<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
JUNE 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: (214) 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 August 2, 1996: 7,106,417
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FORM 10-Q
ENCORE WIRE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
June 30, 1996 (Unaudited) and December 31, 1995
Consolidated Statements of Income (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Quarters and six months ended June 30, 1996 and June 30, 1995
Consolidated Statements of Cash Flows (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Six months ended June 30, 1996 and June 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>
June 30, December 31,
1996 1995
In Thousands of Dollars (Unaudited) (See Note 1)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ 992
Accounts receivable (net of allowance of
$480 and $431) . . . . . . . . . . . . . . . . . . . . . . 34,558 28,188
Inventories (Note 2) . . . . . . . . . . . . . . . . . . . . . 21,768 24,549
Prepaid expenses and other assets . . . . . . . . . . . . . . 419 209
Current taxes receivable . . . . . . . . . . . . . . . . . . . -- 1,042
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 234 234
------------ --------------
Total current assets . . . . . . . . . . . . . . . . . . . 56,979 55,214
Property, plant and equipment-on the basis of cost:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287 287
Buildings and improvements . . . . . . . . . . . . . . . . . . 8,194 8,188
Machinery and equipment . . . . . . . . . . . . . . . . . . . 28,486 27,997
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . 521 507
------------ --------------
Total property, plant, and equipment . . . . . . . . . . . 37,488 36,979
Accumulated depreciation and
amortization . . . . . . . . . . . . . . . . . . . . . 9,176 7,585
------------ --------------
28,312 29,394
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 47
------------ --------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 85,340 $ 84,655
============ ==============
</TABLE>
See accompanying notes
3
<PAGE> 4
FORM 10-Q
ENCORE WIRE CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
<TABLE>
<CAPTION>
June 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 . . . . . . . . . . . . . . . . . . . . . . . . $ 19,368 $ 15,488
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 3,206 4,166
Current income taxes payable . . . . . . . . . . . . . . . . . . . . . 193 --
------------ --------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . 22,767 19,654
Non-current deferred income taxes . . . . . . . . . . . . . . . . . . . . . . 1,624 1,624
Long term notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,800 23,000
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued and outstanding shares - (7,106,417
at June 30, 1996 and 7,104,417 at
December 31, 1995) . . . . . . . . . . . . . . . . . . . . . 71 71
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 28,497 28,495
Treasury stock - 77,500 at June 30, 1996 and
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . (838) (838)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,419 12,649
------------ --------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . 41,149 40,377
------------ --------------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . $ 85,340 $ 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
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FORM 10-Q
ENCORE WIRE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
----------------- ----------------
In Thousands of Dollars, Except Per Share Data 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . $ 44,747 $ 38,674 $ 84,762 $ 76,767
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . 40,203 35,877 76,786 70,125
---------- ---------- ---------- ----------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . 4,544 2,797 7,976 6,642
Selling, general, and administrative expense . . . . . . . . 3,114 2,663 5,817 5,194
---------- ---------- ---------- ----------
Operating income . . . . . . . . . . . . . . . . . . . . . . 1,430 134 2,159 1,448
Interest expense (net) . . . . . . . . . . . . . . . . . . . 477 408 907 703
---------- ---------- ---------- ----------
Income (loss) before income taxes . . . . . . . . . . . . . . 953 (274) 1,252 745
Provision (benefit) for income taxes . . . . . . . . . . . . 367 (106) 482 287
---------- ---------- ---------- ----------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . $ 586 $ (168) $ 770 $ 458
========== =========== =========== ===========
Net income (loss) per common and common
equivalent share . . . . . . . . . . . . . . . . . . . . . $ .08 $ (.02) $ .11 $ .06
========== =========== =========== ===========
Weighted average common and common
equivalent shares . . . . . . . . . . . . . . . . . . . . 7,085 7,205 7,086 7,227
========== ========== ========== ==========
Cash dividends declared per share . . . . . . . . . . . . . . $ -- $ -- $ -- $ --
========== =========== =========== ===========
</TABLE>
See accompanying notes
5
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FORM 10-Q
ENCORE WIRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
In Thousands of Dollars 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 770 $ 458
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . .. . . . . . . . . . . . 1,615 1,469
Reduction of inventory cost to market . . . . . . . . . .. . . . . . . . . . . . 288 --
Provision for bad debts . . . . . . . . . . . . . . . . .. . . . . . . . . . . . 112 125
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . .. . . . . . . . . . . . (6,482) (2,663)
Inventory . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . 2,493 (5,288)
Accounts payable and accrued liabilities . . . . . . .. . . . . . . . . . . . 3,880 3,188
Other assets and liabilities . . . . . . . . . . . . .. . . . . . . . . . . . (1,170) (159)
Current income taxes payable . . . . . . . . . . . . .. . . . . . . . . . . . 1,235 (474)
-------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES. . . . . . . . . . . . 2,741 (3,344)
-------- ----------
INVESTING ACTIVITIES
Purchases of property, plant and equipment . . . . . . . . . . . . . . . . . . . . (625) (3,312)
Proceeds from Sale of Equipment . . . . . . . . . . . . . . . . . . . . . . . . . 90 --
-------- ----------
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES. . . . . . . . . . . . . . . . (535) (3,312)
-------- ----------
FINANCING ACTIVITIES
Borrowings (repayments) under notes payable . . . . . . . . . . . . . . . . . . . (3,200) 7,100
Purchases of Treasury Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (537)
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . 2 74
-------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES . . . . . . . . . . . . . . . . . . . (3,198) 6,637
-------- ----------
NET INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (992) (19)
Cash at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 992 1,264
-------- ----------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ 1,245
======== ==========
</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>
JUNE 30, DECEMBER 31,
1996 1995
-------------- ---------------
<S> <C> <C>
Raw materials . . . . . . . . . . . . . . $ 2,236 $ 3,290
Work-in-process . . . . . . . . . . . . . 4,551 4,992
Finished goods . . . . . . . . . . . . . . 17,900 22,414
--------------- ---------------
24,687 30,696
Decrease to LIFO cost . . . . . . . . . . (2,631) (6,147)
--------------- ---------------
22,056 24,549
Reduction to market value (288) --
--------------- ---------------
$ 21,768 $ 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 June 30, 1996, as computed in the Financing Agreement, was
$34.9 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 June 30, 1996. At June 30, 1996, the balance outstanding under the
Financing Agreement was $19.8 million. Amounts outstanding under the Financing
Agreement are payable on July 15, 1997 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.
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 will be made in the open market or
through privately negotiated transactions. The Company has amended its
Financing Agreement to allow it to effect this repurchase of common stock. 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
June 30, 1996, the Company had repurchased 77,500 shares of its common stock in
the open market at a weighted average price of $10.81 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 June 30, 1996 Compared to Quarter Ended June 30, 1995
The following discussion and analysis relates to factors that have
affected the operating results of the Company for the quarters ended June 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 second quarter of 1996 amounted to $44.7 million
compared with net sales of $38.7 million for the second quarter of 1995, an
increase of 16%. 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 second quarter of 1996 compared to the
second 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
$1.82 in the second quarter of 1996, compared to $1.98 in the second 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 $40.2 million in the second quarter of 1996,
compared to $35.9 million in the second quarter of 1995. Copper costs
increased to $30.7 million in the second quarter of 1996 from $28.3 million in
the second quarter of 1995. The average cost per copper pound purchased
decreased to $1.23 in the second quarter of 1996 from $1.40 in the second
quarter of 1995. Copper costs as a percentage of net sales decreased to 68.7%
in the second quarter of 1996 from 73.3% in the second quarter of 1995. This
decrease as a percentage of net sales in the second quarter of 1996 from the
9
<PAGE> 10
FORM 10-Q
comparable quarter 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
second 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
volume, were the primary factors in the Company's net income increasing to
$586,000 in the second quarter of 1996 from a loss of $168,000 in the second
quarter of 1995. Other raw material costs as a percentage of net sales
remained relatively unchanged at 12.5% in the second quarter of 1996, compared
with 12.2% in the second quarter of 1995. Depreciation, labor and overhead
costs as a percentage of net sales remained constant at 8.3% in the second
quarter of 1996 and 1995. Although these costs as measured by pound of copper
sold decreased during the second quarter of 1996 compared to the second quarter
of 1995, these costs as a percentage of net sales remained constant because of
the decrease in sales price per copper pound of product sold (as discussed
above).
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 second quarter of 1996, necessitating a decrease
in the LIFO reserve of $135,000 that resulted in an increase to the inventory
value and a decrease in cost of goods sold. In the second quarter of 1995, the
price of copper decreased necessitating a decrease in the LIFO reserve that
resulted in an increase to the inventory value and a decrease to the cost of
goods sold by $416,000. At June 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 June 30, 1996, LIFO
cost did exceed the market value of the inventory. Thus, the inventory value
was decreased by $288,000 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 $4.5 million, or 10.2% of net sales, for the
second quarter of 1996 from $2.8 million, or 7.2% of net sales, for the second
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 second quarter of 1996, as discussed above.
General and administrative expenses were $775,000, or 1.7% of net
sales, in the second quarter of 1996 compared to $724,000, or 1.9% of net
sales, in the second quarter of 1995. The provision for bad debts in the
second quarter of 1996 increased to $112,000 in the second quarter of 1996
compared to $70,000 in the second quarter of 1995. Selling expenses for the
second quarter of 1996 were $2.3 million, or 5.2% of net sales, compared to
$1.9 million, or 5.0% of net sales, in the second 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.
10
<PAGE> 11
FORM 10-Q
Net interest expense was $477,000 in the second quarter of 1996
compared to $408,000 in the second quarter of 1995. The increase was due to
more debt outstanding during the second quarter 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 sales of commercial wire. These were partially offset by
the decreased cost of copper in the second quarter of 1996 compared to the
second 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
$586,000 in the second quarter of 1996 compared to a loss of $168,000 in the
second quarter of 1995.
Six Months Ended June 30, 1995 Compared to Six Months Ended June 30, 1993
The following discussion and analysis relates to factors that have
affected the operating results of the Company for the six months ended June 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 six months of 1996 amounted to $84.8 million
compared with net sales of $76.8 million for the first six 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 six months of 1996 compared to
the first six 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 $1.81 in the first six months of 1996, compared to $2.04 in
the first six 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 $76.8 million in the first six months of 1996,
compared to $70.1 million in the first six months of 1995. Copper costs
increased to $61.9 million in the first six months of 1996 from $54.2 million
in the first six months of 1995. The average cost per copper pound purchased
decreased to $1.24 in the first six months of 1996 from $1.42 in the first six
months of 1995. Copper costs as a percentage of net sales increased to 73.1%
in the first six months of 1996 from 70.5% in the first six months of 1995.
This increase as a percentage of net sales in the first six months of 1996 from
the comparable six months in 1995 was due primarily to a decreased differential
between what the Company pays per pound of copper purchased and the Company's
net sales price per copper pound. This differential was decreased in the first
six months of 1996 due to a greater decrease in the sales price per copper
pound than the average cost per copper pound purchased. Other raw material
costs as a percentage of net sales increased to 12.9% in the first six months
of 1996, compared with 12.5% in the first six months of 1995. Depreciation,
labor and overhead costs as a percentage of net sales increased to 8.3% in the
first six months of 1996 compared to 7.7% in the first six months of 1996.
Although other raw materials, depreciation, labor and overhead as measured by
pound of copper sold decreased
11
<PAGE> 12
FORM 10-Q
during the first six months of 1996 compared to the first six months of 1995,
these costs as a percentage of net sales increased because of the decrease in
sales price per copper pound of product sold (as discussed above).
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 six months of 1996, necessitating a
decrease in the LIFO reserve of $3.5 million that resulted in an increase to
the inventory value and a decrease in cost of goods sold. In the first six
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 a increase to the cost of goods sold by $500,000. At June
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 June 30, 1996, LIFO cost did exceed the market value of
the inventory. Thus, the inventory value was decreased by $288,000 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 $7.9 million, or 9.4% of net sales, for the
first six months of 1996 from $6.6 million, or 8.7% of net sales, for the first
six months of 1995. The increase in gross profit as a percentage of net sales
was due primarily to larger unit volume in the first six months of 1996
compared to the first six months of 1995 as well as the improved pricing
environment for the Company's products. This improved pricing environment
resulted in a higher differential, as a percentage of net sales, between
product price and copper cost in the first six months of 1996, compared to the
same period in 1995.
General and administrative expenses were $1.4 million, or 1.6% of net
sales, in the first six months of 1996 compared to $1.5 million, or 1.9% of net
sales, in the first six months of 1995. Although the dollar amount of general
and administrative expenses remained relatively constant, they decreased as a
percentage of net sales because of the increase in net sales. The provision
for bad debts in the first six months of 1996 decreased to $112,000 in the
first six months of 1996 compared to $139,000 in the first six months of 1995.
Selling expenses for the first six months of 1996 were $4.5 million, or 5.3% of
net sales, compared to $3.7 million, or 4.9% of net sales, in the first six
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 $906,000 in the first six months of 1996
compared to $703,000 in the first six months of 1995. The increase was due to
more debt outstanding during the first six 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 sales of commercial wire. These were partially offset by
the decreased cost of copper in the first six months of 1996 compared to the
first six months of 1995.
12
<PAGE> 13
FORM 10-Q
The Company's effective tax rate remained constant at 38.5%.
As a result of the foregoing factors, the Company's net income
increased to $770,000 in the first six months of 1996 from $458,000 in the
first six 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 necessary 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 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 June 30, 1996, as computed in the Financing Agreement, was
$34.9 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 June 30, 1996. At June 30, 1996, the balance outstanding under the
Financing Agreement was $19.8 million. Amounts outstanding under the Financing
Agreement are payable on July 15, 1997 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.
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 will be made in the open market or
through privately negotiated transactions. The Company has amended its
Financing Agreement to allow it to effect this repurchase of common stock. 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
June 30, 1996, the Company had repurchased 77,500 shares of its common stock in
the open market at a weighted average price of $10.81 per share.
Cash provided by operations was $2.7 million in the first six months
of 1996 compared to cash used by operations of $3.3 million in the first six
months of 1995. This decrease in the use of cash is primarily the result of
the decrease of inventory in the first six months of 1996 compared to an
increase in the first six months of 1995, as well as greater net income in the
first six months of 1996 compared to the first six months of 1996. These items
were partially offset by a greater increase in accounts receivable in the first
six months of 1996 compared to the first six months of 1995. The increase in
13
<PAGE> 14
FORM 10-Q
accounts receivable in the first six months of 1996 was due to a larger
increase in sales in the first six months of 1996 from the fourth quarter of
1995 compared to the increase in sales in the first six months of 1995 from the
fourth quarter of 1994. Cash used in investing activities decreased from $3.3
million in the first six months of 1995 to $535,000 in the first six months of
1996. In both periods, these funds were used primarily to increase the
Company's production capacity. The cash provided by financing activities was
due primarily to borrowings in the first six months of 1996 and 1995 used to
fund the activities discussed above.
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. 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.
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, 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
11 Statement re computation of per share earnings.
27 Financial Data Schedule
(b) The Company filed a current report on Form 8-K dated May 9, 1996 (date
of event reported: May 7, 1996) relating to a press release distributed
by the Company regarding a change in management. No financial
statements were included in such report. No other reports on form 8-K
were filed by the Company during the three months ended June 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: August 14, 1996 /s/ Vincent A. Rego
----------------------------------------------
Vincent A. Rego, President and
Chief Executive Officer
Date: August 14, 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>
11 Statement re Computation of
Per Share Earnings
27 Financial Data Schedule
</TABLE>
17
<PAGE> 1
FORM 10-Q
ENCORE WIRE CORPORATION
COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
----------------------------------------------------
<S> <C> <C> <C> <C>
COMMON SHARES OUTSTANDING AT
BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . . . 7,106,417 7,080,817 7,104,417 7,080,317
TREASURY SHARES . . . . . . . . . . . . . . . . . . . . . . . . (77,500) -- (77,500) --
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES ISSUED DURING THE PERIOD . . . . . . . . . . . . . . . -- 8,406 1,945 4,555
INCREMENTAL SHARES RELATED TO ASSUMED
EXERCISE OF STOCK OPTIONS . . . . . . . . . . . . . . . . . . 56,255 116,052 56,660 141,671
---------- ---------- ---------- ----------
WEIGHTED COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING . . . . . . . . . . . . . . . . 7,085,172 7,205,275 7,085,522 7,226,543
========== ========= ========== ==========
WEIGHTED COMMON AND COMMON
EQUIVALENT SHARES USED IN THE
CALCULATION OF INCOME PER
COMMON AND COMMON EQUIVALENT
SHARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,085,172 7,205,275 7,085,522 7,226,543
========== ========= ========== ==========
NET INCOME (LOSS) (IN THOUSANDS) . . . . . . . . . . . . . . . $ 586 $ (168) $ 770 $ 458
========== ========= ========== ==========
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $ .08 $ (.02) $ .11 $ .06
========== ========= ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 35,038
<ALLOWANCES> 480
<INVENTORY> 21,768
<CURRENT-ASSETS> 56,979
<PP&E> 37,488
<DEPRECIATION> 9,176
<TOTAL-ASSETS> 85,340
<CURRENT-LIABILITIES> 22,767
<BONDS> 0
<COMMON> 0
71
0
<OTHER-SE> 41,078
<TOTAL-LIABILITY-AND-EQUITY> 85,340
<SALES> 84,762
<TOTAL-REVENUES> 84,762
<CGS> 76,786
<TOTAL-COSTS> 5,817
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 112
<INTEREST-EXPENSE> 907
<INCOME-PRETAX> 1,252
<INCOME-TAX> 482
<INCOME-CONTINUING> 770
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 770
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
