INSTEEL INDUSTRIES INC (IIIN)

Item 7. 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.

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. 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.

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Results of Operations

The following discussion and analysis of our financial condition and results of operations is for the year ended September 28, 2024 compared with the year ended September 30, 2023. Discussions of our financial condition and results of operations for the year ended September 30, 2023 compared to October 1, 2022 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 30, 2023, which was filed with the SEC on October 26, 2023.

The table below presents a summary of our results of operations for fiscal 2024 and fiscal 2023.

Statements of Operations – Selected Data

(Dollars in thousands)

"N/M" = not meaningful

2024 Compared with 2023

Net Sales

Net sales decreased 18.5% to $529.2 million in 2024 from $649.2 million in 2023 driven entirely by a decrease in average selling prices as shipments remained relatively flat. The decrease in average selling prices was driven by persistent competitive pricing pressures in our welded wire reinforcing markets, the impact of low-priced PC strand and a decline in raw material costs. Shipments for the current year were adversely impacted by weaker market conditions, increasing volumes of PC strand imports and adverse weather conditions.

Gross Profit

Gross profit decreased 24.1% to $49.6 million, or 9.4% of net sales, in 2024 from $65.4 million, or 10.1% of net sales, in 2023. The year-over-year decrease was primarily due to lower spreads between average selling prices and raw material costs ($16.6 million) partially offset by lower manufacturing costs ($782,000). The decrease in spreads was driven by lower average selling prices ($119.7 million) partially offset by lower raw material costs ($102.8 million) and a decrease in freight expense ($291,000).

Selling, General and Administrative Expense

Selling, general and administrative expense (“SG&A expense”) decreased 3.6% to $29.6 million, or 5.6% of net sales, in 2024 from $30.7 million, or 4.7% of net sales, in 2023 primarily due to lower compensation expense ($1.4 million) and the relative year-over-year changes in the cash surrender value of life insurance policies ($1.0 million) partially offset by higher depreciation ($569,000) and bad debt ($350,000) expense. The decrease in compensation expense was largely driven by lower incentive plan expense due to a decline in financial results in the current year. The cash surrender value of life insurance policies increased $1.5 million in the current year compared with $531,000 in the prior year due to the corresponding changes in the value of the underlying investments. The increase in depreciation expense was attributed to higher capital expenditures during the current year. The higher bad debt expense resulted from adjustments to customer credit reserves.

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Other Expense (Income), net

Other expense was $37,000 for 2024 compared with other income of $3.4 million in 2023. Other income in the prior year was primarily related to a net gain from the sale of property, plant and equipment ($3.3 million).

Interest Income

Interest income increased $1.7 million due to higher average cash balances and interest rates.

Income Taxes

Our effective income tax rate for 2024 increased to 23.7% from 22.4% in 2023, primarily due to an adjustment to state income tax expense and an increase in the valuation allowance for a deferred tax asset that is not expected to be utilized.

Net Earnings

Net earnings decreased to $19.3 million ($0.99 per share) in 2024 from $32.4 million ($1.66 per share) in 2023, primarily due to the decrease in gross profit and other income partially offset by lower SG&A expense and increased interest income.

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 28, 2024, our cash and cash equivalents totaled $111.5 million compared with $125.7 million as of September 30, 2023.

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.

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Selected Liquidity and Capital Resources Data

(Dollars in thousands)

Operating Activities

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.

Operating activities provided $142.2 million of cash in 2023 primarily from net earnings adjusted for non-cash items together with a net decrease in working capital. Working capital provided $95.6 million of cash due to a $94.3 million decrease in inventories and an $18.2 million reduction in accounts receivable partially offset by a $16.9 million decrease in accounts payable and accrued expenses. The decrease in inventories was primarily due to lower raw material purchases along with 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 lower raw material purchases, lower unit costs and a reduction in accrued incentive plan expense.

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 $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). Investing activities used $20.9 million of cash in 2023 primarily due to capital expenditures ($30.7 million) partially offset by the receipt of proceeds from the sale of property, plant and equipment ($9.9 million). 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 $22.0 million in 2025, including expenditures 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 should future business conditions warrant that such actions be taken.

Financing Activities

Financing activities used $52.7 million of cash in 2024 and $44.0 million of cash in 2023. 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. In 2023, $41.3 million of cash was used for dividend payments (including a special cash dividend of $38.9 million, or $2.00 per share, and regular cash dividends totaling $2.4 million) and $2.3 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.

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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 28, 2024, no borrowings were outstanding on the Credit Facility, $98.5 million of borrowing capacity was available and outstanding letters of credit totaled $1.5 million (see Note 8 to the consolidated financial statements). As of September 30, 2023, 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 28, 2024, include:

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.

After initially rising in the first half of 2024, wire rod prices declined during the latter part of the year due to reductions in the cost of steel scrap for wire rod producers and weakening demand. Selling prices for our products declined during 2024 in response to weak demand, competitive pricing pressures and the impact of low-priced PC strand imports, which negatively impacted our financial results. During 2023, we experienced a decline in wire rod prices primarily due to reductions in the cost of scrap for wire producers and a concurrent weakening in demand. Selling prices for our products fell in response to the softening demand and competitive pricing pressure. Consequently, our financial results were adversely affected as we consumed higher cost inventory that was purchased in prior periods. The timing and magnitude of any future increases in raw material costs and the impact on selling prices for our products is uncertain at this time.

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Outlook

Looking ahead to fiscal 2025, we expect our financial results will be favorably impacted by the improving business conditions in our construction end markets. Although recent key indicators and industry forecasts for nonresidential construction spending have been somewhat mixed, customer sentiment is generally positive, and easing inflation concerns and the downward trajectory of interest rates will likely stimulate demand going forward. Furthermore, the outlook for public nonresidential construction is favorable, as federal spending associated with the Infrastructure Investment and Jobs Act is expected to drive new project activity in fiscal 2025 and beyond. We also expect our financial results for the coming year to benefit from our recent acquisition of EWP through the anticipated operational synergies upon completion of integration activities.

Regardless of the market dynamics, we continue to focus on those factors we control, including closely managing and controlling our expenses; aligning our production schedules with demand in a proactive manner as there are changes in market conditions to minimize our operating costs; pursuing further improvements in the productivity and effectiveness of all our manufacturing, selling and administrative activities; and furthering our human capital strategy. 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. Finally, we will continue to pursue acquisitions opportunistically to expand our penetration of markets we currently serve or expand our footprint.

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

Item 7. 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.

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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. 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 30, 2023 compared with the year ended October 1, 2022. Discussions of our financial condition and results of operations for the year ended October 1, 2022 compared to October 2, 2021 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 October 1, 2022, which was filed with the SEC on October 27, 2022.

The table below presents a summary of our results of operations for fiscal 2023 and fiscal 2022.

Statements of Operations – Selected Data

(Dollars in thousands)

2023 Compared with 2022

Net Sales

Net sales decreased 21.5% to $649.2 million in 2023 from $826.8 million in 2022, reflecting a 17.1% decrease in selling prices along with a 5.3% decrease in shipments. The decrease in average selling prices was driven by competitive pricing pressures resulting from weakening demand for our products and declining raw material costs. The decrease in shipments was due to reduced demand resulting from inventory management measures pursued by our customers during the fiscal year and a decrease in new project activity.

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Gross Profit

Gross profit decreased 66.9% to $65.4 million, or 10.1% of net sales, in 2023 from $197.3 million, or 23.9% of net sales, in 2022. The year-over-year decrease was primarily due to lower spreads between average selling prices and raw material costs ($105.7 million) along with a decrease in shipments ($11.8 million) and higher manufacturing costs ($14.4 million). The decrease in spreads was driven by lower average selling prices ($129.7 million) and an increase in freight expense ($1.4 million) partially offset by lower raw material costs ($25.4 million).

Selling, General and Administrative Expense

Selling, general and administrative expense (“SG&A expense”) decreased 14.9% to $30.7 million, or 4.7% of net sales, in 2023 from $36.0 million, or 4.4% of net sales, in 2022 primarily due to lower compensation ($2.9 million), the relative year-over-year changes in the cash surrender value of life insurance policies ($2.4 million) and depreciation expense ($577,000) partially offset by higher employee benefit expense ($489,000). The decrease in compensation expense was largely driven by lower incentive plan expense due to a decline in financial results in the current year. The cash surrender value of life insurance policies increased $531,000 in the current year compared with a decrease of $1.9 million in the prior year due to the corresponding changes in the value of the underlying investments. The increase in employee benefits expense was due to a net gain on the settlement of life insurance policies ($364,000) in the prior year along with higher employee health insurance costs in the current year period.

Other (Income) Expense, net

Other income of $3.4 million for 2023 was primarily related to a net gain from the sale of property, plant and equipment ($3.3 million).

Interest Income

Interest income increased to $3.7 million due to an increase in cash and higher average interest rates.

Income Taxes

Our effective income tax rate for 2023 decreased to 22.4% from 22.7% in 2022 due to changes in book versus tax differences.

Net Earnings

Net earnings decreased to $32.4 million ($1.66 per share) in 2023 from $125.0 million ($6.37 per diluted share) in 2022, primarily due to the decrease in gross profit partially offset by lower SG&A expense and increased other income and interest income.

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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 30, 2023, our cash and cash equivalents totaled $125.7 million compared with $48.3 million as of October 1, 2022.

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)

Operating Activities

Operating activities provided $142.2 million of cash in 2023 primarily from net earnings adjusted for non-cash items together with a net decrease in working capital. Working capital provided $95.6 million of cash due to a $94.3 million decrease in inventories and an $18.2 million reduction in accounts receivable partially offset by a $16.9 million decrease in accounts payable and accrued expenses. The decrease in inventories was primarily due to lower raw material purchases along with 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 lower raw material purchases, lower unit costs and a reduction in accrued incentive plan expense.

Operating activities provided $5.7 million of cash in 2022 primarily from net earnings adjusted for non-cash items partially offset by an increase in working capital. Working capital used $134.3 million of cash due to a $118.6 million increase in inventories, a $13.7 million increase in accounts receivable and a $2.0 million decrease in accounts payable and accrued expenses. The increase in inventories was the result of higher raw material purchases during 2022 together with higher average unit costs. The increase in accounts receivable was due to higher average selling prices. The decrease in accounts payable and accrued expenses was primarily related to lower raw material purchases near the end of the current year.

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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 $20.9 million of cash in 2023 primarily due to capital expenditures ($30.7 million) partially offset by the receipt of proceeds from the sale of property, plant and equipment ($9.9 million). Investing activities used $6.0 million of cash in 2022 primarily due to capital expenditures ($15.9 million) partially offset by the receipt of proceeds from the sale of assets held for sale ($6.9 million), life insurance claims ($1.5 million) and a decrease in cash surrender value of life insurance policies ($1.4 million). 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 $30.0 million in 2024, including expenditures to support costs and productivity initiatives, modernize our facilities and information systems and 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 $44.0 million of cash in 2023 and $41.2 million of cash in 2022. In 2023, $41.3 million of cash was used for dividend payments (including a special cash dividend of $38.9 million, or $2.00 per share, and regular cash dividends totaling $2.4 million) and $2.3 million for the repurchase of common stock. In 2022, $41.2 million of cash was used for dividend payments (including a special cash dividend of $38.8 million, or $2.00 per share, and regular cash dividends totaling $2.4 million) and $1.2 million for the repurchase of common stock, which was partially offset by $1.7 million of proceeds from the exercise of stock options.

Cash Management

Our cash is principally concentrated at one 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 30, 2023, no borrowings were outstanding on the Credit Facility, $98.5 million of borrowing capacity was available and outstanding letters of credit totaled $1.5 million (see Note 8 to the consolidated financial statements). As of October 1, 2022, 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 30, 2023, include:

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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 2023, we experienced a decline in wire rod prices primarily due to reductions in the cost of scrap for wire producers and a concurrent weakening in demand. Selling prices for our products fell in response to the softening demand and competitive pricing pressure. Consequently, our financial results were adversely affected as we consumed higher cost inventory that was purchased in prior periods. During 2022, 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. The timing and magnitude of any future increases in raw material costs and the impact on selling prices for our products is uncertain at this time.

Outlook

Looking ahead to fiscal 2024, we are aware of the risks associated with higher interest rates and the implications for the broader U.S. economy and, ultimately, our end markets. Nevertheless, we remain optimistic about demand in our private and public nonresidential construction markets as customer sentiment is mostly positive. Furthermore, the outlook for infrastructure construction remains favorable as federal spending associated with the Infrastructure Investment and Jobs Act is expected to accelerate as we progress through fiscal 2024 and help drive demand.

Regardless of the market dynamics, we continue to focus on those factors we control, including closely managing and controlling our expenses; aligning our production schedules with demand in a proactive manner as there are changes in market conditions to minimize our operating costs; pursuing further improvements in the productivity and effectiveness of all our manufacturing, selling and administrative activities: and furthering our human capital strategy. 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. Finally, we will continue to pursue acquisitions opportunistically to expand our penetration of markets we currently serve or expand our footprint.

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

Item 7. 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.

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On March 16, 2020, we, through our wholly-owned subsidiary, IWP, purchased substantially all of the assets of STM for an adjusted purchase price of $19.4 million, which reflects certain post-closing adjustments. STM was a leading manufacturer of PC strand for concrete construction applications. We acquired, among other assets, STM’s accounts receivable, inventories, production equipment and facility located in Summerville, South Carolina and assumed certain of its accounts payable and accrued liabilities. Subsequent to the acquisition, we elected to consolidate our PC strand operations with the closure of the Summerville facility.

Impact of COVID-19

Despite the significant disruption in the U.S. and global economies, including supply chain challenges and labor market obstacles, COVID-19 has had a limited impact on our operations to date. We continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business and the potential effect on our financial position, results of operations and cash flows.

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. 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 October 1, 2022 compared with the year ended October 2, 2021. Discussions of our financial condition and results of operations for the year ended October 2, 2021 compared to October 3, 2020 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 October 2, 2021, which was filed with the SEC on October 27, 2021.

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The table below presents a summary of our results of operations for fiscal 2022 and fiscal 2021.

Statements of Operations – Selected Data

(Dollars in thousands)

2022 Compared with 2021

Net Sales

Net sales increased 40.0% to $826.8 million in 2022 from $590.6 million in 2021, reflecting a 51.9% increase in selling prices partially offset by a 7.8% decrease in shipments. The increase in average selling prices was driven by price increases implemented in the current year to recover the escalation in raw material costs. The decrease in shipments was due to tight supply conditions for raw materials during the first half of the current year followed by inventory management measures pursued by our customers and weakness in residential construction activity in the latter half of the year.

Gross Profit

Gross profit increased 62.3% to $197.3 million, or 23.9% of net sales, in 2022 from $121.5 million, or 20.6% of net sales, in 2021. The year-over-year increase was primarily due to higher spreads between average selling prices and raw material costs ($94.2 million) partially offset by higher manufacturing costs ($9.2 million) and a decrease in shipments ($9.2 million). The increase in spreads was driven by higher average selling prices ($282.0 million) partially offset by higher raw material costs ($181.9 million) and freight expense ($5.9 million).

Selling, General and Administrative Expense

Selling, general and administrative expense (“SG&A expense”) increased 11.3% to $36.0 million, or 4.4% of net sales, in 2022 from $32.4 million, or 5.5% of net sales, in 2021 primarily due to relative year-over-year changes in the cash surrender value of life insurance policies ($3.4 million), higher compensation ($948,000), travel ($423,000) and insurance ($265,000) expense partially offset by the lower legal ($1.8 million) and employee benefit ($321,000) expense. The cash surrender value of life insurance policies decreased $1.9 million in the current year compared with an increase of $1.5 million in the prior year due to the corresponding changes in the value of the underlying investments. The increase in compensation expense was largely driven by higher incentive and stock-based compensation expense. The decrease in legal expense was primarily related to costs associated with trade matters incurred in the prior year. The decrease in employee benefits expense was due to a net gain on the settlement of life insurance policies ($364,000) in the current year.

Restructuring (Recoveries) Charges, Net

Net restructuring recoveries of $318,000 were incurred in 2022 related to the closure of the Summerville, South Carolina facility, which had been acquired through the STM Acquisition, and the consolidation of our PC strand operations. Net restructuring recoveries in 2022 included a gain on sale of the Summerville facility ($622,000) partially offset by facility closure costs ($304,000). Net restructuring charges of $2.9 million were incurred in the prior year which included asset impairment charges ($1.4 million), facility closure costs ($1.0 million), equipment relocation costs ($423,000) and employee separation costs ($13,000).

Income Taxes

Our effective income tax rate for 2022 increased to 22.7% from 22.6% in 2021 due to changes in book versus tax differences.

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Net Earnings

Net earnings increased to $125.0 million ($6.37 per diluted share) in 2022 from $66.6 million ($3.41 per diluted share) in 2021 primarily due to the increase in gross profit and the change in net restructuring (recoveries) charges partially offset by higher SG&A expense.

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 October 1, 2022, our cash and cash equivalents totaled $48.3 million compared with $89.9 million as of October 2, 2021.

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)

Operating Activities

Operating activities provided $5.7 million of cash in 2022 primarily from net earnings adjusted for non-cash items partially offset by an increase in working capital. Working capital used $134.3 million of cash due to a $118.6 million increase in inventories, a $13.7 million increase in accounts receivable and a $2.0 million decrease in accounts payable and accrued expenses. The increase in inventories was the result of higher raw material purchases during 2022 together with higher average unit costs. The increase in accounts receivable was due to higher average selling prices. The decrease in accounts payable and accrued expenses was primarily related to lower raw material purchases near the end of the current year.

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Operating activities provided $69.9 million of cash in 2021 primarily from net earnings adjusted for non-cash items partially offset by an increase in working capital. Working capital used $12.3 million of cash due to a $14.1 million increase in accounts receivable and a $10.1 million increase in inventories partially offset by an $11.9 million increase in accounts payable and accrued expenses. The increase in accounts receivable and inventories were due to the escalation in raw material costs and average selling prices during 2021. The increase in accounts payable and accrued expenses was primarily related to raw material purchases with higher unit costs near the end of the period and, to a lesser extent, increases in accrued salaries, wages and related expenses and income taxes.

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 $6.0 million of cash in 2022 primarily due to capital expenditures ($15.9 million) partially offset by the receipt of proceeds from the sale of assets held for sale ($6.9 million), life insurance claims ($1.5 million) and a decrease in cash surrender value of life insurance policies ($1.4 million). Investing activities used $17.8 million of cash in 2021 primarily due to capital expenditures ($17.5 million) and an increase in the cash surrender value of life insurance policies ($0.4 million). 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 $30.0 million in 2023, which include expenditures primarily to advance the growth of our engineered structural mesh business and to support cost and productivity improvement 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 $41.2 million of cash in 2022 and $30.9 million of cash in 2021. In 2022, $41.2 million of cash was used for dividend payments (including a special cash dividend of $38.8 million, or $2.00 per share, and regular cash dividends totaling $2.4 million) and $1.2 million for the repurchase of common stock, which was partially offset by $1.7 million of proceeds from the exercise of stock options. In 2021, $31.3 million of cash was used for dividend payments (including a special cash dividend of $29.0 million, or $1.50 per share, and regular cash dividends totaling $2.3 million), which was partially offset by $1.1 million of proceeds from the exercise of stock options.

Cash Management

Our cash is principally concentrated at one 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 May 2019, we entered into a new credit agreement, which amended and restated in its entirety the previous agreement pertaining to the revolving credit facility that had been in effect since June 2010. The new credit agreement, among other changes, extended the maturity date of the Credit Facility from May 13, 2020 to May 15, 2024 and provided for an 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 October 1, 2022, no borrowings were outstanding on the Credit Facility, $98.6 million of borrowing capacity was available and outstanding letters of credit totaled $1.4 million (see Note 8 to the consolidated financial statements). As of October 2, 2021, 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.

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Contractual Obligations

In addition to our discussion and analysis surrounding our liquidity and capital resources, our contractual obligations and commitments as of October 1, 2022, include:

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 2022 and 2021, we were successful in implementing price increases sufficient to recover the escalation in our raw material costs that occurred over the course of each year. The timing and magnitude of any future increases in raw material costs and the impact on selling prices for our products is uncertain at this time.

Outlook

Looking ahead to fiscal 2023, we are optimistic about demand in both our private and public nonresidential construction markets. Backlogs across our customer base remain solid and widely monitored leading market indicators in private nonresidential construction point to continued expansion. Public nonresidential construction markets should benefit from incremental demand from both the strong financial position of state budgets and funding by the Infrastructure Investment and Jobs Act. Weakness in the residential construction market and heightened uncertainty regarding the future direction of the overall economy are areas we are closely monitoring, but we believe our strong balance sheet and flexible operating model position us to navigate challenges we may encounter.

Regardless of the market dynamics, we continue to focus on those factors we control: closely managing and controlling our expenses; aligning our production schedules with demand in a proactive manner as there are changes in market conditions to minimize our operating costs; pursuing further improvements in the productivity and effectiveness of all our manufacturing, selling and administrative activities: and furthering our human capital strategy. We also expect gradually increasing contributions from the substantial investments we have made in our facilities in the form of reduced operating costs and additional capacity to support future growth. Finally, we will continue to pursue acquisitions opportunistically in our existing businesses that expand our penetration of markets we currently serve or expand our footprint.

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

Item 7. 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.

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On March 16, 2020, we, through our wholly-owned subsidiary, IWP, purchased substantially all of the assets of STM for an adjusted purchase price of $19.4 million, which reflects certain post-closing adjustments. STM was a leading manufacturer of PC strand for concrete construction applications. We acquired, among other assets, STM’s accounts receivable, inventories, production equipment and facility located in Summerville, South Carolina and assumed certain of its accounts payable and accrued liabilities. Subsequent to the acquisition, we elected to consolidate our PC strand operations with the closure of the Summerville facility.

Impact of COVID-19

Despite the significant disruption in the U.S. and global economies, including supply chain challenges and labor market obstacles, COVID-19 has had a limited impact on our operations to date. We have implemented procedures to support the health and safety of our employees and we are following all U.S. Centers for Disease Control and Prevention guidelines. While the U.S. economy appears to be entering a recovery and operating conditions are improving, we continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business and the potential effect on our financial position, results of operations, and cash flows. There are many uncertainties regarding the future and ultimate impact that COVID-19 will have on all aspects of our business. We will continue to assess and make adjustments as necessary.

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 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 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 October 2, 2021 compared with the year ended October 3, 2020. Discussions of our financial condition and results of operations for the year ended October 3, 2020 compared to September 28, 2019 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 October 3, 2020, which was filed with the SEC on October 29, 2020.

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The table below presents a summary of our results of operations for fiscal 2021 and fiscal 2020.

Statements of Operations – Selected Data

(Dollars in thousands)

"N/M"= Not meaningful

2021 Compared with 2020

Net Sales

Net sales increased 25.0% to $590.6 million in 2021 from $472.6 million in 2020, reflecting a 25.7% increase in selling prices partially offset by a 0.6% decrease in shipments. The increase in average selling prices was driven by price increases implemented in the current year primarily to recover the escalation in raw material costs together with strong demand for our products. Shipments for the prior year benefited from an extra week based on our fiscal calendar. On a pro forma basis adjusting the prior year to reflect the same 52-week period as 2021, the year-over-year shipment increase was 1.6%. The pro forma increase in shipments was primarily due to improved market conditions, the additional business provided by the STM Acquisition and strengthening demand for our products relative to the prior year, which offset the impact on shipments resulting from sustained tight supply conditions for raw materials. Shipments for both years were not materially impacted by the COVID-19 pandemic.

Gross Profit

Gross profit increased 117.9% to $121.5 million, or 20.6% of net sales, in 2021 from $55.8 million, or 11.8% of net sales, in 2020. The year-over-year increase was primarily due to higher spreads between average selling prices and raw material costs ($73.2 million) partially offset by higher manufacturing costs ($7.0 million) and a decrease in shipments ($436,000). The increase in spreads was driven by higher average selling prices ($122.2 million) partially offset by higher raw material costs ($46.7 million) and freight expense ($2.3 million).

Selling, General and Administrative Expense

Selling, general and administrative expense (“SG&A expense”) increased 3.3% to $32.4 million, or 5.5% of net sales, in 2021 from $31.3 million, or 6.6% of net sales, in 2020 primarily due to higher compensation ($3.5 million) and legal expense ($392,000) offset by the relative year-over-year changes in the cash surrender value of life insurance policies ($1.3 million) and lower earnout expense ($1.4 million). The increase in compensation expense was largely driven by higher incentive plan expense due to our improved financial results in the current year. The increase in legal expense was primarily related to costs associated with trade matters. The decrease in earnout expense was due to the revaluation of a contingent earnout liability in the prior year.

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Restructuring Charges, Net

Net restructuring charges of $2.9 million were incurred in 2021 compared with $1.7 million in the prior year. The net restructuring charges were related to the closure of the Summerville, South Carolina facility, which had been acquired through the STM Acquisition, and consolidation of our PC strand operations. Net restructuring charges in 2021 included asset impairment charges ($1.4 million), facility closure costs ($1.0 million), equipment relocation costs ($423,000) and employee separation costs ($13,000). The net restructuring charges incurred in the prior year were for facility closure costs ($806,000), equipment relocation costs ($482,000), impairment charges related to the decommissioning of equipment ($343,000) and employee separation costs ($182,000). These charges were partially offset by a $118,000 gain from the sale of equipment associated with the Summerville facility.

Acquisition Costs

Acquisition costs of $195,000 were incurred in 2020 for legal, accounting and other professional fees related to the STM Acquisition. There were no acquisition costs incurred in 2021.

Other Expense (Income), Net

Other expense was $114,000 for 2021 compared with other income of $1.3 million in 2020. Other income in the prior year was primarily related to a gain from the disposition of assets held for sale.

Income Taxes

Our effective income tax rate for 2021 increased to 22.6% from 21.4% in 2020 due to a discrete tax benefit recorded in the prior year in connection with the net operating loss carryback provisions of the Coronavirus Aid, Relief and Economic Security Act, which was enacted in March 2020.

Net Earnings

Net earnings increased to $66.6 million ($3.41 per diluted share) in 2021 from $19.0 million ($0.98 per diluted share) in 2020 primarily due to the increase in gross profit partially offset by higher SG&A expense and restructuring charges associated with the consolidation of our PC strand operations.

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 October 2, 2021, our cash and cash equivalents totaled $89.9 million compared with $68.7 million as of October 3, 2020.

Selected Financial Data

(Dollars in thousands)

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Operating Activities

Operating activities provided $69.9 million of cash in 2021 primarily from net earnings adjusted for non-cash items partially offset by an increase in working capital. Working capital used $12.3 million of cash due to a $14.1 million increase in accounts receivable and a $10.1 million increase in inventories partially offset by an $11.9 million increase in accounts payable and accrued expenses. The increase in accounts receivable and inventories were due to the escalation in raw material costs and average selling prices during 2021. The increase in accounts payable and accrued expenses was primarily related to raw material purchases with higher unit costs near the end of the period and, to a lesser extent, increases in accrued salaries, wages and related expenses and income taxes.

Operating activities provided $56.2 million of cash in 2020 primarily from net earnings adjusted for non-cash items together with decrease in working capital. Working capital provided $19.4 million of cash due to a $20.2 million increase in accounts payable and accrued expenses and a $5.1 million decrease in inventories partially offset by a $5.8 million increase in accounts receivable. The increase in accounts payable and accrued expenses was primarily related to higher raw material purchases near the end of the year together with increases in accrued salaries, wages and related expenses, earnout liability and income taxes. The decrease in inventories was primarily driven by lower unit costs partially offset by higher raw material purchases. The increase in accounts receivable was primarily related to higher shipments partially offset 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 $17.8 million of cash in 2021 primarily due to capital expenditures ($17.5 million) and an increase in the cash surrender value of life insurance policies ($0.4 million). Investing activities used $23.2 million of cash in 2020 primarily due to the STM Acquisition ($18.4 million) and capital expenditures ($7.1 million) partially offset by the receipt of proceeds from the sale of assets held for sale ($2.2 million). 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 $25.0 million in 2022, which include expenditures primarily to advance the growth of our engineered structural mesh business and to support cost and productivity improvement 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 $30.9 million of cash in 2021 and $2.5 million of cash in 2020. In 2021, $31.3 million of cash was used for dividend payments (including a special cash dividend of $29.0 million, or $1.50 per share, and regular cash dividends totaling $2.3 million), which was partially offset by $1.1 million of proceeds from the exercise of stock options. In 2020, $2.3 million of cash was used for dividend payments.

Cash Management

Our cash is principally concentrated at one 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 May 2019, we entered into a new credit agreement, which amended and restated in its entirety the previous agreement pertaining to the revolving credit facility that had been in effect since June 2010. The new credit agreement, among other changes, extended the maturity date of the Credit Facility from May 13, 2020 to May 15, 2024 and provided for an 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 October 2, 2021, no borrowings were outstanding on the Credit Facility, $98.6 million of borrowing capacity was available and outstanding letters of credit totaled $1.4 million (see Note 8 to the consolidated financial statements). As of October 3, 2020, there were no borrowings outstanding on the Credit Facility.

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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. 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.

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 October 2, 2021, include:

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 2021, 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 2020, selling prices for our products declined in response to low-priced import competition, which negatively impacted our financial results. The timing and magnitude of any future increases in raw material costs and the impact on selling prices for our products is uncertain at this time.

Outlook

Looking ahead to fiscal 2022, we expect continued robust demand in our construction markets. The economic recovery along with sustained favorable forecasts from widely monitored leading market indicators in private non-residential construction and a resilient public construction market are supporting our optimism in the demand outlook. We also believe there is a possibility that Congress and the Administration will successfully negotiate an infrastructure investment plan that may benefit our markets, although the ultimate size and timing of any improvements are not possible to project.

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The supply shortage and escalating prices for steel wire rod, our primary raw material, remains a key concern. In addition, critically tight labor markets are expected to continue to negatively affect our operations. These challenges may impact our ability to meet fully our customer demand and result in plant operating inefficiencies and customer service delays. We expect to continue passing the rising costs through the supply chain, but we would anticipate margins returning to more normalized levels once the raw materials markets stabilize. Additionally, our markets and operations remain vulnerable to the lingering impact of COVID-19.

Regardless of the market dynamics, we continue to focus on those factors we control: closely managing and controlling our expenses; 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 gradually increasing contributions from the substantial investments we have made in our facilities in the form of reduced operating costs and additional capacity to support future growth. Finally, we will continue to pursue acquisitions opportunistically in our existing businesses that expand our penetration of markets we currently serve or expand our footprint.

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