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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, 1997
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 October 27, 1997: 10,768,385
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FORM 10-Q
ENCORE WIRE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Page No.
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<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . 3
September 30, 1997 (Unaudited) and December 31, 1996
Consolidated Statements of Income (Unaudited) . . . . . . . . 5
Quarters and nine months ended September 30, 1997
and September 30, 1996
Consolidated Statements of Cash Flows (Unaudited) . . . . . . 6
Nine months ended September 30, 1997 and September 30, 1996
Notes to Consolidated Financial Statements. . . . . . . . . . 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . .10
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . .16
(A) Exhibit 11 - Statement re Computation of
Per Share Earnings
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</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,
1997 1996
In Thousands of Dollars (Unaudited) (See Note 1)
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,134 $ 1,261
Accounts receivable (net of allowance of
$726 and $473) . . . . . . . . . . . . . . . . . . . . . . 53,286 33,232
Inventories (Note 2) . . . . . . . . . . . . . . . . . . . . . 24,743 27,248
Prepaid expenses and other assets . . . . . . . . . . . . . . 262 210
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 268 268
------------ --------------
Total current assets . . . . . . . . . . . . . . . . . . . 79,693 62,219
Property, plant and equipment-on the basis of cost:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,747 287
Buildings and improvements . . . . . . . . . . . . . . . . . . 8,793 8,749
Construction in Progress . . . . . . . . . . . . . . . . . . . 7,856 --
Machinery and equipment . . . . . . . . . . . . . . . . . . . 35,481 29,962
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . 767 676
------------ --------------
Total property, plant, and equipment . . . . . . . . . . . 54,644 39,674
Accumulated depreciation and
amortization . . . . . . . . . . . . . . . . . . . . . 13,691 10,888
------------ --------------
40,953 28,786
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 63
------------ --------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 120,790 $ 91,068
============ ==============
</TABLE>
See accompanying notes
3
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FORM 10-Q
ENCORE WIRE CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
In Thousands of Dollars, Except Share Data (Unaudited) (See Note 1)
- ----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Trade accounts payable . . . . . . . . . . . . . . . . . . . . . . . . $ 20,248 $ 15,473
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 7,966 6,250
Current income taxes payable . . . . . . . . . . . . . . . . . . . . . 1,999 1,359
------------ --------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . 30,213 23,082
Non-current deferred income taxes . . . . . . . . . . . . . . . . . . . . . . 2,587 2,587
Long term notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,900 18,500
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued and outstanding shares - (10,768,385
at September 30, 1997 and 7,112,917 at
December 31, 1996) . . . . . . . . . . . . . . . . . . . . . 108 71
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 29,145 28,529
Treasury stock - 200,250 at September 30, 1997 and 192,750 at
December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . (1,608) (1,509)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,445 19,808
------------ --------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . 63,090 46,899
------------ --------------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . $ 120,790 $ 91,068
============ ==============
Note: The consolidated balance sheet at December 31, 1996, as presented, is derived from the audited consolidated
financial statements at that date.
</TABLE>
See accompanying notes
4
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FORM 10-Q
ENCORE WIRE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------- -----------------
<S> <C> <C> <C> <C>
In Thousands of Dollars, Except Per Share Data 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . $ 70,728 $ 46,099 $ 192,747 $ 130,861
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . 55,381 37,347 153,660 114,133
--------- --------- --------- ---------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . 15,347 8,752 39,087 16,728
Selling, general, and administrative expense . . . . . . . . 4,487 3,294 12,178 9,111
--------- --------- --------- ---------
Operating income . . . . . . . . . . . . . . . . . . . . . . 10,860 5,458 26,909 7,617
Interest expense (net) . . . . . . . . . . . . . . . . . . . 254 413 1,062 1,320
--------- --------- --------- ---------
Income (loss) before income taxes . . . . . . . . . . . . . . 10,606 5,045 25,847 6,297
Provision (benefit) for income taxes . . . . . . . . . . . . 4,285 1,942 10,210 2,425
--------- --------- --------- ---------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . $ 6,321 $ 3,103 $ 15,637 $ 3,872
========= ========= ========= =========
Net income (loss) per common and common
equivalent share . . . . . . . . . . . . . . . . . . . . . $ .57 $ .29 $ 1.41 $ .36
========= ========= ========= =========
Weighted average common and common
equivalent shares . . . . . . . . . . . . . . . . . . . . . 11,076 10,680 11,055 10,633
========= ========= ========= =========
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>
Nine Months Ended
September 30,
In Thousands of Dollars
1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,637 $ 3,872
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . 2,955 2,499
Reduction of inventory cost to market . . . . . . . . . . . . . . . . . . . . . -- 517
Provision for bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341 227
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,396) (8,512)
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,505 805
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . 6,492 (1,064)
Other assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . (51) 1,010
Current income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . 642 3,329
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES . . . . . . . . . . . 8,125 2,683
-------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . (15,141) (1,447)
Increase in Long Term Investments . . . . . . . . . . . . . . . . . . . . . . . . . . (80) (17)
Proceeds from Sale of Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 92
-------- --------
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES . . . . . . . . . . . . . . . . . (15,205) (1,372)
-------- --------
FINANCING ACTIVITIES
Borrowings (repayments) under notes payable . . . . . . . . . . . . . . . . . . . . . 6,400 (100)
Purchases of Treasury Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (99) (527)
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . 652 12
-------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES . . . . . . . . . . . . . . . . . 6,953 (615)
-------- --------
NET INCREASE IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (127) 696
Cash at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,261 992
-------- --------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,134 $ 1,688
======== ========
</TABLE>
See accompanying notes
6
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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, 1997. 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, 1996.
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,
1997 1996
------------- ------------
<S> <C> <C>
Raw materials . . . . . . . . . . . . . . $ 1,878 $ 1,364
Work-in-process . . . . . . . . . . . . . 1,993 4,185
Finished goods . . . . . . . . . . . . . . 20,872 21,821
-------------- -------------
24,743 27,370
Decrease to LIFO cost . . . . . . . . . . -- (122)
-------------- -------------
$ 24,743 $ 27,248
============== =============
</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 these are subject to many forces beyond management's control, interim
results are subject to the final year-end LIFO inventory valuation.
7
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FORM 10-Q
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.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share, which is required to be adopted in the
quarter ended December 31, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to restate
all prior periods. The impact of Statement 128 on the calculation of fully
diluted earnings per share for this quarter and nine months ended is not
expected to be material.
NOTE 4 - LONG TERM NOTE PAYABLE
Effective June 9, 1997, the Company completed an unsecured loan
facility with a group of banks (the "Financing Agreement"). The Financing
Agreement provides for maximum borrowings of the lesser of $55.0 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 calculated maximum borrowing amount available at September 30, 1997, as
computed under the Financing Agreement, was $55.0 million. The Financing
Agreement is unsecured and contains customary covenants and events of default.
The Company was in compliance with these covenants as of September 30, 1997.
Pursuant to the Financing Agreement, the Company is prohibited from declaring,
paying, or issuing cash dividends. At September 30, 1997, the balance
outstanding under the Financing Agreement was $24.9 million. Amounts
outstanding under the Financing Agreement are payable on May 31, 2000 with
interest due quarterly based on the bank's prime rate or LIBOR Rate options, at
the Company's election.
NOTE 5 - STOCK REPURCHASE AUTHORIZATION
In 1995, the Board of Directors authorized the Company to purchase up
to 600,000 shares, or approximately 5.6%, of its outstanding common stock
dependent upon market conditions. Purchases made pursuant to the repurchase
program are made from time to time in the open market or through privately
negotiated transactions. The Financing Agreement discussed in note 4 allows
the Company to purchase up to 407,250 shares at an aggregate price not to
exceed $3,991,410. As of September 30, 1997, the Company had repurchased
200,250 shares of its common stock in the open market at a weighted average
price of $8.03 per share.
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FORM 10-Q
NOTE 6 - STOCK DIVIDEND
On July 22, 1997 the Board of Directors of the Company declared a
3-for-2 stock split to be paid as a 50% stock dividend on its common stock.
The stock dividend was payable August 18, 1997 to stockholders of record at the
close of business on August 11, 1997. The per share amounts disclosed in this
filing have been restated to reflect the stock dividend.
9
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FORM 10-Q
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is a low-cost manufacturer of copper electrical building
wire and cable. The Company is a significant supplier of residential wire for
interior wiring in homes, apartments and manufactured housing. In 1994, the
Company completed a major plant expansion and began manufacturing commercial
wire for commercial and industrial buildings.
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 77.4%, 76.8%,
67.9%, 70.0% and 73.9% of the Company's cost of goods sold during fiscal 1996,
1995, 1994, 1993 and 1992 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.
The following discussion and analysis relates to factors that have
affected the operating results of the Company for the three month and nine
month periods ended September 30, 1997 and 1996. 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, 1996.
RESULTS OF OPERATIONS
Quarter Ended September 30, 1997 Compared to Quarter Ended September 30, 1996
Net sales for the third quarter of 1997 amounted to $70.7 million
compared with net sales of $46.1 million for the third quarter of 1996, an
increase of 53%. This increase was primarily due to an increase in sales
volume of 33% and an increase in the average cost of copper. The increase in
the average cost of copper resulted in a increase 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 1997 compared to the third quarter of
1996. The average sales price per copper pound of product sold was $1.93 in
the third quarter of 1997, compared to $1.74 in the third quarter of 1996.
Fluctuations in sales prices are primarily a result of price competition and
changing copper raw material prices.
Cost of goods sold was $55.4 million in the third quarter of 1997,
compared to $37.3 million in the third quarter of 1996. Copper costs increased
to $44.0 million in the third quarter of 1997 from $30.2 million in the third
quarter of 1996. The average cost per copper pound purchased increased to
$1.09 in the third quarter of 1997 from $.99 in the third quarter of 1996.
Copper costs as a percentage of net sales decreased to 62.3% in the third
quarter of 1997 from 65.6% in the third quarter of 1996. This decrease as a
percentage of net sales in the third quarter of 1997 from the comparable
quarter in 1996 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. The increased differential was a result
10
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FORM 10-Q
of improved pricing conditions and, along with higher sales volume, were the
primary factors in the Company's net income increasing to $6.3 million in the
third quarter of 1997 from net income of $3.1 million in the third quarter of
1996. Other raw material costs as a percentage of net sales decreased to 11.2%
in the third quarter of 1997, compared with 13.9% in the third quarter of 1996.
This decrease was caused primarily by two factors. First, other raw material
costs remained relatively constant while the net sales price per copper pound
increased as discussed above. Additionally, commercial wire sales accounted
for a larger percentage of net sales in the third quarter of 1997 compared to
the third quarter of 1996. Since commercial wire contains less other raw
materials than residential wire, other raw materials as a percentage of net
sales decreased. Depreciation, labor and overhead costs as a percentage of net
sales decreased to 9.0% in the third quarter of 1997 from 9.7% in the third
quarter of 1996. This decrease was caused by an increase in sales price per
copper pound which more than offset the absolute dollar increase of overhead
expenses related to higher volumes of production.
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 1997, necessitating a decrease
in the LIFO reserve of $2,956,000 that resulted in an increase to the inventory
value and a decrease in cost of goods sold. In the third quarter of 1996, the
price of copper decreased from the previous quarter, 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 $3,953,000. At September 30, 1997,
because LIFO approximated FIFO cost and did not exceed the market value of the
inventory, no adjustment to lower the cost of the inventory to the market value
was necessary. At September 30, 1996, LIFO cost did exceed the market value of
the inventory by $517,000. 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 $15.3 million, or 21.7% of net sales, for
the third quarter of 1997 from $8.8 million, or 19.0% of net sales, for the
third quarter of 1996. 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 1997, as discussed above.
General and administrative expenses were $887,000, or 1.3% of net
sales, in the third quarter of 1997 compared to $693,000, or 1.5% of net sales,
in the third quarter of 1996. 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 third quarter of 1997 increased to $127,000 compared to
$115,000 in the third quarter of 1996. Selling expenses for the third quarter
of 1997 were $3.5 million, or 4.9% of net sales, compared to $2.5 million, or
5.4% of net sales, in the third quarter of 1996. This decrease 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
increased.
Net interest expense was $254,000 in the third quarter of 1997
compared to $413,000 in the third quarter of 1996. While total debt increased
in the third quarter of 1997 compared to the third quarter
11
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FORM 10-Q
of 1996, a portion of this debt was due to the construction of the Company's
new copper rod fabrication facility and finished goods distribution facility.
This resulted in the capitalization of $273,000 of interest expense relating to
this construction in the third quarter of 1997.
The Company's effective tax rate increased to 40.4% in the third
quarter of 1997 due to the Company's higher taxable income being taxed at
higher marginal rates.
As a result of the foregoing factors, the Company's net income was 6.3
million in the third quarter of 1997 compared to net income of $3.1 million in
the third quarter of 1996
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
Net sales for the first nine months of 1997 amounted to $192.7 million
compared with net sales of $130.9 million for the first nine months of 1996, an
increase of 47%. This increase was primarily due to an increase in sales
volume of 33% and an increase in the average cost of copper. The increase in
the average cost of copper resulted in a increase 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 1997 compared to the first nine
months of 1996. The average sales price per copper pound of product sold was
$1.97 in the first nine months of 1997, compared to $1.78 in the first nine
months of 1996. Fluctuations in sales prices are primarily a result of price
competition and changing copper raw material prices.
Cost of goods sold was $153.7 million in the first nine months of
1997, compared to $114.1 million in the first nine months of 1996. Copper
costs increased to $113.8 million in the first nine months of 1997 from $92.2
million in the first nine months of 1996. The average cost per copper pound
purchased remained constant at $1.15 in the first nine months of 1997 and 1996.
Copper costs as a percentage of net sales decreased to 59.1% in the first nine
months of 1997 from 70.5% in the first nine months of 1996. This decrease as a
percentage of net sales in the first nine months of 1997 from the comparable
nine months in 1996 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 1997 primarily as a result of improved pricing conditions and, along
with higher volume, was a primary factor in the Company's net income increasing
to $15.6 million in the first nine months of 1997 compared to $3.8 million in
the first nine months of 1996. Other raw material costs as a percentage of net
sales decreased to 12.2% in the first nine months of 1997, compared with 13.3%
in the first nine months of 1996. This decrease was caused primarily by two
factors. First, other raw material costs remained relatively constant while
the net sales price per copper pound increased as discussed above.
Additionally, commercial wire sales accounted for a larger percentage of net
sales in the first nine months of 1997 compared to the first nine months of
1996. Since commercial wire contains less other raw materials than residential
wire, other raw material cost as a percentage of net sales decreased.
Depreciation, labor and overhead costs as a percentage of net sales decreased
to 8.5% in the first nine months of 1997 compared to 8.8% in the first nine
months of 1996. This decrease was caused by an absolute dollar increase of
overhead expenses related to higher volumes of production offset by a higher
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
12
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FORM 10-Q
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 increased during the first nine months
of 1997, necessitating an increase in the LIFO reserve of $122,000 that
resulted in a decrease to the inventory value and an increase in cost of goods
sold. In the first nine months of 1996, 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, 1997, because LIFO cost approximated
FIFO cost and did not exceed the market value of the inventory, no adjustment
to lower the cost of the inventory to the market value was necessary. 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 $39.0 million, or 20.3% of net sales, for
the first nine months of 1997 from $16.7 million, or 12.8% of net sales, for
the first nine months of 1996. The increase in gross profit as a percentage of
net sales was due primarily to larger unit volume in the first nine months of
1997 compared to the first nine months of 1996 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 1997, compared to the same period in 1996.
General and administrative expenses increased to $2.5 million, or 1.3%
of net sales, in the first nine months of 1997 compared to $1.9 million, or
1.5% of net sales, in the first nine months of 1996. 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 nine months of 1997 increased
to $341,000 in the first nine months of 1997 compared to $227,000 in the first
nine months of 1996. This increase was due to a larger accounts receivable
balance at September 30, 1997 than September 30, 1996. Selling expenses for
the first nine months of 1997 were $9.3 million, or 4.8% of net sales, compared
to $6.9 million, or 5.3% of net sales, in the first nine months of 1996. This
slight decrease 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 increased.
Net interest expense was $1.1 million in the first nine months of 1997
compared to $1.3 million in the first nine months of 1996. While total debt
increased in the first nine months of 1997 compared to the first nine months
of 1996, a portion of this debt was due to the construction of the Company's
new copper rod fabrication facility and finished goods distribution facility.
This resulted in the capitalization of $273,000 of interest expense relating to
this construction in the first nine months of 1997.
The decrease was due primarily to $273,000 of interest expense relating to
construction being capitalized during the first nine months of 1997 compared to
none in the third quarter of 1996 as well as a lower average interest rate
during the first nine months of 1997 compared to the first nine months of 1996.
The Company's effective tax rate increased to 39.5% in the first nine
months of 1997 compared to 38.5% in the first nine months of 1996.
13
<PAGE> 14
FORM 10-Q
As a result of the foregoing factors, the Company's net income
increased to $15.6 million in the first nine months of 1997 from $3.9 million
in the first nine months of 1996.
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 these 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 9, 1997, the Company completed an unsecured loan
facility with a group of banks (the "Financing Agreement"). The Financing
Agreement provides for maximum borrowings of the lesser of $55.0 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 calculated maximum borrowing amount available at September 30, 1997, as
computed in the Financing Agreement, was $55.0 million. The Financing
Agreement is unsecured and contains customary covenants and events of default.
The Company was in compliance with these covenants as of September 30, 1997.
Pursuant to the Financing Agreement, the Company is prohibited from declaring,
paying, or issuing cash dividends. At September 30, 1997, the balance
outstanding under the Financing Agreement was $24.9 million. Amounts
outstanding under the Financing Agreement are payable on May 31, 2000 with
interest due quarterly based on the bank's prime rate or LIBOR Rate options, at
the Company's election.
In 1995, the Board of Directors authorized the Company to purchase up
to 600,000 shares, or approximately 5.6%, of its outstanding Common Stock from
time to time dependent upon market conditions. Purchases made pursuant to the
repurchase program are made from time to time on the open market or through
privately negotiated transactions at prices determined by the Chairman of the
Board or the President of the Company. Cash provided by operations and
borrowings under the Financing Agreement are used to fund any repurchase of
shares by the Company. The repurchase program permits the Company to purchase
shares of its Common Stock whenever management believes that the stock price is
undervalued relative to the performance and future prospects of the Company.
The Financing Agreement discussed above allows the Company to purchase up to
407,250 shares with the aggregate price of these shares not to exceed
$3,991,410. As of September 30, 1997, the Company had repurchased 200,250
shares of its Common Stock in the open market at a weighted average price of
$8.03 per share.
Cash provided by operations was $8.1 million in the first nine months
of 1997 compared to cash provided by operations of $2.7 million in the first
nine months of 1996. This increase in cash provided by operations is primarily
the result of a substantially greater net income in the first nine months of
1997 compared to the first nine months of 1996, offset by a larger increase of
accounts receivable in the first nine months of 1997 compared to the first nine
months of 1996. The increase in accounts receivable in the first nine months
of 1997 was due to a larger increase in sales in the first nine months of 1997
from the fourth quarter of 1996 compared to the increase in sales in the first
nine months of 1996 from the fourth quarter of 1995. Cash used in investing
activities increased from $1.4 million in the first nine months of 1996 to
$15.2 million in the first nine months of 1997. In 1996, these funds were used
14
<PAGE> 15
FORM 10-Q
primarily to increase the Company's production capacity. In 1997, these funds
were used primarily to purchase land and begin construction of the Company's
copper rod fabrication facility and finished goods distribution facility as well
as increase the Company's production capacity. The cash provided by financing
activities in the first nine months of 1997 was due primarily to borrowings. The
cash used by financing activities in the first nine months of 1996 were used to
reduce the Company's borrowings.
During 1997, the Company expects its capital expenditures will consist
of additional manufacturing equipment for its residential and commercial wire
operations. In addition, the Company is in the process of constructing and
equipping a copper rod fabrication facility and finished goods distribution
facility. The total capital expenditures associated with these facilities and
the additional manufacturing equipment are estimated to be approximately $25.0
million. The Company also expects its working capital requirements to continue
to increase during 1997 as a result of expected continued increases in sales.
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 cash available pursuant to the Financing
Agreement will satisfy working capital needs and 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.
15
<PAGE> 16
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.
(b) No reports on form 8-K were filed by the Company during the
three months ended September 30, 1997.
16
<PAGE> 17
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 6, 1997 /s/ Vincent A. Rego
---------------------------------
Vincent A. Rego, President and
Chief Executive Officer
Date: November 6, 1997 /s/ Scott D. Weaver
---------------------------------
Scott D. Weaver, Vice President -
Finance, Treasurer and Secretary
(Principal Financial Officer)
17
<PAGE> 18
FORM 10-Q
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ------- -------
<S> <C>
11 Statement re Computation of
Per Share Earnings
27 Financial Data Schedule
</TABLE>
18
<PAGE> 1
FORM 10-Q
EXHIBIT 11
ENCORE WIRE CORPORATION
COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
COMMON SHARES OUTSTANDING AT
BEGINNING OF PERIOD . . . . . . . . . . . . . . . . 10,731,101 10,659,625 10,669,376 10,656,625
TREASURY SHARES INCLUDING WEIGHTED
AVERAGE NUMBER OF SHARES PURCHASED
DURING THE PERIOD . . . . . . . . . . . . . . . . (200,250) (138,473) (200,250) (123,711)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES ISSUED DURING THE PERIOD. . . . . . . . . . 29,078 530 46,339 3,123
INCREMENTAL SHARES RELATED TO ASSUMED
EXERCISE OF STOCK OPTIONS. . . . . . . . . . . . . 516,475 157,917 539,597 97,743
----------- ----------- ----------- -----------
WEIGHTED COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING. . . . . . . . . . . 11,076,404 10,679,599 11,055,062 10,633,780
=========== =========== =========== ===========
WEIGHTED COMMON AND COMMON
EQUIVALENT SHARES USED IN THE
CALCULATION OF INCOME PER
COMMON AND COMMON EQUIVALENT SHARE . . . . . . . . 11,076,404 10,679,599 11,055,062 10,633,780
=========== =========== =========== ===========
NET INCOME (LOSS) (IN THOUSANDS) . . . . . . . . . . $ 6,321 $ 3,103 $ 15,637 $ 3,872
=========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE . . . . . . . . . . . . . $ .57 $ .29 $ 1.41 $ .36
=========== =========== =========== ===========
</TABLE>
Note: All amounts have been adjusted to reflect the Company's 3-for-2 stock
split paid on August 18, 1997.
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,134
<SECURITIES> 0
<RECEIVABLES> 54,012
<ALLOWANCES> 726
<INVENTORY> 24,743
<CURRENT-ASSETS> 79,693
<PP&E> 54,644
<DEPRECIATION> 13,691
<TOTAL-ASSETS> 120,790
<CURRENT-LIABILITIES> 30,213
<BONDS> 0
0
0
<COMMON> 108
<OTHER-SE> 62,982
<TOTAL-LIABILITY-AND-EQUITY> 120,790
<SALES> 70,728
<TOTAL-REVENUES> 0
<CGS> 55,381
<TOTAL-COSTS> 4,360
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 127
<INTEREST-EXPENSE> 254
<INCOME-PRETAX> 10,606
<INCOME-TAX> 4,285
<INCOME-CONTINUING> 6,321
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,321
<EPS-PRIMARY> .57
<EPS-DILUTED> .57
</TABLE>
