INSTEEL INDUSTRIES INC - Quarter Report: 2019 December (Form 10-Q)

 

 

Table of contents

 

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 28, 2019

 

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

 

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 of shares outstanding of the registrant’s common stock as of January 15, 2020 was 19,260,725.

 

 

 

		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

 

		(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

 

		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 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

 

(1) Basis of Presentation

 

We have prepared 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 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 the disclosures are adequate to make the information presented not misleading. 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 consolidated financial statements and notes thereto included in our Annual Report on 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. The results of operations for the three-month period ended December 28, 2019 are not necessarily indicative of the results that may be expected for the full fiscal year or any future periods.

 

(2) Recent Accounting Pronouncements

 

Current Adoptions

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-02 “Leases (Topic 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 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 “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 became effective for us in the current quarter. The adoption of this update did not impact our consolidated financial statements.

 

Future Adoptions

 

In January 2017, the FASB issued ASU No. 2017-04 “Intangibles – Goodwill and Other (Topic 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 will become effective for us in the first quarter of fiscal 2021 and early adoption is permitted. We are evaluating the impact that the adoption of this update will have on our consolidated financial statements.

 

(3) 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 and not disclose information regarding remaining performance obligations that have original expected durations of one year or less.

 

 

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:

 

 

Our net sales by geographic region are as follows:

 

 

Contract assets primarily relate to our rights to consideration for products that are delivered but not billed as of the reporting date and are reclassified to receivables when the customer is invoiced. Contract liabilities primarily relate to performance obligations that are to be satisfied in the future and arise when we 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.

 

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) 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 December 28, 2019 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:

 

 

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 and September 28, 2019, 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 approximates 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 $273,000 for the three-month periods ended December 28, 2019 and December 29, 2018.

 

 

(6) 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, 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, replaced the 2005 Equity Incentive Plan of Insteel Industries, Inc., which expired on February 15, 2015. As of December 28, 2019, there were 143,000 shares of our common stock available for future grants under the 2015 Plan, which is our only active equity incentive plan.

 

Stock option awards. Under our equity incentive plan, employees and directors may be granted options to purchase shares of common stock at the fair market value on the date of the grant. Options granted under these plans generally vest over three years and expire ten years from the date of the grant. Compensation expense associated with stock options was $60,000 and $55,000 for the three-month periods ended December 28, 2019 and December 29, 2018, respectively. As of December 28, 2019, there was $222,000 of unrecognized compensation cost related to unvested options which is expected to be recognized over a weighted average period of 1.53 years.

 

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. Compensation expense associated with RSUs was $126,000 and $119,000 for the three-month periods ended December 28, 2019 and December 29, 2018, respectively.

 

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

 

The following table summarizes RSU activity:

 

 

 

(7) Income Taxes

 

Effective income tax rate. Our effective income tax rate was 22.7% for the three-month period ended December 28, 2019 compared with 23.5% for the three-month period ended December 29, 2018. 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, we recorded a deferred tax liability (net of valuation allowance) of $7.1 million in other liabilities on our consolidated balance sheet. We have $3.5 million of state net operating loss carryforwards (“NOLs”) that begin to expire in 2022, but principally expire between 2022 and 2032. 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 and September 28, 2019, we recorded a valuation allowance of $265,000 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, we had $122,000 of unrecognized tax benefits that would reduce our income tax rate in future periods, if recognized, which were classified as a reduction in income taxes receivable in other current assets.

 

We file U.S. federal, state and local income tax returns in various jurisdictions. Federal and various state tax returns filed subsequent to 2014 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 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 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 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, no borrowings were outstanding on the Credit Facility, $71.7 million of borrowing capacity was available and outstanding letters of credit totaled $1.6 million.

 

 

Interest rates on the Credit Facility are based upon (1) an index rate that is established at the highest of the prime rate, 0.50% plus the federal funds rate or the LIBOR rate plus the excess of the then-applicable margin for LIBOR loans over the then-applicable margin for index rate loans, or (2) at 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, the applicable interest rate margins on the Credit Facility were 0.25% for index rate loans and 1.25% for LIBOR loans.

 

Our ability to borrow available amounts under the Credit Facility will be restricted or eliminated in the event of certain covenant breaches, events of default or if we are unable to make certain representations and warranties provided for under the terms of the Credit Facility. We are required to maintain a fixed charge coverage ratio of not less than 1.0 at the end of each fiscal quarter for the twelve-month period then ended when the amount of liquidity on the Credit Facility is less than $10.0 million. In addition, the terms of the Credit Facility restrict our ability to, among other things: engage in certain business combinations or divestitures; make investments in or loans to third parties, unless certain conditions are met with respect to such investments or loans; pay cash dividends or repurchase shares of our stock subject to certain minimum borrowing availability requirements; incur or assume indebtedness; issue securities; enter into certain transactions with our affiliates; or permit liens to encumber our property and assets. The terms of the Credit Facility also provide that an event of default will occur upon the occurrence of, among other things: defaults or breaches under the loan documents, subject in certain cases to cure periods; defaults or breaches by us or any of our subsidiaries under any agreement resulting in the acceleration of amounts above certain thresholds or payment defaults above certain thresholds; certain events of bankruptcy or insolvency; certain entries of judgment against us or any of our subsidiaries, which are not covered by insurance; or a change of control. As of December 28, 2019, 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 December 28, 2019 and December 29, 2018.

 

(10) Earnings Per Share

 

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

 

 

Options and RSUs that were antidilutive and not included in the dilutive earnings per share calculation amounted to 293,000 and 158,000 shares for the three-month periods ended December 28, 2019 and December 29, 2018, 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 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, there was $24.8 million remaining available for future share repurchases under this Authorization. There were no share repurchases during the three-month periods ended December 28, 2019 and December 29, 2018.

 

 

(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 Accounting Standards Codification Topic 280, Segment Reporting, we have one reportable segment.

 

(14) 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 12 months or less are not recorded on our consolidated balance sheet. Lease expense for operating leases with original terms of more than 12 months was $327,000 for the three-month period ended December 28, 2019.

 

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:

 

 

Supplemental balance sheet information related to leases is as follows:

 

 

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

 

 

 

(15) 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 29, 2018, we received $391,000 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) and selling, general and administrative expense ($5,000) 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 ended December 29, 2018, 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.