<PAGE> 1
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UNITED STATES
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 QUARTER ENDED
SEPTEMBER 30, 1996
OR
[ ] 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: 0-20278
ENCORE WIRE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2274963
(State of incorporation) (I.R.S. employer identification number)
1410 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 [ ]
Number of shares of Common Stock outstanding as of November 4, 1996: 7,112,917
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<PAGE> 2
FORM 10-Q
ENCORE WIRE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
September 30, 1996 (Unaudited) and December 31, 1995
Consolidated Statements of Income (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Quarters and nine months ended September 30, 1996 and September 30, 1995
Consolidated Statements of Cash Flows (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Nine months ended September 30, 1996 and September 30, 1995
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
(A) Exhibit 11 - Statement re Computation of
Per Share Earnings
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
</TABLE>
2
<PAGE> 3
FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ENCORE WIRE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
In Thousands of Dollars (Unaudited) (See Note 1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,688 $ 992
Accounts receivable (net of allowance of
$519 and $431) . . . . . . . . . . . . . . . . . . . . . . 36,473 28,188
Inventories (Note 2) . . . . . . . . . . . . . . . . . . . . . 23,227 24,549
Prepaid expenses and other assets . . . . . . . . . . . . . . 271 209
Current taxes receivable . . . . . . . . . . . . . . . . . . . -- 1,042
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 234 234
---------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . 61,893 55,214
Property, plant and equipment-on the basis of cost:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287 287
Buildings and improvements . . . . . . . . . . . . . . . . . . 8,332 8,188
Machinery and equipment . . . . . . . . . . . . . . . . . . . 29,138 27,997
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . 542 507
---------- -----------
Total property, plant, and equipment . . . . . . . . . . . 38,299 36,979
Accumulated depreciation and
amortization . . . . . . . . . . . . . . . . . . . . . 10,049 7,585
---------- -----------
28,250 29,394
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 47
---------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 90,207 $ 84,655
========== ===========
</TABLE>
See accompanying notes
3
<PAGE> 4
FORM 10-Q
ENCORE WIRE CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
In Thousands of Dollars, Except Share Data (Unaudited) (See Note 1)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable . . . . . . . . . . . . . . . . . . . . . . . . $ 14,424 $ 15,488
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 5,238 4,166
Current income taxes payable . . . . . . . . . . . . . . . . . . . . . 2,287 --
--------- ---------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . 21,949 19,654
Non-current deferred income taxes . . . . . . . . . . . . . . . . . . . . . . 1,624 1,624
Long term notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,900 23,000
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued and outstanding shares - (7,107,917
at September 30, 1996 and 7,104,417 at
December 31, 1995) . . . . . . . . . . . . . . . . . . . . . 71 71
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 28,507 28,495
Treasury stock - 118,500 at September 30, 1996 and 77,500 at
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . (1,365) (838)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,521 12,649
--------- ---------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . 43,734 40,377
--------- ---------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . $ 90,207 $ 84,655
========= =========
</TABLE>
Note: The consolidated balance sheet at December 31, 1995, as presented, is
derived from the audited consolidated financial statements at that date.
See accompanying notes
4
<PAGE> 5
FORM 10-Q
ENCORE WIRE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------- -------------
In Thousands of Dollars, Except Per Share Data 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . $ 46,099 $ 41,945 $ 130,861 $ 118,712
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . 37,347 38,998 114,133 109,124
---------- ---------- ---------- ----------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . 8,752 2,947 16,728 9,588
Selling, general, and administrative expense . . . . . . . . . 3,294 2,695 9,111 7,889
---------- ---------- ---------- ----------
Operating income . . . . . . . . . . . . . . . . . . . . . . . 5,458 252 7,617 1,699
Interest expense (net) . . . . . . . . . . . . . . . . . . . . 413 432 1,320 1,135
---------- ---------- ---------- ----------
Income (loss) before income taxes . . . . . . . . . . . . . . . 5,045 (180) 6,297 564
Provision (benefit) for income taxes . . . . . . . . . . . . . 1,942 (69) 2,425 217
---------- ---------- ---------- ----------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . $ 3,103 $ (111) $ 3,872 $ 347
========== ========== ========== ==========
Net income (loss) per common and common
equivalent share . . . . . . . . . . . . . . . . . . . . . . . $ .44 $ (.02) $ .55 $ .05
========== ========== ========== ==========
Weighted average common and common
equivalent shares . . . . . . . . . . . . . . . . . . . . . . . 7,120 7,102 7,089 7,485
========== ========== ========== ==========
Cash dividends declared per share . . . . . . . . . . . . . . . $ -- $ -- $ -- $ --
========== ========== ========== ==========
</TABLE>
See accompanying notes
5
<PAGE> 6
FORM 10-Q
ENCORE WIRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
In Thousands of Dollars 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,872 $ 347
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . 2,499 2,267
Reduction of inventory cost to market . . . . . . . . . . . . . . . . . . . . . 517 --
Provision for bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227 139
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,512) (4,390)
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 805 (6,218)
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . (1,064) 5,684
Other assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 1,010 (313)
Current income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . 3,329 (494)
-------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES . . . . . . . . . . . . . . 2,683 (2,978)
-------- ---------
INVESTING ACTIVITIES
Purchases of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . (1,447) (4,645)
Increase in Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17) --
Proceeds from Sale of Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 --
-------- ----------
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES . . . . . . . . . . . . . . . . . (1,372) (4,645)
-------- ----------
FINANCING ACTIVITIES
Borrowings (repayments) under notes payable . . . . . . . . . . . . . . . . . . . . . (100) 9,100
Purchases of Treasury Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (527) (537)
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . 12 72
-------- ----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES . . . . . . . . . . . . . . . . . (615) 8,635
-------- ----------
NET INCREASE IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 696 1,012
Cash at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 992 1,264
-------- ----------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,688 $ 2,276
======== ==========
</TABLE>
See accompanying notes
6
<PAGE> 7
FORM 10-Q
ENCORE WIRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements of Encore Wire
Corporation have been prepared in accordance with generally accepted accounting
principles for interim financial 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 generally accepted accounting principles
for complete 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 the periods presented are not necessarily indicative of the results that
may be expected for the year ending December 31, 1996. These financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1995.
NOTE 2 - INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined by the last-in, first-out (LIFO) method.
Inventories (in thousands) consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
-------------- ---------------
<S> <C> <C>
Raw materials . . . . . . . . . . . . . . $ 3,185 $ 3,290
Work-in-process . . . . . . . . . . . . . 4,443 4,992
Finished goods . . . . . . . . . . . . . . 14,794 22,414
--------------- ---------------
22,422 30,696
Increase (Decrease) to LIFO cost . . . . . 1,322 (6,147)
--------------- ---------------
23,744 24,549
Reduction to market value (517) --
--------------- ---------------
$ 23,227 $ 24,549
=============== ===============
</TABLE>
An actual valuation of inventory under the LIFO method can be made
only at the end of each year based on the inventory levels and costs at that
time. Accordingly, interim LIFO calculations must necessarily be based on
management's estimates of expected year-end inventory levels and costs.
Because
7
<PAGE> 8
FORM 10-Q
these are subject to many forces beyond management's control, interim results
are subject to the final year-end LIFO inventory valuation.
NOTE 3 - INCOME (LOSS) PER SHARE
Income (loss) per common and common equivalent share is 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.
NOTE 4 - LONG TERM NOTE PAYABLE
Effective June 15, 1994, the Company completed an unsecured loan
facility with a bank (the "Financing Agreement"). The Financing Agreement
initially provided for maximum borrowings of the lesser of $25.0 million or the
amount of eligible accounts receivable plus the amount of eligible finished
goods and raw materials, less any available reserves established by the bank.
The maximum borrowing amount was increased to the lesser of a calculated amount
or $35.0 million effective August 31, 1995. The calculated maximum borrowing
amount available at September 30, 1996, as computed in the Financing Agreement,
was $35.0 million. The Financing Agreement is unsecured and contains customary
covenants and events of default. Because of the net loss incurred in 1995, the
Company was in default at December 31, 1995 under certain of the covenants
contained in the Financing Agreement. However, the bank waived the Company's
default as of December 31, 1995, and the bank and the Company have amended the
Financing Agreement, effective as of March 19, 1996, so that it contains less
restrictive covenants. The Company was in compliance with these new covenants
as of September 30, 1996. At September 30, 1996, the balance outstanding under
the Financing Agreement was $22.9 million. The Financing Agreement was
amended September 17, 1996 to extend the term of the agreement and to make
other minor changes. Amounts outstanding under the Financing Agreement are
payable on July 15, 1998 with interest due quarterly based on the bank's prime
rate, LIBOR or CD Rate options, at the Company's election. Each of the
interest rate options includes a premium dependent upon the Company's financial
performance which is computed quarterly. Effective October 1, 1996, the
Company's financial performance earned it the lowest interest rate option
offered by the Financing Agreement.
NOTE 5 - STOCK REPURCHASE AUTHORIZATION
On March 24, 1995, the Company announced that its Board of Directors
had authorized it to purchase up to 400,000 shares, or approximately 6%, of its
outstanding common stock dependent upon market conditions. Purchases made
pursuant to this common stock authorization may be made in the open market or
through privately negotiated transactions. The Company has amended its
Financing Agreement to allow it to make common stock repurchases. As amended,
the Financing Agreement permits the Company to repurchase up to 400,000 shares
of common stock at prices not to exceed $13.75 per share. As of September 30,
1996, the Company had repurchased 118,500 shares of its common stock in the
open market at a weighted average price of $11.52 per share.
8
<PAGE> 9
FORM 10-Q
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company was incorporated in April 1989 and during the remainder of
that year used its resources to acquire, equip and test its manufacturing
facility. In late February 1990, the Company began to manufacture and sell
residential wire. In 1994, the Company completed a plant expansion for the
production of commercial wire.
Price competition for electrical wire and cable is intense, and the
Company sells its products in accordance with prevailing market prices. Copper
rod, a commodity product, is the principal raw material used by the Company in
manufacturing its products. Copper accounted for approximately 71.7%, 73.9%,
70.0%, 67.9% and 76.8% of the Company's cost of goods sold during fiscal 1991,
1992, 1993, 1994 and 1995, respectively. The price of copper fluctuates,
depending on general economic conditions and in relation to supply and demand
and other factors, and has caused monthly variations in the cost of copper
purchased by the Company. The Company cannot predict copper prices in the
future or the effect of fluctuations in the cost of copper on the Company's
future operating results.
RESULTS OF OPERATIONS
Quarter Ended September 30, 1996 Compared to Quarter Ended September 30, 1995
The following discussion and analysis relates to factors that have
affected the operating results of the Company for the quarters ended September
30, 1996 and 1995. 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, 1995.
Net sales for the third quarter of 1996 amounted to $46.1 million
compared with net sales of $41.9 million for the third quarter of 1995, an
increase of 10%. This increase was primarily due to an increase in sales
volume of 26%, which was partially offset by a decrease in the average cost of
copper. The decrease in the average cost of copper resulted in a decrease in
the average sales price per copper pound of the Company's products. Sales
volume increased due to several factors, including increases in customer
acceptance and product availability. Sales volume of both the residential and
commercial products increased during the third quarter of 1996 compared to the
third quarter of 1995. As discussed above, the impact on net sales of this
increase in sales volume was reduced by the decrease in average sales price per
copper pound sold. The average sales price per copper pound of product sold was
$1.74 in the third quarter of 1996, compared to $1.99 in the third quarter of
1995. Fluctuations in sales prices are primarily a result of price competition
and changing copper raw material prices.
Cost of goods sold was $37.3 million in the third quarter of 1996,
compared to $39.0 million in the third quarter of 1995. Copper costs remained
consistent at $30.2 million in the third quarter of 1996 from $30.2 million in
the third quarter of 1995. The average cost per copper pound purchased
decreased to $.99 in the third quarter of 1996 from $1.43 in the third quarter
of 1995. Copper costs as a percentage of net sales decreased to 65.6% in the
third quarter of 1996 from 71.9% in the third quarter of 1995. This decrease
as a percentage of net sales in the third quarter of 1996 from the comparable
quarter in 1995 was due primarily to an increased differential between what the
Company pays per pound
9
<PAGE> 10
FORM 10-Q
of copper purchased and the Company's net sales price per copper pound. This
differential was increased in the third quarter of 1996 due to a greater
decrease in the average cost per copper pound purchased than the sales price
per copper pound. The increased differential was a result of improved pricing
conditions and, along with higher sales volume, were the primary factors in the
Company's net income increasing to $3,103,000 in the third quarter of 1996 from
a net loss of $111,000 in the third quarter of 1995. Other raw material costs
as a percentage of net sales increased to 13.9% in the third quarter of 1996,
compared with 12.5% in the third quarter of 1995. This increase was caused
primarily by other raw material costs remaining relatively constant while the
net sales price per copper pound sold decreased as discussed above.
Depreciation, labor and overhead costs as a percentage of net sales increased
to 9.7% in the third quarter of 1996 from 7.4% in the third quarter of 1995.
This increase was caused by an absolute dollar increase of overhead expenses
related to higher volumes of production combined with a lower sales price per
copper pound sold.
Inventories are stated at the lower of cost, determined by the last
in, first out (LIFO) method, or market. As permitted by 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 LIFO
adjustment to adjust total inventory and cost of goods sold to LIFO. The price
of copper decreased during the third quarter of 1996, necessitating a decrease
in the LIFO reserve of $3,953,000 that resulted in an increase to the inventory
value and a decrease in cost of goods sold. In the third quarter of 1995, the
price of copper increased from the previous quarter necessitating an increase
in the LIFO reserve that resulted in a decrease to the inventory value and an
increase to the cost of goods sold by $441,000. At September 30, 1995, LIFO
cost did not exceed the market value of the inventory, therefore no adjustment
to lower the cost of the inventory to the market value was necessary. However,
at September 30, 1996, LIFO cost did exceed the market value of the inventory
by $517,000. Since a reserve was provided at June 30, 1996 in the amount of
$288,000, an additional reserve of $229,000 was provided in the third quarter
of 1996. Future reductions in the price of copper could require the Company to
record additional lower of cost or market adjustments against the related
inventory balance which would result in a negative impact on net income.
Additionally, a reduction in the quantity of inventory 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 at the different price.
Gross profit increased to $8.8 million, or 19.0% of net sales, for the
third quarter of 1996 from $2.9 million, or 7.0% of net sales, for the third
quarter of 1995. The increase in gross profit as a percentage of net sales was
due primarily to the improved pricing environment for the Company's products
which resulted in a higher differential between product price and copper cost
in the third quarter of 1996, as discussed above.
General and administrative expenses were $693,000, or 1.5% of net
sales, in the third quarter of 1996 compared to $595,000, or 1.4% of net sales,
in the third quarter of 1995. The provision for bad debts in the third quarter
of 1996 increased to $115,000 in the third quarter of 1996 compared to no
provision in the third quarter of 1995. Selling expenses for the third quarter
of 1996 were $2.5 million, or 5.4% of net sales, compared to $2.1 million, or
5.0% of net sales, in the third quarter of 1995. This slight increase as a
percentage of net sales was due primarily to freight charges per copper pound
of product shipped remaining relatively the same while the sales price per
copper pound sold decreased.
Net interest expense was $413,000 in the third quarter of 1996
compared to $432,000 in the third quarter of 1995. The decrease was due to
less debt outstanding during the third quarter of 1996. The decrease in debt
outstanding was due primarily to improved cash flow resulting from improved
income
10
<PAGE> 11
FORM 10-Q
and lower copper prices. Accounts receivable increased as a result of
increased sales volumes. The increase in inventories, as compared to the third
quarter of 1995, is primarily due to the accumulation of larger quantities of
inventory necessary to support higher sales. The additional working capital
required by the increased sales was offset by the decreased cost of copper in
the third quarter of 1996 compared to the third quarter of 1995.
The Company's effective tax rate remained constant at 38.5%.
As a result of the foregoing factors, the Company's net income was
$3,103,000 in the third quarter of 1996 compared to a loss of $111,000 in the
third quarter of 1995.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
The following discussion and analysis relates to factors that have
affected the operating results of the Company for the nine months ended
September 30, 1996 and 1995. 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, 1995.
Net sales for the first nine months of 1996 amounted to $130.9 million
compared with net sales of $118.7 million for the first nine months of 1995, an
increase of 10%. This increase was primarily due to an increase in sales
volume of 25%, which was partially offset by a decrease in the average cost of
copper. The decrease in the average cost of copper resulted in a decrease in
the average sales price per copper pound of the Company's products. Sales
volume increased due to several factors, including increases in customer
acceptance and product availability. Sales volume of both the residential and
commercial products increased during the first nine months of 1996 compared to
the first nine months of 1995. As discussed above, the impact on net sales of
this increase in sales volume was reduced by the decrease in average sales
price per copper pound sold. The average sales price per copper pound of
product sold was $1.78 in the first nine months of 1996, compared to $2.02 in
the first nine months of 1995. Fluctuations in sales prices are primarily a
result of price competition and changing copper raw material prices.
Cost of goods sold was $114.1 million in the first nine months of
1996, compared to $109.1 million in the first nine months of 1995. Copper
costs increased to $92.2 million in the first nine months of 1996 from $84.3
million in the first nine months of 1995. The average cost per copper pound
purchased decreased to $1.15 in the first nine months of 1996 from $1.42 in the
first nine months of 1995. Copper costs as a percentage of net sales decreased
to 70.5% in the first nine months of 1996 from 71.0% in the first nine months
of 1995. This decrease as a percentage of net sales in the first nine months
of 1996 from the comparable nine months in 1995 was due primarily to an
increased differential between what the Company pays per pound of copper
purchased and the Company's net sales price per copper pound. This
differential was increased in the first nine months of 1996 due to a greater
decrease in the average cost per copper pound purchased than the sales price
per copper pound sold. Other raw material costs as a percentage of net sales
increased to 13.3% in the first nine months of 1996, compared with 12.5% in the
first nine months of 1995. This increase was caused primarily by other raw
material costs remaining relatively constant while the net sales price per
copper pound sold decreased as discussed above. Depreciation, labor and
overhead costs as a percentage of net sales increased to 8.8% in the first nine
months of 1996 compared to 7.6% in the first nine months of 1996. This
increase was caused by
11
<PAGE> 12
FORM 10-Q
an absolute dollar increase of overhead expenses related to higher volumes of
production combined with a lower sales price per copper pound sold.
Inventories are stated at the lower of cost, determined by the last
in, first out (LIFO) method, or market. As permitted by 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 LIFO
adjustment to adjust total inventory and cost of goods sold to LIFO. The price
of copper decreased during the first nine months of 1996, necessitating a
decrease in the LIFO reserve of $7.5 million that resulted in an increase to
the inventory value and a decrease in cost of goods sold. In the first nine
months of 1995, the price of copper remained relatively constant, but
necessitated an increase in the LIFO reserve that resulted in a decrease to the
inventory value and an increase to the cost of goods sold by $941,000. At
September 30, 1995, LIFO cost did not exceed the market value of the inventory,
therefore no adjustment to lower the cost of the inventory to the market value
was necessary. However, at September 30, 1996, LIFO cost did exceed the market
value of the inventory. Thus, the inventory value was decreased by $517,000
with a corresponding increase to cost of goods sold. Future reductions in the
price of copper could require the Company to record additional lower of cost or
market adjustments against the related inventory balance which would result in
a negative impact on net income. Additionally, a reduction in the quantity of
inventory 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 at the different price.
Gross profit increased to $16.7 million, or 12.8% of net sales, for
the first nine months of 1996 from $9.6 million, or 8.1% of net sales, for the
first nine months of 1995. The increase in gross profit as a percentage of net
sales was due primarily to larger unit volume in the first nine months of 1996
compared to the first nine months of 1995 as well as the improved pricing
environment for the Company's products. This improved pricing environment
resulted in a higher differential between product price and copper cost in the
first nine months of 1996, compared to the same period in 1995.
General and administrative expenses remained relatively constant at
$1.9 million, or 1.5% of net sales, in the first nine months of 1996 compared
to $2.0 million, or 1.6% of net sales, in the first nine months of 1995. The
provision for bad debts in the first nine months of 1996 increased to $227,000
in the first nine months of 1996 compared to $139,000 in the first nine months
of 1995. Selling expenses for the first nine months of 1996 were $6.9 million,
or 5.3% of net sales, compared to $5.8 million, or 4.9% of net sales, in the
first nine months of 1995. This slight increase as a percentage of sales was
due primarily to freight charges per copper pound of product shipped remaining
relatively the same while the sales price per copper pound sold decreased.
Net interest expense was $1,320,000 in the first nine months of 1996
compared to $1,135,000 in the first nine months of 1995. The increase was due
to a larger average debt balance during the first nine months of 1996 which was
necessary to satisfy increased working capital requirements related to an
increase in accounts receivable and the build up in inventories. Accounts
receivable increased as a result of increased sales volumes. The increase in
inventories is primarily due to the accumulation of larger quantities of
inventory necessary to support increased sales. These were partially offset by
the decreased cost of copper in the first nine months of 1996 compared to the
first nine months of 1995.
The Company's effective tax rate remained constant at 38.5%.
12
<PAGE> 13
FORM 10-Q
As a result of the foregoing factors, the Company's net income
increased to $3,873,000 in the first nine months of 1996 from $347,000 in the
first nine months of 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a substantial inventory of finished products to
satisfy customers' prompt delivery requirements. As is customary in the
industry, the Company provides to most of its customers 60-day payment terms,
although the Company's suppliers typically require more immediate payment,
generally within 30 days. Therefore, the Company's liquidity needs have
generally consisted of operating capital necessary to finance receivables and
inventory. Capital expenditures have historically been to expand the
production capacity of the Company's manufacturing operations. The Company has
satisfied its liquidity and capital expenditure needs with cash generated from
operations, borrowings under its revolving credit facilities and sales of its
common stock.
Effective September 15, 1994, the Company completed an unsecured loan
facility with a bank (the "Financing Agreement"). The Financing Agreement
initially provided for maximum borrowings of the lesser of $25.0 million or the
amount of eligible accounts receivable plus the amount of eligible finished
goods and raw materials, less any available reserves established by the bank.
The maximum borrowing amount was increased to the lesser of a calculated amount
or $35.0 million effective August 31, 1995. The calculated maximum borrowing
amount available at September 30, 1996, as computed in the Financing Agreement,
was $35.0 million. The Financing Agreement is unsecured and contains customary
covenants and events of default. Because of the net loss incurred in 1995, the
Company was in default at December 31, 1995 under certain of the covenants
contained in the Financing Agreement. However, the bank waived the Company's
default as of December 31, 1995, and the bank and the Company have amended the
Financing Agreement, effective as of March 19, 1996, so that it contains less
restrictive covenants. The Company was in compliance with these new covenants
as of September 30, 1996. At September 30, 1996, the balance outstanding under
the Financing Agreement was $22.9 million. The Financing Agreement was amended
September 17, 1996 to extend the term of the agreement and to make other minor
changes. Amounts outstanding under the Financing Agreement are payable on July
15, 1998 with interest due quarterly based on the bank's prime rate, LIBOR or
CD Rate options, at the Company's election. Each of the interest rate options
includes a premium dependent upon the Company's financial performance, which is
computed quarterly. Effective October 1, 1996, the Company's financial
performance earned it the lowest interest rate option offered by the Financing
Agreement.
On March 24, 1995, the Company announced that its Board of Directors
had authorized it to purchase up to 400,000 shares, or approximately 6%, of its
outstanding common stock dependent upon market conditions. Purchases made
pursuant to this common stock authorization may be made in the open market or
through privately negotiated transactions. The Company has amended its
Financing Agreement to allow it to make common stock repurchases. As amended,
the Financing Agreement permits the Company to repurchase up to 400,000 shares
of common stock at prices not to exceed $13.75 per share. As of September 30,
1996, the Company had repurchased 118,500 shares of its common stock in the
open market at a weighted average price of $11.52 per share.
Cash provided by operations was $2.7 million in the first nine months
of 1996 compared to cash used by operations of $3.0 million in the first nine
months of 1995. This increase in cash provided from operations is primarily
the result of the decrease of inventory value in the first nine months of 1996
compared to an increase in the first nine months of 1995, as well as greater
net income in the first nine
13
<PAGE> 14
FORM 10-Q
months of 1996 compared to the first nine months of 1996. These items were
partially offset by a greater increase in accounts receivable in the first nine
months of 1996 compared to the first nine months of 1995. The increase in
accounts receivable in the first nine months of 1996 was due to a larger
increase in sales in the first nine months of 1996 from the fourth quarter of
1995 compared to the increase in sales in the first nine months of 1995 from
the fourth quarter of 1994. Cash used in investing activities decreased from
$4.6 million in the first nine months of 1995 to $1.4 million in the first nine
months of 1996. In both periods, these funds were used primarily to increase
the Company's production capacity. The cash provided by financing activities
in the first nine months of 1995 was due primarily to borrowings to fund the
activities discussed above. The cash used by financing activities in the first
nine months of 1996 was due to net repayments of borrowings and purchases of
treasury stock.
During the remainder of 1996, the Company's capital expenditures will
include the purchase of additional production equipment for its residential and
commercial wire operations. These capital expenditures are estimated to be
$2.0 million. However the Company is exploring expansion alternatives which
might require a greater capital expenditure. In addition, the Company expects
its working capital requirements to increase during the remainder of 1996 as a
result of anticipated increases in sales. However, these increased working
capital requirements may be partially offset by lower copper prices.
Moreover, the Company expects that the inventory levels necessary to support
sales of commercial wire will continue to be greater than the levels necessary
to support comparable sales of residential wire. The Company believes that the
cash flow from operations and the revolving credit facility will satisfy
working capital expenditure requirements for the next twelve months.
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
This report contains various forward-looking statements and information that
are based on management's belief as well as assumptions made by and information
currently available to management. 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.
14
<PAGE> 15
FORM 10-Q
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1. Sixth Amendment to Amended and Restated Financing
Agreement dated as of September 17, 1996 by and
between NationsBank of Texas, N.A. and Encore Wire
Corporation
11 Statement re computation of per share earnings.
27 Financial Data Schedule
(b) No reports on form 8-K were filed by the Company during the
three months ended September 30, 1996.
15
<PAGE> 16
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)
Date: November 12, 1996 /s/ Vincent A. Rego
--------------------------------------------------
Vincent A. Rego, President and
Chief Executive Officer
Date: November 12, 1996 /s/ Scott D. Weaver
--------------------------------------------------
Scott D. Weaver, Vice President - Finance,
Treasurer and Secretary
(Principal Financial Officer)
16
<PAGE> 17
FORM 10-Q
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Page
- -------- ------- ------------
<S> <C> <C>
10.1. Sixth Amendment to Amended and Restated
Financing Agreement dated as of September
17, 1996 by and between NationsBank of
Texas, N.A. and Encore Wire Corporation
11 Statement re Computation of
Per Share Earnings
27 Financial Data Schedule
</TABLE>
17
<PAGE> 1
EXHIBIT 10.1
SIXTH AMENDMENT
TO
AMENDED AND RESTATED FINANCING AGREEMENT
This Sixth Amendment to Amended and Restated Financing Agreement is
executed and entered into by and between NATIONSBANK OF TEXAS, N.A., a national
bank ("Lender") and ENCORE WIRE CORPORATION, A Delaware corporation
("Borrower"), effective as of September 17, 1996, as follows:
RECITALS
NationsBank and Encore are parties to the certain Amended and Restated
Financing Agreement dated effective June 15, 1994, as amended by the
First Amendment to Amended and Restated Financing Agreement dated July
26, 1994, the Second Amendment to Amended and Restated Financing
Agreement dated December 29, 1994, the Third Amendment to Amended and
Restated Financing Agreement dated April 7, 1995, the Fourth Amendment
to Amended and Restated Financing Agreement dated August 31, 1995, and
the Fifth Amendment to Amended and Restated Financing Agreement dated
March 19, 1995 (hereinafter called the "Agreement"). Terms defined in
the Agreement, wherever used in this Sixth Amendment, shall have the
same meanings as are prescribed by the Agreement.
NationsBank and Encore have agreed to amend the Agreement as provided
hereinbelow.
NOW THEREFORE, for value received, and in consideration of the premises,
NationsBank and Encore hereby agree as follows:
1. Paragraph 1.20 (definition of "Contract Term") of the Agreement
hereby is amended to read in its entirety as follows:
"1.20 "CONTRACT TERM" means the period beginning
on the effective date specified in the preamble of
this Agreement and continuing through July 15, 1998."
2. Subparagraph (a)3 ("Fixed Charge Ratio") of paragraph 7.21
("Financial Covenants") of the Agreement hereby is amended to read in tis
entirety as follows:
"3. Fixed Charge Ratio. Fixed Charge Ratio shall not at
any time be less than the following prescribed
minimums, as applicable:
Minimum Fixed
Applicable Period Charge Ratio
----------------- --------------
All times through December 30, 1996 1.5 to 1.0
December 31, 1996 through June 29, 1997 2.0 to 1.0
June 30, 1997 through December 30, 1997 2.5 to 1.0
December 31, 1997 and thereafter 3.0 to 1.0"
<PAGE> 2
4. The following items shall be delivered to Lender prior to or
simultaneously with execution and delivery of this Sixth Amendment:
(a) A certificate signed by the corporation secretary of
Borrower (i) certifying to Lender that its Certificate of Incorporation
and Bylaws have not been amended since Borrower's certification thereof
under Secretary's Certificate previously submitted to Lender as of June
15, 1994 in connection with execution of the Agreement, and specifying
that the officers of Borrower listed therein are duly elected, qualified
and ating as of the effective date hereof (or alternatively, specifying
any change in such listing) and (ii) attaching and certifying
resolutions duly adopted by the board of directors of Borrower
authorizing the Sixth Amendment and the transactions evidenced hereby,
and authorizing and directing one or more named officers of Borrower to
execute and deliver the Sixth Amendment, and all related documentation
required by Lender, on behalf of Borrower, which certificate shall be in
form satisfactory to Lender; and
(b) Such other documentation as Lender may reasonably
require in connection with the Agreement or this Sixth Amendment.
5. In consideration of this Sixth Amendment, Borrower represents to
Lender that, except as specifically referenced in the certain letter agreement
of even date herewith between Lender and Borrower (i) no Event of Default, or
other event or condition which would be the subject of a required notice under
paragraph 7.13 of the Agreement, is in existence as of the effective date
hereof, (ii) each of the representations and warranties contained in the
following paragraphs of the Agreement are true and correct as of the effective
date of this Sixth Amendment: paragraph 6.1 through paragraph 6.21.
6. The Agreement hereby is ratified and confirmed as being and
continuing in full force and effect according to its terms, as amended by this
Sixth Amendment.
7. This Agreement (i) is binding upon Borrower and Lender and their
respective successors and assigns, (ii) represents the entire agreement between
the parties regarding the subject matter hereof and may not be amended or
modified except in writing signed by both parties, (iii) shall be governed and
construed according to the laws of the State of Texas and (iv) may be executed
by counterpart, in which case each such counterpart together shall be considered
to be the same agreement. A telecopy of any such executed counterpart shall be
valid as an original.
2
<PAGE> 3
THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN
THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
EXECUTED effective as of the date specified in the preamble.
NATIONSBANK OF TEXAS, N.A.
By: /s/ FRANK IZZO
---------------------------
Name: Frank Izzo
-------------------------
Title: Senior Vice President
------------------------
By: /s/ TODD M. BURNS
---------------------------
Name: Todd M. Burns
-------------------------
Title: Banking Officer
------------------------
ENCORE WIRE CORPORATION
By: /s/ SCOTT WEAVER
---------------------------
Name: Scott Weaver
-------------------------
Title: VP - Finance
------------------------
CONSENT BY GUARANTOR
EWC Leasing Corp. hereby (i) consents to execution and performance by
Borrower of the foregoing Sixth Amendment to Amended and Restated Financing
Agreement ("Sixth Amendment") and (ii) ratifies and confirms its Guaranty dated
effective as of June 15, 1994 as continuing in full force and effect with
respect to all "Obligations" defined by the Agreement, including as amended by
the Sixth Amendment, as of the effective date hereof.
EWC LEASING CORP.
By: /s/ SCOTT WEAVER
---------------------------
Name: Scott Weaver
-------------------------
Title: VP - Finance
------------------------
3
<PAGE> 4
THE STATE OF TEXAS )
COUNTY OF DALLAS )
BEFORE ME, the undersigned authority, on this day personally appeared
Frank Izzo, known to me to be the person and officer whose name is subscribed to
the foregoing instrument, and acknowledged to me that the same was the act of
the said NATIONSBANK OF TEXAS, N.A., and was executed for the purposes and
consideration therein expressed and in the capacity therein stated.
GIVEN UNDER MY HAND AND SEAL OF OFFICE this the 26 day of September,
1996.
/s/ KAREN LYNNE RUSHING
-------------------------------
NOTARY PUBLIC, STATE OF TEXAS
My Commission Expires:
6/24/99 Karen Lynne Rushing
- --------------------- -------------------------------
(Printed Name of Notary)
(NOTARY SEAL) KAREN LYNNE RUSHING
NOTARY PUBLIC
STATE OF TEXAS
My Comm. Exp. 06-24-99
THE STATE OF TEXAS )
COUNTY OF DALLAS )
BEFORE ME, the undersigned authority, on this day personally appeared
T. M. Burns, known to me to be the person and officer whose name is subscribed
to the foregoing instrument, and acknowledged to me that the same was the act
of the said NATIONSBANK OF TEXAS, N.A., and was executed for the purposes and
consideration therein expressed and in the capacity therein stated.
GIVEN UNDER MY HAND AND SEAL OF OFFICE this the 26 day of September,
1996.
/s/ KAREN LYNNE RUSHING
-------------------------------
NOTARY PUBLIC, STATE OF TEXAS
My Commission Expires:
6/24/99 Karen Lynne Rushing
- --------------------- -------------------------------
(Printed Name of Notary)
(NOTARY SEAL) KAREN LYNNE RUSHING
NOTARY PUBLIC
STATE OF TEXAS
My Comm. Exp. 06-24-99
4
<PAGE> 5
THE STATE OF TEXAS )
COUNTY OF COLLIN )
BEFORE ME, the undersigned authority, on this day personally appeared
Scott Weaver, known to me to be the person and officer whose name is subsribed
to the foregoing instrument, and acknowledged to me that the same was the act of
the said ENCORE WIRE CORPORATION, a Delaware corporation, and that he executed
the same as the act of such corporation for the purposes and consideration
therein expressed and in the capacity therein stated.
GIVEN UNDER MY HAND AND SEAL OF OFFICE this the 18 day of September,
1996.
/s/ SHIRLEY WRIGHT
-------------------------------
NOTARY PUBLIC, STATE OF TEXAS
My Commission Expires:
1-31-97 SHIRLEY WRIGHT
- --------------------- -------------------------------
(Printed Name of Notary)
THE STATE OF TEXAS )
COUNTY OF COLLIN )
BEFORE ME, the undersigned authority, on this day personally appeared
Scott Weaver, known to me to be the person and officer whose name is subsribed
to the foregoing instrument, and acknowledged to me that the same was the act of
the said EWC LEASING CORP., a Nevada corporation, and that he executed
the same as the act of such corporation for the purposes and consideration
therein expressed and in the capacity therein stated.
GIVEN UNDER MY HAND AND SEAL OF OFFICE this the 18 day of September,
1996.
/s/ SHIRLEY WRIGHT
-------------------------------
NOTARY PUBLIC, STATE OF TEXAS
My Commission Expires:
1-31-97 SHIRLEY WRIGHT
- --------------------- -------------------------------
(Printed Name of Notary)
5
<PAGE> 1
EXHIBIT 11
ENCORE WIRE CORPORATION
COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
-----------------------------------------------------
<S> <C> <C> <C> <C>
COMMON SHARES OUTSTANDING AT
BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . 7,106,417 7,099,817 7,104,417 7,080,317
TREASURY SHARES INCLUDING WEIGHTED
AVERAGE NUMBER OF SHARES PURCHASED
DURING THE PERIOD . . . . . . . . . . . . . . . . . . . . . (92,315) -- (82,474) --
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES ISSUED DURING THE PERIOD . . . . . . . . . . . . . . 353 1,767 2,082 10,187
INCREMENTAL SHARES RELATED TO ASSUMED
EXERCISE OF STOCK OPTIONS . . . . . . . . . . . . . . . . . 105,278 * 65,162 394,502
----------- --------- --------- ---------
WEIGHTED COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING . . . . . . . . . . . . . . . 7,119,733 7,101,584 7,089,187 7,485,006
=========== ========= ========= =========
WEIGHTED COMMON AND COMMON
EQUIVALENT SHARES USED IN THE
CALCULATION OF INCOME PER
COMMON AND COMMON EQUIVALENT
SHARE . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,119,733 7,101,584 7,089,187 7,485,006
=========== ========= ========= =========
NET INCOME (LOSS) (IN THOUSANDS) . . . . . . . . . . . . . . . $ 3,103 $ (111) $ 3,872 $ 347
=========== ========= ========= =========
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE . . . . . . . . . . . . . . . . . . $ .44 $ (.02) $ .55 $ .05
=========== ========= ========= =========
</TABLE>
* Warrants and stock options were not dilutive in the quarter ended September
30, 1995.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,688
<SECURITIES> 0
<RECEIVABLES> 36,992
<ALLOWANCES> 519
<INVENTORY> 23,227
<CURRENT-ASSETS> 61,893
<PP&E> 37,488
<DEPRECIATION> 10,049
<TOTAL-ASSETS> 90,207
<CURRENT-LIABILITIES> 21,949
<BONDS> 0
0
0
<COMMON> 71
<OTHER-SE> 43,663
<TOTAL-LIABILITY-AND-EQUITY> 90,207
<SALES> 130,861
<TOTAL-REVENUES> 130,861
<CGS> 114,133
<TOTAL-COSTS> 9,111
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 115
<INTEREST-EXPENSE> 1,320
<INCOME-PRETAX> 6,297
<INCOME-TAX> 2,425
<INCOME-CONTINUING> 3,872
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,872
<EPS-PRIMARY> .55
<EPS-DILUTED> .55
</TABLE>
