[INSTEEL INDUSTRIES, INC. LOGO]
March 18, 2005
VIA EDGAR
Mr. Rufus Decker
Accounting Branch Chief
Division of Corporation Finance
United States Securities and Exchange Commission
Washington, D.C. 20549-0510
RE: Insteel Industries, Inc. ("Insteel" or the "Company")
Form 10-K/A#1 for the fiscal year ended October 2, 2004
File 1-9929
Dear Mr. Decker:
Following is our response to the letter of the staff of the Division of
Corporation Finance (the "Staff") dated March 8, 2005 concerning Insteel's
amended Form 10-K/A (Amendment No. 1) for the fiscal year ended October 2, 2004.
We have repeated the Staff's comments from the March 8, 2005 letter and
reflected our response immediately following each item. Please note the
numbering of the items corresponds to the numbering of the comments in the
Staff's March 8, 2005 letter.
GENERAL
1. WHERE A COMMENT BELOW REQUESTS ADDITIONAL DISCLOSURES OR OTHER
REVISIONS TO BE MADE, PLEASE PROVIDE TO US YOUR INTENDED
DISCLOSURE. THESE REVISIONS SHOULD BE INCLUDED IN YOUR FUTURE
FILINGS.
Company Response
We acknowledge your comment and have provided the requested disclosure or other
revisions to the Staff's comments in our responses below, as applicable, and
will include such additional disclosures or other revisions in our future
filings as indicated.
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL COVENANTS. PAGE 18
2. WE NOTE YOUR RESPONSE TO PRIOR COMMENT 3. THERE ARE SEVERAL
LINES IN YOUR EBITDA CALCULATION THAT ARE NOT CONSISTENT WITH
THE DEFINITION OF EBITDA. IN THIS REGARD, PLEASE RETITLE THE
CALCULATION ACCORDINGLY.
Company Response
The titles that are reflected in the table of supporting calculations for the
financial covenants are based upon the definitions in the Company's Credit
Agreement. With regard to the Staff's comment about the
1373 BOGGS DRIVE/MOUNT AIRY, NORTH CAROLINA 27030/336-786-2141/FAX 336-786-9463
inconsistency of several lines in the Company's EBITDA calculation with the
definition of EBITDA, although certain of the line items are not customarily
included in the calculation, to our knowledge, there are no authoritative
references or regulations that specify a standardized calculation methodology
for EBITDA. However, in order to prevent any confusion on the part of the
readers of the Company's financial statements, we will clearly indicate that the
definition of EBITDA for purposes of the financial covenants is based on the
definition specified in the Company's Credit Agreement. Following is a revised
version of the disclosure that was reported in the amended Form 10-K for the
year ended October 2, 2004:
FIXED CHARGE COVERAGE RATIO
For the four-month period ended October 2, 2004
($ amounts in thousands)
EBITDA(1) $ 30,436
Less Unfunded Capital Expenditures (1,505)
--------
28,931
Fixed Charges 15,245
--------
Fixed Charge Coverage Ratio 1.90
========
Net earnings $ 12,019
Cash pension contributions (213)
Income tax provision 8,815
Interest expense 2,236
Depreciation and amortization (net) 1,792
Pension expense 254
Expense associated with option grants 5,515
Net non-cash losses recorded as other
expenses 18
--------
EBITDA(1) $ 30,436
========
(1)As defined in the Company's Credit Agreement
The Company's credit facility includes financial covenants such as a
Fixed Charge Coverage Ratio, as defined above, that are derived from
non-GAAP financial measures, particularly, earnings before interest,
taxes, depreciation and amortization as defined in the Company's Credit
Agreement ("EBITDA"). EBITDA as defined in the Company's Credit
Agreement includes additional adjustments to GAAP net earnings as set
forth in the table above. The Company's management uses EBITDA and the
debt covenant ratios to measure compliance with its debt covenants and
evaluate the operations of the Company. Management believes this
presentation is appropriate and enables investors to (i) evaluate the
Company's compliance with the financial covenants of its credit
facility and (ii) assess the Company's performance over the periods
presented. EBITDA and the debt covenant ratio as presented here may not
be comparable to similarly titled measures used by other companies in
that they are specifically based on the definitions provided for in the
Company's Credit Agreement. EBITDA (i) should not be considered as an
alternative to net earnings (determined in accordance with GAAP) as an
indicator of the Company's financial performance, (ii) is not an
alternative to cash flow from operating activities (determined in
accordance with GAAP) as a measure of the Company's liquidity, and
(iii) is not indicative of funds available to fund the Company's cash
needs because of needed capital replacement or expansion, debt service
obligations, or other cash commitments and uncertainties.
Beginning with the Form 10-Q for the quarter ending April 2, 2005, we will
provide the revised disclosure for the applicable financial covenant
calculations as defined under the terms of the Credit Agreement.
INSTEEL INDUSTRIES, INC.
FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS. PAGE 24
3. WE READ YOUR RESPONSE TO PRIOR COMMENT 5. AS PREVIOUSLY
REQUESTED, PLEASE TELL US WHETHER YOUR EARNINGS BEFORE
INTEREST, INCOME TAXES AND ACCOUNTING CHANGE SUBTOTAL
REPRESENTS OPERATING INCOME UNDER U.S. GAAP FOR ALL PERIODS
PRESENTED. IF NOT, PLEASE REMOVE THIS SUBTOTAL. ITEM
10(E)(L)(II)(C) OF REGULATION S-K. PROHIBITS THE PRESENTATION
OF NON-GAAP MEASURES IN YOUR FINANCIAL STATEMENTS. SEE ALSO,
SEC RELEASE 33-8176, INCLUDING FOOTNOTE 20.
Company Response
The earnings before interest, income taxes and accounting change does not
represent operating income under U.S. GAAP for all periods presented. Beginning
with the Form 10-Q for the quarter ending April 2, 2005, we will remove this
subtotal from the Company's consolidated statement of operations in its
financial statements.
STATEMENTS OF CASH FLOWS. PAGE 26
4. WE NOTE YOUR RESPONSE TO PRIOR COMMENT 6 IN WHICH YOU
EXPLAINED HOW YOU DETERMINED THE CASH YOU PAID AS A RESULT OF
YOUR TERMINATION OF INTEREST RATE SWAPS SHOULD BE CLASSIFIED
AS A FINANCING ACTIVITY. PLEASE TELL US THE GAAP BASIS USED IN
DETERMINING YOUR CONCLUSIONS AND LET US KNOW WHO FROM GRANT
THORNTON'S NATIONAL OFFICE WAS CONSULTED AND AGREES WITH YOUR
CONCLUSIONS.
Company Response
We do not believe that GAAP specifically addresses the classification of
interest rate swap payments on the cash flow statement. Although Footnote 12b to
paragraph 45A of SFAS 133 indicates that swap agreements involving no payments
between the parties at inception are not considered to have a financing element
present at inception, it does not specifically prescribe how the associated
payments should be classified on the cash flow statement. As we indicated in our
letter dated February 22, 2005, the payments that were made to terminate the
interest rate swaps were required by the Company's previous lenders that were
counterparties to the swaps as a condition for the completion of the refinancing
and their willingness to waive certain fees which would have otherwise been
payable by the Company and been classified as a financing activity on the
Company's consolidated statement of cash flow. In view of the underlying factors
that were responsible for the termination of the swap agreements prior to their
scheduled maturity dates, the Company believes that the classification of the
termination payments as a financing activity is a more appropriate presentation.
The Grant Thornton engagement team consulted with the firm's national office in
regards to the appropriate period in which to recognize the loss on the
termination of the swaps. However, they did not consult with the national office
at the time of the audit regarding the specific presentation of the cash paid to
terminate the swaps in the Company's statement of cash flows. They have since
consulted with Karin French in their national office, who agrees that the
Company's presentation of the payment in financing activities is appropriate
given the facts and circumstances.
INSTEEL INDUSTRIES, INC.
NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, PAGE 27
GENERAL
5. WE NOTE OUR RESPONSE TO PRIOR COMMENT 10. IN ORDER TO IMPROVE
THE ABILITY FOR READERS TO COMPARE INSTEEL TO OTHERS IN THE
INDUSTRY, PLEASE DISCLOSE IN A FOOTNOTE IN A MANNER SIMILAR TO
YOUR SUPPLEMENTAL RESPONSE THE TYPES OF EXPENSES THAT YOU
INCLUDE IN COST OF SALES AND THE TYPES OF EXPENSE THAT YOU
INCLUDE IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES AND
WHETHER YOU INCLUDE INBOUND FREIGHT CHARGES, PURCHASING AND
RECEIVING COSTS, INSPECTION COSTS, WAREHOUSING COSTS, INTERNAL
TRANSFER COSTS, AND THE OTHER COSTS OF YOUR DISTRIBUTION
NETWORK IN THE COST OF SALES LINE ITEM.
Company Response
Beginning with the Form 10-K for the year ending October 1, 2005, we will
provide the following disclosure in the Summary of Significant Accounting
Policies presented in the footnotes to the Company's consolidated financial
statements:
COST OF SALES. The Company includes the costs of direct
material, manufacturing labor and overhead, plant administration, inbound and
outbound freight, purchasing and receiving, inspection and warehousing in cost
of sales. As the Company generally ships its products from its manufacturing
facilities directly to its customers, the Company does not maintain an internal
distribution network or incur such distribution or transfer costs in cost of
sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. The Company
includes the costs associated with sales and customer service, corporate and
business unit administration, finance and accounting, information systems, human
resources, and corporate purchasing and logistics in selling, general and
administrative expense.
NOTE 12 - BUSINESS SEGMENT INFORMATION, PAGE 39
6. WE NOTE YOUR RESPONSE TO PRIOR COMMENT 12. PLEASE PROVIDE US
WITH THE HISTORICAL COMPARISONS OF SALES, COST OF GOODS SOLD,
AND GROSS MARGIN AMOUNTS FOR EACH BUSINESS UNIT TO SHOW
ECONOMIC SIMILARITY. PLEASE ALSO PROVIDE THIS INFORMATION AS
IT RELATES TO A 2005 BUDGET OR ANY ADDITIONAL LONG-TERM
FORECASTS.
Company Response
The Company's response to this comment has been submitted to the Securities and
Exchange Commission under separate cover pursuant to a request for confidential
treatment under 17 C.F.R. Section 200.83.
* * * * *
In connection with our response, we acknowledge that:
- - the Company is responsible for the adequacy and accuracy of the
disclosure in its filings;
- - Staff comments or changes to disclosure in response to Staff comments
do not foreclose the Commission from taking any action with respect to
the filing; and
- - the Company may not assert Staff comments as a defense in any
proceeding initiated by the Commission or any person under the federal
securities laws of the United States.
INSTEEL INDUSTRIES, INC.
If you should have any additional information requests or questions regarding
our responses in this letter, please call me at (336) 786-2141, Ext. 3020.
Sincerely,
/s/ Michael C. Gazmarian
Michael C. Gazmarian
Chief Financial Officer and Treasurer
INSTEEL INDUSTRIES, INC.