized financing costs
16 16
Stock-based compensation expense
186 174
Deferred income taxes
186 2,131
Gain on sale and disposition of property, plant and equipment
- (709 )
Increase in cash surrender value of life insurance policies over premiums paid
(339 ) -
Net changes in assets and liabilities:

Accounts receivable, net
8,777 14,960
Inventories
5,599 (21,149 )
Accounts payable and accrued expenses
10,225 (25,145 )
Other changes
892 (414 )
Total adjustments
29,020 (26,894 )
Net cash provided by (used for) operating activities
29,575 (22,768 )

Cash Flows From Investing Activities:

Capital expenditures
(600 ) (6,194 )
Decrease (increase) in cash surrender value of life insurance policies
(42 ) 518
Proceeds from surrender of life insurance policies
- 13
Net cash used for investing activities
(642 ) (5,663 )

Cash Flows From Financing Activities:

Proceeds from long-term debt
67 90
Principal payments on long-term debt
(67 ) (90 )
Payment of employee tax withholdings related to net share transactions
- (7 )
Net cash used for financing activities
- (7 )

Net increase (decrease) in cash and cash equivalents
28,933 (28,438 )
Cash and cash equivalents at beginning of period
38,181 43,941
Cash and cash equivalents at end of period
$ 67,114 $ 15,503

Supplemental Disclosures of Cash Flow Information:

Cash paid during the period for:

Income taxes, net
$ 14 $ 36
Non-cash investing and financing activities:

Purchases of property, plant and equipment in accounts payable
310 1,090
Declaration of cash dividends to be paid
578 576
Restricted stock units and stock options surrendered for withholding taxes payable
- 7

											Accumulated
					Additional						Other			Total
	Common Stock				Paid-In			Retained			Comprehensive			Shareholders'
	Shares		Amount		Capital			Earnings			Loss			Equity
For the nine months ended June 27, 2020

Balance at September 28, 2019		19,261	$	19,261	$	74,632		$	154,372		$	(2,248	)	$	246,017
Net earnings									555						555
Compensation expense associated with stock-based plans						186									186
Cash dividends declared									(578	)					(578	)
Balance at December 28, 2019		19,261		19,261		74,818			154,349			(2,248	)		246,180
Net earnings									4,364						4,364
Vesting of restricted stock units		22		22		(22	)								-
Compensation expense associated with stock-based plans						941									941
Restricted stock units and stock options surrendered for withholding taxes payable						(76	)								(76	)
Cash dividends declared									(578	)					(578	)
Balance at March 28, 2020		19,283		19,283		75,661			158,135			(2,248	)		250,831
Net earnings									6,664						6,664
Compensation expense associated with stock-based plans						150									150
Cash dividends declared									(579	)					(579	)
Balance at June 27, 2020		19,283	$	19,283	$	75,811		$	164,220		$	(2,248	)	$	257,066

For the nine months ended June 29, 2019

Balance at September 29, 2018		19,223	$	19,223	$	72,852		$	151,084		$	(1,494	)	$	241,665
Net earnings									4,126						4,126
Compensation expense associated with stock-based plans						174									174
Restricted stock units and stock options surrendered for withholding taxes payable						(7	)								(7	)
Cash dividends declared									(576	)					(576	)
Balance at December 29, 2018		19,223		19,223		73,019			154,634			(1,494	)		245,382
Net earnings									1,049						1,049
Vesting of restricted stock units		29		29		(29	)								-
Compensation expense associated with stock-based plans						845									845
Restricted stock units and stock options surrendered for withholding taxes payable						(168	)								(168	)
Cash dividends declared									(578	)					(578	)
Balance at March 30, 2019		19,252		19,252		73,667			155,105			(1,494	)		246,530
Net earnings									2,190						2,190
Compensation expense associated with stock-based plans						182									182
Cash dividends declared									(578	)					(578	)
Balance at June 29, 2019		19,252	$	19,252	$	73,849		$	156,717		$	(1,494	)	$	248,324

See accompanying notes to consolidated financial statements

~~See accompanying notes to consolidated financial statements.~~

~~Table of Contents~~

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

For the three months ended December 28, 2019

Balance at September 28, 2019
19,261 $ 19,261 $ 74,632 $ 154,372 $ (2,248 ) $ 246,017
Net earnings
555 555
Compensation expense associated with stock-based plans
186 186
Cash dividends declared
(578 ) (578 )
Balance at December 28, 2019
19,261 $ 19,261 $ 74,818 $ 154,349 $ (2,248 ) $ 246,180

For the three months ended December 29, 2018

Balance at September 29, 2018
19,223 $ 19,223 $ 72,852 $ 151,084 $ (1,494 ) $ 241,665
Net earnings
4,126 4,126
Compensation expense associated with stock-based plans
174 174
Restricted stock units and stock options surrendered for withholding taxes payable
(7 ) (7 )
Cash dividends declared
(576 ) (576 )
Balance at December 29, 2018
19,223 $ 19,223 $ 73,019 $ 154,634 $ (1,494 ) $ 245,382

~~See accompanying notes to consolidated financial statements.~~

~~Table of Contents~~

~~INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES~~

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~(1)~~(1) Basis of Presentation

~~We have prepared the~~The accompanying unaudited interim consolidated financial statements ~~pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements~~have been prepared in accordance with generally accepted accounting principles in the U.S. (“GAAP”) ~~have been condensed or omitted pursuant to such rules and regulations. However, we believe~~on a basis consistent with that used in the ~~disclosures are adequate to make~~Annual Report on Form 10-K for the ~~information presented not misleading. The~~ year ended September 28, 2019 (“2019 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 September 28, 2019 consolidated balance sheet was derived from audited consolidated financial statements but does not include all of the disclosures required by GAAP. These ~~consolidated financial~~ statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our ~~Annual Report on~~2019 Form ~~10-K for the year ended September 28, 2019.~~

We believe the accompanying unaudited interim consolidated financial statements reflect all adjustments of a normal recurring nature necessary to present fairly the consolidated balance sheet as of December 28, 2019, and the statements of operations and comprehensive income, statements of cash flows and statements of shareholders’ equity for the three-month periods ended December 28, 2019 and December 29, 2018.10-K. The results of operations for the ~~three-month period ended December 28, 2019~~periods indicated are not necessarily indicative of the results that may be expected for the full fiscal year or any future periods.

On March 16, 2020, we, through our wholly-owned subsidiary, Insteel Wire Products Company (“IWP”), purchased substantially all of the assets of Strand-Tech Manufacturing, Inc. (“STM”) (see Note 3 to the consolidated financial statements).

~~(2)~~(2) Recent Accounting Pronouncements

Current Adoptions

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. ~~2016-02~~2016-02 “Leases (Topic ~~842)~~842),” which requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet for leases with terms greater than twelve months. We adopted the new lease standard in the ~~current~~first quarter using the modified retrospective method, which allows for the recognition of a cumulative effect adjustment to the beginning balance of retained earnings in the period of adoption without adjusting the comparative periods prior to adoption. We elected the package of practical expedients permitted under the new lease standard, which among other things, allowed us to carry forward historical lease classification. We also elected the short-term lease exemption such that the new lease standard was applied to leases greater than one year in duration. We did not elect the hindsight practical expedient to determine the lease term for existing leases. The adoption of the new lease standard had a material effect on our consolidated financial statements as it resulted in a $1.9 million increase in total assets and total liabilities on our consolidated balance sheet as of September 29, 2019. The new lease standard did not have a material impact on our consolidated earnings or cash flows.

In May 2017, the FASB issued ASU No. ~~2017-09~~2017-09 “Compensation – Stock Compensation (Topic ~~718)~~718): Scope of Modification Accounting.” ASU No. ~~2017-09~~2017-09 was issued to clarify and reduce both (i) diversity in practice and (ii) cost and complexity when applying its guidance to changes in the terms and conditions of a share-based payment award. ASU No. ~~2017-09~~2017-09 became effective for us in the ~~current~~first quarter. The adoption of this update did not impact our consolidated financial statements.

Future Adoptions

In ~~January 2017,~~ June 2016, the FASB issued ASU No. ~~2017-04~~2016-13 “Credit Losses - Measurement of Credit Losses on Financial Instruments.” ASU No.2016-13 significantly changes how entities will measure credit losses for most financial assets, including accounts and notes receivables, by replacing today’s “incurred loss” approach with an “expected loss” model under which allowances will be recognized based on expected rather than incurred losses. ASU No.2016-13 will become effective for us in the first quarter of fiscal 2021. The adoption of this update will not have a material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU No.2017-04 “Intangibles – Goodwill and Other (Topic ~~350)~~350): Simplifying the Test for Goodwill Impairment,” which simplifies the accounting for goodwill impairments by eliminating step 2 from the goodwill impairment test. ASU No. ~~2017-04~~2017-04 will become effective for us in the first quarter of fiscal 2021 and early adoption is permitted. ~~We are evaluating the impact that the~~The adoption of this update will nothave a material impact on our consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12 "Simplifying the Accounting for Income Taxes (Topic 740)." ASU No.2019-12 removes certain exceptions to the general principles in Accounting Standards Codification (“ASC”) 740 and also clarifies and amends existing guidance to provide for more consistent application. ASU 2019-12 will become effective for us in the first quarter of fiscal 2021 and early adoption is permitted. The adoption of this update will not have a material impact on our consolidated financial statements.

(3) Business Combination

On March 16, 2020, we purchased substantially all of the assets of STM for an adjusted purchase price of $19.4 million, reflecting certain post-closing adjustments (the “STM Acquisition”), which included a $1.0 million holdback that is payable one year from the acquisition date.

STM was a leading manufacturer of 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. The STM Acquisition serves to strengthen our competitive position as we contend with increased low-priced import competition.

Following is a summary of our preliminary allocation of the adjusted purchase price to the fair values of the assets acquired and liabilities assumed as of the acquisition date:

In thousands)
Assets acquired:
Accounts receivable	$	3,829
Inventories		3,172
Other current assets		178
Property, plant and equipment		10,919
Intangibles		970
Total assets acquired	$	19,068

Liabilities assumed:
Accounts payable	$	852
Accrued expenses		312
Total liabilities assumed		1,164
Net assets acquired		17,904
Adjusted purchase price		19,356
Goodwill	$	1,452

In connection with the STM Acquisition, we acquired certain intangible assets including customer relationships, a trade name and non-competition agreement. As we are in the process of finalizing internal and third-party valuations of tangible and intangible assets and certain liabilities, the provisional estimates of intangible assets, fixed assets, goodwill and certain accrued liabilities are subject to adjustment. We expect to finalize these amounts as soon as practical and no later than one year from the acquisition date. Goodwill associated with the STM Acquisition, which is deductible for tax purposes, consists largely of the synergies we expect to realize through the integration of the acquired assets with our operations.

The STM Acquisition was accounted for as a business purchase pursuant to ASC Topic 805,Business Combinations (“ASC 805”). Under the provisions of ASC 805, acquisition and integration costs are recorded as expenses in the period in which such costs are incurred rather than included as components of consideration transferred.

Following the STM Acquisition, net sales of the STM facility for the three- and nine-month periods ended June 27, 2020 were approximately $1.8 million and $2.9 million, respectively. The actual net sales specifically attributable to the STM Acquisition, however, cannot be quantified due to our integration efforts which involved the reassignment of business between the former STM facility and our existing PC strand facilities. As a result, we have determined that the presentation of STM’s earnings for the three- and nine-month periods ending June 27, 2020 is impractical due to the integration of STM’s operations following the STM Acquisition.

The following unaudited supplemental pro forma financial information reflects our combined results of operations had the STM Acquisition occurred at the beginning of fiscal 2019. The pro forma information reflects certain adjustments related to the STM Acquisition, including adjusted amortization and depreciation expense based on the fair values of the assets acquired. The pro forma information does not reflect any potential operating efficiencies or cost savings that may result from the STM Acquisition. Accordingly, this pro forma information is for illustrative purposes and is not intended to represent the actual results of operations of the combined company that would have been achieved had the STM Acquisition occurred at the beginning of fiscal 2019, nor is it intended to indicate future results of operations. The pro forma combined results of operations for the three- and nine-month periods ending June 27, 2020 and June 29, 2019 are as follows:

	Three Months Ended				Nine Months Ended
	June 27,		June 29,		June 27,		June 29,
(In thousands)	2020		2019		2020		2019
Net sales	$	121,959	$	133,538	$	346,890	$	357,542
Earnings before income taxes		8,531		2,713		12,730		3,375
Net earnings		6,664		2,209		6,447		2,669

Restructuring charges. In connection with the STM acquisition, we elected to consolidate our PC strand operations through the closure of the Summerville facility and the redeployment of its equipment to our other three PC strand production facilities located in Gallatin, Tennessee; Houston, Texas; and Sanderson, Florida. Operations at the Summerville facility ceased during the third quarter of fiscal 2020. Following is a summary of the restructuring activity during the three- and nine-month periods ended June 27, 2020:

(In thousands)	Employee Separation Costs			Equipment Relocation Costs			Facility Closure Costs			Asset Impairments			Total
Restructuring charges	$	129		$	-		$	20		$	-		$	149
Cash payments		(4	)		-			-			-			(4	)
Liability as of March 28, 2020		125			-			20			-			145
Restructuring charges		76			16			373			343			808
Cash payments		(124	)		(16	)		(350	)		-			(490	)
Non-cash charges		-			-			-			(343	)		(343	)
Liability as of June 27, 2020	$	77		$	-		$	43		$	-		$	120

As of June 27, 2020, we recorded a liability of $120,000 for restructuring liabilities in accrued expenses on our consolidated balance sheet. We currently expect to incur approximately $1.4 million of additional restructuring charges for equipment relocation and facility closure costs.

Acquisition costs. During the three- and nine-month periods ended June 27, 2020, we recorded $8,000 and $195,000, respectively, of acquisition-related costs associated with the STM Acquisition for accounting, legal and other professional fees.

~~(3)~~(4) Revenue Recognition

We recognize revenues when performance obligations under the terms of a contract with our customers are satisfied, which generally occurs when products are shipped and control is transferred. We enter into contracts that pertain to products, which are accounted for as separate performance obligations and typically one year or less in duration. We do not exercise significant judgment in determining the timing for the satisfaction of performance obligations or the transaction price. Revenue is measured as the amount of consideration expected to be received in exchange for our products. We have elected to apply the practical expedient provided for in ASU No. ~~2014-09~~2014-09 and not disclose information regarding remaining performance obligations that have original expected durations of one year or less.

~~Table of Contents~~

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.

Our net sales by product line are as follows:

	Three Months Ended				Three Months Ended				Nine Months Ended
	December 28,		December 29,		June 27,		June 29,		June 27,		June 29,
(In thousands)	2019		2018		2020		2019		2020		2019
Welded wire reinforcement	$	61,827	$	66,278	$	75,103	$	80,007	$	206,284	$	215,226
Prestressed concrete strand		35,742		37,832		46,856		46,245		128,103		127,084
Total	$	97,569	$	104,110	$	121,959	$	126,252	$	334,387	$	342,310

Our net sales by geographic region are as follows:

	Three Months Ended				Three Months Ended				Nine Months Ended
	December 28,		December 29,		June 27,		June 29,		June 27,		June 29,
(In thousands)	2019		2018		2020		2019		2020		2019
United States	$	97,257	$	103,621	$	120,985	$	125,929	$	332,791	$	341,169
Foreign		312		489		974		323		1,596		1,141
Total	$	97,569	$	104,110	$	121,959	$	126,252	$	334,387	$	342,310

Contract assets primarily relate to our rights to consideration for products that are delivered but not billed as of the reporting date and are reclassified to receivables when the customer is invoiced. Contract liabilities primarily relate to performance obligations that are to be satisfied in the future and arise when we bill the customer in advance of shipments. Contract costs are not significant and are recognized as incurred. Contract assets and liabilities were not material as of ~~December 28, 2019.~~June 27,2020.

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

~~(4)~~(5) 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~~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.

~~Table of Contents~~

As of ~~December 28, 2019~~ June 27, 2020 and September 28, 2019, we held financial assets that are required to be measured at fair value on a recurring basis, which are summarized below:

(In thousands)	Total		Quoted Prices in Active Markets (Level 1)		Observable Inputs (Level 2)			Total	Quoted Prices in Active Markets (Level 1)		Observable Inputs (Level 2)
As of December 28, 2019:
As of June 27, 2020:
Current assets:
Cash equivalents	$	68,265	$	68,265	$	-	$	63,844	$	63,844	$	-
Other assets:
Cash surrender value of life insurance policies		10,592		-		10,592		10,149		-		10,149
Total	$	78,857	$	68,265	$	10,592	$	73,993	$	63,844	$	10,149

As of September 28, 2019:
Current assets:
Cash equivalents	$	37,826	$	37,826	$	-	$	37,826	$	37,826	$	-
Other assets:
Cash surrender value of life insurance policies		10,211		-		10,211		10,211		-		10,211
Total	$	48,037	$	37,826	$	10,211	$	48,037	$	37,826	$	10,211

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

As of ~~December 28, 2019~~ June 27, 2020 and September 28, 2019, we had no nonfinancial assets that were required to be measured at fair value on a nonrecurring ~~basis.~~basis other than the assets and liabilities that were acquired from STM at fair value during the nine-month period ended June 27, 2020 (see Note 3 to the consolidated financial statements). The carrying amounts of accounts receivable, accounts payable and accrued expenses ~~approximates~~approximate fair value due to the short-term maturities of these financial instruments.

~~(5)~~(6) Intangible Assets

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

(In thousands)	Gross Amount		Accumulated Amortization			Net Book Value		Gross Amount		Accumulated Amortization			Net Book Value
As of December 28, 2019:
As of June 27, 2020:
Customer relationships	$	9,070	$	(2,359	)	$	6,711	$	9,870	$	(2,675	)	$	7,195
Developed technology and know-how		1,800		(483	)		1,317		1,800		(528	)		1,272
Non-competition agreements		1,800		(1,556	)		244		1,860		(1,643	)		217
Trade name		140		(75	)		65		250		(124	)		126
	$	12,810	$	(4,473	)	$	8,337	$	13,780	$	(4,970	)	$	8,810

As of September 28, 2019:
Customer relationships	$	9,070	$	(2,207	)	$	6,863	$	9,070	$	(2,207	)	$	6,863
Developed technology and know-how		1,800		(461	)		1,339		1,800		(461	)		1,339
Non-competition agreements		1,800		(1,466	)		334		1,800		(1,466	)		334
Trade name		140		(66	)		74		140		(66	)		74
	$	12,810	$	(4,200	)	$	8,610	$	12,810	$	(4,200	)	$	8,610

Amortization expense for intangibles was $240,000 and $273,000 for the ~~three-month~~three-month periods ended ~~December 28,~~June 27, 2020 and June 29, 2019, respectively, and ~~December~~$770,000 and $819,000 for the nine-month periods ended June 27, 2020 and June 29, ~~2018.~~2019, respectively.

~~Table of Contents~~

~~(6)~~(7) Stock-Based Compensation

Under our equity incentive plan, employees and directors may be granted stock options, restricted stock, restricted stock units and performance awards. Effective February ~~17, 2015,~~ 28, 2020, our shareholders approved an amendment to the 2015 Equity Incentive Plan of Insteel Industries, Inc. (the ~~“2015~~“2015 Plan”), which authorizes up to ~~900,000~~an additional 750,000 shares of our common stock for future grants under the ~~plan. The 2015 Plan, which~~plan and expires on February 17, ~~2025, replaced the 2005 Equity Incentive Plan of Insteel Industries, Inc., which expired on February 15, 2015.~~ 2025. As of ~~December 28, 2019,~~ June 27, 2020, there were ~~143,000~~790,000 shares of our common stock available for future grants under the 2015 Plan, which is our only active equity incentive plan.

Stock o~~ption~~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 ~~$60,000~~$13,000 and ~~$55,000~~$58,000 for the ~~three-month~~three-month periods ended ~~December 28,~~June 27, 2020 and June 29, 2019, respectively, and ~~December~~$476,000 and $496,000 for the nine-month periods ended June 27, 2020 and June 29, ~~2018,~~ 2019, respectively. As of ~~December 28, 2019,~~ June 27, 2020, there was ~~$222,000~~$225,000 of unrecognized compensation cost related to unvested options which is expected to be recognized over a weighted average period of ~~1.53~~1.57 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, 2020 and June 29, 2019 was $7.39 and $7.96 per share, respectively, based on the following assumptions:

	Nine Months Ended
	June 27,			June 29,
	2020			2019
Risk-free interest rate		2.75	%		3.84	%
Dividend yield		0.54	%		0.50	%
Expected volatility		40.89	%		43.08	%
Expected term (in years)		4.59			4.56

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:

Contractual

Aggregate

Options

Exercise Price Per Share

Term - Weighted

Intrinsic

Outstanding

Weighted

Average

Value

(in thousands)

Range

Average

(in years)

(in thousands)

Outstanding at September 28, 2019
388 $10.23 - $41.85 $ 26.16
Exercised
- - -
Outstanding at December 28, 2019
388 10.23 - 41.85 26.16 7.56 $ 508

Vested and anticipated to vest in the future at December 28, 2019
384 26.17 7.55 503

Exercisable at December 28, 2019
184 27.62 6.08 246

										Contractual		Aggregate
	Options			Exercise Price Per Share						Term - Weighted		Intrinsic
	*Outstanding*							*Weighted*		*Average*		*Value*
	(in thousands)			*Range*				*Average*		(in years)		(in thousands)
Outstanding at September 28, 2019		388			$10.23	-	$41.85	$	26.16
Granted		67			22.09	-	22.09		22.09
Exercised		-			-	-	-		-
Forfeited		(27	)		18.05	-	41.85		25.88
Outstanding at June 27, 2020		428			10.23	-	41.85		25.55		7.47	$	64

Vested and anticipated to vest in the future at June 27, 2020		424							25.56		7.45		64

Exercisable at June 27, 2020		210							27.73		6.00		64

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 unitts.s. 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 ~~$126,000~~$137,000 and ~~$119,000~~$124,000 for the ~~three-month~~three-month periods ended ~~December 28,~~June 27, 2020 and June 29, 2019, respectively, and ~~December~~$801,000 and $705,000 for the nine-month periods ended June 27, 2020 and June 29, ~~2018,~~2019, respectively. The market value of RSUs granted during the nine-month periods ended June 27, 2020 and June 29, 2019 was $960,000 and $763,000, respectively.

As of ~~December 28, 2019,~~ June 27, 2020, there was ~~$356,000~~$534,000 of unrecognized compensation cost related to unvested RSUs which is expected to be recognized over a weighted average period of ~~1.77~~1.46 years.

The following table summarizes RSU activity:

Weighted

Restricted

Average

Stock Units

Grant Date

(Unit amounts in thousands)

Outstanding

Fair Value

Balance, September 28, 2019
115 $ 26.16
Released
- -
Balance, December 28, 2019
115 26.16

Weighted

Restricted

Average

Stock Units

Grant Date

(Unit amounts in thousands)

Outstanding

Fair Value

Balance, September 28, 2019
115 $ 26.16
Granted
43 22.09
Released
(26 ) 28.66
Forfeited
(5 ) 25.49
Balance, June 27, 2020
127 24.29

~~(7)~~(8) Income Taxes

Effective income tax rate. Our effective income tax rate was ~~22.7%~~21.7% for the ~~three-month~~nine-month period ended ~~December 28, 2019~~ June 27, 2020 compared with ~~23.5%~~22.4% for the ~~three-month~~nine-month period ended ~~December~~June 29, ~~2018.~~ 2019. 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 ~~December 28, 2019,~~ June 27, 2020, we recorded a deferred tax liability (net of valuation allowance) of ~~$7.1~~$7.3 million in other liabilities on our consolidated balance sheet. We have ~~$3.5~~$2.3 million of state net operating loss carryforwards (“NOLs”) that begin to expire in 2022, but principally expire between 2022 and ~~2032.~~2035. We have also recorded gross deferred tax assets of $8,000 for various state tax credits that expire this year.

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 ~~December 28, 2019~~ June 27, 2020 and September 28, 2019, we recorded a valuation allowance of ~~$265,000~~$202,000 and $257,000, respectively, pertaining to various state NOLs and tax credits that were not expected to be utilized. The valuation allowance is subject to periodic review and adjustment based on changes in facts and circumstances and would be reduced should we utilize the state NOLs and tax credits against which an allowance had previously been provided or determine that such utilization was more likely than not.

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 ~~December 28, 2019,~~ June 27, 2020, we had ~~$122,000~~$68,000 of unrecognized tax benefits that would reduce our income tax rate in future periods, if recognized, which were classified as ~~a reduction~~an increase in accrued income taxes ~~receivable~~ in ~~other current assets.~~accrued expenses.

We file U.S. federal, state and local income tax returns in various jurisdictions. Federal and various state tax returns filed subsequent to ~~2014~~2015 remain subject to examination.

13

~~(8)~~(9) Employee Benefit Plans

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

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

Three Months Ended

December 28,

December 29,

(In thousands)

2019

2018

Interest cost
$ 82 $ 96
Service cost
83 74
Recognized net actuarial loss
72 35
Net periodic pension cost
$ 237 $ 205

Three Months Ended

Nine Months Ended

June 27,

June 29,

June 27,

June 29,

(In thousands)

2020

2019

2020

2019

Interest cost
$ 82 $ 96 $ 249 $ 288
Service cost
83 74 245 222
Recognized net actuarial loss
72 35 212 105
Net periodic pension cost
$ 237 $ 205 $ 706 $ 615

~~(9)~~(10) Long-Term Debt

Revolving Credit Facility.. We have a $100.0 million revolving credit facility (the “Credit Facility”) that is used to supplement our operating cash flow and fund our working capital, capital expenditure, general corporate and growth requirements. In May 2019, we entered into a new credit agreement, which amended and restated in its entirety the previous agreement pertaining to the revolving credit facility that had been in effect since June 2010. The new credit agreement, among other changes, extended the maturity date of the Credit Facility from May 13, 2020 to May 15, 2024 and provided for an incremental 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~~$100.0 million) or a borrowing base amount that is calculated based upon a percentage of eligible receivables and inventories. As of ~~December 28, 2019, no~~June 27, 2020, 0 borrowings were outstanding on the Credit Facility, ~~$71.7~~$94.4 million of borrowing capacity was available and outstanding letters of credit totaled ~~$1.6~~$1.5 million.
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~~Table of Contents~~

Interest rates on the Credit Facility are based upon ~~(1)~~(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)~~(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 ~~December 28, 2019,~~ June 27, 2020, the applicable interest rate margins on the Credit Facility were 0.25% for index rate loans and 1.25% for LIBOR loans.

Our ability to borrow available amounts under the Credit Facility will be restricted or eliminated in the event of certain covenant breaches, events of default or if we are unable to make certain representations and warranties provided for under the terms of the Credit Facility. We are required to maintain a fixed charge coverage ratio of not less than 1.0 at the end of each fiscal quarter for the ~~twelve-month~~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 ~~December 28, 2019,~~ June 27, 2020, we were in compliance with all of the financial and negative covenants under the Credit Facility and there have not been any events of default.

Amortization of capitalized financing costs associated with the Credit Facility was $17,000 and $16,000 for ~~each of~~ the ~~three-month~~three-month periods ended ~~December 28,~~June 27, 2020 and June 29, 2019, respectively, and ~~December~~$49,000 and $48,000 for the nine-month periods ended June 27, 2020 and June 29, ~~2018.~~2019, respectively.

14

(101) Earnings Per Share

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

Three Months Ended

Three Months Ended

Nine Months Ended

December 28,

December 29,

June 27,

June 29,

June 27,

June 29,

(In thousands, except per share amounts)

2019

2018

2020

2019

2020

2019

Net earnings
$ 555 $ 4,126 $ 6,664 $ 2,190 $ 11,583 $ 7,365

Basic weighted average shares outstanding
19,261 19,223 19,283 19,252 19,272 19,239
Dilutive effect of stock-based compensation
109 113 94 82 106 97
Diluted weighted average shares outstanding
19,370 19,336 19,377 19,334 19,378 19,336

Net earnings per share:

Basic
$ 0.03 $ 0.21 $ 0.35 $ 0.11 $ 0.60 $ 0.38
Diluted
$ 0.03 $ 0.21 $ 0.34 $ 0.11 $ 0.60 $ 0.38

Options and RSUs that were antidilutive and not included in the dilutive earnings per share calculation amounted to ~~293,000~~423,000 and ~~158,000~~276,000 shares for the ~~three-month~~three-month periods ended ~~December 28,~~June 27, 2020 and June 29, 2019, respectively, and ~~December~~360,000 and 221,000 shares for the nine-month periods ended June 27, 2020 and June 29, ~~2018,~~ 2019, respectively.

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~~Table of Contents~~

(112) Share Repurchases

On November 18,2008, our Board of Directors approved a share repurchase authorization to buy back up to $25.0 million of our outstanding common stock (the “Authorization”). Under the Authorization, repurchases may be made from time to time in the open market or in privately negotiated transactions subject to market conditions, applicable legal requirements and other factors. We are not obligated to acquire any 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 ~~December 28, 2019,~~ June 27, 2020, there was $24.8 million remaining available for future share repurchases under this Authorization. There were no0 share repurchases during the ~~three-month~~three- and nine-month periods ended ~~December 28, 2019~~ June 27, 2020 and ~~December~~June 29, ~~2018.~~2019.

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15

~~Table of Contents~~

(1(123) Other Financial Data

Balance sheet information:

	December 28,			September 28,			June 27,			September 28,
(In thousands)	2019			2019			2020			2019
Accounts receivable, net:
Accounts receivable	$	35,603		$	44,436		$	55,204		$	44,436
Less allowance for doubtful accounts		(198	)		(254	)		(303	)		(254	)
Total	$	35,405		$	44,182		$	54,901		$	44,182

Inventories:
Raw materials	$	22,143		$	27,667		$	32,399		$	27,667
Work in process		4,366			4,885			4,492			4,885
Finished goods		38,743			38,299			37,378			38,299
Total	$	65,252		$	70,851		$	74,269		$	70,851

Other current assets:
Prepaid insurance	$	3,950		$	4,545		$	4,811		$	4,545
Income tax receivable		1,252			1,215			-			1,215
Other		1,268			1,610			1,434			1,610
Total	$	6,470		$	7,370		$	6,245		$	7,370

Other assets:
Cash surrender value of life insurance policies	$	10,592		$	10,211		$	10,149		$	10,211
Assets held for sale								7,971			-
Right-of-use asset		1,988			-			1,838			-
Capitalized financing costs, net		221			237			188			237
Other		114			114			114			114
Total	$	12,915		$	10,562		$	20,260		$	10,562

Property, plant and equipment, net:
Land and land improvements	$	14,628		$	14,548		$	14,507		$	14,548
Buildings		56,579			56,404			52,384			56,404
Machinery and equipment		166,176			165,609			173,394			165,609
Construction in progress		4,864			5,285			1,737			5,285
		242,247			241,846			242,022			241,846
Less accumulated depreciation		(139,582	)		(136,886	)		(140,933	)		(136,886	)
Total	$	102,665		$	104,960		$	101,089		$	104,960

Accrued expenses:
Salaries, wages and related expenses	$	2,176		$	2,463		$	3,800		$	2,463
Customer rebates		1,881			1,381			1,272			1,381
Income taxes								1,258			-
Property taxes		1,680			1,820			1,122			1,820
Holdback for business acquired								1,000			-
Operating lease liability		934			-			942			-
Dividends		578			-
State sales and use taxes								533			136
Workers' compensation								97			112
Sales allowance reserves		551			544			66			544
Workers' compensation		105			112
Other		458			498			1,749			362
Total	$	8,363		$	6,818		$	11,839		$	6,818

Other liabilities:
Deferred compensation	$	11,857		$	11,679		$	11,719		$	11,679
Deferred income taxes		7,086			6,900			7,292			6,900
Operating lease liability		1,046			-			883			-
Total	$	19,989		$	18,579		$	19,894		$	18,579

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~~Table of Contents~~

~~(13)~~(14) Business Segment Information

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

~~(14)~~(15) Leases

We have operating leases for certain equipment, office space and vehicles. We determine whether an arrangement is a lease at its inception if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Leases with an initial term of 12twelve months or less are not recorded on our consolidated balance sheet. Lease expense for operating leases with original terms of more than 12twelve months was ~~$327,000~~$289,000 and $953,000 for the ~~three-month period~~three- and nine-month periods ended ~~December 28, 2019.~~June 27, 2020, respectively.

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

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

	Three Months Ended
	December 28,		Nine Months Ended
(In thousands)	2019		June 27, 2020
Cash paid for operating leases included in operating cash flows	$	335	$	959
Right-of-use assets obtained in exchange for new lease obligations		358		755

Supplemental balance sheet information related to leases is as follows:

	December 28,
(In thousands)	2019		June 27, 2020
Right-of-use assets:
Other assets	$	1,988	$	1,838

Lease liabilities:
Accrued expenses		934		942
Other liabilities		1,046		883
Total operating lease liabilities	$	1,980	$	1,825

As of ~~December 28, 2019,~~ June 27, 2020, our operating leases had a weighted average remaining lease term of ~~2.4~~2.3 years and a weighted average discount rate of ~~5.2%~~5.0%. Aggregate future operating lease payments as of ~~December 28, 2019~~ June 27, 2020 are as follows:

(In thousands)
2020	$	1,014		$	990
2021		718			633
2022		263			207
2023		73			74
2024		41			4
Thereafter		-			-
Total future operating lease payments		2,109			1,908
Less: imputed interest		(129	)		(83	)
Present value of lease liabilities	$	1,980		$	1,825

15
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~~(15)~~(16) Contingencies

Insurance recoveries. We maintain general liability, business interruption and replacement cost property insurance coverage on our facilities.

In August 2018, a transformer outage and electrical fire occurred at our Dayton, Texas manufacturing facility, which resulted in the temporary curtailment of operations. Alternative power arrangements for the facility were subsequently made that allowed operations to continue until permanent repairs were completed during the first quarter of 2019. We reached a final settlement on the property damage and business interruption claim with our insurance carrier in the prior year. During the three months ended ~~December~~June 29, ~~2018,~~ 2019, we received ~~$391,000~~$486,000 of insurance proceeds related to the claim that was applied against the September 29, 2018 receivable of $462,000. As of December 29, 2018, we recorded a $263,000 receivable for the anticipated insurance proceeds associated with the expenses incurred as of the end of the quarter. The anticipated insurance proceeds attributable to the additional expenses incurred were recorded in cost of sales ($~~187,000)~~339,000), other income ($144,000) and selling, general and administrative expense (“SG&A expense”) ($~~5,000)~~3,000) on the consolidated statements of operations and comprehensive income. During the nine-month period ended June 29, 2019, we received $2.2 million of insurance proceeds related to the claim that was partially applied against the September 29, 2018 receivable of $462,000 with the remainder recorded in other income ($1.1 million), cost of sales ($645,000) and SG&A expense ($48,000) on the consolidated statements of operations and comprehensive income.

In August 2017, operations at our manufacturing facility located in Dayton, Texas were adversely affected by hurricane Harvey. During the ~~three months~~nine-month period ended ~~December~~June 29, ~~2018,~~ 2019, we reached a final settlement on the property damage and business interruption claim with our insurance carrier and received $150,000 of proceeds related to this claim of which $98,000 was recorded in other income on the consolidated statements of operations and comprehensive income.

The insurance proceeds attributable to the property and equipment damaged are reported in cash flows from investing activities and all other insurance proceeds received are reported in cash flows from operating activities on the consolidated statements of cash flows.

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

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 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 September 28, 2019 (our “2019 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 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 ~~markets in which we operate;~~spending levels for nonresidential and residential construction and the impact on demand for our products;

●

changes in the ~~spending levels for nonresidential~~amount and ~~residential construction~~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, including the ~~amount and duration~~Section 232 tariff on imported steel, affecting imports or exports of ~~transportation funding provided by federal, state and local governments and the impact on spending for infrastructure construction and demand for~~steel wire rod or our products;

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●

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

●

the ~~cyclical nature~~impact of ~~the steel~~fluctuations in demand and ~~building material industries;~~capacity utilization levels on our unit manufacturing costs;

●

~~credit~~our ability to further develop the market ~~conditions~~for engineered structural mesh (“ESM”) and ~~the relative availability~~expand our shipments of ~~financing for us, our customers and the construction industry as a whole;~~ESM;

●

~~fluctuations in the cost and availability of~~legal, environmental, economic or regulatory developments that significantly impact our ~~primary raw material, hot-rolled carbon steel wire rod, from domestic and foreign suppliers;~~operating costs;

●

~~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, including the Section 232 tariff on imported steel, affecting imports or exports of steel wire rod or our products;~~

●

unanticipated ~~changes in customer demand, order patterns~~plant outages, equipment failures or labor difficulties; 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 or regulatory developments that significantly impact our operating costs;~~

●

~~unanticipated plant outages, equipment failures or labor difficulties; and~~

●

the “Risk Factors” discussed in our 2019 Annual Report and in other filings made by us with the SEC.

Overview

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

On March 16, 2020, we, through our wholly-owned subsidiary, Insteel Wire Products (“IWP”), purchased substantially all of the assets of Strand-Tech Manufacturing, Inc. (“STM”) for an adjusted purchase price of $19.4 million, which reflects certain post-closing adjustments (the “STM Acquisition”). STM was a leading manufacturer of PC strand for concrete construction applications. We acquired, among other assets, STM’s accounts receivable, inventories, production equipment and facility located in Summerville, South Carolina and assumed certain of its accounts payable and accrued liabilities.

Impact of COVID-19

In March 2020, the World Health Organization characterized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The rapid spread of the outbreak has caused significant disruptions in the U.S. and global economies, and economists expect the impact will continue to be significant during the remainder of 2020. We are a company operating in a critical infrastructure industry, as defined by the U.S. Department of Homeland Security and our facilities have been allowed to remain open. Accordingly, COVID-19 has had limited impact on our operations to date. We have implemented new procedures to support the health and safety of our employees and we are following all U.S. Centers for Disease Control and Prevention and state and local health department guidelines. The costs associated with these safety procedures were not material. In view of the rapidly changing business environment, unprecedented market volatility and heightened degree of uncertainty resulting from COVID-19, we are currently unable to fully determine its future impact on our business. However, we are concerned about the potential impact of future funding constraints on infrastructure projects and the uncertain economic environment on activity in the private non-residential construction market. We are continuing to monitor the progression of the pandemic and its potential effect on our financial position, results of operations, and cash flows.

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Results of Operations

Statements of Operations – Selected Data

(Dollars in thousands)

	Three Months Ended									Three Months Ended									Nine Months Ended
	December 28,						December 29,			June 27,						June 29,			June 27,						June 29,
	2019			Change			2018			2020			Change			2019			2020			Change			2019

Net sales	$	97,569			(6.3	)%	$	104,110		$	121,959			(3.4	%)	$	126,252		$	334,387			(2.3%	)	$	342,310
Gross profit		6,237			(43.2	)%		10,976			14,805			79.8	%		8,236			36,325			38.5	%		26,233
Percentage of net sales		6.4	%					10.5	%		12.1	%					6.5	%		10.9	%					7.7	%
Selling, general and administrative expense	$	5,744			(12.1	)%	$	6,534		$	6,694			21.4	%	$	5,516		$	22,040			18.5	%	$	18,606
Percentage of net sales		5.9	%					6.3	%		5.5	%					4.4	%		6.6	%					5.4	%
Restructuring charges										$	808			100.0	%	$	-		$	957			100.0	%	$	-
Acquisition costs											8			100.0	%		-			195			100.0	%		-
Other income, net	$	(25	)		(97.0	)%	$	(829	)		(1,240	)	N/M				(23	)		(1,283	)		(29.6	%)		(1,823	)
Interest expense		26			(13.3	)%		30			26			(58.1	%)		62			78			(43.1	%)		137
Interest income		(226	)		45.8	%		(155	)		(22	)		144.4	%		(9	)		(452	)		156.8	%		(176	)
Effective income tax rate		22.7	%					23.5	%		21.9	%					18.6	%		21.7	%					22.4	%
Net earnings	$	555			(86.5	)%	$	4,126		$	6,664			204.3	%	$	2,190		$	11,583			57.3	%	$	7,365

"N/M" = not meaningful

~~First~~Third Quarter of Fiscal 2020 Compared to ~~First~~Third Quarter of Fiscal 2019

Net Sales

Net sales for the ~~first~~third quarter of 2020 decreased ~~6.3%~~3.4% to ~~$97.6 million~~$122.0 from ~~$104.1~~$126.3 million in the prior year quarter, reflecting ~~a 16.1%~~an 11.7% decrease in average selling prices partially offset by a ~~11.7%~~9.5% increase in shipments. The decrease in average selling prices was driven by competitive pricing pressures resulting from an increase in low-priced import ~~competition spurred by the Section 232 tariffs on imported steel.~~competition. The increase in shipments was primarily due to improved market conditions, the STM Acquisition and strengthening demand for our products relative to the prior year, which was unfavorably impacted by ~~the~~ unusually wet ~~weather.~~weather across many of our markets. Shipments for the current year quarter were not materially impacted by the COVID-19 pandemic.

Gross Profit

Gross profit for the ~~first~~third quarter of 2020 ~~decreased 43.2%~~increased 79.8% to ~~$6.2~~$14.8 million, or ~~6.4%~~12.1% of net sales, from ~~$11.0~~$8.2 million, or ~~10.5%~~6.5% of net sales, in the prior year quarter due to ~~lower~~higher spreads between average selling prices and raw material costs ($~~6.0~~5.4 million) and ~~higher manufacturing costs ($663,000) partially offset by higher~~the increase in shipments ($~~1.4 million)~~814,000). The ~~decrease~~increase in spreads was driven by lower ~~average selling prices~~raw material costs ($~~19.4~~22.7 million) partially offset by lower ~~raw material costs~~average selling prices ($~~13.2~~17.3 million) ~~and freight expense ($217,000)~~.

Selling, General and Administrative Expense

Selling, general and administrative expense (“SG&A expense”) for the ~~first~~third quarter of 2020 ~~decreased 12.1%~~increased 21.4% to ~~$5.7~~$6.7 million, or ~~5.9%~~5.5% of net sales, from ~~$6.5~~$5.5 million, or ~~6.3%~~4.4% of net sales in the prior year quarter primarily due to higher compensation ($1.1 million) and legal expense ($666,000) partially offset by the relative year-over-year changes in the cash surrender value of life insurance policies ($~~871,000)~~589,000). The increase in compensation expense was largely driven by higher incentive plan expense due to our improved financial results in the current year. The increase in legal expense was primarily related to costs associated with trade matters. The cash surrender value of ~~the~~life insurance policies increased ~~$339,000~~$731,000 in the current year quarter compared with ~~a decrease of $532,000~~$142,000 in the prior year quarter due to the ~~corresponding~~ changes in the value of the underlying investments.

Restructuring Charges, Net

Net restructuring charges of $808,000 were incurred in the third quarter of 2020 related to the closure of the Summerville, South Carolina facility, which had been acquired through the STM Acquisition. Restructuring charges included facility closure costs ($373,000), asset impairments ($343,000), employee separation ($76,000) and equipment relocation costs ($16,000).

Other Income

Other income was $1.2 million for the third quarter of ~~$829,000~~2020 and primarily related to a gain from the disposition of assets held for sale.

Income Taxes

Our effective tax rate for the third quarter of 2020 increased to 21.9% from 18.6% for the prior year quarter primarily due to changes in book versus tax differences during the prior year period.

Net Earnings

Net earnings for the third quarter of 2020 increased to $6.7 million ($0.34 per diluted share) from $2.2 million ($0.11 per share) in the prior year quarter primarily due to the increase in gross profit and other income partially offset by the increase in SG&A expense.

First Nine Months of Fiscal 2020 Compared to First Nine Months of Fiscal 2019

Net Sales

Net sales for the first nine months of 2019 decreased 2.3% to $334.4 million from $342.3 million in the same year-ago period, reflecting a 14.0% decrease in average selling prices partially offset by a 13.5% increase in shipments. The decrease in average selling prices was driven by competitive pricing pressures resulting from an increase in low-priced import competition. The increase in shipments was primarily due to improved market conditions, the STM Acquisition and strengthening demand for our products relative to the prior year, which was unfavorably impacted by unusually wet weather across many of our markets. Shipments for the first nine months of the current year were not materially impacted by the COVID-19 pandemic.

Gross Profit

Gross profit for the first nine months of 2020 increased 38.5% to $36.3 million, or 10.9% of net sales, from $26.2 million, or 7.7% of net sales, in the same year-ago period due to higher spreads between average selling prices and raw material costs ($6.2 million) and increase in shipments ($3.7 million) partly offset by higher manufacturing costs ($562,000). The increase in spreads was driven by lower raw material costs ($61.6 million) and freight expense ($461,000) partially offset by lower average selling prices ($55.9 million).

Selling, General and Administrative Expense

SG&A expense for the first nine months of 2020 increased 18.5% to $22.0 million, or 6.6% of net sales, from $18.6 million, or 5.4% of net sales, in the same year-ago period primarily due to higher compensation ($1.5 million) and legal expense ($835,000) along with the relative year-over-year changes in the cash surrender value of life insurance policies ($379,000). The increase in compensation expense was largely driven by higher incentive plan expense due to our improved financial results in the current year. The increase in legal expense was primarily related to costs associated with trade matters. The cash surrender value of life insurance policies decreased $175,000 in the current year period compared with $204,000 in the prior year period due to the changes in the value of the underlying investments.

Restructuring Charges, Net

Net restructuring charges of $957,000 were incurred during the first nine months of 2020 related to the closure of the Summerville, South Carolina facility, which had been acquired through the STM Acquisition. Restructuring charges included facility closure costs ($393,000), asset impairments ($343,000), employee separation ($205,000) and equipment relocation costs ($16,000).

Other Income

Other income was $1.3 million for the first nine months of 2020 compared with $1.8 million in the same year ago period. Other income for the current year was primarily related to a ~~net~~ gain from the disposition of assets held for sale. Other income for the prior year period was primarily related to gains from property insurance proceeds ($1.2 million) and the disposition of property, plant and equipment ($~~709,000)~~568,000).

Income Taxes

Our effective tax rate for the first ~~quarter~~nine months of 2020 decreased to ~~22.7%~~21.7% from ~~23.5%~~22.4% for the ~~prior~~same year ~~quarter~~ago period primarily due to ~~changes~~a $224,000 discrete tax benefit that was recorded in ~~permanent book versus tax differences.~~

~~Table~~connection with the net operating loss carryback provisions of ~~Contents~~

the Coronavirus Aid, Relief and Economic Security Act, which was enacted in March 2020.

Net Earnings

Net earnings for the first ~~quarter~~nine months of 2020 ~~decreased~~increased to ~~$555,000~~$11.6 million ($~~0.03~~0.60 per share) from ~~$4.1~~$7.4 million ($~~0.21~~0.38 per share) in the ~~prior year quarter~~same year-ago period primarily due to the ~~decrease~~increase in gross profit partially offset by the ~~decrease~~increase in SG&A ~~expense.~~expense and decrease in other income.

Liquidity and Capital Resources

Selected Financial Data
(Dollars in thousands)

Three Months Ended

Nine Months Ended

December 28,

December 29,

June 27,

June 29,

2019

2018

2020

2019

Net cash provided by (used for) operating activities
$ 29,575 $ (22,768 ) $ 44,628 $ (25,939 )
Net cash used for investing activities
(642 ) (5,663 ) (19,627 ) (8,409 )
Net cash used for financing activities
- (7 ) (1,811 ) (2,144 )

Net working capital
133,959 125,265 137,056 132,020
Total debt
- - - -
Percentage of total capital
- - - -
Shareholders' equity
$ 246,180 $ 245,382 $ 257,066 $ 248,324
Percentage of total capital
100.0 % 100.0 % 100.0 % 100.0 %
Total capital (total debt + shareholders' equity)
$ 246,180 $ 245,382 $ 257,066 $ 248,324

Operating Activities

Operating activities provided ~~$29.6~~$44.6 million of cash during the first ~~quarter~~nine months of 2020 primarily from net earnings adjusted for non-cash items together with a net decrease in working capital. Working capital provided ~~$24.6~~$19.1 million of cash due to a ~~$10.2~~$26.3 million increase in accounts payable and accrued expenses ~~an $8.8~~partially offset by a $6.9 million ~~decrease~~increase in accounts receivable and a ~~$5.6~~$0.3 million ~~decrease~~increase in inventories. The increase in accounts payable and accrued expenses was largely ~~due~~related to higher raw material purchases ~~near~~driven by the ~~end of~~higher shipments during the ~~quarter.~~period. The ~~reduction~~increase in accounts receivable was largely ~~related to~~driven by the ~~usual seasonal downturn~~increase in ~~sales and decrease in~~shipments during the third quarter of 2020 partially offset by lower average selling prices. The ~~reduction~~increase in inventories was ~~driven~~due to the higher raw material purchases during the current quarter mostly offset by lower ~~average~~ unit costs.
22

Operating activities used ~~$22.8~~$25.9 million of cash during the first ~~quarter~~nine months of 2019 primarily from a net increase in the working capital partially offset by net earnings adjusted for non-cash ~~items together with a net decrease in working capital.~~items. Working capital used ~~$31.2~~$43.4 million of cash due to a ~~$25.1~~$33.6 million decrease in accounts payable and accrued expenses and a ~~$21.1~~$10.5 million increase in inventories partially offset by a ~~$15.0~~$0.7 million decrease in accounts receivable. The ~~reduction~~decrease in accounts payable and accrued expenses was largely due to ~~lower~~payments related to higher raw material purchases that were made near the end of the ~~quarter,~~prior year, and, to a lesser extent, the payment of accrued incentive compensation for the prior year. The increase in inventories was primarily driven by the reduction in shipments and higher ~~average~~ unit ~~costs.~~costs during the period. The ~~reduction~~decrease in accounts receivable was ~~principally~~primarily due to ~~the usual seasonal downturn in~~improved collections and lower days sales ~~compounded by the unusually wet weather.~~outstanding.

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

Investing activities used ~~$642,000~~$19.6 million of cash during the first ~~quarter~~nine months of 2020 compared to ~~$5.7~~$8.4 million during the prior year ~~quarter~~period primarily due to ~~a decrease in~~the STM Acquisition ($18.4 million) and lower capital expenditures ($~~5.6~~6.0 million) ~~and an increase~~partially offset by the receipt of proceeds from the sale of assets held for sale ($1.9 million). Proceeds of $1.2 million were received in the ~~cash surrender value of life~~prior year period related to an insurance ~~policies ($560,000).~~claim. Capital expenditures decreased to ~~$600,000~~$3.4 million from ~~$6.2~~$9.4 million in the prior year period and are expected to total up to ~~$17.0~~$12.0 million for fiscal 2020 primarily focused on 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.

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Financing Activities

Financing activities ~~did not provide or use any significant amounts~~used $1.8 million of cash during the ~~current or~~first nine months of 2020 compared to $2.1 million during the prior year ~~quarters. During~~period. Cash dividends used $1.7 million of cash in both the first quarter of 2020, we declared a regular quarterly cash dividend of $578,000, or $0.03 per share, which was paid in the second quarter of 2020. During the first quarter of 2019, we declared a regular quarterly cash dividend of $576,000, or $0.03 per share, which was paid in the second quarter of 2019.current and prior year periods.

Cash Management

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.

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 incremental 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 ~~December 28, 2019,~~June 27, 2020, no borrowings were outstanding on the Credit Facility, ~~$71.7~~$94.4 million of borrowing capacity was available and outstanding letters of credit totaled ~~$1.6~~$1.5 million (see Note 910 to the consolidated financial statements).

COVID-19 has not had a material impact on our operations to date, and our cash and cash equivalents increased $21.0 million in the third quarter to $61.4 million as of June 27, 2020. 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.

23
Should we determine, at any time, that we ~~required~~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 ~~flexible capital structure~~ 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.

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, 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.

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Impact of Inflation

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 ~~quarter~~nine months of fiscal 2020, selling prices for our products declined in response to low-priced import competition, ~~spurred by the Section 232 tariff on imported steel,~~ which negatively impacted our financial ~~results as we consumed higher cost inventory that was purchased in prior periods.~~results. 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.

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 described 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 2019 Annual Report 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 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. 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 2019 Annual Report for further information regarding our critical accounting policies and estimates. As of ~~December 28, 2019,~~June 27, 2020, there were no changes in our critical accounting policies or the application of those policies from those reported in our 2019 Annual Report.
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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 including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements.

Outlook

~~Looking ahead~~Our visibility is limited due to the ~~remainder~~uncertainty surrounding the ultimate impact of ~~2020,~~COVID-19 on our operations and markets. As a result, the prospect, if any, of future funding constraints for public infrastructure projects and economic weakness slowing the non-residential construction markets cannot be measured at this time. In addition, we expect our financial results will be favorably impacted by the continued growth in our construction end-markets and the weather-related deferral of business from last year. The infrastructure-related portion of our business should benefit from higher state and local spending in many of our markets supported by various initiatives such as fuel tax increases, bond issuances and other ballot measures together with increased federal funding through the FAST Act and supplementary measures. The leading indicators and industry forecasts for nonresidential construction have remained relatively stable, reflecting modest growth for the year.
We expect business conditions ~~will~~to remain challenging ~~however,~~ in ~~view of the surge of low-priced imports~~our markets that ~~has followed the imposition of the Section 232 tariff on imports of hot-rolled steel wire rod.~~ are susceptible to import competition.
In ~~addition~~response to ~~continuing our dialogue with the Administration concerning the impact of imports on our business,~~these challenges, we will continue to focus on ~~the operational fundamentals of our business:~~those factors that we can control: 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 our manufacturing, selling and administrative activities. 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. In addition, we will continue to pursue ~~further~~ acquisitions opportunistically in our existing businesses that expand our penetration of markets we currently serve or expand our footprint.

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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.

Commodity Prices

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 ~~quarter~~nine months of 2020, a 10% increase in the price of wire rod would have resulted in a ~~$6.3~~$20.2 million decrease in our pre-tax earnings (assuming there was not a corresponding change in our selling prices).

Interest Rates

Although we did not have any balances outstanding on our Credit Facility as of ~~December 28, 2019,~~June 27, 2020, future borrowings under the facility are subject to a variable rate of interest and are sensitive to changes in interest rates.

Foreign Exchange Exposure

We have not typically hedged foreign currency exposures related to transactions denominated in currencies other than U.S. dollars, as such transactions have not been material historically. We will occasionally hedge firm commitments for certain equipment purchases that are denominated in foreign currencies. The decision to hedge any such transactions is made by us on a case-by-case basis. There were no forward contracts outstanding as of ~~December 28, 2019.~~June 27, 2020.
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Item 4. Controls and Procedures

We have conducted an evaluation of the effectiveness of our disclosure controls and procedures as of ~~December 28, 2019.~~June 27, 2020. 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 ~~December 28, 2019~~June 27, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are involved in lawsuits, claims, investigations and proceedings, including commercial, environmental and employment matters, which arise in the ordinary course of business. We do not 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.

Item 1A. Risk Factors

~~During~~Except as described in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended ~~December~~March 28, ~~2019,~~2020, there ~~were~~have been no material changes from the risk factors set forth under Part I, Item 1A., “Risk Factors” in our 2019 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 2019 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 ~~December 28, 2019,~~June 27, 2020, there was $24.8 million remaining available for future share repurchases under the Authorization. There were no share repurchases during the ~~three-month~~three- and nine-month periods ended ~~December 28, 2019~~June 27, 2020 and ~~December~~June 29, ~~2018.~~2019.
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Item 6. Exhibits

10.1*
Offer Letter to Mark A. Carano (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 4, 2020).
10.2*
Change in Control Severance Agreement between Insteel Industries Inc. and Mark A. Carano, dated May 27, 2020.
10.3*
Insteel Industries Inc. Retirement Security Agreement between Insteel Industries Inc. and Mark A. Carano, dated May 27, 2020.
31.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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The following financial information from the Quarterly Report on Form 10-Q of Insteel Industries, Inc. for the quarter ended ~~December 28, 2019,~~June 27, 2020, formatted in ~~XBRL (eXtensible~~iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended ~~December 28,~~June 27, 2020 and June 29, 2019, ~~and December 29, 2018,~~ (ii) the Consolidated Balance Sheets as of ~~December 28, 2019~~June 27, 2020 and September 28, 2019, (iii) the Consolidated Statements of Cash Flows for the ~~three~~nine months ended ~~December 28,~~June 27, 2020 and June 29, 2019, ~~and December 29, 2018,~~ (iv) the Consolidated Statements of Shareholders’ Equity for the three and nine months ended ~~December 28,~~June 27, 2020 and June 29, 2019, ~~and December 29, 2018,~~ and (v) the Notes to Consolidated Financial Statements.
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The cover page from our Quarterly Report on Form 10-Q for the quarter ended June 27, 2020, formatted in iXBRL
*
Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate.
Our SEC file number reference for documents filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended, is 1-09929.

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SIGNATURES

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

INSTEEL INDUSTRIES, INC.
Registrant

Date: ~~January~~July 16, 2020

By:
/s/ ~~Michael C. Gazmarian~~Mark A. Carano

~~Michael C. Gazmarian~~Mark A. Carano

Vice President, Chief Financial Officer and Treasurer

(Duly Authorized Officer and Principal Financial Officer)

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