Insteel Industries : Annual Report for Fiscal Year Ending 09-27, 2025 (Form 10-K)

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

The matters discussed in this section include forward-looking statements that are subject to numerous risks. You should carefully read the "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors" in this Form 10-K.

Overview

Our operations are entirely focused on the manufacture and marketing of concrete reinforcing products for the concrete construction industry. 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 October 21, 2024, we, through our wholly-owned subsidiary, IWP, purchased substantially all of the assets, other than cash and accounts receivable, of EWP and certain related assets of LSG for an adjusted purchase price of $67.0 million. EWP was a leading manufacturer of WWR products for use in nonresidential and residential construction. We acquired EWP's inventories, production equipment, production facilities located in Upper Sandusky, Ohio and Warren, Ohio and certain equipment from LSG. Subsequent to the acquisition, we elected to consolidate our WWR operations with the closure of the Warren facility and relocation of certain equipment to our existing WWR facilities.

On November 26, 2024, we, through our wholly-owned subsidiary, IWP, purchased certain assets of OWP for a purchase price of $5.1 million. OWP was a manufacturer of WWR products for use in nonresidential and residential construction. We acquired certain of OWP's inventories and all of OWP's production equipment. Subsequent to the acquisition, we elected to consolidate our WWR operations with the relocation of certain acquired equipment from OWP to our existing WWR facilities.

Critical Accounting Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. Our discussion and analysis of our financial condition and results of operations are based on these consolidated financial statements. The preparation of our consolidated financial statements requires the application of these accounting principles in addition to certain estimates and judgments based on currently available information, actuarial estimates, historical results and other assumptions believed to be reasonable. These estimates, assumptions and judgments are affected by our application of accounting policies, which are discussed in Note 2, "Summary of Significant Accounting Policies", and elsewhere in the accompanying consolidated financial statements. Estimates are used for, but not limited to, determining the net carrying value of trade accounts receivable, inventories, recording self-insurance liabilities and other accrued liabilities. Estimates are also used in establishing opening balances in relation to purchase accounting. Actual results could differ from these estimates.

Accounting estimates are considered critical if both of the following conditions are met: (1) the nature of the estimates or assumptions is material because of the levels of subjectivity and judgment needed to account for matters that are highly uncertain and susceptible to change and (2) the effect of the estimates and assumptions is material to the financial statements.

We have reviewed our accounting estimates, and none were deemed to be considered critical for the accounting periods presented.

Recent Accounting Pronouncements.

The nature and impact of recent accounting pronouncements is discussed in Note 3 to our consolidated financial statements and incorporated herein by reference.

Results of Operations

The following discussion and analysis of our financial condition and results of operations is for the year ended September 27, 2025 compared with the year ended September 28, 2024. Discussions of our financial condition and results of operations for the year ended September 28, 2024 compared to September 30, 2023 that have been omitted under this item can be found in Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the fiscal year ended September 28, 2024, which was filed with the SEC on October 24, 2024.

The table below presents a summary of our results of operations for fiscal 2025 and fiscal 2024.

Statements of Operations - Selected Data

(Dollars in thousands)

		Year Ended
		September 27,								September 28,
		2025				Change				2024
Net sales		$	647,706				22.4	%		$	529,198
Gross profit			93,438				88.3	%			49,632
Percentage of net sales			14.4	%							9.4	%
Selling, general and administrative expense		$	39,002				31.8	%		$	29,591
Percentage of net sales			6.0	%							5.6	%
Restructuring charges, net		$	2,304			N/M				$	-
Acquisition costs			325			N/M					61
Interest income			(2,067	)			(62.0%	)			(5,433	)
Effective income tax rate			23.8	%							23.7	%
Net earnings		$	41,020				112.5	%		$	19,305
"N/M" = not meaningful

2025 Compared with 2024

Net Sales

Net sales increased 22.4% to $647.7 million in 2025 from $529.2 million in 2024 reflecting a 14.8% increase in shipments and a 6.7% rise in average selling prices. The increase in shipments was primarily due to incremental volume generated from our acquisitions completed earlier in the year and improved demand in our construction end markets. The increase in average selling prices was driven by pricing actions implemented across all product lines to recover higher raw material costs.

Gross Profit

Gross profit increased 88.3% to $93.4 million, or 14.4% of net sales, in 2025 from $49.6 million, or 9.4% of net sales, in 2024. The year-over-year increase was primarily due to higher spreads between average selling prices and raw material costs ($36.1 million), higher shipments ($7.8 million) and other material costs and adjustments ($2.8 million), partially offset by higher manufacturing costs ($2.9 million). The increase in spreads was driven by higher average selling prices ($36.3 million) and lower raw material costs ($1.3 million) partially offset by an increase in freight expense ($1.5 million).

Selling, General and Administrative Expense

Selling, general and administrative expense ("SG&A expense") increased 31.8% to $39.0 million, or 6.0% of net sales, in 2025 from $29.6 million, or 5.6% of net sales, in 2024 primarily due to higher compensation expense ($6.4 million), an increase in amortization expense associated with intangible assets ($1.1 million), the relative year-over-year changes in the cash surrender value of life insurance policies ($1.0 million) and an increase in employee benefit expense ($511,000). The increase in compensation expense was largely driven by higher incentive plan expense due to our improved financial results in the current year. The cash surrender value of life insurance policies increased $452,000 in the current year compared with $1.5 million in the prior year due to the corresponding changes in the value of the underlying investments. The increase in amortization expense was primarily attributed to the intangible assets that were acquired in connection with our first quarter acquisitions. The increase in employee benefit expense was primarily related to higher employee health insurance expense in the current year.

Restructuring Charges, Net

Restructuring charges of $2.3 million were incurred in 2025 related to the closure of the Warren, Ohio facility, which had been acquired through the EWP Acquisition, and expenses related to the consolidation of our WWR operations. Restructuring charges included $1.0 million for asset impairment charges, $681,000 for facility closure costs, $371,000 for equipment relocation costs and $251,000 for employee separation costs.

Acquisition Costs

Acquisition costs of $325,000 were incurred in 2025 for legal, accounting and other professional fees related to the EWP Acquisition and the OWP Acquisition.

Interest Income

Interest income decreased $3.4 million due to lower average cash balances and interest rates.

Income Taxes

Our effective income tax rate for 2025 increased to 23.8% from 23.7% in 2024 due to changes in book versus tax differences.

Net Earnings

Net earnings increased to $41.0 million ($2.10 per diluted share) in 2025 from $19.3 million ($0.99 per share) in 2024 primarily due to the increase in gross profit partially offset by higher SG&A expense, lower interest income, restructuring charges and acquisitions costs.

Liquidity and Capital Resources

Overview

Our sources of liquidity include cash and cash equivalents, cash generated by operating activities and borrowing availability provided under our $100.0 million revolving credit facility (the "Credit Facility"). Our principal capital requirements include funding working capital, capital expenditures, dividends and any share repurchases. As of September 27, 2025, our cash and cash equivalents totaled $38.6 million compared with $111.5 million as of September 28, 2024.

We believe that, in the absence of significant unanticipated cash demands, cash and cash equivalents, 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, in both the short- and long-term. We also expect to have access to the amounts available under our 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, delay or restrict share repurchases, cease dividend payments and/or realign our working capital requirements.

Should we determine, at any time, that we require additional short-term liquidity, we would evaluate the alternative sources of financing that were 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.

Selected Liquidity and Capital Resources Data

(Dollars in thousands)

		Year Ended
		September 27,				September 28,
		2025				2024
Net cash provided by operating activities		$	27,163			$	58,207
Net cash used for investing activities			(75,674	)			(19,637	)
Net cash used for financing activities			(24,397	)			(52,702	)
Cash and cash equivalents			38,630				111,538
Net working capital			195,938				220,260
Total debt			-				-
Percentage of total capital			-				-
Shareholders' equity		$	371,532			$	350,855
Percentage of total capital			100	%			100	%
Total capital (total debt + shareholders' equity)		$	371,532			$	350,855

Operating Activities

Operating activities provided $27.2 million of cash in 2025 primarily from net earnings adjusted for non-cash items partially offset by a net increase in working capital. Working capital used $37.6 million of cash due to a $36.5 million increase in inventories and a $20.4 million increase in accounts receivable partially offset by a $19.3 million increase in accounts payable and accrued expenses. The increase in inventories was the result of higher average unit costs along with higher raw material purchases during 2025. The increase in accounts receivable was largely driven by higher average selling prices combined with an increase in shipments. The increase in accounts payable and accrued expenses was related to higher raw material purchases near the end of the period, higher unit costs, the timing of payments related to raw material purchases and an increase in accrued salaries, wages and related expenses.

Operating activities provided $58.2 million of cash in 2024 primarily from net earnings adjusted for non-cash items together with a net decrease in working capital. Working capital provided $18.9 million of cash due to a $14.5 million decrease in inventories and a $5.1 million reduction in accounts receivable partially offset by a $639,000 decrease in accounts payable and accrued expenses. The decrease in inventories was primarily due to lower average unit costs. The decrease in accounts receivable was largely driven by lower average selling prices.

We may elect to adjust our operating activities as there are changes in the conditions in our construction end-markets, which could materially impact our cash requirements. While a downturn in the level of construction activity affects sales to our customers, it generally reduces our working capital requirements.

Investing Activities

Investing activities used $75.7 million of cash in 2025, primarily due to the EWP Acquisition ($67.0 million), the OWP Acquisition ($5.1 million) and capital expenditures ($8.2 million) partially offset by the receipt of proceeds from the sale of assets held for sale ($5.0 million). Investing activities used $19.6 million of cash in 2024 primarily due to capital expenditures ($19.1 million) and an increase in the cash surrender value of life insurance policies ($517,000). Capital expenditures for both years focused on cost and productivity improvement initiatives in addition to recurring maintenance requirements. Capital expenditures are expected to total up to approximately $20.0 million in 2026, including expenditures to support cost and productivity initiatives, as well as recurring maintenance requirements. Our investing activities are largely discretionary, providing us with the ability to significantly curtail outlays should future business conditions warrant that such actions be taken.

Financing Activities

Financing activities used $24.4 million of cash in 2025 and $52.7 million of cash in 2024. In 2025, $21.8 million of cash was used for dividend payments (including a special cash dividend of $19.4 million, or $1.00 per share, and regular cash dividends totaling $2.4 million) and $2.3 million for the repurchase of common stock. In 2024, $50.9 million of cash was used for dividend payments (including a special cash dividend of $48.6 million, or $2.50 per share, and regular cash dividends totaling $2.3 million) and $1.8 million for the repurchase of common stock.

Cash Management

Our cash is principally concentrated at one major 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 Credit Facility that is used to supplement our operating cash flow and fund our working capital, capital expenditure, general corporate and growth requirements. In March 2023, we amended our credit agreement to extend the maturity date of the Credit Facility from May 15, 2024, to March 15, 2028 and replaced the London Inter-Bank Offered Rate with the Secured Overnight Financing Rate. The Credit Facility provides for an accordion feature whereby its size may be increased by up to $50.0 million, subject to our lender's approval. Advances under the Credit Facility are limited to the lesser of the revolving loan commitment amount (currently $100.0 million) or a borrowing base amount that is calculated based upon a percentage of eligible receivables and inventories. As of September 27, 2025, no borrowings were outstanding on the Credit Facility, $98.7 million of borrowing capacity was available and outstanding letters of credit totaled $1.3 million (see Note 8 to the consolidated financial statements). As of September 28, 2024, there were no borrowings outstanding on the Credit Facility.

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 defined 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

In addition to our discussion and analysis surrounding our liquidity and capital resources, our contractual obligations and commitments as of September 27, 2025, include:

●

Raw Material Purchase Commitments - See Note 12, "Commitments and Contingencies," within our consolidated financial statements for further details concerning our non-cancelable raw material purchase commitments.

●

Supplemental Employee Retirement Plan Obligations - See Note 11, "Employee Benefit Plans," within our consolidated financial statements for further detail of our obligations and the timing of expected future payments under our supplemental employee retirement plan.

●

Operating Leases - See Note 13, "Leases," within our consolidated financial statements for further detail of our obligations and the timing of expected future payments, including a five-year maturity schedule.

●

Debt Obligations and Interest Payments - See Note 8, "Long-Term Debt," within our consolidated financial statements for further detail of our debt and the timing of expected future principal and interest payments. As of September 27, 2025, there were no borrowings outstanding.

●

Capital Expenditures - As of September 27, 2025, we had contractual commitments for capital expenditures of $0.9 million.

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, labor, 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 2025, we were successful in implementing price increases sufficient to recover the escalation in our raw material costs that occurred over the course of the year. In 2024, wire rod prices increased during the first half of the year but declined in the latter half, primarily due to lower steel scrap costs for wire rod producers and softening demand. Selling prices for our products also decreased throughout 2024, driven by weak market demand, competitive pricing pressures and the impact of low-priced PC strand imports. These factors collectively had a negative impact on our financial performance. The timing and magnitude of any future increases in raw material costs and the impact on selling prices for our products are uncertain at this time.

Outlook

We enter fiscal 2026 with momentum, supported by operational improvements, recovering raw material availability and contributions from our recent acquisitions. Market conditions remain generally strong and stable, though residential construction continues to lag. Our recent acquisitions have already made meaningful contributions by expanding shipment volumes and strengthening our competitive position in key markets. These acquisitions, together with prior capital investments, are expected to continue driving value in the year ahead. Public nonresidential construction is expected to remain strong, supported by ongoing federal investment under the Infrastructure Investment and Jobs Act, which should sustain elevated project activity through fiscal 2026. At the same time, we are closely monitoring broader macroeconomic conditions which could weigh on customer sentiment and demand in the near term. Nevertheless, we remain cautiously optimistic about the outlook for fiscal 2026 and are confident in our long-term strategy.

Regardless of the market dynamics, we remain focused on the factors within our control. This includes disciplined expense management, capturing synergies from recent acquisitions and proactively aligning production schedules with evolving demand to optimize operating efficiency. We are also driving continuous improvements across our manufacturing, sales and administrative functions to enhance productivity and effectiveness. We expect increasing contributions from the substantial investments we have made in our facilities in recent years and expect to continue to make in the form of reduced operating costs and additional capacity to support future growth. Looking ahead, we will continue to evaluate acquisition opportunities that enhance our presence in markets we currently serve or expand our geographic footprint.

The statements contained in this section are forward-looking statements. See "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors".