<PAGE> 1
================================================================================
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, 1998
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 July 24, 1998: 16,301,043
================================================================================
<PAGE> 2
FORM 10-Q
ENCORE WIRE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets..................................................................3
June 30, 1998 (Unaudited) and December 31, 1997
Consolidated Statements of Income (Unaudited)................................................5
Quarters and six months ended June 30, 1998 and June 30, 1997
Consolidated Statements of Cash Flows (Unaudited)............................................6
Six months ended June 30, 1998 and June 30, 1997
Notes to Consolidated Financial Statements (Unaudited).......................................7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................................................10
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings...........................................................................16
ITEM 6. Exhibits and Reports on Form 8-K............................................................17
Signatures....................................................................................................18
</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,
1998 1997
In Thousands of Dollars (Unaudited) (See Note 1)
- ----------------------- ----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash ........................................ $ 1,371 $ 1,165
Accounts receivable (net of allowance of
$638 and $675) ..................... 51,855 44,302
Inventories (Note 2) ........................ 36,478 30,597
Prepaid expenses and other assets ........... 531 159
Deferred income taxes ....................... 793 793
--------- ---------
Total current assets ............... 91,028 77,016
Property, plant and equipment-on the basis of cost:
Land ........................................ 1,796 1,747
Construction in Progress .................... 24,030 19,258
Buildings and improvements .................. 17,870 8,793
Machinery and equipment ..................... 36,905 35,498
Furniture and fixtures ...................... 941 829
--------- ---------
Total property, plant, and equipment 81,542 66,125
Accumulated depreciation and
amortization .............. 17,322 14,797
--------- ---------
64,220 51,328
Other assets ......................................... 241 411
--------- ---------
Total assets ......................................... $ 155,489 $ 128,755
========= =========
</TABLE>
See accompanying notes
3
<PAGE> 4
FORM 10-Q
ENCORE WIRE CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
In Thousands of Dollars, Except Share Data (Unaudited) (See Note 1)
- ------------------------------------------ ----------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ........................ $ 24,311 $ 23,380
Accrued liabilities ........................... 5,371 8,248
Current income taxes payable .................. 3,164 1,677
--------- ---------
Total current liabilities ..................... 32,846 33,305
Non-current deferred income taxes ...................... 3,240 3,240
Long term notes payable ................................ 38,000 22,200
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued and outstanding shares - (16,276,043
at June 30, 1998 and 16,197,577 at
December 31, 1997) ................... 163 162
Additional paid-in capital ............................. 30,347 29,956
Treasury stock - 300,375 at June 30, 1998 and 300,375 at
December 31, 1997 ............................. (1,608) (1,608)
Retained earnings ...................................... 52,501 41,500
--------- ---------
Total stockholders' equity .................... 81,403 70,010
--------- ---------
Total liabilities and stockholders' equity ............. $ 155,489 $ 128,755
========= =========
</TABLE>
Note: The consolidated balance sheet at December 31, 1997, 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 Six Months Ended
June 30, June 30,
------------- ----------------
In Thousands of Dollars, Except Per Share Data 1998 1997 1998 1997
- ---------------------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales................................................................ $ 63,906 $ 66,889 $ 126,833 $ 122,020
Cost of goods sold....................................................... 51,446 53,620 98,924 98,280
--------- ---------- --------- ----------
Gross profit............................................................. 12,460 13,269 27,909 23,740
Selling, general, and administrative expense............................. 4,513 4,181 9,071 7,691
--------- ---------- --------- ----------
Operating income......................................................... 7,947 9,088 18,838 16,049
Interest expense (net)................................................... 267 444 520 808
--------- ---------- --------- ----------
Income before income taxes............................................... 7,680 8,644 18,318 15,241
Provision for income taxes............................................... 3,114 3,385 7,316 5,925
--------- ---------- --------- ----------
Net income............................................................... $ 4,566 $ 5,259 $ 11,002 $ 9,316
========= =========== ========== ===========
Net income per common and common
equivalent share - basic.............................................. $ .29 $ .33 $ .69 $ .59
========= =========== ========== ===========
Weighted average common and common
equivalent shares - basic............................................. 15,949 15,742 15,925 15,738
========= ========== ========= ==========
Net income per common and common
equivalent share - diluted............................................ $ .27 $ .32 $ .66 $ .57
========= =========== ========== ===========
Weighted average common and common
equivalent shares - diluted........................................... 16,613 16,555 16,586 16,282
========= ========== ========= ==========
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>
Six Months Ended
June 30,
In Thousands of Dollars 1998 1997
- ----------------------- ---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income ....................................................... $ 11,002 $ 9,316
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation and amortization ............................ 2,569 1,920
Reduction of inventory cost to market .................... -- --
Provision for bad debts .................................. 375 213
Changes in operating assets and liabilities:
Accounts receivable .................................. (7,928) (13,889)
Inventory ............................................ (5,881) (4,847)
Accounts payable and accrued liabilities ............. (1,946) 7,402
Other assets and liabilities ......................... (387) (199)
Current income taxes payable ......................... 1,487 476
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (709) 392
-------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment ....................... (15,459) (8,693)
Increase in Long Term Investments ................................ 170 (4)
Proceeds from Sale of Equipment .................................. 12 14
-------- --------
NET CASH USED IN INVESTING ACTIVITIES ........................ (15,277) (8,683)
-------- --------
FINANCING ACTIVITIES
Borrowings (repayments) under notes payable ...................... 15,800 7,900
Purchases of Treasury Stock ...................................... -- (99)
Proceeds from issuance of common stock ........................... 392 374
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................... 16,192 8,175
-------- --------
NET DECREASE IN CASH ................................................. 206 (116)
Cash at beginning of period .......................................... 1,165 1,261
-------- --------
Cash at end of period ................................................ $ 1,371 $ 1,145
======== ========
</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, 1998. 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, 1997.
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,
1998 1997
-------- ------------
<S> <C> <C>
Raw materials .................... $ 3,219 $ 2,299
Work-in-process .................. 4,197 6,128
Finished goods ................... 25,660 20,818
-------- --------
33,076 29,245
Increase to LIFO cost ............ 4,679 2,629
-------- --------
37,755 31,874
Lower of Cost or Market Adjustment (1,277) (1,277)
-------- --------
36,478 30,597
======== ========
</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 are based on management's estimates of
expected year-end inventory levels and costs. Because these are
7
<PAGE> 8
FORM 10-Q
subject to many forces beyond management's control, interim results are subject
to the final year-end LIFO inventory valuation.
NOTE 3 - INCOME PER SHARE
Income 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.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Quarter Ending Quarter Ending
June 30, 1998 June 30, 1997
<S> <C> <C>
Numerator:
Net Income $ 4,566,000 $ 5,259,000
=========== ===========
Denominator:
Denominator for basic earnings per share -
weighted average shares 15,948,891 15,741,701
Effect of dilutive securities:
Employee stock options 664,361 813,012
----------- -----------
Denominator for diluted earnings per share -
weighted average shares 16,613,252 16,554,713
=========== ===========
</TABLE>
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Six Months Ending Six Months Ending
June 30, 1998 June 30, 1997
<S> <C> <C>
Numerator:
Net Income $11,002,000 $ 9,316,000
=========== ===========
Denominator:
Denominator for basic earnings per share -
weighted average shares 15,924,930 15,737,729
Effect of dilutive securities:
Employee stock options 661,181 544,482
----------- -----------
Denominator for diluted earnings per share -
weighted average shares 16,586,111 16,282,211
=========== ===========
</TABLE>
8
<PAGE> 9
FORM 10-Q
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 June 30, 1998, 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 June 30, 1998. Pursuant to the
Financing Agreement, the Company is prohibited from declaring, paying, or
issuing cash dividends. At June 30, 1998, the balance outstanding under the
Financing Agreement was $38.0 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
On March 24, 1995, the Company announced that its Board of Directors
had authorized it to purchase up to 900,000 shares, or approximately 5.6%, 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. As of June 30, 1998, the Company had
repurchased an aggregate of 300,375 shares of its common stock in the open
market (including 7,500 shares in 1997) at a weighted average price of $5.35 per
share. The Financing Agreement discussed in note 4 allows the Company to
purchase up to 610,875 shares with an aggregate price of these shares not to
exceed $3,991,410. The Company did not purchase any shares under this
authorization during the second quarter of 1998.
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.
On May 5, 1998 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 June 15, 1998 to stockholders of record at the close of
business on June 8, 1998. The per share amounts disclosed in this filing have
been restated to reflect the stock dividend.
9
<PAGE> 10
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 73.8%, 77.4%,
76.8%, 67.9% and 70.0% of the Company's cost of goods sold during fiscal 1997,
1996, 1995, 1994 and 1993 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 six month
periods ended June 30, 1997 and 1998. 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, 1997.
RESULTS OF OPERATIONS
Quarter Ended June 30, 1998 Compared to Quarter Ended June 30, 1997
Net sales for the second quarter of 1998 amounted to $63.9 million
compared with net sales of $66.9 million for the second quarter of 1997. This
decrease was due to a decrease in the average sales price per copper pound of
the Company's products, offset in part by an increase of 21% in the pounds of
copper shipped during the period. The decrease in the average sales price per
copper pound of the Company's products was due to a decrease of 29% in the
average cost of copper from the second quarter of 1997 to the same period in
1998, as well as competitive pricing pressure for 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 1998 compared to the
second quarter of 1997. The average sales price per copper pound of product sold
was $1.59 in the second quarter of 1998, compared to $2.03 in the second quarter
of 1997. Fluctuations in sales prices are primarily a result of price
competition and changing copper raw material prices.
Cost of goods sold was $51.4 million in the second quarter of 1998,
compared to $53.6 million in the second quarter of 1997. Copper costs decreased
to $34.7 million in the second quarter of 1998 from $38.8 million in the second
quarter of 1997. The average cost per copper pound purchased decreased to $.85
in the second quarter of 1998 from $1.20 in the second quarter of 1997. Copper
costs as a percentage of net sales decreased to 54.3% in the second quarter of
1998 from 58.0% in the second quarter of 1997. This decrease as a percentage of
net sales in the second quarter of 1998 from the
10
<PAGE> 11
FORM 10-Q
comparable quarter in 1997 was due primarily to lower copper costs per pound of
product sold partially offset by 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 decreased in the second quarter of 1998 due to a
lesser decrease in the average cost per copper pound purchased than in the sales
price per copper pound. The decreased differential was a result of competitive
pricing conditions. Other raw material costs as a percentage of net sales
increased to 14.6% in the second quarter of 1998, compared with 12.6% in the
second quarter of 1997. This increase is due to raw materials per pound of
copper sold remaining relatively constant while the sales price per copper pound
of product sold decreased as discussed above. Depreciation, labor and overhead
costs as a percentage of net sales increased to 12.9% in the second quarter of
1998, compared with 8.2% in the second quarter of 1997. This increase is due to
an increase in depreciation, labor and overhead per pound of copper sold
relating to the Company's expansion projects as well as a lower 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 1998, necessitating a decrease
in the LIFO reserve of $835,000 and a corresponding decrease in cost of goods
sold. In the second quarter of 1997, the price of copper increased 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 of $918,000. At June 30, 1998,
LIFO cost exceeded the market value of the inventory, However the excess did not
require an addition to the lower of cost or market reserve because the reserve
previously established, in the amount of $1.3 million, was adequate to adjust
for the amount of cost over market. At June 30, 1997, LIFO cost did not exceed
the market value of the inventory, thus no adjustment to lower the cost of
inventory to market value was necessary. Future reductions in the price of
copper could require the Company to record lower of cost or market adjustments
against the related inventory balance which would result in a negative impact on
net income. In addition, if the quantity of inventory is reduced in any period,
copper that is carried in inventory at a cost different from the cost of copper
in the period in which the reduction occurs will be included in cost of goods
sold at the different price.
Gross profit remained relatively constant at $12.5 million, or 19.5% of
net sales, for the second quarter of 1998 compared to $13.3 million, or 19.8% of
net sales, for the second quarter of 1997.
General and administrative expenses were $1.0 million, or 1.7% of net
sales, in the second quarter of 1998 compared to $858,000, or 1.3% of net sales,
in the second quarter of 1997. This increase in general and administrative
expenses was due to increased expenses related to the Company's increased
volume. As a percentage of sales, this increase was caused by the increase in
general and administrative costs as well as a decrease in the sales price per
copper pound sold. The provision for bad debts in the second quarter of 1998
increased to $175,000 in the second quarter of 1998 compared to $117,000 in the
second quarter of 1997. Selling expenses for the second quarter of 1998 were
$3.3 million, or 5.1% of net sales, compared to $3.2 million, or 4.8% of net
sales, in the second quarter of 1997. Freight charges per copper pound of
product shipped decreased due to the a greater percentage of the Company's sales
being shipped to geographic locations closer to the Company's plant in the
second quarter of 1998 compared to the same quarter of 1997. This decrease was
partially offset by the decrease in the sales price per copper pound sold.
11
<PAGE> 12
FORM 10-Q
Net interest expense was $267,000 in the second quarter of 1998
compared to $444,000 in the second quarter of 1997. The decrease was due to a
higher average debt balance outstanding during the second quarter of 1998 than
the comparable period during 1997, reduced by the capitalization of interest
related to the Company's copper rod fabrication facility construction. This
increase in average debt outstanding was the result of capital expenditures and
additional working capital. The decreased cost of copper in the second quarter
of 1998 compared to the second quarter of 1997 decreased the amount of working
capital necessary for inventory, but this was partially offset by increased
quantities of inventory and an increased accounts receivable balance.
The Company's effective tax rate increased to 40.5% in the second
quarter of 1998 compared to 39.2% in the second quarter of 1997. This increase
was due to the accrual for a non deductible penalty in the second quarter of
1998 (See Part II - Item 1. Legal Proceedings). Without the accrual of this
amount, the Company's effective tax rate would have been 39.5%.
As a result of the foregoing factors, the Company's net income was $4.6
million in the second quarter of 1998 compared to $5.3 million in the second
quarter of 1997.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Net sales for the first six months of 1998 amounted to $126.8 million
compared with net sales of $122.0 million for the first six months of 1997. This
increase was due to a 25% increase in the pounds of copper shipped during the
period, offset in part by a decrease in the average sales price per copper pound
of the Company's products. The decrease in the average sales price per copper
pound of the Company's products was due to a decrease of 28% in the average cost
of copper from the first six months of 1997 to the same period in 1998, as well
as competitive pricing pressure for the Company's products in the second quarter
of 1998. 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
1998 compared to the first six months of 1997. The average sales price per
copper pound of product sold was $1.66 in the first six months of 1998, compared
to $2.00 in the first six months of 1997. Fluctuations in sales prices are
primarily a result of price competition and changing copper raw material prices.
Cost of goods sold was $98.9 million in the first six months of 1998,
compared to $98.3 million in the first six months of 1997. Copper costs
decreased to $67.2 million in the first six months of 1998 from $69.8 million in
the first six months of 1997. The average cost per copper pound purchased
decreased to $.85 in the first six months of 1998 from $1.18 in the first six
months of 1997. Copper costs as a percentage of net sales decreased to 53.0% in
the first six months of 1998 from 57.1% in the first six months of 1997. This
decrease as a percentage of net sales in the first six months of 1998 from the
comparable period in 1997 was due primarily to lower copper costs per pound of
product sold partially offset by a slightly decreased differential between what
the Company pays per pound of copper purchased and the Company's net sales price
per copper pound. This differential decreased in the first six months of 1998
due to a lesser decrease in the average cost per copper pound purchased than in
the sales price per copper pound. The decreased differential was a result of
competitive pricing conditions in the second quarter of 1998. Other raw material
costs as a percentage of net sales increased to 14.8% in the first six months of
1998, compared with 12.8% in the first six months of 1997. This increase is due
to a decrease in the sales price per copper pound sold, as discussed above,
which more than offset the slight decrease in raw materials per pound of copper
sold. Depreciation, labor and overhead costs as
12
<PAGE> 13
FORM 10-Q
a percentage of net sales increased to 11.8% in the first six months of 1998
compared to 8.2% in the first six months of 1997. This increase is due to an
increase in depreciation labor and overhead per pound of copper sold relating to
the Company's expansion projects as well as a lower 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 1998, necessitating a
decrease in the LIFO reserve of $2.0 million that resulted in an increase to the
inventory value and a decrease in cost of goods sold. In the first six months of
1997, the price of copper increased, necessitating an increase in the LIFO
reserve that resulted in an decrease to the inventory value and an increase to
the cost of goods sold of $2.8 million. At June 30, 1998, LIFO cost exceeded the
market value of the inventory. However, the excess did not require an addition
to the lower of cost or market reserve because the reserve previously
established, in the amount of $1.3 million, was adequate to adjust for the
amount of cost over market. At June 30, 1997, LIFO cost did not exceed the
market value of the inventory, thus, no adjustment to lower the cost of
inventory to market value was necessary. Future reductions in the price of
copper could require the Company to record lower of cost or market adjustments
against the related inventory balance which would result in a negative impact on
net income. In addition, if the quantity of inventory is reduced in any period,
copper that is carried in inventory at a cost different from the cost of copper
in the period in which the reduction occurs will be included in cost of goods
sold at the different price.
Gross profit increased to $27.9 million, or 22.0% of net sales, for the
first six months of 1998 from $23.7 million, or 19.5% of net sales, for the
first six months of 1997. The increase in gross profit as a percentage of net
sales was due primarily to increased sales volume, partially offset by
competitive pricing for the Company's product in the second quarter of 1998
which resulted in a slightly lower differential between product price and copper
cost in the first six months of 1998, as discussed above.
General and administrative expenses were $2.1 million, or 1.7% of net
sales, in the first six months of 1998 compared to $1.6 million, or 1.3% of net
sales, in the first six months of 1997. This increase in general and
administrative expenses was due to increased expenses related to the Company's
increased sales volume. As a percentage of sales, this increase was caused by
the dollar increase in general and administrative costs as well as a decrease in
the sales price per copper pound sold. The provision for bad debts in the first
six months of 1998 increased to $375,000 in the first six months of 1998
compared to $214,000 in the first six months of 1997. This increase was due to a
larger accounts receivable balance at June 30, 1998 than June 30, 1997. Selling
expenses for the first six months of 1998 were $6.6 million, or 5.2% of net
sales, compared to $5.8 million, or 4.8% of net sales, in the first six months
of 1997. Freight charges per copper pound of product shipped decreased due to
the a greater percentage of the Company's sales being shipped to geographic
locations closer to the Company's plant in the first six months of 1998 compared
to the same period of 1997. This decrease was offset by the decrease in the
sales price per copper pound sold.
Net interest expense was $520,000 in the first six months of 1998
compared to $808,000 in the first six months of 1997. The decrease was due to a
higher average debt balance outstanding during the first six months of 1998 than
the comparable period during 1997, reduced by the capitalization of interest
related to the Company's copper rod fabrication facility construction. This
increase in average debt outstanding was the result of capital expenditures and
additional working capital. The decreased cost of
13
<PAGE> 14
FORM 10-Q
copper in the first six months of 1998 compared to the comparable period of 1997
decreased the amount of working capital necessary for inventory, but this was
partially offset by increased quantities of inventory and an increased accounts
receivable balance.
The Company's effective tax rate increased to 39.9% in the first six
months of 1998 compared to 38.9% in the first six months of 1997. This increase
was due to the accrual for a non deductible penalty in the first six months of
1998 (See Part II Item 1. Legal Proceedings). Without the accrual of this
amount, the Company's effective tax rate would have been 39.5%.
As a result of the foregoing factors, the Company's net income
increased to $11.0 million in the first six months of 1998 from $9.3 million in
the first six months of 1997.
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 June 30, 1998, 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 June 30, 1998. Pursuant to the
Financing Agreement, the Company is prohibited from declaring, paying, or
issuing cash dividends. At June 30, 1998, the balance outstanding under the
Financing Agreement was $38.0 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.
On March 24, 1995, the Company announced that its Board of Directors
had authorized it to purchase up to 900,000 shares, or approximately 5.6%, 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. As of June 30, 1998, the Company had
repurchased an aggregate of 300,375 shares of its common stock in the open
market (including 7,500 shares in 1997) at a weighted average price of $5.35 per
share. The Financing Agreement discussed in note 4 allows the Company to
purchase up to 610,875 shares with an aggregate price of these shares not to
exceed $3,991,410. The Company did not purchase any shares under this
authorization during the second quarter of 1998.
Cash used by operating activities was $709,000 in the first six months
of 1998 compared to cash provided by operations of $392,000 in the first six
months of 1997. This decrease in cash provided by operations is primarily the
result of a larger increase of accounts receivable and inventory in the first
six
14
<PAGE> 15
FORM 10-Q
months of 1998 compared to the first six months of 1997, which was partially
offset by a greater net income in the first six months of 1998 compared to the
first six months of 1997. The increase in accounts receivable in the first six
months of 1998 was due to a larger increase in sales in the first six months of
1998 from the fourth quarter of 1997 compared to the increase in sales in the
first six months of 1997 from the fourth quarter of 1996. Cash used in investing
activities increased from $8.7 million in the first six months of 1997 to $15.2
million in the first six months of 1998. In 1997 these funds were used primarily
to increase the Company's production capacity. In 1998, these funds were used
primarily to purchase land and complete construction of the Company's copper rod
fabrication facility as well as increase the Company's production capacity. The
cash provided by financing activities in the first six months of 1998 and 1997
was due primarily to borrowings.
During 1998, the Company expects its capital expenditures will consist
of additional manufacturing equipment for its residential and commercial wire
operations, purchase of real property and the completion of its copper rod
fabrication 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 1998 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.
IMPACT OF YEAR 2000
The Company is currently working to determine the impact of the year
2000 issue on the processing of date sensitive information by the Company's
computerized information systems. The year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failures. Based on
information available at this time, costs of addressing potential problems are
not currently expected to have a material adverse impact on the Company's
financial position, results of operations or cash flows in future periods. The
Company is currently engaged in identifying and resolving all significant year
2000 issues in a timely manner.
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 1. LEGAL MATTERS
On August 20, 1997, the Company was inspected by the U.S. Environmental
Protection Agency (the "EPA") to determine the Company's compliance with the
requirements of the Emergency Planning and Community Right-to-Know Act
provisions ("EPCRA") of the Comprehensive Environmental Response, Compensation
and Liability Act, as amended. In general, EPCRA requires private businesses to
maintain and file with the government specified documents concerning the on-site
recycling and off-site management of a defined group of chemicals, including
metal compounds. The Company was required to provide the EPA by September 12,
1997 with information concerning its processing of copper, lead compounds,
antimony compounds and methyl ethyl ketone for calendar years 1994 and 1995.
This information was researched by the Company, and the required documents were
timely filed with the EPA.
In a separate matter, by letter dated February 17, 1998, the Company
was issued "Findings of Violation and Order for Compliance" by the EPA. In this
document, the EPA alleged that the Company had failed to obtain a federal storm
water discharge permit pursuant to the Clean Water Act ("CA") for its past and
current ongoing operations in McKinney, Texas, and to otherwise meet the terms
of this permitting program. The Company was ordered timely to (1) apply for a
federal storm water discharge permit, (2) prepare and submit a Storm Water
Pollution Prevention Plan and (3) prepare and file a report with the EPA
describing actions that the Company has taken or would take to correct
violations alleged by the EPA. On March 6, 1998, the Company applied for a
federal storm water discharge permit. On March 23, 1998, the Company filed the
Storm Water Pollution Prevention Plan and the written report required by the
"Findings of Violation and Order for Compliance" with the EPA.
In addition, the "Findings of Violation and Order for Compliance"
offered the Company the opportunity to contact the EPA to schedule a Show Cause
hearing to demonstrate to the EPA why it should not take further enforcement
action against the Company relating to the matters stated in this document. The
Company requested a Show Cause Hearing, and it was held on April 13, 1998.
On April 17, 1998, the Company was issued a consolidated "Complaint and
Notice of Opportunity for Hearing" by the EPA (the "1998 Complaint"). In the
1998 Complaint, the EPA proposed a civil penalty of $151,000 for seven alleged
violations of EPCRA's reporting requirements and proposed a civil penalty of
$27,500 for the alleged failure to have a federal storm water discharge permit.
In accordance with the EPA's Rule of Practice, the Company has filed an Answer
to the Complaint and has requested an informal settlement conference and a
hearing on all matters alleged by the EPA. The Company intends to vigorously
defend itself in this matter.
16
<PAGE> 17
FORM 10-Q
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Second Amendment to Second Amended and Restated Financing
Agreement dated as of June 15, 1998 by and among Encore Wire
Corporation, NationsBank of Texas, N.A. and Bank of America,
Texas N.A.
27 Financial Data Schedule
(b) No reports on Form 8-K were filed by the Company during
the three months ended June 30, 1998.
17
<PAGE> 18
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 13, 1998 /s/ Vincent A. Rego
------------------------------------------
Vincent A. Rego,
Chief Executive Officer
Date: August 13, 1998 /s/ Daniel L. Jones
------------------------------------------
Daniel L. Jones, President
Date: August 13, 1998 /s/ Scott D. Weaver
------------------------------------------
Scott D. Weaver, Vice President - Finance,
Treasurer and Secretary
(Principal Financial Officer)
18
<PAGE> 19
FORM 10-Q
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Page
- ------- ------- ------------
<S> <C> <C>
10.1 Second Amendment to Second Amended and Restated Financing Agreement
dated as of June 15, 1998 by and among Encore Wire Corporation,
NationsBank of Texas, N.A. and Bank of America, Texas N.A. ................. 19
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
SECOND AMENDMENT TO SECOND
AMENDED AND RESTATED FINANCING AGREEMENT
THIS SECOND AMENDMENT TO SECOND AMENDED AND RESTATED FINANCING AGREEMENT
(the "Amendment") dated as of June 15, 1998, is by and among ENCORE WIRE
CORPORATION, a Delaware corporation ("Borrower"), NATIONSBANK, N.A. (successor
by merger to NationsBank of Texas, N.A.), a national banking association, and
BANK OF AMERICA, TEXAS, N.A., a national banking association, in their
individual capacities as "Lenders" (as such term is defined herein), and
NATIONSBANK, N.A. (successor by merger to NationsBank of Texas, N.A.), a
national banking association, as agent for itself and the other Lenders (in
such capacity, together with its successors in such capacity, the "Agent").
W I T N E S S E T H:
WHEREAS, the Borrower, the Agent and the Lenders are parties to the Second
Amended and Restated Financing Agreement, dated as of June 9, 1997, as amended
by the First Amendment to Second Amended and Restated Financing Agreement,
dated as of February 20, 1998 (the "First Amendment") (as so amended, the
"Original Financing Agreement") relating to a $40,000,000 revolving credit
facility ("Facility"), pursuant to which, inter alia, the Lenders agreed to
make certain loans available to the Borrower upon the terms and conditions
contained in the Original Financing Agreement;
WHEREAS, Borrower desires that the Lenders increase the available credit
under said facility to an aggregate of $55,000,000 and make certain other
modifications to the Original Financing Agreement; and
WHEREAS, the parties hereto desire to amend the Original Financing
Agreement in accordance with the terms and provisions of this Amendment;
NOW, THEREFORE, for and in consideration of these premises and other
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Borrower, the Agent and the Lenders hereby agree as follows:
1. Terms. All capitalized terms defined in the Original Financing
Agreement and not otherwise defined herein shall have the same definitions when
used herein as set forth in the Original Financing Agreement as amended by this
Amendment.
2. Amendment of Section 1.83. Section 1.83 of the Original Financing
Agreement is amended by deleting Section 1.83, as amended by the First
Amendment, in its entirety and replacing it with the following:
1.83 "Revolving Credit Limit" means the amount of (i) Fifty-Five Million
Dollars ($55,000,000) for the period commencing on June 15, 1998 through
and including June 30, 1999 and (ii) Fifty Million Dollars ($50,000,000)
for the period commencing on June 30, 1999 until the last day of the
Contract Term. Upon such reduction date, the respective Commitments of each
Lender shall be reduced proportionately based upon their respective
Commitments Percentages immediately prior to the effectiveness of such
reduction of the Revolving Credit Limit.
<PAGE> 2
3. Increase of Commitment. The aggregate Commitment of all Lenders is
increased from $40,000,000 to $55,000,000; the amount of NationsBank's
Commitment is increased from $25,500,000 to $35,000,000; and the amount of Bank
of America's Commitment is increased from $14,500,000 to $20,000,000.
4. Costs. The Borrower shall pay all reasonable out-of-pocket costs and
expenses incurred by the Agent or any Lender in connection with the
negotiation, preparation, execution and consummation of this Amendment and the
transactions contemplated by this Amendment, including, without limitation, the
reasonable fees and expenses of counsel to the Agent and the Lenders.
5. Miscellaneous.
5.1 Headings. Section headings are for reference only and shall not
affect the interpretation or meanings of any provision of this Amendment.
5.2 Effect of this Amendment. The Original Financing Agreement, as
amended by this Amendment, shall remain in full force and effect except that
any reference therein, or in any other Loan Document referring to the Original
Financing Agreement, shall be deemed to refer to the Original Financing
Agreement as amended by this Amendment.
5.3 GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS AND APPLICABLE FEDERAL LAW.
5.4 Counterparts. This Amendment may be executed by the different parties
hereto on separate counterparts, each of which, when so executed, shall be
deemed an original but all such counterparts shall constitute but one and the
same Amendment.
5.5 NO ORAL AGREEMENTS. THE Original Financing Agreement, AS AMENDED BY
THIS AMENDMENT, TOGETHER WITH THE OTHER LOAN DOCUMENTS, REPRESENTS THE ENTIRE
AGREEMENT AMONG 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 OR AMONG THE PARTIES.
2
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective duly authorized officers as of the date first
above written.
BORROWER:
ENCORE WIRE CORPORATION
By: /s/ SCOTT WEAVER
---------------------------------
Name: Scott Weaver
-------------------------------
Title: VP - Finance
------------------------------
LENDERS AND AGENT:
NATIONSBANK, N.A.
Individually and as Agent
By:
---------------------------------
Todd M. Burns, Vice President
BANK OF AMERICA, TEXAS, N.A.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
CONFIRMATION OF GUARANTY
EWC Leasing Corp. ("Guarantor"), a wholly-owned subsidiary of Encore Wire
Corporation, hereby acknowledges the matters covered by the Second Amendment to
Second Amended and Restated Financing Agreement to which this Confirmation of
Guaranty is attached and confirms that, notwithstanding such matters, the
Guaranty By Corporation dated as of June 9, 1997 issued by Guarantor to and in
favor of NationsBank of Texas, N.A. (and now in favor of NationsBank, N.A. as a
result of the merger of NationsBank of Texas, N.A. with and into NationsBank,
N.A.) and the Guaranty By Corporation dated as of June 9, 1997 issued by
Guarantor to and in favor of Bank of America, Texas, N.A. remain in full force
and effect as continuing obligations of Guarantor, enforceable against
Guarantor in accordance with their respective terms.
In Witness Whereof, this Confirmation of Guaranty is executed and
delivered as of the 15th day of June, 1998.
EWC LEASING CORP.
By: /s/ SCOTT D. WEAVER
-----------------------------------------
Scott D. Weaver
Vice President
3
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,371
<SECURITIES> 0
<RECEIVABLES> 52,493
<ALLOWANCES> 638
<INVENTORY> 36,478
<CURRENT-ASSETS> 91,028
<PP&E> 81,542
<DEPRECIATION> 17,322
<TOTAL-ASSETS> 155,489
<CURRENT-LIABILITIES> 32,846
<BONDS> 0
0
0
<COMMON> 163
<OTHER-SE> 81,240
<TOTAL-LIABILITY-AND-EQUITY> 155,489
<SALES> 63,906
<TOTAL-REVENUES> 63,906
<CGS> 51,446
<TOTAL-COSTS> 4,338
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 175
<INTEREST-EXPENSE> 267
<INCOME-PRETAX> 7,680
<INCOME-TAX> 3,114
<INCOME-CONTINUING> 4,566
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,566
<EPS-PRIMARY> .29
<EPS-DILUTED> .27
</TABLE>
