Quarterly Report for Quarter Ending June 28, 2025 (Form 10-Q)

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

Cautionary Note Regarding Forward-Looking Statements

This report contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, particularly under the caption "Outlook" below. When used in this report, the words "believes," "anticipates," "expects," "estimates," "appears," "plans," "intends," "may," "should," "could," "outlook," "continues," "remains" and similar expressions are intended to identify forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, they are subject to numerous risks and uncertainties and involve certain assumptions. Actual results may differ materially from those expressed in forward-looking statements, and we can provide no assurances that such plans, intentions or expectations will be implemented or achieved. Many of these risks and uncertainties are discussed in detail and, where appropriate, updated in our filings with the U.S. Securities and Exchange Commission ("SEC"), in particular in our Annual Report on Form 10-K for the fiscal year ended September 28, 2024 (our "2024 Annual Report"). You should carefully review these risks and uncertainties.

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. All forward-looking statements speak only to the respective dates on which such statements are made, and we do not undertake any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events, except as may be required by law.

It is not possible to anticipate and list all risks and uncertainties that may affect our business, future operations or financial performance; however, they include, but are not limited to, the following:

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general economic and competitive conditions in the markets in which we operate, including uncertainty over global trade policies and the financial impact of related tariffs and retaliatory tariffs;

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changes in the spending levels for nonresidential and residential construction and the impact on demand for our products;

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changes in the amount and duration of transportation funding provided by federal, state and local governments and the impact on spending for infrastructure construction and demand for our products;

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the cyclical nature of the steel and building material industries;

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credit market conditions and the relative availability of financing for us, our customers and the construction industry as a whole;

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the impact of rising interest rates on the cost of financing for our customers;

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fluctuations in the cost and availability of our primary raw material, hot-rolled carbon steel wire rod, from domestic and foreign suppliers;

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competitive pricing pressures and our ability to raise selling prices in order to recover increases in raw material or operating costs;

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changes in U.S. or foreign trade policy affecting imports or exports of steel wire rod or our products;

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

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the impact of fluctuations in demand and capacity utilization levels on our unit manufacturing costs;

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our ability to further develop the market for engineered structural mesh ("ESM") and expand our shipments of ESM;

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legal, environmental, economic or regulatory developments that significantly impact our business or operating costs;

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unanticipated plant outages, equipment failures or labor difficulties;

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the impact of cybersecurity breaches and data leaks; and

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the risks and uncertainties discussed under "Risk Factors" in our 2024 Annual Report and in other filings made by us with the SEC.

Overview

Insteel Industries Inc. ("we," "us," "our," "the Company" or "Insteel") is the nation's largest manufacturer of steel wire reinforcing products for concrete construction applications. We manufacture and market prestressed concrete strand ("PC strand") and welded wire reinforcement ("WWR"), including ESM, concrete pipe reinforcement and standard welded wire reinforcement. Our products are sold primarily to manufacturers of concrete products that are used in nonresidential construction. We market our products through sales representatives who are our employees. We sell our products nationwide across the U.S. and, to a much lesser extent, into Canada, Mexico and Central and South America, shipping them primarily by truck, using common or contract carriers. Our business strategy is focused on: (1) achieving leadership positions in our markets; (2) operating as the lowest cost producer in our industry; and (3) pursuing growth opportunities within our core businesses that further our penetration of the markets we currently serve or expand our footprint.

On October 21, 2024, we, through our wholly-owned subsidiary, Insteel Wire Products Company ("IWP"), purchased substantially all of the assets, other than cash and accounts receivable, of Engineered Wire Products, Inc. ("EWP") and certain related assets of Liberty Steel Georgetown, Inc. ("LSG") for an adjusted purchase price of $67.0 million (the "EWP Acquisition"). 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 located in Georgetown, South Carolina. 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 O'Brien Wire Products of Texas, Inc. ("OWP") for a purchase price of $5.1 million (the "OWP Acquisition"). OWP was a manufacturer of WWR products for use in nonresidential and residential construction. We acquired certain of OWP's inventories and all of the 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.

Results of Operations

Statements of Operations - Selected Data

(Dollars in thousands)

		Three Months Ended												Nine Months Ended
		June 28,								June 29,				June 28,								June 29,
		2025				Change				2024				2025				Change				2024
Net sales		$	179,886				23.4	%		$	145,775			$	470,262				19.1	%		$	394,894
Gross profit			30,772				100.0	%			15,388				64,830				73.5	%			37,373
Percentage of net sales			17.1	%							10.6	%			13.8	%							9.5	%
Selling, general and administrative expense		$	10,607				34.6	%		$	7,879			$	29,294				32.4	%		$	22,121
Percentage of net sales			5.9	%							5.4	%			6.2	%							5.6	%
Restructuring charges, net		$	843			N/M				$	-			$	2,201			N/M				$	-
Acquisition costs			27			N/M					-				325			N/M					-
Interest income			(472	)			(62.1%	)			(1,245	)			(1,574	)			(61.1%	)			(4,051	)
Effective income tax rate			23.3	%							24.7	%			23.4	%							23.9	%
Net earnings		$	15,159				130.9	%		$	6,565			$	26,470				80.9	%		$	14,636

"N/M" = not meaningful

Third Quarter of Fiscal 2025 Compared to Third Quarter of Fiscal 2024

Net Sales

Net sales for the third quarter of 2025 increased 23.4% to $179.9 million from $145.8 million in the prior year quarter, reflecting an 11.7% increase in average selling prices and a 10.5% increase in shipments. The increase in average selling prices was driven by price increases implemented to recover the escalation in raw material costs. 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.

Gross Profit

Gross profit for the third quarter of 2025 increased 100.0% to $30.8 million, or 17.1% of net sales, from $15.4 million, or 10.6% of net sales, in the prior year quarter due to higher spreads between average selling prices and raw material costs ($16.1 million) and an increase in shipments ($1.7 million) partially offset by higher manufacturing costs ($2.4 million). The increase in spreads was driven by higher average selling prices ($17.9 million) partially offset by an increase in freight expense ($1.0 million) and higher raw material costs ($780,000).

Selling, General and Administrative Expense

Selling, general and administrative expense ("SG&A expense") for the third quarter of 2025 increased 34.6% to $10.6 million, or 5.9% of net sales, from $7.9 million, or 5.4% of net sales, in the prior year quarter primarily due to higher compensation expense ($2.7 million) and amortization expense associated with intangible assets ($292,000) partially offset by the relative year-over-year change in the cash surrender value of life insurance policies ($487,000). The increase in compensation expense was largely driven by higher incentive plan expense due to our improved financial results in the current year quarter. The increase in amortization expense was primarily attributed to the intangible assets that were acquired in connection with our first quarter acquisitions. The cash surrender value of life insurance policies increased $458,000 in the current year quarter compared with a decrease of $29,000 in the prior year quarter due to the corresponding changes in the value of the underlying investments.

Restructuring Charges, Net

Restructuring charges of $843,000 were incurred in the third quarter of 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 $408,000 for asset impairment charges, $267,000 for equipment relocation costs and $168,000 for facility closure costs.

Interest Income

Interest income decreased $773,000 from the prior year quarter due to lower average cash balances and interest rates.

Income Taxes

Our effective tax rate for the third quarter of 2025 decreased to 23.3% from 24.7% for the prior year quarter primarily due to changes in state income taxes treated as discrete in the prior year period.

Net Earnings

Net earnings for the third quarter of 2025 increased to $15.2 million ($0.78 per share) from $6.6 million ($0.34 per share) in the prior year quarter primarily due to the increase in gross profit partially offset by higher SG&A expense, restructuring charges and lower interest income.

First Nine Months of Fiscal 2025 Compared to First Nine Months of Fiscal 2024

Net Sales

Net sales for the first nine months of 2025 increased 19.1% to $470.3 million from $394.9 million in the prior year period, reflecting a 16.5% increase in shipments and a 2.2% increase in average selling prices. The increase in shipments was driven by increased demand in our construction end markets compared to the prior year and the incremental volume generated from our current year acquisitions. The increase in average selling prices was driven by price increases implemented to recover the escalation in raw material costs.

Gross Profit

Gross profit for the first nine months of 2025 increased 73.5% to $64.8 million, or 13.8% of net sales, from $37.4 million, or 9.5% of net sales, in the prior year period. The year-over-year increase was primarily due to higher spreads between average selling prices and raw material costs ($19.3 million), an increase in shipments ($6.8 million) and other material costs and adjustments ($3.3 million) partially offset by higher manufacturing costs ($2.0 million). The increase in spreads was driven by lower raw material costs ($13.0 million) and higher average selling prices ($7.3 million) partially offset by an increase in freight expense ($1.0 million).

Selling, General and Administrative Expense

SG&A expense for the first nine months of 2025 increased 32.4% to $29.3 million, or 6.2% of net sales, from $22.1 million, or 5.6% of net sales, in the prior year period primarily due to higher compensation expense ($4.9 million), the relative year-over-year change in the cash surrender value of life insurance policies ($877,000), higher amortization expense associated with intangible assets ($810,000) and an increase in employee benefit expense ($485,000). The increase in compensation expense was largely driven by higher incentive plan expense due to our improved financial results in the current year period. The cash surrender value of life insurance policies increased $152,000 in the current year period compared to $1.0 million in the prior year period 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 period.

Restructuring Charges, Net

Restructuring charges of $2.2 million were incurred in the first nine months of 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, $604,000 for facility closure costs, $345,000 for equipment relocation costs and $251,000 for employee separation costs.

Acquisition Costs

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

Interest Income

Interest income decreased $2.5 million due to lower average cash balances and interest rates.

Income Taxes

Our effective tax rate for the first nine months of 2025 decreased to 23.4% from 23.9% for the prior year period primarily due to changes in book versus tax differences.

Net Earnings

Net earnings for the first nine months of 2025 increased to $26.5 million ($1.35 per diluted share) from $14.6 million ($0.75 per share) in the prior year period primarily due to the increase in gross profit partially offset by higher SG&A expense, lower interest income, restructuring charges and acquisition costs.

Liquidity and Capital Resources

Selected Financial Data

(Dollars in thousands)

		Nine Months Ended
		June 28,				June 29,
		2025				2024
Net cash provided by operating activities		$	44,170			$	41,978
Net cash used for investing activities			(78,811	)			(17,874	)
Net cash used for financing activities			(23,232	)			(52,029	)
Net working capital			173,817				212,409
Total debt			-				-
Percentage of total capital			-				-
Shareholders' equity		$	356,208			$	346,015
Percentage of total capital			100.0	%			100.0	%
Total capital (total debt + shareholders' equity)		$	356,208			$	346,015

Operating Activities

Operating activities provided $44.2 million of cash during the first nine months of 2025 primarily from net earnings adjusted for non-cash items partially offset by a net increase in working capital. Working capital, net of adjustments for assets and liabilities acquired, used $0.2 million of cash due to a $24.9 million increase in accounts receivable and a $17.9 million increase in inventories partially offset by a $42.6 million increase in accounts payable and accrued expenses. The increase in accounts receivable was largely driven by higher average selling prices combined with an increase in shipments. The increase in inventories was the result of higher raw material purchases near the end of the period together with higher average unit costs. The increase in accounts payable and accrued expenses was related to higher raw material purchases near the end of the period, higher unit costs and an increase in accrued salaries, wages and related expenses.

Operating activities provided $42.0 million of cash during the first nine months of 2024 primarily from net earnings adjusted for non-cash items together with a net decrease in working capital. Working capital provided $13.6 million of cash due to a $13.9 million decrease in inventories and a $2.2 million reduction in accounts receivable partially offset by a $2.5 million 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. The decrease in accounts payable and accrued expenses was largely due to a reduction in accrued salaries, wages and related expenses.

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

Investing Activities

Investing activities used $78.8 million of cash during the first nine months of 2025 compared to $17.9 million during the prior year period primarily due to the EWP Acquisition ($67.0 million) and the OWP Acquisition ($5.1 million) partially offset by lower capital expenditures ($11.0 million). Capital expenditures decreased to $6.5 million from $17.5 million in the prior year period and are expected to total up to approximately $11.0 million for fiscal 2025. Capital expenditures for fiscal 2025 are to support costs and productivity initiatives as well as recurring maintenance requirements.

Our investing activities are largely discretionary, providing us with the ability to significantly curtail outlays when warranted based on business conditions.

Financing Activities

Financing activities used $23.2 million of cash during the first nine months of 2025 compared to $52.0 million during the prior year period. During the first nine months of 2025, $21.2 million of cash was used for dividend payments (including a special dividend of $19.4 million, or $1.00 per share, and regular quarterly dividends totaling $1.8 million, or $0.09 per share) and $2.0 million for the repurchase of common stock. During the first nine months of 2024, $50.4 million of cash was used for dividend payments (including a special dividend of $48.6 million, or $2.50 per share, and regular quarterly dividends totaling $1.8 million, or $0.09 per share) 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 $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 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 June 28, 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 10 to the consolidated financial statements).

We believe that, in the absence of significant unanticipated funding requirements, 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 the Credit Facility as required. However, should we experience future reductions in our operating cash flows due to weakening conditions in our construction end-markets and reduced demand from our customers, we may need to curtail capital and operating expenditures, cease dividend payments, delay or restrict share repurchases and/or realign our working capital requirements.

Should we determine, at any time, that we require additional short-term liquidity, we would evaluate the alternative sources of financing potentially available to provide such funding. There can be no assurance that any such financing, if pursued, would be obtained, or if obtained, would be adequate or on terms acceptable to us. However, we believe that our strong balance sheet, flexible capital structure and borrowing capacity available to us under our Credit Facility position us to meet our anticipated liquidity requirements for the foreseeable future, including the next 12 months.

Seasonality and Cyclicality

Demand in our markets is both seasonal and cyclical, driven by the level of construction activity, but can also be impacted by fluctuations in the inventory positions of our customers. Shipments are seasonal, typically reaching their highest level when weather conditions are the most conducive to construction activity. As a result, assuming normal seasonal weather patterns, shipments and profitability are usually higher in the third and fourth quarters of the fiscal year and lower in the first and second quarters. Construction activity and demand for our products are cyclical based on overall economic conditions, although there can be significant differences between the relative strength of nonresidential and residential construction for extended periods.

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 rates, freight, energy and other consumables that are used in our manufacturing processes. We have generally been able to adjust our selling prices to pass through increases in these costs or offset them through various cost reduction and productivity improvement initiatives. However, our ability to raise our selling prices depends on market conditions and competitive dynamics, and there may be periods during which we are unable to fully recover increases in our costs. During the first nine months of 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 period. The timing and magnitude of any future increases in our raw material costs and the selling prices for our products are uncertain at this time.

Contractual Obligations

There have been no material changes in our contractual obligations and commitments as disclosed in our 2024 Annual Report other than those which occur in the ordinary course of business.

Critical Accounting Estimates

Our Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our unaudited financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information. The preparation of our financial statements requires the application of these accounting principles in addition to certain estimates and judgments based on current available information, actuarial estimates, historical results and other assumptions believed to be reasonable. These estimates, assumptions and judgments are affected by our application of accounting policies, which are discussed in our 2024 Annual Report. 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. Actual results could differ from these estimates. Please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates" included in our 2024 Annual Report for further information regarding our critical accounting policies and estimates. As of June 28, 2025, none of our accounting estimates were deemed to be critical for the accounting periods presented, which is consistent with our assessment of critical accounting estimates disclosed in our 2024 Annual Report.

Recent Accounting Pronouncements

Refer to Note 2 of the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report for recently issued accounting pronouncements including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements.

Outlook

As we enter the fourth quarter of fiscal 2025, we remain confident in our business outlook. Demand for our reinforcing products has improved, and recent acquisitions are making a meaningful contribution to our performance. Customer sentiment remains positive, even as broader macroeconomic indicators for construction suggest a more cautious environment. In the near term, we expect favorable conditions to support increased shipments, improved operating rates, and lower unit manufacturing costs across our facilities. Looking ahead, the outlook for public nonresidential construction remains strong, supported by ongoing federal investment through the Infrastructure Investment and Jobs Act, which is expected to drive elevated project activity through the remainder of 2025 and beyond.

As noted last quarter, a positive development from the Trump Administration's recent trade actions was the expansion of Section 232 tariffs to include derivative steel products such as PC strand, helping to mitigate the impact of low-priced PC strand imports that have challenged the U.S. market since 2018. The Administration's unexpected decision in June to double the tariff to 50% provides further support in leveling the competitive playing field, although the basis for calculating the tariff has changed and the Section 232 steel tariff will apply only to the "steel content" of the tariffed product. There is considerable ambiguity surrounding the language and intent of the Executive Order that needs to be resolved by the Administration. Higher tariffs together with recent reductions in domestic wire rod capacity, have tightened North American supply and added upward pressure on raw material costs. Looking ahead, we are closely monitoring the evolving trade landscape which could affect offshore purchases of capital equipment, spare parts, and operating supplies. Given this uncertainty, we remain focused on disciplined pricing strategies and active management of our tariff exposure, to the extent we can forecast tariff exposure. The sharp escalation in costs we have experienced for raw materials and other operating inputs will require our industry to increase selling prices to recover higher costs. We believe we will be successful in this effort.

Regardless of the market dynamics, we continue to focus on those factors we control, including closely managing and controlling our expenses; realizing synergies from our recent acquisitions; aligning our production schedules with demand in a proactive manner as there are changes in market conditions to minimize our operating costs; and pursuing further improvements in the productivity and effectiveness of all our manufacturing, selling and administrative activities. We also 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".