INSTEEL INDUSTRIES INC - Quarter Report: 2018 June (Form 10-Q)

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X]

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

 

For the quarterly period ended June 30, 2018

 

OR

 

[  ]

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

 

For the transition period from ________ to ________

 

Commission File Number: 1-9929

 

Insteel Industries, Inc.

(Exact name of registrant as specified in its charter)

 

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

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes [X]

No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X]

No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 [X]
Non-accelerated filer   [  ] (Do not check if a smaller reporting company)	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 [X]

 

The number of shares outstanding of the registrant’s common stock as of July 18, 2018 was 19,085,438.

 

 

 

TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
Item 1.	Unaudited Financial Statements
	Consolidated Statements of Operations and Comprehensive Income	3
	Consolidated Balance Sheets	4
	Consolidated Statements of Cash Flows	5
	Consolidated Statements of Shareholders' Equity	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4.	Controls and Procedures	21
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 6.	Exhibits	22
SIGNATURES		23

 

 

 

		Three Months Ended								Nine Months Ended
		June 30,				July 1,				June 30,				July 1,
		2018				2017				2018				2017
Net sales		$	126,688			$	96,938			$	331,846			$	291,985
Cost of sales			102,502				80,262				280,583				244,005
Gross profit			24,186				16,676				51,263				47,980
Selling, general and administrative expense			7,541				6,216				20,779				19,535
Restructuring charges, net			-				60				-				133
Other expense (income), net			(32	)			50				153				50
Interest expense			23				34				74				103
Interest income			(150	)			(75	)			(279	)			(175	)
Earnings before income taxes			16,804				10,391				30,536				28,334
Income taxes			3,936				3,522				3,678				9,585
Net earnings		$	12,868			$	6,869			$	26,858			$	18,749
Net earnings per share:
Basic		$	0.67			$	0.36			$	1.41			$	0.99
Diluted			0.67				0.36				1.40				0.98
Weighted average shares outstanding:
Basic			19,070				19,025				19,054				19,003
Diluted			19,274				19,225				19,252				19,219
Cash dividends declared per share		$	0.03			$	0.03			$	1.09			$	1.34
Comprehensive income		$	12,868			$	6,869			$	26,858			$	18,749

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		(Unaudited)
		June 30,				September 30,
		2018				2017
Assets
Current assets:
Cash and cash equivalents		$	45,232			$	32,105
Accounts receivable, net			55,832				40,284
Inventories			54,751				81,853
Other current assets			5,075				5,949
Total current assets			160,890				160,191
Property, plant and equipment, net			102,789				98,670
Intangibles, net			9,976				7,913
Goodwill			8,293				6,965
Other assets			9,778				9,334
Total assets		$	291,726			$	283,073
Liabilities and shareholders' equity
Current liabilities:
Accounts payable		$	34,420			$	33,651
Accrued expenses			10,017				8,667
Total current liabilities			44,437				42,318
Other liabilities			16,602				17,379
Commitments and contingencies
Shareholders' equity:
Common stock			19,085				19,041
Additional paid-in capital			70,982				69,817
Retained earnings			141,953				135,851
Accumulated other comprehensive loss			(1,333	)			(1,333	)
Total shareholders' equity			230,687				223,376
Total liabilities and shareholders' equity		$	291,726			$	283,073

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		Nine Months Ended
		June 30,				July 1,
		2018				2017
Cash Flows From Operating Activities:
Net earnings		$	26,858			$	18,749
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization			9,578				8,576
Amortization of capitalized financing costs			48				48
Stock-based compensation expense			1,241				1,343
Deferred income taxes			(2,321	)			2,705
Loss on sale and disposition of property, plant and equipment			270				49
Increase in cash surrender value of life insurance policies over premiums paid			(428	)			(568	)
Net changes in assets and liabilities (net of assets and liabilities acquired):
Accounts receivable, net			(15,548	)			5,082
Inventories			27,102				(12,496	)
Accounts payable and accrued expenses			3,011				290
Other changes			24				(1,739	)
Total adjustments			22,977				3,290
Net cash provided by operating activities			49,835				22,039
Cash Flows From Investing Activities:
Capital expenditures			(12,481	)			(16,855	)
Acquisition of business			(3,300	)			-
Proceeds from surrender of life insurance policies			152				100
Increase in cash surrender value of life insurance policies			(291	)			(330	)
Net cash used for investing activities			(15,920	)			(17,085	)
Cash Flows From Financing Activities:
Proceeds from long-term debt			290				322
Principal payments on long-term debt			(290	)			(322	)
Cash dividends paid			(20,756	)			(25,440	)
Cash received from exercise of stock options			242				107
Payment of employee tax withholdings related to net share transactions			(274	)			(646	)
Net cash used for financing activities			(20,788	)			(25,979	)
Net increase (decrease) in cash and cash equivalents			13,127				(21,025	)
Cash and cash equivalents at beginning of period			32,105				58,873
Cash and cash equivalents at end of period		$	45,232			$	37,848
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Income taxes, net		$	3,553			$	6,796
Non-cash investing and financing activities:
Purchases of property, plant and equipment in accounts payable			499				2,092
Restricted stock units and stock options surrendered for withholding taxes payable			274				646

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																		Accumulated
										Additional								Other				Total
		Common Stock								Paid-In				Retained				Comprehensive				Shareholders'
		Shares				Amount				Capital				Earnings				Loss				Equity
Balance at September 30, 2017			19,041			$	19,041			$	69,817			$	135,851			$	(1,333	)		$	223,376
Net earnings															26,858								26,858
Stock options exercised, net			24				24				218												242
Vesting of restricted stock units			20				20				(20	)											-
Compensation expense associated with stock-based plans											1,241												1,241
Restricted stock units and stock options surrendered for withholding taxes payable											(274	)											(274	)
Cash dividends declared															(20,756	)							(20,756	)
Balance at June 30, 2018			19,085			$	19,085			$	70,982			$	141,953			$	(1,333	)		$	230,687

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(1) Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements of Insteel Industries, Inc. (“we,” “us,” “our,” “the Company” or “Insteel”) have been prepared pursuant to the rules and regulations of the United States (“U.S.”) Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q. Certain information and note disclosures normally included in the audited financial statements prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although we believe the disclosures made are adequate to make the information not misleading. The September 30, 2017 consolidated balance sheet was derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements should therefore be read in conjunction with the consolidated financial statements and notes for the fiscal year ended September 30, 2017 included in our Annual Report on Form 10-K filed with the SEC on October 27, 2017.

 

The accompanying unaudited interim consolidated financial statements reflect all adjustments of a normal recurring nature that we consider necessary for a fair presentation of results for these interim periods. The results of operations for the nine-month period ended June 30, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending September 29, 2018 or future periods.

 

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

 

 

(2) Recent Accounting Pronouncements

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting," which is intended to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. We adopted this update during our first fiscal quarter. One provision within ASU No. 2016-09 requires the recognition of excess income tax benefits and deficiencies related to share-based payments within income tax expense as a discrete event in the period in which they occur, rather than within additional paid-in capital on a prospective basis. There was no material impact from this provision on income tax expense in the current quarter or nine-month period. The impact of this provision on our future results of operations is difficult to predict as it will depend in part on the market prices for the shares of our common stock on the dates that there are taxable events related to the share-based awards. In connection with another provision within ASU No. 2016-09, we have elected to account for forfeitures of share-based awards as an estimate of the number of awards that are expected to vest, which is consistent with our accounting policy prior to adoption. We also adopted the provisions related to changes on the consolidated statements of cash flows on a retrospective basis. As a result, we no longer classify excess income tax benefits as a financing activity, which increased net cash provided by operating activities and reduced net cash provided by financing activities by $488,000 for the nine months ended July 1, 2017.

 

In February 2018, the FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which allows companies to reclassify stranded income tax effects resulting from the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings in their consolidated financial statements. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years with early adoption permitted. We are evaluating the impact that the adoption of this update will have on our consolidated financial statements.

 

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

 

 

In May 2017, the FASB issued ASU No. 2017-09 “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” ASU No. 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 will become effective for us in the first quarter of fiscal 2020. We are evaluating the impact that the adoption of this update will have on our consolidated financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15 “Statement of Cash Flows Topic 230: Classification of Certain Cash Receipts and Cash Payments.” ASU No. 2016-15 addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows with the objective of reducing existing differences in the presentation of these items. The amendments in ASU No. 2016-15 are to be adopted retrospectively and will become effective for us in the first quarter of fiscal 2019. We do not expect the adoption of this update will have a material effect on our consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02 “Leases,” which will replace the guidance in Accounting Standards Codification (“ASC”) Topic 840. ASU No. 2016-02 was issued to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset. ASU No. 2016-02 will become effective for us in the first quarter of fiscal 2020. We are evaluating the impact that the adoption of this update will have on our consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09 “Revenue from Contracts with Customers,” which will supersede nearly all existing revenue recognition guidance under GAAP. ASU No. 2014-09 provides that an entity recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU No. 2014-09 allows for either full retrospective or modified retrospective adoption and will become effective for us in the first quarter of fiscal 2019. We have substantially completed our evaluation of the impact this update will have on our consolidated financial statements and plan on using the modified retrospective method upon adoption. We have not identified any material changes in the timing of revenue recognition that will result from the adoption of this guidance, but expect it will have a material impact on the disclosures required in our notes to the consolidated financial statements.

 

 

(3) Restructuring Charges

 

In fiscal 2014, we purchased substantially all of the assets associated with the prestressed concrete strand (“PC strand”) business of American Spring Wire Corporation (the “ASW Acquisition”). Subsequent to the ASW Acquisition, in fiscal 2014, we incurred employee separation costs for staffing reductions associated with the acquisition. In February 2015, we elected to consolidate our PC strand operations with the closure of the Newnan, Georgia facility that had been acquired through the ASW Acquisition, which was completed in March 2015.

 

Following is a summary of the restructuring activities and associated costs that were incurred during the prior year three- and nine-month periods ended July 1, 2017:

 

 

We do not expect to incur any additional restructuring charges related to the consolidation of our PC strand operations.

 

 

 

(4) Fair Value Measurements

 

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

 

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

 

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

 

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

 

As of June 30, 2018 and September 30, 2017, we held financial assets that are required to be measured at fair value on a recurring basis, which are summarized below:

 

 

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 June 30, 2018 and September 30, 2017, we had no nonfinancial assets that were required to be measured at fair value on a nonrecurring basis. The carrying amounts of accounts receivable, accounts payable and accrued expenses approximate fair value due to the short-term maturities of these financial instruments.

 

 

 

(5) Intangible Assets

 

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

 

 

Amortization expense for intangibles was $299,000 and $289,000 for the three-month periods ended June 30, 2018 and July 1, 2017, respectively, and $987,000 and $868,000 for the nine-month periods ended June 30, 2018 and July 1, 2017, respectively. We completed the acquisition of a business during the nine-month period ended June 30, 2018, and the effects of the purchase price allocation for this transaction on the accompanying unaudited interim consolidated financial statements are not material.

 

 

(6) Stock-Based Compensation

 

Under our equity incentive plans, employees and directors may be granted stock options, restricted stock, restricted stock units and performance awards. Effective February 17, 2015, our shareholders approved the 2015 Equity Incentive Plan of Insteel Industries, Inc. (the “2015 Plan”), which authorizes up to 900,000 shares of our common stock for future grants under the plan. The 2015 Plan, which expires on February 17, 2025, replaces the 2005 Equity Incentive Plan of Insteel Industries, Inc., which expired on February 15, 2015. As of June 30, 2018, there were 378,000 shares of our common stock available for future grants under the 2015 Plan, which is our only active equity incentive plan.

 

Stock option awards. Under our equity incentive plans, 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 is as follows:

 

 

As of June 30, 2018, there was $185,000 of unrecognized compensation cost related to unvested options which is expected to be recognized over a weighted average period of 1.51 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 30, 2018 and July 1, 2017 was $10.46 and $13.66 per share, respectively, based on the following assumptions:

 

 

 

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

 

The following table summarizes stock option activity:

 

 

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

 

Restricted stock units. Restricted stock units (“RSUs”) granted under our equity incentive plans are valued based upon the fair market value on the date of the grant and provide for a dividend equivalent payment which is included in compensation expense. The vesting period for RSUs is generally one year from the date of the grant for RSUs granted to directors and three years from the date of the grant for RSUs granted to employees. RSUs do not have voting rights. RSU grants and compensation expense are as follows:

 

 

As of June 30, 2018, there was $443,000 of unrecognized compensation cost related to unvested RSUs which is expected to be recognized over a weighted average period of 1.42 years.

 

The following table summarizes RSU activity:

 

 

 

 

(7) Income Taxes

 

Effective income tax rate. Our effective income tax rate was 12.0% for the nine-month period ended June 30, 2018 compared with 33.8% for the nine-month period ended July 1, 2017. 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. On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was enacted, which, among other changes, reduced the federal statutory corporate tax rate from 35% to 21% effective January 1, 2018. Since our fiscal year ends on the Saturday closest to September 30 rather than the calendar year, we are subject to IRS rules relating to transitional income tax rates. As a result, we will be subject to a federal statutory rate of 24.5% for fiscal 2018 and 21% for fiscal 2019 and beyond. Based on the provisions of the Act, we remeasured our deferred tax liabilities and adjusted our estimated annual federal income tax rate to incorporate the lower corporate tax rate into our tax provision during our first fiscal quarter which resulted in a $3.7 million reduction of income tax expense. We are still in process of evaluating the income tax effect of the Act on the executive compensation limitations that will be effective for our fiscal year 2019.

 

Deferred income taxes. As of June 30, 2018, we recorded a deferred tax liability (net of valuation allowance) of $5.8 million in other liabilities on our consolidated balance sheet. We have $7.4 million of state net operating loss carryforwards (“NOLs”) that begin to expire in 2018, but principally expire between 2018 and 2032. We have also recorded gross deferred tax assets of $72,000 for various state tax credits that begin to expire in 2019, but principally expire between 2019 and 2020.

 

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 June 30, 2018 and September 30, 2017, we recorded a valuation allowance of $254,000 and $251,000, 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. As of June 30, 2018, we had no material, known tax exposures that require the establishment of contingency reserves for uncertain tax positions.

 

We file U.S. federal income tax returns as well as state and local income tax returns in various jurisdictions. Federal and various state tax returns filed subsequent to 2013 remain subject to examination.

 

 

(8) Employee Benefit Plans

 

Supplemental employee retirement plan. We have Retirement Security Agreements (each, a “SERP”) with certain of our employees (each, a “Participant”). Under the SERPs, if the Participant remains in continuous service with us for a period of at least 30 years, we will pay them a supplemental retirement benefit for the 15-year period following their retirement equal to 50% of their highest average annual base salary for five consecutive years in the 10-year period preceding their 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 their supplemental retirement benefit will be reduced by 1/360th for each month short of 30 years that they were employed by us.

 

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

 

 

 

(9) 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 2015, we amended the Credit Facility to, among other changes, extend its maturity date from June 2, 2016 to May 13, 2020. Advances under the Credit Facility are limited to the lesser of the revolving loan commitment amount (currently $100.0 million) or a borrowing base amount that is calculated based upon a percentage of eligible receivables and inventories. As of June 30, 2018, no borrowings were outstanding on the Credit Facility, $82.5 million of borrowing capacity was available and outstanding letters of credit totaled $1.8 million.

 

 

Interest rates on the Credit Facility are based upon (1) an index rate that is established at the highest of the prime rate, 0.50% plus the federal funds rate or the LIBOR rate plus the excess of the then-applicable margin for LIBOR loans over the then-applicable margin for index rate loans, or (2) at our election, a LIBOR rate, plus in either case, an applicable interest rate margin. The applicable interest rate margins are adjusted on a quarterly basis based upon the amount of excess availability on the Credit Facility within the range of 0.25% to 0.75% for index rate loans and 1.25% to 1.75% for LIBOR loans. In addition, the applicable interest rate margins would be increased by 2.00% upon the occurrence of certain events of default provided for under the terms of the Credit Facility. Based on our excess availability as of June 30, 2018, 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 1.10 at the end of each fiscal quarter for the twelve-month period then ended when the amount of liquidity on the Credit Facility is less than $12.5 million. In addition, the terms of the Credit Facility restrict 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 June 30, 2018, we were in compliance with all of the financial and negative covenants under the Credit Facility and there have not been any events of default.

 

Amortization of capitalized financing costs associated with the Credit Facility was $16,000 for each of the three-month periods ended June 30, 2018 and July 1, 2017, and $48,000 for each of the nine-month periods ended June 30, 2018 and July 1, 2017.

 

 

(10) Earnings Per Share

 

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

 

 

Options that were antidilutive and not included in the dilutive earnings per share calculation amounted to 97,000 and 78,000 shares for the three-month periods ended June 30, 2018 and July 1, 2017, respectively, and 98,000 and 57,000 shares for the nine-month periods ended June 30, 2018 and July 1, 2017, respectively.

 

 

(11) 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 particular amount of common stock and the program may be commenced or suspended at any time at our discretion without prior notice. The Authorization continues in effect until terminated by the Board of Directors. As of June 30, 2018, there was $24.8 million remaining available for future share repurchases under this Authorization. There were no share repurchases during the three- and nine-month periods ended June 30, 2018 and July 1, 2017.

 

 

 

(12) Other Financial Data

 

Balance sheet information:

 

 

 

 

(13) 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 ASC Topic 280, Segment Reporting, we have one reportable segment.

 

 

(14) Contingencies

 

Insurance recoveries. In August 2017, operations at our manufacturing facility located in Dayton, Texas were adversely affected by hurricane Harvey. We are in the process of completing repairs and finalizing the insurance claim relating to the business interruption and property damage resulting from the storm.

 

We maintain general liability, business interruption and replacement cost property insurance coverage on our facilities that was sufficient to cover the losses incurred from the storm. During the three-month period ended June 30, 2018, we recorded a $52,000 receivable for anticipated insurance proceeds related to the costs that were incurred during the period resulting from the storm, which were recorded in selling, general and administrative expense (“SG&A expense”) ($5,000) and other income ($47,000) on the consolidated statement of operations and comprehensive income. During the nine-month period ended June 30, 2018, we received $439,000 of insurance proceeds related to the expenses that were incurred and business interruption losses resulting from the storm, which were recorded in cost of sales ($418,000), SG&A expense ($26,000) and other income ($47,000) on the consolidated statement of operations and comprehensive income.

 

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.

 

 

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