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INSTEEL INDUSTRIES INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) 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; and (3) pursuing growth opportunities within our core businesses that further our penetration of the markets we currently serve or expand our geographic footprint. On August 15, 2014, we, through our wholly-owned subsidiary, IWP, purchased substantially all of the assets associated with the PC strand business of ASW for an adjusted purchase price of $33.9 million, subject to certain additional post-closing adjustments. ASW manufactured PC strand at facilities located in Houston, Texas and Newnan, Georgia (see Note 4 to the consolidated financial statements). We acquired, among other assets, the accounts receivable and inventories related to ASW's PC strand business, the production equipment at its facility in Houston, Texas and its production equipment and facility in Newnan, Georgia. We also entered into an agreement pursuant to which we lease the Houston facility from ASW with an option to purchase it in the future. Critical Accounting Policies Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). 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 principles 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. Following is a discussion of our most critical accounting policies, which are those that are both important to the depiction of our financial condition and results of operations and that require judgments, assumptions and estimates. Revenue recognition. We recognize revenue from product sales when products are shipped and risk of loss and title has passed to the customer. Sales taxes collected from customers are recorded on a net basis and as such, are excluded from revenue. 12-------------------------------------------------------------------------------- Concentration of credit risk. Financial instruments that subject us to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. Our cash is concentrated primarily at one financial institution, which at times exceeds federally insured limits. We are exposed to credit risk in the event of default by institutions in which our cash and cash equivalents are held and by customers to the extent of the amounts recorded on the balance sheet. We invest excess cash primarily in money market funds, which are highly liquid securities that bear minimal risk. Most of our accounts receivable are due from customers that are located in the U.S. 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 potential inability of our customers to make required payments on outstanding balances owed to us. Significant management judgments and estimates are used in establishing the allowances. These judgments and estimates consider such factors as customers' financial position, cash flows and payment history as well as current and expected business conditions. It is reasonably likely that actual collections will differ from our estimates, which may result in increases or decreases in the allowances. Adjustments to the allowances may also be required if there are significant changes in the financial condition of our customers. Inventory valuation. We periodically evaluate the carrying value of our inventory. This evaluation includes assessing the adequacy of allowances to cover losses in the normal course of operations, providing for excess and obsolete inventory, and ensuring that inventory is valued at the lower of cost or estimated net realizable value. Our evaluation considers such factors as the cost of inventory, future demand, our historical experience and market conditions. In assessing the realization of inventory values, we are required to make judgments and estimates regarding future market conditions. Because of the subjective nature of these judgments and estimates, it is reasonably likely that actual outcomes will differ from our estimates. Adjustments to these reserves may be required if actual market conditions for our products are substantially different than the assumptions underlying our estimates. Long-lived assets. We review long-lived assets, which consist principally of property, plant and equipment and finite-lived intangibles, for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be fully recoverable. Recoverability of long-lived assets to be held and used is measured based on the future net undiscounted cash flows expected to be generated by the related asset or asset group. If it is determined that an impairment loss has been incurred, the impairment loss is recognized in the period in which it is incurred and is calculated based on the difference between the carrying value and the present value of estimated future net cash flows or comparable market values. Assets to be disposed of by sale are recorded at the lower of carrying value or fair value less selling cost when we have committed to a disposal plan, and are reported separately as assets held for sale on our balance sheet. Unforeseen events and changes in circumstances and market conditions could negatively affect the value of assets and result in an impairment charge. Goodwill. Goodwill is tested annually for impairment and whenever events or circumstances change that would make it more likely than not that an impairment may have occurred. We perform our annual impairment analysis as of the first day of the fourth quarter each fiscal year, which involves comparing the current estimated fair value of each reporting unit to its recorded value, including goodwill. We will perform a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. It may be necessary to perform a quantitative analysis where a discounted cash flow model is used to determine the current estimated fair value of the reporting unit. Key assumptions used to determine the fair value of the reporting unit as part of our annual testing (and any required interim testing) include: (a) expected cash flow for the five-year period following the testing date; (b) an estimated terminal value using a terminal year growth rate based on the growth prospects of the reporting unit; (c) a discount rate based on our estimated after-tax weighted average cost of capital; and (d) a probability-weighted scenario approach by which varying cash flows are assigned to alternative scenarios based on their likelihood of occurrence. In developing these assumptions, we consider historical and anticipated future results, general economic and market conditions, the impact of planned business and operational strategies and all available information at the time the fair value of the reporting unit is estimated. We will monitor operating results within the reporting unit throughout the upcoming year to determine if events or changes in circumstances warrant any interim impairment testing. Otherwise, the reporting unit will be subject to the required annual impairment test during our fourth quarter of fiscal 2015. Changes in the judgments and estimates underlying our analysis of goodwill for possible impairment, including the expected future operating cash flows and discount rate, could reduce the estimated fair value of our reporting unit in the future and result in an impairment of goodwill. 13 -------------------------------------------------------------------------------- Self-insurance. We are self-insured for certain losses relating to medical and workers' compensation claims. Self-insurance claims filed and claims incurred but not reported are accrued based upon our estimates of the discounted ultimate cost for uninsured claims incurred using actuarial assumptions followed by the insurance industry and historical experience. These estimates are subject to a high degree of variability based upon future inflation rates, litigation trends, changes in benefit levels and claim settlement patterns. Because of uncertainties related to these factors as well as the possibility of changes in the underlying facts and circumstances, future adjustments to these reserves may be required. Litigation. From time to time, we may be involved in claims, lawsuits and other proceedings. The eventual outcome of such matters and the potential losses that we may ultimately incur are subject to a high degree of uncertainty. We record expenses for litigation when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We estimate the probability of such losses based on the advice of legal counsel, the outcome of similar litigation, the status of the lawsuits and other factors. Due to the numerous factors that enter into these judgments and assumptions, it is reasonably likely that actual outcomes will differ from our estimates. We monitor our potential exposure to these contingencies on a regular basis and may adjust our estimates as additional information becomes available or as there are significant developments. Stock-based compensation. We account for stock-based compensation arrangements, including stock option grants, restricted stock awards and restricted stock units, in accordance with the provisions of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 718, Compensation - Stock Compensation. Under these provisions, compensation cost is recognized based on the fair value of equity awards on the date of grant. The compensation cost is then amortized on a straight-line basis over the vesting period. We use the Monte Carlo valuation model to determine the fair value of stock options at the date of grant, which requires us to make assumptions such as expected term, volatility and forfeiture rates to determine the stock options' fair value. These assumptions are based on historical information and judgment regarding market factors and trends. If actual results differ from our assumptions and judgments used in estimating these factors, future adjustments to these estimates may be required. Assumptions for employee benefit plans. We account for our defined employee benefit plans, the Insteel Wire Products Company Retirement Income Plan for Hourly Employees, Wilmington, Delaware (the "Delaware Plan") and the supplemental employee retirement plans (each, a "SERP") in accordance with FASB ASC Topic 715, Compensation - Retirement Benefits. Under the provisions of ASC Topic 715, we recognize net periodic pension costs and value pension assets or liabilities based on certain actuarial assumptions, principally the assumed discount rate and the assumed long-term rate of return on plan assets. The discount rates we utilize for determining net periodic pension costs and the related benefit obligations for our plans are based, in part, on current interest rates earned on long-term bonds that receive one of the two highest ratings assigned by recognized rating agencies. Our discount rate assumptions are adjusted as of each valuation date to reflect current interest rates on such long-term bonds. The discount rates are used to determine the actuarial present value of the benefit obligations as of the valuation date as well as the interest component of the net periodic pension cost for the following year. The discount rate for the Delaware Plan and SERPs was 4.25%, 4.75% and 4.00% for 2014, 2013 and 2012, respectively. The assumed long-term rate of return on plan assets for the Delaware Plan represents the estimated average rate of return expected to be earned on the funds invested or to be invested in the plan's assets to fund the benefit payments inherent in the projected benefit obligations. Unlike the discount rate, which is adjusted each year based on changes in current long-term interest rates, the assumed long-term rate of return on plan assets will not necessarily change based upon the actual short-term performance of the plan assets in any given year. The amount of net periodic pension cost or benefit that is recorded each year is based on the assumed long-term rate of return on plan assets for the plan and the actual fair value of the plan assets as of the beginning of the year. We regularly review our actual asset allocation and, when appropriate, rebalance the investments in the plan to more accurately reflect the targeted allocation. For 2014, 2013 and 2012, the assumed long-term rate of return utilized for the Delaware Plan assets was 8%. We currently expect to use the same assumed rate for the long-term return on plan assets in 2015. In determining the appropriateness of this assumption, we considered the historical rate of return on the plan assets, the current and projected asset mix, our investment objectives and information provided by our third-party investment advisors. The projected benefit obligations and net periodic pension cost for the SERPs are based in part on expected increases in future compensation levels. Our assumption for the expected increase in future compensation levels is based upon our average historical experience and our intentions regarding future compensation increases, which generally approximates average long-term inflation rates. 14-------------------------------------------------------------------------------- Assumed discount rates and rates of return on plan assets are reevaluated annually. Changes in these assumptions can result in the recognition of materially different pension costs over different periods and materially different asset and liability amounts in our consolidated financial statements. A reduction in the assumed discount rate generally results in an actuarial loss, as the actuarially-determined present value of estimated future benefit payments will increase. Conversely, an increase in the assumed discount rate generally results in an actuarial gain. In addition, an actual return on plan assets for a given year that is greater than the assumed return on plan assets results in an actuarial gain, while an actual return on plan assets that is less than the assumed return results in an actuarial loss. Other actual outcomes that differ from previous assumptions, such as individuals living longer or shorter lives than assumed in the mortality tables that are also used to determine the actuarially-determined present value of estimated future benefit payments, changes in such mortality tables themselves or plan amendments will also result in actuarial losses or gains. Under GAAP, actuarial gains and losses are deferred and amortized into income over future periods based upon the expected average remaining service life of the active plan participants (for plans for which benefits are still being earned by active employees) or the average remaining life expectancy of the inactive participants (for plans for which benefits are not still being earned by active employees). However, any actuarial gains generated in future periods reduce the negative amortization effect of any cumulative unamortized actuarial losses, while any actuarial losses generated in future periods reduce the favorable amortization effect of any cumulative unamortized actuarial gains. The amounts recognized as net periodic pension cost and as pension assets or liabilities are based upon the actuarial assumptions discussed above. We believe that all of the actuarial assumptions used for determining the net periodic pension costs and pension assets or liabilities related to the Delaware Plan are reasonable and appropriate. The funding requirements for the Delaware Plan are based upon applicable regulations, and will generally differ from the amount of pension cost recognized under ASC Topic 715 for financial reporting purposes. During 2014, 2013 and 2012, we made contributions totaling $240,000, $307,000 and $206,000, respectively, to the Delaware Plan. We currently expect net periodic pension (benefit) cost for 2015 to be ($8,000) for the Delaware Plan and $644,000 for the SERPs. Cash contributions to the plans during 2015 are expected to be $261,000 for the Delaware Plan and $290,000 for the SERPs. A 0.25% decrease in the assumed discount rate for the Delaware Plan would have increased our projected and accumulated benefit obligations as of September 27, 2014 by approximately $85,000 and have no impact on our expected net periodic pension benefit for 2015. A 0.25% decrease in the assumed discount rate for our SERPs would have increased our projected and accumulated benefit obligations as of September 27, 2014 by approximately $241,000 and $190,000, respectively, and our expected net periodic pension cost for 2015 by approximately $21,000. A 0.25% decrease in the assumed long-term rate of return on plan assets for the Delaware Plan would have reduced our expected net periodic pension benefit for 2015 by approximately $6,000. Recent Accounting Pronouncements. Current Adoptions In February 2013, the FASB issued ASU No. 2013-02 "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income." ASU No. 2013-02 requires an entity to disaggregate the total change of each component of other comprehensive income either on the face of the income statement or as a separate disclosure in the notes. We adopted ASU No. 2013-02 in the first quarter of fiscal 2014. The adoption of this update did not have a material effect on our consolidated financial statements. Future Adoptions In May 2014, the FASB issued ASU No. 2014-09 "Revenue from Contracts with Customers," which will supersede nearly all existing revenue recognition guidance under GAAP. ASU No. 2014-09 provides that an entity recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU No. 2014-09 allows for either full retrospective or modified retrospective adoption and will become effective for us in the first quarter of fiscal 2018. We are evaluating the alternative transition methods and the potential effects of the adoption of this update on our consolidated financial statements. 15-------------------------------------------------------------------------------- Results of Operations Statements of Operations - Selected Data (Dollars in thousands) Year Ended September 27, September 28, September 29, 2014 Change 2013 Change 2012 Net sales $ 408,978 12.4 % $ 363,896 0.2 % $ 363,303 Gross profit 48,773 24.3 % 39,233 74.7 % 22,458 Percentage of net sales 11.9 % 10.8 % 6.2 % Selling, general and administrative expense $ 23,371 13.0 % $ 20,682 9.4 % $ 18,911 Percentage of net sales 5.7 % 5.7 % 5.2 % Gain on early extinguishment of %) debt $ - - $ - (100.0 $ (425 ) Restructuring charges, net 1,247 N/M - (100.0 %) 832 Acquisition costs 612 N/M - - - Other expense (income), net (1,907 ) N/M 333 N/M (188 ) Interest expense 252 7.2 % 235 (62.3 %) 623 Interest income (10 ) (28.6 %) (14 ) (33.3 %) (21 ) Effective income tax rate 34.0 % 34.8 % 33.6 % Net earnings $ 16,641 41.8 % $ 11,735 N/M $ 1,809 "N/M" = not meaningful 2014 Compared with 2013 Net Sales Net sales increased 12.4% to $409.0 million in 2014 from $363.9 million in 2013. Shipments for the year increased 12.8% while average selling prices decreased 0.3% from the prior year levels. The increase in shipments was primarily due to improved market conditions and increased demand for our products relative to the prior year as well as the addition of the ASW facilities for a portion of our fourth quarter. Sales for both years reflect depressed volumes on an absolute basis relative to the prerecession levels in our construction end-markets. Gross Profit Gross profit increased 24.3% to $48.8 million, or 11.9% of net sales, in 2014 from $39.2 million, or 10.8% of net sales, in 2013. The year-over-year increase was primarily due to wider spreads between average selling prices and raw material costs ($6.8 million) and higher shipments ($5.4 million), partially offset by higher unit conversion costs ($1.2 million). The increase in spreads was driven by lower raw material costs ($8.5 million) partially offset by lower average selling prices ($1.4 million) and higher freight expense ($0.3 million). Gross profit for both years was unfavorably impacted by depressed shipment volumes and elevated unit conversion costs largely driven by reduced operating schedules. Selling, General and Administrative Expense Selling, general and administrative expense ("SG&A expense") increased 13.0% to $23.4 million, or 5.7% of net sales, in 2014 from $20.7 million, or 5.7% of net sales, in 2013 primarily due to increases in compensation ($1.7 million), employee benefits ($0.3 million), amortization of intangible assets ($0.3 million) and bad debt expense ($0.2 million). The increase in compensation expense was primarily driven by higher incentive plan expense due to our improved financial results in the current year. The increase in employee benefits expense was primarily due to higher employee health insurance costs during 2014. The higher amortization expense is related to the additional intangible assets that were acquired in connection with the ASW Acquisition. The increase in bad debt expense was due to an adjustment to the allowance for doubtful accounts driven by the increase in sales and accounts receivable. Restructuring Charges, Net Net restructuring charges of $1.2 million were incurred in 2014 for employee separation costs associated with staffing reductions that were implemented in connection with the ASW Acquisition. Acquisition Costs Acquisition costs of $0.6 million were incurred in 2014 for legal, accounting and other professional fees related to the ASW Acquisition. The accounting requirements for business combinations require the expensing of acquisition costs in the period in which they are incurred. Other Expense (Income) Other income for 2014 was $1.9 million compared to $0.3 million of other expense in 2013. The other income for the current year was primarily due to the net gain from insurance proceeds attributable to the replacement of property and equipment damaged in the fire at our Gallatin, Tennessee PC strand manufacturing facility. Other expense for 2013 was primarily due to a net loss on the disposal of equipment. Interest Expense Interest expense increased 7.2% to $252,000 in 2014 from $235,000 in 2013 primarily due to higher average debt outstanding during 2014. 16 -------------------------------------------------------------------------------- Income Taxes Our effective income tax rate was 34.0% in 2014 compared with 34.8% in 2013 due to changes in permanent book versus tax differences. Net Earnings Net earnings increased to $16.6 million ($0.89 per diluted share) in 2014 from $11.7 million ($0.64 per diluted share) in 2013 primarily due to the increase in gross profit partially offset by higher SG&A expense together with the acquisition costs and restructuring charges associated with the ASW Acquisition. 2013 Compared with 2012 Net Sales Net sales for 2013 were relatively flat at $363.9 million compared with $363.3 million in 2012. Shipments for 2013 increased 4.6% while average selling prices decreased 4.3% from the prior year levels. The increase in shipments was primarily due to modest improvement in market conditions and demand for our products relative to 2012. The decrease in average selling prices was driven by competitive pricing pressures. Sales for both years reflect severely depressed volumes due to the continuation of recessionary conditions in our construction end-markets. Gross Profit Gross profit increased 74.7% to $39.2 million, or 10.8% of net sales, in 2013 from $22.5 million, or 6.2% of net sales, in 2012. The year-over-year increase was primarily due to wider spreads between average selling prices and raw material costs ($15.0 million), higher shipments ($1.5 million) and lower unit conversion costs ($0.8 million). The increase in spreads was driven by lower raw material costs ($31.1 million) and freight expense ($0.2 million) partially offset by lower average selling prices ($16.3 million). Gross profit for both years was unfavorably impacted by depressed shipment volumes and elevated unit conversion costs largely due to reduced operating schedules. Selling, General and Administrative Expense SG&A expense increased 9.4% to $20.7 million, or 5.7% of net sales, in 2013 from $18.9 million, or 5.2% of net sales, in 2012 primarily due to higher compensation expense ($1.5 million), a reduction in the gain on the settlement of life insurance policies ($460,000) and the relative year-over-year change in the cash surrender value of life insurance policies ($155,000). The increase in compensation expense was primarily driven by higher incentive plan expense due to our improved financial results in 2013. The cash surrender value of life insurance policies increased $555,000 in 2013 compared with $710,000 in 2012 due to the related changes in the value of the underlying investments. These increases in SG&A expense were partially offset by lower bad debt expense ($551,000). Gain on Early Extinguishment of Debt A gain on the early extinguishment of debt of $425,000 was recorded in 2012 for the discount on our prepayment of the remaining balance outstanding on the subordinated note that was issued in connection with the acquisition of Ivy Steel and Wire, Inc. ("Ivy") in 2011 ("Ivy Acquisition"). Restructuring Charges, Net Net restructuring charges of $832,000 were recorded in 2012, which included $744,000 for equipment relocation costs and $139,000 for facility closure costs less $11,000 of net proceeds from the sale of decommissioned equipment and a $40,000 adjustment related to the remaining employee separation costs associated with plant closures and other staffing reductions. Other Expense (Income) Other expense for 2013 was $333,000 compared to $188,000 of other income in 2012. The other expense for 2013 was primarily due to the net loss on the disposal of equipment. Interest Expense Interest expense decreased 62.3% to $235,000 in 2013 from $623,000 in 2012 primarily due to the reduction in average debt outstanding during 2013 and the lower interest rate on borrowings on the revolving credit facility relative to the secured subordinated promissory note associated with the Ivy Acquisition that was outstanding in 2012 prior to its prepayment in December 2011. 17 -------------------------------------------------------------------------------- Income Taxes Our effective income tax rate was 34.8% in 2013 compared with 33.6% in 2012 due to changes in permanent book versus tax differences. Net Earnings Net earnings increased to $11.7 million ($0.64 per diluted share) in 2013 from $1.8 million ($0.10 per share) in 2012 primarily due to the increase in gross profit partially offset by higher SG&A expense. Liquidity and Capital Resources Selected Financial Data (Dollars in thousands) Year Ended September 27, September 28, September 29, 2014 2013 2012 Net cash provided by operating activities $ 29,232 $ 36,828 $ 13,144 Net cash used for investing activities (40,375 ) (6,294 ) (8,191 ) Net cash used for financing activities (1,247 ) (15,104 ) (4,953 ) Cash and cash equivalents 3,050 15,440 10 Working capital 79,407 83,791 79,065 Total debt - - 11,475 Percentage of total capital - - 7 % Shareholders' equity $ 178,883 $ 161,056 $ 149,500 Percentage of total capital 100 % 100 % 93 % Total capital (total debt + shareholders' equity) $ 178,883 $ 161,056 $ 160,975 Operating Activities Operating activities provided $29.2 million of cash in 2014 primarily from net earnings adjusted for non-cash items and a reduction in the net working capital components of accounts receivable, inventories, and accounts payable and accrued expenses. Net working capital provided $2.4 million of cash due to a $21.3 million increase in accounts payable and accrued expenses partially offset by a $16.8 million increase in inventories and a $2.1 million increase in accounts receivable. The increases in accounts payable and accrued expenses and inventories were largely related to higher raw material purchases driven by the increase in sales. The increase in accounts receivable was primarily due to the increase in sales. Operating activities provided $36.8 million of cash in 2013 primarily from net earnings adjusted for non-cash items and a reduction in net working capital. Net working capital provided $9.7 million of cash due to a $7.0 million decrease in inventories, a $1.7 million increase in accounts payable and accrued expenses, and a $1.0 million decrease in accounts receivable. The decrease in inventories was primarily due to lower raw material purchases and unit costs. The increase in accounts payable and accrued expenses was largely related to changes in the mix of vendor payments and terms. The decrease in accounts receivable was primarily driven by a reduction in days sales outstanding. Operating activities provided $13.1 million of cash in 2012 primarily from net earnings adjusted for non-cash items and a reduction in net working capital. Net working capital provided $0.9 million of cash as a $10.6 million decrease in inventories was partially offset by a $9.6 million decrease in accounts payable and accrued expenses, and a $0.2 million increase in accounts receivable. The changes in inventories and accounts payable and accrued expenses were primarily due to lower raw material purchases and unit costs. We may elect to adjust our operating activities depending upon 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. 18-------------------------------------------------------------------------------- Investing Activities Investing activities used $40.4 million of cash in 2014, $6.3 million in 2013 and $8.2 million in 2012. In 2014, $33.9 million of cash was used to fund the ASW Acquisition and $9.0 million for capital expenditures (including $4.5 million to replace property and equipment damaged in the fire at our Gallatin, Tennessee PC strand manufacturing facility), which was partially offset by $2.7 million of insurance proceeds related to the Gallatin fire. In 2013, $5.0 million of cash was used for capital expenditures and $1.9 million for an intangible asset in connection with the acquisition of certain assets from Tatano Wire and Steel, Inc., which was partially offset by $0.6 million of proceeds from life insurance claims. In 2012, $8.1 million of cash was used for capital expenditures. 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 $1.2 million of cash in 2014, $15.1 million in 2013 and $5.0 million in 2012. In 2014, $2.2 million of cash was used for dividend payments, which was partially offset by $1.1 million of proceeds from the exercise of stock options. In 2013, $11.5 million of cash was used to repay debt and $6.6 million for dividend payments (including a special cash dividend of $4.5 million and regular cash dividends totaling $2.1 million), which was partially offset by $3.4 million of proceeds from the exercise of stock options. In 2012, $2.3 million of cash was used to repay debt and $2.1 million for dividends. 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 revolving credit facility (the "Credit Facility") that is used to supplement our operating cash flow and fund our working capital, capital expenditure, general corporate and growth requirements. On February 6, 2012, we entered into an amendment agreement that, among other changes, increased the commitment amount of the Credit Facility from $75.0 million to $100.0 million and extended the maturity date from June 2, 2015 to June 2, 2016. As of September 27, 2014, there were no borrowings outstanding on the Credit Facility, $89.7 million of additional borrowing capacity was available and outstanding letters of credit totaled $1.5 million (see Note 8 to the consolidated financial statements). During 2014, ordinary course borrowings on the Credit Facility were as high as $13.6 million. As of September 28, 2013, there were no borrowings outstanding on the Credit Facility. As part of the consideration for the Ivy Acquisition, we entered into a $13.5 million secured subordinated promissory note (the "Note") payable to Ivy over five years. The Note required semi-annual interest payments in arrears, and annual principal payments payable on November 19 of each year during the period 2011 - 2015. The Note yielded interest on the unpaid principal balance at a fixed rate of 6.0% per annum and was collateralized by certain of the real property and equipment acquired from Ivy. On December 12, 2011, the Company prepaid the remaining balance that was outstanding on the Note for $12.4 million, which represented a discount of $425,000 that was recorded as a gain from the early extinguishment of debt in the 2012 consolidated statement of operations. We believe that, in the absence of significant unanticipated cash demands, cash generated by operating activities 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. 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 required 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. Impact of Inflation We are subject to inflationary risks arising from fluctuations in the market prices for our primary raw material, hot-rolled steel wire rod, and, to a much lesser extent, 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 2012, wire rod prices declined during the latter part of the year due to reductions in the cost of scrap for wire rod producers and weakening demand. During 2014 and 2013, wire rod prices fluctuated within a narrower range and inflation did not have a material impact on our sales or earnings. Our ability to fully recover increases in wire rod prices over this period has been mitigated by competitive pricing pressures resulting from the reduced level of activity in our construction end-markets. The timing and magnitude of any future increases in the prices for wire rod and the impact on selling prices for our products is uncertain at this time. 19-------------------------------------------------------------------------------- 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 Our contractual obligations and commitments at September 27, 2014 are as follows: Payments Due by Period (In thousands) Less Than More Than Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years Contractual obligations: Raw material purchase commitments(1) $ 64,527 $ 64,527 $ - $ - $ - Supplemental employee retirement plan obligations 18,144 290 581 675 16,598 Pension benefit obligations 5,335 213 417 411 4,294 Operating leases 2,519 1,081 1,073 115 250 Trade letters of credit 1,467 1,467 - - - Commitment fee on unused portion of credit facility 747 448 299 - - Other unconditional purchase obligations(2) 4,590 4,590 - - - Total $ 97,329 $ 72,616 $ 2,370 $ 1,201 $ 21,142 (1)Non-cancelable purchase commitments for raw materials. (2)Contractual commitments for capital expenditures. Outlook As we look ahead to 2015, we expect continued improvement in the conditions in our construction end-markets following the steep decline in demand that we have experienced in recent years. There are growing indications the recovery in private nonresidential construction, our primary demand driver, is strengthening, which should favorably impact our financial results through higher shipment volumes and operating levels at our facilities. The outlook for infrastructure construction is less clear pending the enactment of a new multi-year federal transportation funding authorization. We continue to focus on the operational fundamentals of our business: 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 cash operating costs; and pursuing further improvements in the productivity and effectiveness of all of our manufacturing, selling and administrative activities. We expect that our financial results will be favorably impacted by the full-year contribution of the ASW Acquisition together with the realization of additional operating synergies and benefits from the reconfiguration of our welded wire reinforcement operations related to the Ivy Acquisition. As market conditions improve, 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 (see "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors"). In addition, we will continue to pursue further acquisitions in our existing businesses that expand our penetration of markets we currently serve or expand our geographic footprint. |