Insteel Industries - 10-Q quarterly report FY

 

(Exact name of registrant as specified in its charter)

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.

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

     The number of shares outstanding of the registrant’s common stock as of May 1, 2007 was 18,281,257.

 

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except for per share data)
(Unaudited)

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

INSTEEL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
(Unaudited)

     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 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 United States have been condensed or omitted pursuant to such rules and regulations. These financial statements should therefore be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended September 30, 2006 included in the Company’s Annual Report on Form 10-K filed with the SEC.

     The accompanying unaudited interim consolidated financial statements included herein reflect all adjustments of a normal recurring nature that the Company considers necessary for a fair presentation of results for these interim periods. The results of operations for the three- and six-month periods ended March 31, 2007 are not necessarily indicative of the results that may be expected for the fiscal year ending September 29, 2007 or future periods.

     In April 2006, the Company decided to exit the industrial wire business with the closure of its Fredericksburg, Virginia facility which manufactured tire bead wire and other industrial wire for commercial and industrial applications. The Company’s decision was based on the weakening in the business outlook for the facility and the expected continuation of difficult market conditions and reduced operating levels. Manufacturing activities at the Virginia facility ceased in June 2006 and the Company is currently in the process of liquidating the remaining assets of the business.

     The Company has determined that the exit from the industrial wire business meets the criteria of a discontinued operation in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Accordingly, the results of operations and related non-recurring closure costs associated with the industrial wire business have been reported as discontinued operations for all periods presented. Additionally, the assets and liabilities of the discontinued operations have been segregated in the accompanying consolidated balance sheets.

     The following table summarizes the results of discontinued operations for the three- and six-month periods ended March 31, 2007 and April 1, 2006:

     Included within results from discontinued operations is an allocation of interest expense which was calculated based on the net assets of the industrial wire business relative to the consolidated net assets of the Company. Interest expense allocated to discontinued operations was $19,000 and $47,000 for the three- and six-month periods ended April 1, 2006, respectively.

     Assets and liabilities of discontinued operations as of March 31, 2007 and September 30, 2006 are as follows:

     As of March 31, 2007 and September 30, 2006 there was approximately $301,000 and $618,000, respectively, of accrued expenses and other liabilities related to ongoing lease obligations and closure-related liabilities incurred as a result of the Company’s exit from the industrial wire business.

     On May 16, 2006, the Board of Directors approved a two-for-one split of the Company’s common stock payable in the form of a stock dividend. The stock split entitled each shareholder of record on June 2, 2006 to receive one share of common stock for every outstanding share of common stock held on that date and was distributed on June 16, 2006. Unless otherwise indicated, the capital stock accounts and all share and earnings per share amounts in this report give effect to the stock split, applied retroactively, to all periods presented.

     Effective October 2, 2005, the Company began recording compensation expense associated with stock options and other forms of equity compensation in accordance with SFAS No. 123R, “Share-Based Payment” as interpreted by SEC Staff Accounting Bulletin No. 107. Previously the Company had accounted for stock options according to the provisions of Accounting Principals Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and therefore no related compensation expense was recorded for awards granted with no intrinsic value. The Company adopted the modified prospective transition method provided for under SFAS No. 123R and consequently has not retroactively adjusted results from prior periods. Under this transition method, (1) stock compensation expense associated with options granted on or after October 2, 2005 is recorded in accordance with the provisions of SFAS 123R; and (2) stock compensation expense associated with the remaining unvested portion of options granted prior to October 2, 2005 is recorded based on their grant date fair value estimated in accordance with the original provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.”

     The Company recorded $163,000 and $258,000 of compensation expense for stock options within selling, general and administrative expense for the three- and six- month periods ended March 31, 2007. In the prior year, the Company recorded $83,000 and $303,000 of compensation expense for the three- and six- month periods ended April 1, 2006.

     Prior to the adoption of SFAS No. 123R, the benefit of tax deductions in excess of recognized stock compensation expense was reported as a reduction of taxes paid within operating cash flow. SFAS No. 123R requires that such benefits be recorded as a financing cash flow. The Company recognized $59,000 and $314,000 of excess tax benefits for the six-month periods ended March 31, 2007 and April 1, 2006, respectively.

     Under the Company’s stock option 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. The fair value of each option award granted prior to October 1, 2005 was estimated on the date of grant using a Black-Scholes option-pricing model. With the adoption of SFAS 123R, the Company determined that it would use a Monte Carlo valuation model for options granted subsequent to October 1, 2005. The weighted average estimated fair value of stock options granted during the six months ended March 31, 2007 and April 1, 2006 was $8.21 and $7.58, respectively, based on the following weighted average assumptions:

     The assumptions utilized in the 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 is based on the U.S. Treasury yield curve in effect at the time of the grant. The dividend yield is calculated based on the Company’s annual dividend as of the option grant date. The expected volatility is derived using a term structure based on historical volatility and the volatility implied by exchange-traded options on the Company’s stock. The expected term for options is 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.

     As of March 31, 2007, there were 1,396,000 shares available for future grants under the Company’s equity incentive plans. The following table summarizes stock option activity for the six-month period ended March 31, 2007:

     As of March 31, 2007, there were $541,000 of unrecognized compensation costs remaining related to unvested awards, which are expected to be recognized over a weighted average period of 1.37 years. The total fair value of shares vested during the three-month period ended March 31, 2007 was $424,000.

     Restricted Stock Awards. During the six-month period ended March 31, 2007, the Company granted 44,508 shares of restricted stock to key employees which had a total market value of approximately $763,000 as of the grant date. The following table summarizes restricted stock activity during the six-month period ended March 31, 2007:

     The Company recorded amortization expense of $224,000 and $102,000 pertaining to the restricted stock for the three-month periods ended March 31, 2007 and April 1, 2006, respectively. For the six-month periods ended March 31, 2007 and April 1, 2006, the Company recorded $348,000 and $347,000 of amortization expense for restricted stock, respectively. The Company will continue to amortize the remaining unamortized balance over the vesting period of one to three years.

     The Company has recorded the following amounts for deferred income tax assets and accrued income taxes on its consolidated balance sheet as of March 31, 2007: a current deferred income tax asset of $1.4 million (net of valuation allowance) in prepaid expenses and other, a non-current deferred income tax asset of $1.8 million (net of valuation allowance) in other assets, accrued state income taxes payable of $661,000 in accrued expenses and $1.0 million of prepaid federal income taxes within prepaid expenses and other. The Company has $9.6 million of gross state operating loss carryforwards (“NOLs”) as of March 31, 2007 that begin to expire in six years, but principally expire in 13 — 17 years.

     The realization of the Company’s deferred income tax assets is entirely dependent upon the Company’s ability to generate future taxable income in applicable jurisdictions. Generally accepted accounting principles (“GAAP”) require that the Company periodically assess the need to establish a valuation allowance against its deferred income tax assets to the extent the Company no longer believes it is more likely than not that they will be fully utilized. As of March 31, 2007, the Company had recorded a valuation allowance of $601,000 pertaining to various state NOLs that were not anticipated to be utilized. The valuation allowance established by the Company is subject to periodic review and adjustment based on changes in facts and circumstances and would be reduced should the Company utilize the state NOLs against which an allowance had been provided or determine that such utilization is more likely than not.

     In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN No. 48”) which clarifies the criteria for the recognition and measurement of uncertain tax positions in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes.” FIN No. 48 is effective for the Company in fiscal 2008 and requires that the cumulative effect of applying its provisions be disclosed separately as a one-time, non-cash charge against the opening balance of retained earnings in the year of adoption. At this time, the Company has not determined what effect, if any, the adoption of FIN No. 48 will have on its financial position or results of operations.

     Retirement plans. The Company has one defined benefit pension plan, the Insteel Wire Products Company Retirement Income Plan for Hourly Employees, Wilmington, Delaware (the “Delaware Plan”). The Delaware Plan provides benefits for eligible employees based primarily upon years of service and compensation levels. The Company’s funding policy is to contribute amounts at least equal to those required by law. No contributions were made to the Delaware Plan during the three- and six-month periods ended March 31, 2007 and no contributions are expected to be made during the fiscal year ending September 29, 2007. The net periodic pension costs and related components for the Delaware Plan for the three- and six-month periods ended March 31, 2007 and April 1, 2006, respectively, are as follows:

     In connection with the collective bargaining agreement that was reached between the Company and the labor union at the Delaware facility in November 2004, the Delaware Plan was frozen whereby there will be no new plan participants. During the three months ended March 31, 2007, benefits under the Delaware plan were frozen in connection with the expiration of the previous collective bargaining agreement in November 2006 whereby participants will no longer earn additional benefits after January 1, 2007. Accordingly, a curtailment loss of $2,000 was recorded for the three-month period ended March 31, 2007.

     In September 2006, the FASB issued SFAS No. 158, “Employers Accounting for Defined Benefit Pension and Other Postretirement Plans.” SFAS No. 158 requires that an employer recognize the overfunded or underfunded status of a defined benefit postretirement plan in its statement of financial position and changes in the funded status in the year in which the changes occur through other comprehensive income. SFAS No. 158 also requires the measurement of defined benefit

plan assets and obligations as of the date of the employer’s fiscal year-end statement of financial position. The requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective for the Company beginning in fiscal 2007. The requirement to measure plan assets and benefit obligations as of the date of the fiscal year-end balance sheet is effective for the Company beginning in fiscal 2009. At this time, the Company is evaluating the impact, if any, the adoption of SFAS No. 158 will have on its financial position or results of operations.

     As of March 31, 2007, the Company had a $100.0 million revolving credit facility in place to supplement its operating cash flow in funding its working capital, capital expenditure and general corporate requirements. As of March 31, 2007, approximately $4.3 million was outstanding on the revolving credit facility, $53.8 million of additional borrowing capacity was available and outstanding letters of credit totaled $1.7 million.

     Advances under the credit facility are limited to the lesser of the revolving credit commitment or a borrowing base amount that is calculated based upon a percentage of eligible receivables and inventories plus, upon the Company’s request and subject to certain conditions, a percentage of eligible equipment and real estate. Interest rates on the revolver are based upon (1) a base rate that is established at the higher of the prime rate or 0.50% plus the federal funds rate, or (2) at the election of the Company, 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 revolver within the range of 0.00% — 0.50% for the base rate and 1.25% — 2.00% for the LIBOR rate. In addition, the applicable interest rate margins would be adjusted to the highest percentage indicated for each range upon the occurrence of certain events of default provided for under the credit facility. Based on the Company’s excess availability as of March 31, 2007, the applicable interest rate margins were 0.00% for the base rate and 1.25% for the LIBOR rate on the revolver.

     The Company’s ability to borrow available amounts under the revolving credit facility will be restricted or eliminated in the event of certain covenant breaches, events of default or if the Company is unable to make certain representations and warranties provided for in the credit agreement.

     Financial Covenants

     The terms of the credit facility require the Company to maintain a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of not less than: (1) 1.10 at the end of each fiscal quarter for the twelve-month period then ended when the amount of excess availability on the revolving credit facility is less than $10.0 million and the applicable borrowing base only includes eligible receivables and inventories; or (2) 1.15 at the end of each fiscal quarter for the twelve-month period then ended when the amount of excess availability on the revolving credit facility is less than $10.0 million and the applicable borrowing base includes eligible receivables, inventories, equipment and real estate. As of March 31, 2007, the Company was in compliance with all of the financial covenants under the credit facility.

     Negative Covenants

     In addition, the terms of the credit facility restrict the Company’s 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 the Company’s stock subject to certain minimum borrowing availability requirements; incur or assume indebtedness; issue securities; enter into certain transactions with affiliates of the Company; or permit liens to encumber the Company’s property and assets. As of March 31, 2007, the Company was in compliance with all of the negative covenants under the credit facility.

     Events of Default

     Under the terms of the credit facility, an event of default will occur with respect to the Company upon the occurrence of, among other things: a default or breach by the Company or any of its subsidiaries under any agreement resulting in the acceleration of amounts due in excess of $500,000 under such agreement; certain payment defaults by the Company or any of its subsidiaries in excess of $500,000; certain events of bankruptcy or insolvency with respect to the Company; an entry of judgment against the Company or any of its subsidiaries for greater than $500,000, which amount is not covered by insurance; or a change of control of the Company.

     The reconciliation of basic and diluted earnings per share (“EPS”) for the three- and six-month periods ended March 31, 2007 and April 1, 2006, respectively, are as follows:

     Options to purchase 66,000 shares and 55,000 shares for the three- and six-month periods ended March 31, 2007, respectively, were antidilutive and were not included in the diluted EPS calculation. Options to purchase 16,000 shares and 56,000 shares for the three- and six-month periods ended April 1, 2006, respectively, were antidilutive and were not included in the diluted EPS computations.

     Balance sheet information:

     Following the Company’s exit from the industrial wire business (see Note 2 to the consolidated financial statements), the Company’s operations are entirely focused on the manufacture and marketing of concrete reinforcing products, including welded wire reinforcement and prestressed concrete strand (“PC strand”), for the concrete construction industry. Based on the criteria specified in SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” the Company has one reportable segment. The results of operations for the industrial wire products business have been reported as discontinued operations for all periods presented.

          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,” “intends,” “may,” “should” 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, such forward-looking statements are subject to a number of risks and uncertainties, and we can provide no assurances that such plans, intentions or expectations will be implemented or achieved. All forward-looking statements are based on information that is current as of the date of this report. Many of these risks and uncertainties are discussed in detail, and where appropriate, updated in our periodic reports, in particular under the caption “Risk Factors” in our report on Form 10-K for the year ended September 30, 2006, filed with the U.S. Securities and Exchange Commission. You should read these risk factors carefully.

          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 and specifically decline 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.

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

     Following our exit from the industrial wire business (see Note 2 to the consolidated financial statements), our operations are entirely focused on the manufacture and marketing of concrete reinforcing products, including PC strand and

welded wire reinforcement for the concrete construction industry. The results of operations for the industrial wire products business have been reported as discontinued operations for all periods presented. Unless specifically indicated otherwise, all amounts and percentages presented in the management’s discussion and analysis are exclusive of discontinued operations.

Statements of Operations – Selected Data
(Dollars in thousands)

          Net sales for the second quarter of 2007 decreased 6.3% to $74.8 million from $79.8 million in the same year-ago period. Shipments for the quarter decreased 6.4% while average selling prices rose 0.2% from the prior year levels. The decrease in shipments was due to the continued weakness in demand from customers impacted by the reduction in residential construction activity and adverse winter weather conditions in certain of our markets during the quarter.

          Gross profit for the second quarter of 2007 decreased 27.2% to $12.4 million, or 16.5% of net sales from $17.0 million, or 21.3% of net sales in the same year-ago period. The decrease in gross profit was due to the reduction in shipments, higher raw material costs and higher unit manufacturing costs resulting from reduced operating schedules.

          Selling, general and administrative expense for the second quarter of 2007 increased 3.2% to $4.6 million, or 6.1% of net sales from $4.5 million, or 5.6% of net sales in the same year-ago period. The increase was primarily due to higher compensation expense ($417,000) which was partially offset by lower consulting ($203,000), and employee benefit costs ($179,000).

          Interest expense for the second quarter of 2007 was relatively flat at $154,000 compared with $151,000 in the same year-ago period.

          Our effective income tax rate for the second quarter of 2007 decreased to 35.9% from 36.9% in the same year-ago period. The reduction was primarily due to a higher permanent difference in the prior year for nondeductible stock option expense and a lower effective state tax rate within the current period.

     Earnings from continuing operations for the second quarter of 2007 decreased 37.0% to $4.9 million, or $0.27 per diluted share from $7.8 million, or $0.42 per diluted share in the same year-ago period primarily due to the lower sales and gross profit.

     The loss from discontinued operations for the second quarter of fiscal 2007 decreased to $31,000 or $0.00 per diluted share from $444,000, or $0.02 per diluted share in the same year-ago period. The current year loss was related to the non-recurring closure costs associated with our exit from the industrial wire business and closure of our Fredericksburg, Virginia manufacturing facility. The prior year loss reflects the operating losses incurred by the industrial wire business.

     Net earnings for the second quarter of 2007 decreased 33.6% to $4.9 million, or $0.27 per diluted share from $7.4 million, or $0.40 per diluted share in the same year-ago period primarily due to the lower sales and gross profit.

     Net sales for the first half of 2007 decreased 7.0% to $144.5 million from $155.4 million in the same year-ago period. Shipments for the first half of 2007 decreased 7.4% while average selling prices rose 0.4% from the prior year levels. The decrease in shipments was due to the continued weakness in demand from customers impacted by the reduction in residential construction activity and adverse winter weather conditions in certain of our markets during the period.

     Gross profit for the first half of 2007 decreased 23.8% to $26.0 million, or 18.0% of net sales from $34.1 million, or 21.9% of net sales in the same year-ago period. The decrease in gross profit was due to the reduction in shipments, higher raw material costs and higher unit manufacturing costs resulting from reduced operating schedules.

     Selling, general and administrative expense for the first half of 2007 increased 3.1% to $8.8 million, or 6.1% of net sales from $8.6 million, or 5.5% of net sales in the same year-ago period. The increase was primarily due to higher compensation expense ($519,000) which was partially offset by lower employee benefit costs ($303,000).

     Other income for the first half of 2007 decreased to $50,000 from $229,000 in the same year-ago period. The income for the prior year was primarily comprised of $128,000 of duties related to the dumping and countervailing duty cases that were filed by a coalition of domestic PC strand producers which included us.

     Interest expense for the first half of 2007 decreased $88,000, or 22.9%, to $296,000 from $384,000 in the same year-ago period. The decrease was due to lower average outstanding balances on the revolving credit facility in the current period together with lower amortization expense associated with capitalized financing costs.

     Our effective income tax rate for the first half of 2007 decreased to 36.6% from 37.7% in the same year-ago period. The reduction was primarily due to a higher permanent difference in the prior year for nondeductible stock option expense and a lower effective state tax rate within the current period.

     Earnings from continuing operations for the first half of 2007 decreased 31.4% to $10.9 million, or $0.59 per diluted share from $15.9 million, or $0.85 per diluted share in the same year-ago period primarily due to the lower sales and gross profit.

     The loss from discontinued operations for the first half of fiscal 2007 decreased to $183,000 or $0.01 per diluted share from $779,000 or $0.04 per diluted share in the same year-ago period. The current year loss was related to the non-recurring closure costs associated with our exit from the industrial wire business and closure of our Fredericksburg, Virginia manufacturing facility. The prior year loss reflects the operating losses incurred by the industrial wire business.

     Net earnings for the first half of 2007 decreased 29.1% to $10.7 million, or $0.58 per diluted share from $15.1 million, or $0.81 per diluted share in the same year-ago period primarily due to the lower sales and gross profit.

Selected Financial Data
(Dollars in thousands)

     Operating activities of continuing operations used $5.7 million of cash for the first half of 2007 while providing $22.9 million in the same year-ago period. The decrease was largely due to a $23.4 million reduction in cash provided by the net change in the working capital components of receivables, inventories, and accounts payable and accrued liabilities together with a $5.0 million decrease in earnings from continuing operations. Net working capital used $19.6 million in the current year while providing $3.8 million in the prior year largely due to the $16.5 million decrease in accounts payable and accrued expenses in the current year together with the $4.5 million reduction in inventories. The decrease in accounts payable and accrued expenses resulted from payments related to higher raw material purchases made in the first quarter and early in the second quarter in anticipation of future price increases followed by a significant reduction in purchases later in the period. In comparison, accounts payable and accrued expenses increased by $15.6 million during the prior year primarily related to the $13.6 million increase in inventories.

     Investing activities of continuing operations used $8.1 million of cash for the first half of 2007 compared to $8.8 million in the same year-ago period. Capital expenditures amounted to $7.5 million for the current year largely due to capital outlays associated with our ESM and PC strand expansions, various upgrades to our Florida PC strand operation and Delaware welded wire reinforcing facility, and recurring maintenance requirements. Capital expenditures are expected to total $18.0 million for 2007 and decline to a maintenance range of $3.0 to $5.0 million beginning in 2008. The actual timing

of these expenditures as well as the amounts are subject to change based on adjustments in project timelines, future market conditions, our financial performance and additional growth opportunities that may arise.

     Financing activities of continuing operations provided $3.5 million of cash for the first half of 2007 while using $17.2 million in the same year-ago period. The year-to-year change was largely due to the $11.9 million reduction in long-term debt and the $8.5 million of share repurchases in the prior year. Cash provided by financing activities in the current year resulted from borrowings on the revolving credit facility to fund operating activities, capital expenditures and cash dividends.

     As of March 31, 2007, we had a $100.0 million revolving credit facility in place to supplement our operating cash flow in funding our working capital, capital expenditure and general corporate requirements. As of March 31, 2007, approximately $4.3 million was outstanding on the revolving credit facility, $53.8 million of additional borrowing capacity was available and outstanding letters of credit totaled $1.7 million.

     Our total debt-to-capital ratio decreased slightly to 3.1% at March 31, 2007 from 3.5% at April 1, 2006. We believe that, in the absence of significant unanticipated cash demands, net cash generated by operating activities and amounts available under our revolving credit facility will be sufficient to satisfy our expected requirements for working capital, capital expenditures, dividends and share repurchases, if any.

     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.

     Our contractual obligations and commitments have not materially changed since September 30, 2006.

     Our financial statements have been prepared in accordance with accounting policies generally accepted in the United States. Our discussion and analysis of our financial condition and results of operations are based on these financial statements. The preparation of our financial statements requires the application of these accounting policies in addition to certain estimates and judgments based on current available information, actuarial estimates, historical results and other assumptions believed to be reasonable. Actual results could differ from these estimates.

     The following critical accounting policies are used in the preparation of the financial statements:

     Revenue recognition and credit risk. We recognize revenue from product sales in accordance with Staff Accounting Bulletin (“SAB”) No. 104 when products are shipped and risk of loss and title has passed to the customer. Substantially all of our accounts receivable are due from customers that are located in the United States and we generally require no collateral depending upon the creditworthiness of the account. We provide an allowance for doubtful accounts based upon our assessment of the credit risk of specific customers, historical trends and other information. There is no disproportionate concentration of credit risk.

     Allowance for doubtful accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to change significantly, adjustments to the allowances may be required. While we believe our recorded trade receivables will be collected, in the event of default in payment of a trade receivable, we would follow normal collection procedures.

     Excess and obsolete inventory reserves. We write down the carrying value of our inventory for estimated obsolescence to reflect the lower of the cost of the inventory or its estimated net realizable value based upon assumptions about future demand and market conditions. If actual market conditions for our products are substantially different than our projections, adjustments to these reserves may be required.

     Accruals for self-insured liabilities and litigation. We accrue estimates of the probable costs related to self-insured medical and workers’ compensation claims and legal matters. These estimates have been developed in consultation with actuaries, our legal counsel and other advisors and are based on our current understanding of the underlying facts and circumstances. Because of uncertainties related to the ultimate outcome of these issues as well as the possibility of changes in the underlying facts and circumstances, adjustments to these reserves may be required in the future.

     We expect that the favorable demand trend for nonresidential construction, which drives an estimated 80% of our sales, will continue through the remainder of 2007 and be augmented by: (1) higher government spending for infrastructure-related construction associated with the recent enactment of the transportation funding authorization at the federal level together with the improved fiscal positions of most states and (2) the post-hurricane reconstruction that will be required in the Gulf region of the U.S.

     At the same time, the downturn in housing-related markets, which represents an estimated 20% of our sales, significantly reduced shipments during the first half of the year and is now expected to continue through the remainder of 2007. In addition, increasing imports of PC strand and continued escalation in raw material costs could compress margins depending upon the strength of future demand and our ability to recover these additional costs in our markets.

     Despite these near-term challenges, we expect that business conditions will improve as we move into the second half of 2007 and support the maintenance of gross margins and spreads at attractive levels. We recently announced price increases across all of our product lines which should favorably impact our third-quarter results. We also expect gradually increasing contributions from our expansion initiatives in the form of reduced operating costs and additional volume as we progress through 2007 in view of the start-ups of our Tennessee PC strand and North Carolina ESM expansions during the first quarter followed by the expected start-up of our Texas ESM expansion during the fourth quarter. In addition to these organic growth initiatives, we are continually evaluating potential acquisitions in existing or related products that further our penetration in current markets served or expand our geographic presence. We anticipate that these actions, together with the positive overall outlook for our markets, should have a favorable impact on our financial performance through the remainder of 2007 (see “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors”).

     Our cash flows and earnings are subject to fluctuations resulting from changes in commodity prices, interest rates and foreign exchange rates. We manage our exposure to these market risks through internally established policies and procedures and, when deemed appropriate, through the use of derivative financial instruments. We do not use financial instruments for trading purposes and we are not a party to any leveraged derivatives. We monitor our underlying market risk exposures on an ongoing basis and believe that we can modify or adapt our hedging strategies as necessary.

     We do not generally use derivative commodity instruments to hedge our exposures to changes in commodity prices. Our principal commodity price exposure is hot-rolled carbon steel wire rod, our primary raw material, which we purchase from both domestic and foreign suppliers and is denominated in U.S. dollars. We negotiate quantities and pricing for both domestic and foreign steel wire rod purchases for varying periods (most recently monthly for domestic suppliers), depending upon market conditions, to manage our exposure to price fluctuations and to ensure adequate availability of material consistent with our requirements. Our ability to acquire steel wire rod from foreign sources on favorable terms is impacted by fluctuations in foreign currency exchange rates, foreign taxes, duties, tariffs and other trade actions. Although changes in wire rod costs and our selling prices may be correlated over extended periods of time, depending upon market conditions, there may be periods during which we are unable to fully recover increased rod costs through higher selling prices, which reduces our gross profit and cash flow from operations.

     We have debt obligations that are sensitive to changes in interest rates under our senior secured credit facility. However, at March 31, 2007, the outstanding balance on the credit facility was $4.3 million and, accordingly, changes in interest rates are not expected to materially impact us unless our borrowings were to materially increase.

     We have not typically hedged foreign currency exposures related to transactions denominated in currencies other than U.S. dollars, as such transactions have not been material in the past. We will occasionally hedge firm commitments for certain equipment purchases that are denominated in foreign currencies. The decision to hedge any such transactions is made by us on a case-by-case basis. There were no forward contracts outstanding as of March 31, 2007.

     We have conducted an evaluation of the effectiveness of our disclosure controls and procedures as of March 31, 2007, the end of the period covered by this report. This evaluation was conducted under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, we have concluded that these disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports filed by us and submitted under the Securities Exchange Act of 1934, as amended (“the Exchange Act”) is recorded, processed, summarized and reported as and when required. Further we concluded that our disclosure controls and procedures have been designed to ensure that information required to be disclosed in reports filed by us under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, in a manner to allow timely decisions regarding the required disclosure.

     There has been no change in our internal control over financial reporting that occurred during the quarter ended March 31, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

     There are no material changes from the risk factors set forth under Part I, Item 1A. “Risk Factors” in our Form 10-K for the fiscal year ended September 30, 2006. You should carefully consider these factors in addition to the other information set forth in this report which could materially affect our business, financial condition or future results. The risks described in this report and in our Form 10-K for the year ended September 30, 2006 are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

     On January 10, 2007, our Board of Directors authorized the repurchase of up to $25.0 million of our outstanding common stock over a period of up to twelve months ending January 5, 2008. During the six months ended March 31, 2007, we did not repurchase any of our common stock under the repurchase program or otherwise.

     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 suspended at any time at our discretion.

     The Company held its 2007 Annual Meeting of Shareholders on February 13, 2007. The Company’s shareholders elected three directors to serve three-year terms ending in 2010. Voting results were as follows:

a. Exhibits:

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.