ENCORE WIRE CORP - Quarter Report: 2010 June (Form 10-Q)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF | |||
| THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
June 30, 2010
June 30, 2010
or
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF | |||
| THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-20278
ENCORE WIRE CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 75-2274963 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 1329 Millwood Road | ||
| McKinney, Texas | 75069 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (972) 562-9473
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes
[ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer [ ]
|
Accelerated filer x | |
Non-accelerated
filer [ ] (Do not check if a smaller reporting company)
|
Smaller reporting company [ ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes [ ] No x
Number of shares of Common Stock, par value $.01, outstanding as of August 2, 2010: 23,179,452
ENCORE WIRE CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010
Table of Contents
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
ENCORE WIRE CORPORATION
CONSOLIDATED BALANCE SHEETS
| June 30, | December 31, | |||||||
| In Thousands of Dollars | 2010 | 2009 | ||||||
| (Unaudited) | (See Note) | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 90,503 | $ | 226,769 | ||||
Accounts receivable (net of allowance
of $2,432 and $2,278) |
182,309 | 133,176 | ||||||
Inventories |
39,992 | 42,563 | ||||||
Income taxes receivable |
1,078 | 2,660 | ||||||
Prepaid expenses and other |
1,138 | 2,331 | ||||||
Total current assets |
315,020 | 407,499 | ||||||
Property,
plant and equipment - at cost: |
||||||||
Land and land improvements |
17,928 | 13,177 | ||||||
Construction-in-progress |
6,842 | 6,481 | ||||||
Buildings and improvements |
69,477 | 68,125 | ||||||
Machinery and equipment |
173,605 | 168,984 | ||||||
Furniture and fixtures |
6,807 | 6,742 | ||||||
Total property, plant and equipment |
274,659 | 263,509 | ||||||
Accumulated depreciation |
(143,360) | (136,653) | ||||||
Property,
plant and equipment - net |
131,299 | 126,856 | ||||||
Other assets |
197 | 203 | ||||||
Total assets |
$ | 446,516 | $ | 534,558 | ||||
Note:
|
The consolidated balance sheet at December 31, 2009, as presented, is | |||
| derived from the audited consolidated financial statements at that date. | ||||
| See accompanying notes. |
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ENCORE WIRE CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
| June 30, | December 31, | |||||||
| In Thousands of Dollars, Except Share Data | 2010 | 2009 | ||||||
| (Unaudited) | (See Note) | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Current liabilities: |
||||||||
Trade accounts payable |
$ | 17,876 | $ | 11,942 | ||||
Accrued liabilities |
17,888 | 17,140 | ||||||
Current deferred income taxes |
2,007 | 1,105 | ||||||
Current portion of notes payable |
– | 100,430 | ||||||
Total current liabilities |
37,771 | 130,617 | ||||||
Non-current deferred income taxes |
10,631 | 10,957 | ||||||
Commitments and contingencies |
||||||||
Stockholders’ equity: |
||||||||
Preferred stock, $.01 par
value: |
||||||||
Authorized shares – 2,000,000;
none issued |
– | – | ||||||
Common stock, $.01 par
value: |
||||||||
Authorized shares – 40,000,000; Issued shares – 26,328,402 and 26,308,002 |
263 | 263 | ||||||
Additional paid-in capital |
44,446 | 44,057 | ||||||
Treasury stock, at cost – 3,148,950 and 3,148,950
shares |
(21,269) | (21,269) | ||||||
Retained earnings |
374,674 | 369,933 | ||||||
Total stockholders’ equity |
398,114 | 392,984 | ||||||
Total liabilities and stockholders’ equity |
$ | 446,516 | $ | 534,558 | ||||
Note:
|
The consolidated balance sheet at December 31, 2009, as presented, is | |||
| derived from the audited consolidated financial statements at that date. | ||||
| See accompanying notes. |
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ENCORE WIRE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Unaudited)
| Quarter Ended | Six Months Ended | |||||||||||||||
June 30, |
June 30, |
|||||||||||||||
| In Thousands, Except Per Share Data | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Net sales |
$ | 236,094 | $ | 159,351 | $ | 411,323 | $ | 303,836 | ||||||||
Cost of goods sold |
209,179 | 147,491 | 373,807 | 274,141 | ||||||||||||
Gross profit |
26,915 | 11,860 | 37,516 | 29,695 | ||||||||||||
Selling, general, and administrative expenses |
14,068 | 10,730 | 26,052 | 21,338 | ||||||||||||
Operating income |
12,847 | 1,130 | 11,464 | 8,357 | ||||||||||||
Net interest and other expenses |
94 | 476 | 2,797 | 764 | ||||||||||||
Income before income taxes |
12,753 | 654 | 8,667 | 7,593 | ||||||||||||
Provision for income taxes |
4,618 | 54 | 2,998 | 2,377 | ||||||||||||
Net income |
$ | 8,135 | $ | 600 | $ | 5,669 | $ | 5,216 | ||||||||
Net income per common and common
equivalent share – basic |
$ | 0.35 | $ | 0.03 | $ | 0.24 | $ | 0.23 | ||||||||
Weighted average common and common
equivalent shares – basic |
23,171 | 22,999 | 23,165 | 22,998 | ||||||||||||
Net income per common and common
equivalent share – diluted |
$ | 0.35 | $ | 0.03 | $ | 0.24 | $ | 0.22 | ||||||||
Weighted average common and common
equivalent shares – diluted |
23,334 | 23,299 | 23,246 | 23,288 | ||||||||||||
Cash dividends declared per share |
$ | 0.02 | $ | 0.02 | $ | 0.04 | $ | 0.04 | ||||||||
See accompanying notes.
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ENCORE WIRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Unaudited)
| Six Months Ended | ||||||||
| June 30, | ||||||||
| In Thousands of Dollars | 2010 | 2009 | ||||||
OPERATING ACTIVITIES |
||||||||
Net income |
$ | 5,669 | $ | 5,216 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||
Depreciation and amortization |
6,861 | 7,006 | ||||||
Deferred income taxes |
576 | (12) | ||||||
Long-term debt prepayment fee |
2,919 | – | ||||||
Other |
(82) | 191 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(49,287) | 14,396 | ||||||
Inventories |
2,571 | 4,488 | ||||||
Trade accounts payable and accrued liabilities |
6,681 | 1,155 | ||||||
Other assets and liabilities |
1,120 | (646) | ||||||
Current income taxes receivable / payable |
1,607 | (407) | ||||||
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES |
(21,365) | 31,387 | ||||||
INVESTING ACTIVITIES |
||||||||
Purchases of property, plant and equipment |
(11,175) | (16,064) | ||||||
Proceeds from sale of assets |
10 | 117 | ||||||
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES |
(11,165) | (15,947) | ||||||
FINANCING ACTIVITIES |
||||||||
Repayment of notes payable |
(102,919) | – | ||||||
Deferred financing fees |
(50) | – | ||||||
Proceeds from issuances of common stock |
135 | 80 | ||||||
Dividend paid |
(927) | (920) | ||||||
Excess tax benefits of options exercised |
25 | 41 | ||||||
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES |
(103,736) | (799) | ||||||
Net increase (decrease) in cash and cash equivalents |
(136,266) | 14,641 | ||||||
Cash and cash equivalents at beginning of period |
226,769 | 217,666 | ||||||
Cash and cash equivalents at end of period |
$ | 90,503 | $ | 232,307 | ||||
See accompanying notes.
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ENCORE WIRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2010
(Unaudited)
June 30, 2010
NOTE 1 – BASIS OF PRESENTATION
The unaudited consolidated financial statements of Encore Wire Corporation (the “Company”) have
been prepared in accordance with U.S. generally accepted accounting principles for interim
information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by U.S. generally accepted accounting
principles for complete annual financial statements. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments considered necessary for a fair
presentation, have been included. Results of operations for interim periods presented do not
necessarily indicate the results that may be expected for the entire year. These financial
statements should be read in conjunction with the audited consolidated financial statements and
notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31,
2009.
NOTE 2 – INVENTORIES
Inventories are stated at the lower of cost, determined by the last-in, first-out (LIFO) method, or
market.
Inventories consist of the following:
| June 30, | December 31, | |||||||
| In Thousands of Dollars | 2010 | 2009 | ||||||
Raw materials |
$ | 7,548 | $ | 14,497 | ||||
Work-in-process |
17,010 | 12,239 | ||||||
Finished goods |
74,144 | 75,239 | ||||||
| 98,702 | 101,975 | |||||||
Adjust to LIFO cost |
(58,710) | (59,412) | ||||||
Lower of cost or market adjustment |
– | – | ||||||
| $ | 39,992 | $ | 42,563 | |||||
LIFO pools are established at the end of each fiscal year. During the first three quarters of
every year, LIFO calculations are based on the inventory levels and costs at that time.
Accordingly, interim LIFO balances will fluctuate up and down in tandem with inventory levels and
costs.
During the first six months of 2010, the Company liquidated a portion of the layer established in
2005. As a result, under the LIFO method, this inventory layer was liquidated at historical costs
that were less than current costs, which favorably impacted net
income for the second quarter of 2010 by $644,000 and the six months by
$1,480,000. During the first six months of 2009, the Company also liquidated prior
year inventory layers, favorably impacting net income for the six
months by $371,000, all in the second quarter.
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NOTE 3 – ACCRUED LIABILITIES
Accrued liabilities consist of the following:
| June 30, | December 31, | |||||||
| In Thousands of Dollars | 2010 | 2009 | ||||||
Sales volume discounts payable |
$ | 11,395 | $ | 10,120 | ||||
Property taxes payable |
1,361 | 2,555 | ||||||
Commissions payable |
2,175 | 1,569 | ||||||
Accrued salaries |
1,604 | 418 | ||||||
Other accrued liabilities |
1,353 | 2,478 | ||||||
| $ | 17,888 | $ | 17,140 | |||||
NOTE 4 – INCOME TAXES
Income taxes were accrued at an effective rate of 36.2% in the second quarter of 2010 versus 8.3%
in the second quarter of 2009, consistent with the Company’s estimated liabilities. The volatility
of the effective rate is due to the fact that relatively small dollar amounts of book versus tax
adjustments have a larger percentage impact when the pre-tax earnings or loss are at or near break
even. For the six months ended June 30th, the effective tax rates accrued were 34.6% in
2010 and 31.3% in 2009.
NOTE 5 – NET EARNINGS (LOSS) PER SHARE
Net earnings (loss) per common and common equivalent share are computed using the weighted average
number of shares of common stock and common stock equivalents outstanding during each period. If
dilutive, the effect of stock options, treated as common stock equivalents, is calculated using the
treasury stock method.
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The following table sets forth the computation of basic and diluted net earnings per share:
| Quarter Ended | ||||||||
| June 30, | June 30, | |||||||
| In Thousands | 2010 | 2009 | ||||||
Numerator: |
||||||||
Net income (loss) |
$ | 8,135 | $ | 600 | ||||
Denominator: |
||||||||
Denominator for basic
earnings per share –
weighted average
shares |
23,171 | 22,999 | ||||||
Effect of dilutive securities: |
||||||||
Employee stock options |
163 | 300 | ||||||
Denominator for diluted earnings per share
– weighted average shares |
23,334 | 23,299 | ||||||
The number of weighted average employee stock options excluded from the determination of diluted earnings per share for the
second quarter was 211,857 in 2010 and 197,923 in 2009. Such options were anti-dilutive for the respective periods.
The following table sets forth the computation of basic and diluted net earnings per share (in thousands):
| Six Months Ended | ||||||||
| June 30, | June 30, | |||||||
| In Thousands | 2010 | 2009 | ||||||
Numerator: |
||||||||
Net income |
$ | 5,669 | $ | 5,216 | ||||
Denominator: |
||||||||
Denominator for basic earnings per share – weighted
average shares |
23,165 | 22,998 | ||||||
Effect of dilutive securities: |
||||||||
Employee stock options |
81 | 290 | ||||||
Denominator for diluted earnings per share – weighted
average shares |
23,246 | 23,288 | ||||||
The number of weighted average employee stock options excluded from the determination of
diluted earnings per share for the six months ended June 30 was 347,758 in 2010 and 203,309 in 2009. Such options were
anti-dilutive for the respective periods.
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NOTE 6 – LONG TERM NOTES PAYABLE
The Company is party to a Financing Agreement with two banks, Bank of America, N.A., as Agent, and
Wells Fargo Bank, National Association (as amended, the “Financing Agreement”). The Financing
Agreement extends through August 6, 2013, and provides for maximum borrowings of the lesser of
$150,000,000 or the amount of eligible accounts receivable plus the amount of eligible finished
goods and raw materials, less any reserves established by the banks. The calculated maximum
borrowing amount available at June 30, 2010, as computed under the Financing Agreement was
$149,660,000. Borrowings under the line of credit bear interest, at the Company’s option, at either
(1) LIBOR plus a margin that varies from 1.0% to 1.75% depending upon the ratio of debt outstanding
to adjusted earnings or (2) the base rate (which is the higher of the federal funds rate plus 0.5%
or the prime rate) plus 0% to 0.25% (depending upon the ratio of debt outstanding to adjusted
earnings). A commitment fee ranging from 0.20% to 0.375% (depending upon the ratio of debt
outstanding to adjusted earnings) is payable on the unused line of credit. On June 30, 2010, there
were no borrowings outstanding under the Financing Agreement. Obligations under the Financing
Agreement are the only contractual borrowing obligations or commercial borrowing commitments of the
Company.
Obligations under the Financing Agreement are unsecured and contain customary covenants and events
of default. The Company was not in compliance with these covenants as of December 31, 2009. The
Company received a waiver for those covenant violations from the two banks for the December
31st reporting period. In the first quarter, the Company executed an amendment to the
Financing Agreement that reduced the fixed charge ratio that the Company must maintain and amended
certain related definitions. The Company was in compliance with the revised covenants as of June
30, 2010.
The Company, through its agent bank, was also a party to a Note Purchase Agreement (the “2004 Note
Purchase Agreement”) with Hartford Life Insurance Company, Great-West Life & Annuity Insurance
Company, London Life Insurance Company and London Life and Casualty Reinsurance Corporation
(collectively, the “2004 Purchasers”), whereby the Company issued and sold $45,000,000 of 5.27%
Senior Notes, Series 2004-A, due August 27, 2011 (the “Fixed Rate Senior Notes”) to the 2004
Purchasers, the proceeds of which were used to repay a portion of the Company’s outstanding
indebtedness under its previous financing agreement.
On September 28, 2006, the Company, through its agent bank, entered into a second Note Purchase
Agreement (the “2006 Note Purchase Agreement”) with Metropolitan Life Insurance Company, Metlife
Insurance Company of Connecticut and Great-West Life & Annuity Insurance Company, whereby the
Company issued and sold $55,000,000 of Floating Rate Senior Notes, Series 2006-A, due September 30,
2011 (the “Floating Rate Senior Notes”), the proceeds of which were used to repay a portion of the
Company’s outstanding indebtedness under its Financing Agreement.
On January 15, 2010, the Company used available cash to pay off all of its then outstanding debt,
comprised of the Fixed Rate Senior Notes and the Floating Rate Senior Notes. The Company paid off
the $100 million debt with a payment totaling $103.8 million, which included accrued and unpaid
interest, along with a pre-payment
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fee applicable to the Fixed Rate Senior Notes. The Company incurred a one-time charge of $2.6
million in the first quarter of 2010 in connection with this
transaction. For the second quarter and six months ended June 30, 2010, the Company made an immaterial
adjustment to reclassify the cash pre-payment fee from operating activities to financing activities
in the accompanying consolidated statement of cash flows.
NOTE 7 – STOCK REPURCHASE AUTHORIZATION
On November 10, 2006, the Board of Directors approved a stock repurchase program authorizing the
Company to repurchase up to 1,000,000 shares of its common stock through December 31, 2007 on the
open market or through privately negotiated transactions at prices determined by the President of
the Company. The Company’s Board of Directors has subsequently authorized annual extensions of
this stock repurchase program through February 28, 2011 authorizing the Company to repurchase up to
the remaining 2,610,000 shares of its common stock. The Company did not repurchase any shares of
its stock in the first six months of 2010 or 2009.
NOTE 8 – CONTINGENCIES
On July 7, 2009, Southwire Company, a Delaware corporation (“Southwire”), filed a complaint for
patent infringement against the Company and Cerro Wire, Inc. in the United States District Court
for the Eastern District of Texas. In the complaint, Southwire alleges that the Company has
infringed one or more claims of United States Patent No. 7,557,301, entitled “Method of
Manufacturing Electrical Cable Having Reduced Required Force for Installation,” by making and
selling electrical cables, including the Company’s Super Slick cables. On February 5, 2010, the
United States Patent and Trademark Office (the “USPTO”) ordered the re-examination of the U.S.
Patent 7,557,301. In ordering re-examination of Southwire’s ‘301 patent, the USPTO has determined
that the Company’s submission of prior art not previously considered during the original
examination of the ‘301 patent has raised a substantial new question of patentability of the claims
of the ‘301 patent. In the re-examination, an Examiner in the USPTO will review the claims of the
Southwire ‘301 patent and make a new determination of the patentability of those claims.
On August 24, 2009, Southwire filed a second complaint for patent and trademark infringement
against the Company. In the second complaint, Southwire has alleged that the Company infringed one
or more of the claims of United States Patent No. 6,486,395 entitled “Interlocked Metal Clad Cable”
by making and selling electrical cables, including the Company’s MCMP Multipurpose cables.
Southwire has also alleged that the Company has infringed Southwire’s United States Trademark
registration for the mark, “MCAP”, Registration No. 3,292,777. The second complaint also alleges
violations of Federal, State and Common law unfair competition claims. The Company has filed
counterclaims against Southwire alleging claims of statutory and common law unfair competition
violations, tortious interference with existing and prospective business relations,
misappropriation and claims for declaratory relief.
On July 2, 2010, the Company filed a complaint against Southwire in the Northern District of
Georgia. The complaint alleged that Southwire was using a misdescriptive trademark, and that
Southwire had made false statements about the Company’s slick wire products. On July 6, 2010, the
Company amended its complaint to seek a declaratory judgment that the Company’s slick wire products
do not infringe Southwire’s United States Patent No. 7,749,024. Later on July 6, 2010, Southwire
filed a complaint against the Company in the Eastern District of Texas for infringement of the ‘024
patent.
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The complaints seek unspecified damages and injunctive relief. The Company disputes all of
Southwire’s claims and alleged damages and intends to vigorously defend the lawsuits and vigorously
pursue its own claims.
The Company is also a party to litigation and claims arising out of the ordinary business of the
Company.
NOTE 9 – SUBSEQUENT EVENTS
Subsequent events were evaluated through the date the financial statements were issued.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
General
The Company is a low-cost manufacturer of copper electrical building wire and cable. The Company
is a significant supplier of residential wire for interior wiring in homes, apartments and
manufactured housing and commercial wire for commercial and industrial buildings.
The Company’s operating results in any given time period are driven by several key factors,
including the volume of product produced and shipped, the cost of copper and other raw materials,
the competitive pricing environment in the wire industry and the resulting influence on gross
margins and the efficiency with which the Company’s plants operate during the period, among others.
Price competition for electrical wire and cable is intense, and the Company sells its products in
accordance with prevailing market prices. Copper is the principal raw material used by the Company
in manufacturing its products. Copper accounted for approximately 73.5% and 90.3% of the Company’s
cost of goods sold during fiscal 2009 and 2008, respectively. The price of copper fluctuates,
depending on general economic conditions and in relation to supply and demand and other factors,
which has caused monthly variations in the cost of copper purchased by the Company. The Company
cannot predict future copper prices or the effect of fluctuations in the cost of copper on the
Company’s future operating results.
The following discussion and analysis relates to factors that have affected the operating results
of the Company for the quarterly and six-month periods ended June 30, 2010 and 2009. Reference
should also be made to the audited financial statements and notes thereto included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2009.
Results of Operations
Quarter Ended June 30, 2010 Compared to Quarter Ended June 30, 2009
Net sales for the second quarter of 2010 amounted to $236.1 million compared with net sales of
$159.4 million for the second quarter of 2009. This dollar increase was primarily the result of a
44.9% increase in the price of wire sold and a 2.3% increase in the unit volume of product shipped.
The average cost per pound of raw copper purchased increased 48.1% in the second quarter of 2010
compared to the second quarter of 2009,
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and was the principal driver of the increased average sales price of wire. Fluctuations in sales
prices are primarily a result of changing copper raw material prices and product price competition.
Cost of goods sold increased to $209.2 million, or 88.6% of net sales, in the second quarter of
2010, compared to $147.5 million, or 92.6% of net sales, in the second quarter of 2009. Gross
profit increased to $26.9 million, or 11.4% of net sales, in the second quarter of 2010 versus
$11.9 million, or 7.4% of net sales, in the second quarter of 2009. The increased gross profit and
gross margin percentages were primarily the result of the increased spread between what the Company
paid for a pound of copper and the price of wire that contained a pound of copper. In comparing
the second quarter of 2010 to the second quarter of 2009, this spread increased by 35.7% resulting
in the increased margins. Spreads increased as a result of improved industry pricing discipline in
the second quarter of 2010.
Inventories are stated at the lower of cost, using the last-in, first-out (LIFO) method, or market.
The Company maintains only one inventory pool for LIFO purposes as all inventories held by the
Company generally relate to the Company’s only business segment, the manufacture and sale of copper
building wire products. As permitted by U.S. generally accepted accounting principles, the Company
maintains its inventory costs and cost of goods sold on a first-in, first-out (FIFO) basis and
makes a quarterly adjustment to adjust total inventory and cost of goods sold from FIFO to LIFO.
The Company applies the lower of cost or market (LCM) test by comparing the LIFO cost of its raw
materials, work-in-process and finished goods inventories to estimated market values, which are
based primarily upon the most recent quoted market price of copper, in pound quantities, as of the
end of each reporting period. Additionally, future reductions in the quantity of inventory on hand
could cause copper that is carried in inventory at costs different from the cost of copper in the
period in which the reduction occurs to be included in cost of goods sold for that period.
As a result of decreasing copper costs, offset slightly by an increase in the quantity of inventory
on hand during the second quarter of 2010, a LIFO adjustment was recorded decreasing cost of sales
by $9.2 million during the quarter. Based on copper prices at the end of the quarter, no LCM
adjustment was necessary. Future reductions in the price of copper could require the Company to
record an LCM adjustment against the related inventory balance, which would result in a negative
impact on net income.
Selling expenses, consisting of commissions and freight, for the second quarter of 2010 were $10.0
million, or 4.3% of net sales, compared to $8.0 million, or 5.0% of net sales, in the second
quarter of 2009. Commissions paid to independent manufacturers’ representatives are paid as a
relatively stable percentage of sales, and therefore, rose $1.8 million in concert with the
increased sales dollars. Additionally, freight costs increased by $0.3 million due to the 2.3%
increase in unit sales. General and administrative expenses increased to $4.0 million, or 1.7% of
net sales, in the second quarter of 2010 compared to $2.7 million, or 1.7% of net sales, in the
second quarter of 2009. The general and administrative dollar costs rose primarily due to
increased legal and administrative costs, while the percentage of net sales remained stable. The
provision for bad debts was $75,000 in the second quarter of both 2010 and 2009.
The net interest and other income and expense category decreased in expense to $94,000 in the
second quarter of 2010 from $476,000 expense in the second quarter of
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2009, due primarily to the early retirement of the Company’s $100 million in long-term notes
payable during the first quarter of 2010. Income taxes were accrued at an effective rate of 36.2%
in the second quarter of 2010 versus 8.3% in the second quarter of 2009, consistent with the
Company’s estimated liabilities. The volatility of the effective rate is due to the fact that
relatively small dollar amounts of book versus tax adjustments have a larger percentage impact when
the pre-tax earnings are near break even, which drove the 2009 rate downward.
As a result of the foregoing factors, the Company had net income of $8.1 million in the second
quarter of 2010 versus $600,000 in the second quarter of 2009.
Six Months Ended June 30, 2010 compared to Six Months Ended June 30, 2009
Net sales for the first six months of 2010 amounted to $411.3 million compared with net sales of
$303.8 million for the first half of 2009. This dollar increase was the result of a 59.2% increase
in the average price of wire sold, partially offset by a 14.9% decrease in the unit volume of wire
sold, measured in pounds of copper contained in the wire. The average cost per pound of raw copper
purchased increased 74.1% in the first six months of 2010 compared to the first six months of 2009,
but increased less than the selling price of wire per copper pound did in dollar terms. In
comparing the first half of 2010 to the first half of 2009, the average sales price of wire that
contained a pound of copper increased more than the average price of copper purchased during the
period. Margins expanded as the spread between the price of wire sold and the cost of raw copper
purchased increased by 24.3%, due primarily to industry pricing discipline. In addition, the unit
volume decreased as discussed above. Fluctuations in sales prices are primarily a result of
changing copper raw material prices and product price competition.
Cost of goods sold increased to $373.8 million in the first six months of 2010, compared to $274.1
million in the first six months of 2009. Gross profit increased to $37.5 million, or 9.1% of net
sales, in the first six months of 2010 versus $29.7 million, or 9.8% of net sales, in the first six
months of 2009. The increased gross profit dollars were primarily the result of the 35.4% increase
in net sales dollars in the first six months of 2010 versus the same period in 2009 as discussed
above, while the percentage margin decreased slightly.
As a result of decreasing copper costs in the second quarter and a slightly decreased amount of
inventory on hand during the first six months of 2010, a LIFO adjustment was recorded decreasing
cost of sales by $702,000 during the six month period. Based on the current copper prices, there
is no LCM adjustment necessary. Future reductions in the price of copper could require the Company
to record an LCM adjustment against the related inventory balance, which would result in a negative
impact on net income.
Selling expenses for the first six months of 2010 increased to $17.7 million, or 4.3% of net sales,
compared to $15.6 million, or 5.1% of net sales, in the same period of 2009. Commissions paid to
independent manufacturers’ representatives are paid as a percentage of sales, and therefore, rose
$2.5 million in concert with the increased sales dollars. This increase in commissions was
slightly offset by freight costs, which decreased $383,000 due to the decrease in unit sales.
Commissions amounted to 2.6% and 2.7% in the first six months of 2010 and 2009, respectively.
General and administrative expenses increased to $8.2 million, or 2.0% of net sales, in the first
six months of 2010 compared to $5.6 million, or 1.9% of net sales, in the same period of
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2009. The general and administrative costs rose primarily due to increased legal and
administrative costs, while decreasing slightly as a percentage of net sales. The provision for
bad debts was $150,000 in the first six months of both 2010 and 2009.
Net interest and other expense was $2.8 million in the first six months of 2010 compared to
$764,000 in the first half of 2009. The increase was due primarily to a $2.6 million one-time
charge associated with the early retirement of the Company’s $100 million in long-term notes
payable. Income taxes were accrued at an effective rate of 34.6% in the first six months of 2010
versus 31.3% in the first six months of 2009 consistent with the Company’s estimated liabilities.
As a result of the foregoing factors, the Company’s net income increased to $5.7 million in the
first half of 2010 from $5.2 million in the first half of 2009.
Liquidity and Capital Resources
The Company maintains a substantial inventory of finished products to satisfy the prompt delivery
requirements of its customers. As is customary in the industry, the Company provides payment terms
to most of its customers that exceed terms that it receives from its suppliers. Therefore, the
Company’s liquidity needs have generally consisted of operating capital necessary to finance these
receivables and inventory. Capital expenditures have historically been necessary to expand the
production capacity of the Company’s manufacturing operations. The Company has historically
satisfied its liquidity and capital expenditure needs with cash generated from operations,
borrowings under its various debt arrangements and sales of its common stock. Prior to building
the current substantial cash balance, the Company historically used its revolving credit facility
to manage day to day operating cash needs as required by daily fluctuations in working capital, and
has the facility in place should such a need arise in the future.
The Company is party to a Financing Agreement with two banks, Bank of America, N.A., as Agent, and
Wells Fargo Bank, National Association (as amended, the “Financing Agreement”). The Financing
Agreement extends through August 6, 2013, and provides for maximum borrowings of the lesser of
$150,000,000 or the amount of eligible accounts receivable plus the amount of eligible finished
goods and raw materials, less any reserves established by the banks. The calculated maximum
borrowing amount available at June 30, 2010, as computed under the Financing Agreement was
$149,660,000. Borrowings under the line of credit bear interest, at the Company’s option, at either
(1) LIBOR plus a margin that varies from 1.0% to 1.75% depending upon the ratio of debt outstanding
to adjusted earnings or (2) the base rate (which is the higher of the federal funds rate plus 0.5%
or the prime rate) plus 0% to 0.25% (depending upon the ratio of debt outstanding to adjusted
earnings). A commitment fee ranging from 0.20% to 0.375% (depending upon the ratio of debt
outstanding to adjusted earnings) is payable on the unused line of credit. On June 30, 2010, there
were no borrowings outstanding under the Financing Agreement. Obligations under the Financing
Agreement are the only contractual borrowing obligations or commercial borrowing commitments of the
Company.
Obligations under the Financing Agreement are unsecured and contain customary covenants and events
of default. The Company was not in compliance with these covenants as of December 31, 2009. The
Company received a waiver for those covenant violations from the two banks for the December
31st reporting period. In the
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first quarter, the Company executed an amendment to the Financing Agreement that reduced the fixed
charge ratio that the Company must maintain and amended certain related definitions. The Company
was in compliance with the revised covenants as of June 30, 2010.
The Company, through its agent bank, was also a party to a Note Purchase Agreement (the “2004 Note
Purchase Agreement”) with Hartford Life Insurance Company, Great-West Life & Annuity Insurance
Company, London Life Insurance Company and London Life and Casualty Reinsurance Corporation
(collectively, the “2004 Purchasers”), whereby the Company issued and sold $45,000,000 of 5.27%
Senior Notes, Series 2004-A, due August 27, 2011 (the “Fixed Rate Senior Notes”) to the 2004
Purchasers, the proceeds of which were used to repay a portion of the Company’s outstanding
indebtedness under its previous financing agreement.
On September 28, 2006, the Company, through its agent bank, entered into a second Note Purchase
Agreement (the “2006 Note Purchase Agreement”) with Metropolitan Life Insurance Company, Metlife
Insurance Company of Connecticut and Great-West Life & Annuity Insurance Company, whereby the
Company issued and sold $55,000,000 of Floating Rate Senior Notes, Series 2006-A, due September 30,
2011 (the “Floating Rate Senior Notes”), the proceeds of which were used to repay a portion of the
Company’s outstanding indebtedness under its Financing Agreement.
On January 15, 2010, the Company used available cash to pay off all of its then outstanding debt,
comprised of the Fixed Rate Senior Notes and the Floating Rate Senior Notes. The Company paid off
the $100 million debt with a payment totaling $103.8 million, which included accrued and unpaid
interest, along with a pre-payment fee applicable to the Fixed Rate Senior Notes. The Company
incurred a one-time charge of $2.6 million in the first quarter of 2010 in connection with this
transaction and expects to realize a net cash savings of $1.8 million based on interest rates in
effect at the time of the payoff, over the original remaining life of the notes. For the second
quarter and six months ended June 30, 2010, the Company made an immaterial adjustment to reclassify
the cash pre-payment fee from operating activities to financing activities in the accompanying
consolidated statement of cash flows.
Cash used by operating activities was $21.4 million in the first six months of 2010 compared to
cash provided of $31.4 million in the first six months of 2009. The following changes in
components of cash flow were notable. The Company had net income of $5.7 million in the first
six months of 2010 versus net income of $5.2 million in the first six months of 2009. Accounts
receivable decreased in the first six months of 2009, providing $14.4 million in cash, while
accounts receivable increased by $49.3 million in the first six months of 2010, resulting in a
$63.7 million negative swing in cash provided by operations. Accounts receivable increased in
concert with the increased sales in 2010. Trade accounts payable and accrued liabilities had a
$5.5 million increase in cash flow provided in the first six months of 2010 versus the first six
months of 2009 due primarily to the increase in accounts payable, attributable to increased sales
and production along with the timing of inventory receipts at quarter end. These changes in cash
flow were the primary drivers of the $52.8 million decrease in cash flow from operations in the
first six months of 2010 versus the first six months of 2009.
Cash used in investing activities decreased to $11.2 million in the first six months of 2010 from
$15.9 million in the first six months of 2009. In 2009, the funds were used
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primarily for equipment purchases, while in 2010 the reduced funds were used for both equipment and
land purchases. The $103.7 million of cash used in financing activities in the first six months of
2010 was primarily the result of the Company’s early retirement of long-term notes payable
discussed above. In the first half of 2010, the Company’s revolving line of credit remained at $0.
The Company’s cash balance was $90.5 million at June 30, 2010.
During the remainder of 2010, the Company expects its capital expenditures will consist primarily
of purchases of additional plant and equipment for its building wire operations. The total capital
expenditures for all of 2010 associated with these projects are currently estimated to be between
$16 million and $19 million. The Company will continue to manage its working capital requirements.
These requirements may increase as a result of increased sales and may be impacted by the price of
copper. The Company believes that the current cash balance, cash flow from operations, and the
financing available under the Financing Agreement will satisfy working capital and capital
expenditure requirements during 2010.
Information Regarding Forward Looking Statements
This quarterly report on Form 10-Q contains various “forward-looking statements” (within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended) and information that are based on management’s belief as well as
assumptions made by and information currently available to management. The words “believes”,
“estimates”, “anticipates”, “plans”, “seeks”, “expects”, “intends” and similar expressions identify
some of the forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Such statements are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary materially from those
expected. Among the key factors that may have a direct bearing on the Company’s operating results
are fluctuations in the economy and in the level of activity in the building and construction
industry, demand for the Company’s products, the impact of price competition and fluctuations in
the price of copper. For more information regarding “forward looking statements” see “Information
Regarding Forward Looking Statements” in Part II, Item 7 of the Company’s Annual Report on Form
10-K for the year ended December 31, 2009, which is hereby incorporated by reference.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes from the information provided in Item 7A, “Quantitative and
Qualitative Disclosures About Market Risk,” of the Company’s Annual Report on Form 10-K for the
year ended December 31, 2009.
Item 4. Controls and Procedures.
The Company maintains controls and procedures designed to ensure that information required to be
disclosed by it in the reports it files with or submits to the Securities and Exchange Commission
(the “SEC”) is recorded, processed, summarized and reported, within the time periods specified in
the SEC’s rules and forms and to ensure that information required to be disclosed by the Company in
such reports is accumulated and
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communicated to the Company’s management, including the Chief Executive and Chief Financial
Officers, as appropriate to allow timely decisions regarding required disclosure. Based on an
evaluation of the Company’s disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the
period covered by this report conducted by the Company’s management, with the participation of the
Chief Executive and Chief Financial Officers, the Chief Executive and Chief Financial Officers
concluded that the Company’s disclosure controls and procedures were effective to ensure that
information required to be disclosed by the Company in the reports it files with or submits to the
SEC is recorded, processed, summarized and reported, within the time periods specified in the SEC’s
rules and forms and to ensure that information required to be disclosed by the Company in such
reports is accumulated and communicated to the Company’s management, including the Chief Executive
and Chief Financial Officers, as appropriate to allow timely decisions regarding required
disclosure.
There have been no changes in the Company’s internal control over financial reporting or in other
factors that have materially affected, or are reasonably likely to materially affect, internal
control over financial reporting during the period covered by this report.
Item 4T. Controls and Procedures.
Not applicable.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
Please refer to Note 8 – “Contingencies” in Notes to Consolidated Financial Statements of this
quarterly report on Form 10-Q for information on legal proceedings.
Item 1A. Risk Factors.
There have been no material changes to the Company’s risk factors as disclosed in Item 1A, “Risk
Factors,” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
On November 10, 2006, the Board of Directors approved a stock repurchase program authorizing the
Company to repurchase up to 1,000,000 shares of its common stock through December 31, 2007 on the
open market or through privately negotiated transactions at prices determined by the President of
the Company. The Company’s Board of Directors has subsequently authorized annual extensions of
this stock repurchase program through February 28, 2011 authorizing the Company to repurchase up to
the remaining 2,610,000 shares of its common stock. The Company did not repurchase any shares of
its stock in the first six months of 2010 or 2009.
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Item 6. Exhibits.
The information required by this Item 6 is set forth in the Index to Exhibits accompanying this
Form 10-Q.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ENCORE WIRE CORPORATION | ||
| (Registrant) | ||
Dated: August 4, 2010
|
/s/ DANIEL L. JONES | |
| Daniel L. Jones, President and | ||
| Chief Executive Officer | ||
Dated: August 4, 2010
|
/s/ FRANK J. BILBAN | |
| Frank J. Bilban, Vice President – Finance, | ||
| Chief Financial Officer, | ||
| Treasurer and Secretary |
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INDEX TO EXHIBITS
| Exhibit | ||
Number |
Description |
|
3.1
|
Certificate of Incorporation of Encore Wire Corporation and all
amendments thereto (filed as Exhibit 3.1 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2009,
and incorporated herein by reference). |
|
3.2
|
Second Amended and Restated Bylaws of Encore Wire Corporation, as
amended through December 13, 2007 (filed as Exhibit 3.2 to the
Company’s Annual Report on Form 10-K for the year ended December
31, 2007, and incorporated herein by reference). |
|
31.1
|
Certification by Daniel L. Jones, President and Chief Executive
Officer of Encore Wire Corporation, dated August 4, 2010 and
submitted pursuant to Rule 13a-14(a)/15d-14(a) and pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
31.2
|
Certification by Frank J. Bilban, Vice President-Finance, Chief
Financial Officer, Treasurer and Secretary of Encore Wire
Corporation, dated August 4, 2010 and submitted pursuant to Rule
13a-14(a)/15d-14(a) and pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
32.1
|
Certification by Daniel L. Jones, President and Chief Executive
Officer of Encore Wire Corporation, dated August 4, 2010 and
submitted as required by 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|
32.2
|
Certification by Frank J. Bilban, Vice President-Finance, Chief
Financial Officer, Treasurer and Secretary of Encore Wire
Corporation, dated August 4, 2010 as required by 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |