<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 2000
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 31, 2000: 15,193,709
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<PAGE> 2
ENCORE WIRE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets.....................................................................3
June 30, 2000 (Unaudited) and December 31, 1999
Consolidated Statements of Income (Unaudited)...................................................5
Quarters and six months ended June 30, 2000 and June 30, 1999
Consolidated Statements of Cash Flows (Unaudited)...............................................6
Six months ended June 30, 2000 and June 30, 1999
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..............................................................................15
ITEM 4. Submission of Matters to a Vote of Security Holders............................................15
ITEM 6. Exhibits and Reports on Form 8-K...............................................................16
Signatures.......................................................................................................17
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ENCORE WIRE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
In Thousands of Dollars 2000 1999
(Unaudited) (See Note 1)
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash .......................................... $ 1,334 $ 1,256
Accounts receivable (net of allowance of
$486 and $485) ............................ 60,028 46,592
Inventories (Note 2) .......................... 44,246 54,638
Prepaid expenses and other assets ............. 816 368
Current taxes receivable ...................... -- --
-------- --------
Total current assets ...................... 106,424 102,854
Property, plant and equipment-on the basis of cost:
Land .......................................... 3,583 3,583
Construction in Progress ...................... 1,864 2,191
Buildings and improvements .................... 26,086 26,004
Machinery and equipment ....................... 76,594 74,052
Furniture and fixtures ........................ 1,973 1,865
-------- --------
Total property, plant, and equipment ...... 110,100 107,695
Accumulated depreciation and
Amortization .......................... 32,779 28,305
-------- --------
77,321 79,390
Other assets ........................................... 169 145
-------- --------
Total assets ........................................... $183,914 $182,389
======== ========
</TABLE>
See accompanying notes
3
<PAGE> 4
ENCORE WIRE CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
<TABLE>
<CAPTION>
June 30, December 31,
In Thousands of Dollars, Except Share Data 2000 1999
(Unaudited) (See Note 1)
----------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ................................ $ 24,873 $ 18,082
Accrued liabilities ................................... 6,222 8,213
Current income taxes payable .......................... 550 514
Current deferred income taxes ......................... 1,818 1,818
--------- ---------
Total current liabilities ............................. 33,463 28,627
Non-current deferred income taxes .............................. 5,740 5,739
Long term notes payable ........................................ 55,000 60,600
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued and outstanding shares - (16,637,509
at June 30, 2000 and 16,337,922 at ............. 166 163
December 31, 1999)
Additional paid-in capital ..................................... 32,162 30,656
Treasury stock -1,377,300 at June 30, 2000 and 1,006,000 at
December 31, 1999 ..................................... (11,517) (9,057)
Retained earnings .............................................. 68,900 65,661
--------- ---------
Total stockholders' equity ............................ 89,711 87,423
--------- ---------
Total liabilities and stockholders' equity ..................... $ 183,914 $ 182,389
========= =========
</TABLE>
Note: The consolidated balance sheet at December 31, 1999, as presented, is
derived from the audited consolidated financial statements at that date.
See accompanying notes
4
<PAGE> 5
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 2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales ....................................... $ 73,027 $ 55,442 $140,076 $118,966
Cost of goods sold .............................. 63,243 49,379 121,105 103,721
-------- -------- -------- --------
Gross profit .................................... 9,784 6,063 18,971 15,245
Selling, general, and administrative expense .... 6,060 4,483 11,840 9,476
-------- -------- -------- --------
Operating income ................................ 3,724 1,580 7,131 5,769
Interest expense (net) .......................... 1,057 630 2,071 1,148
-------- -------- -------- --------
Income before income taxes ...................... 2,667 950 5,060 4,621
Provision for income taxes ...................... 959 364 1,821 1,777
-------- -------- -------- --------
Net income ...................................... $ 1,708 $ 586 $ 3,239 $ 2,844
======== ======== ======== ========
Net income per common and common
equivalent share - basic ..................... $ .11 $ .04 $ .21 $ .18
======== ======== ======== ========
Weighted average common and common
equivalent shares - basic .................... 15,264 15,530 15,282 15,576
======== ======== ======== ========
Net income per common and common
equivalent share - diluted ................... $ .11 $ .04 $ .21 $ .18
======== ======== ======== ========
Weighted average common and common
equivalent shares - diluted .................. 15,475 15,871 15,606 15,923
======== ======== ======== ========
Cash dividends declared per share ............... $ -- $ -- $ -- $ --
======== ======== ======== ========
</TABLE>
See accompanying notes
5
<PAGE> 6
ENCORE WIRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
In Thousands of Dollars 2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ........................................................ $ 3,239 $ 2,844
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation and amortization ............................. 4,508 3,812
Provision for bad debts ................................... 50 --
Changes in operating assets and liabilities:
Accounts receivable ................................... (13,486) (10,384)
Inventory ............................................. 10,392 (687)
Accounts payable and accrued liabilities .............. 4,800 1,512
Other assets and liabilities .......................... (460) (433)
Current income taxes payable .......................... 36 2,594
-------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES ... 9,079 (742)
-------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment ........................ (2,481) (5,978)
Increase (decrease) in Long Term Investments ...................... (24) 5
Proceeds from Sale of Equipment ................................... 55 89
-------- --------
NET CASH USED IN INVESTING ACTIVITIES ......................... (2,450) (5,884)
FINANCING ACTIVITIES
Borrowings (repayments) under notes payable ....................... (5,600) 8,700
Purchases of Treasury Stock ....................................... (2,460) (2,377)
Proceeds from issuance of common stock ............................ 1,509 33
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES ..................... (6,551) 6,356
-------- --------
NET INCREASE (DECREASE) IN CASH ....................................... 78 (270)
Cash at beginning of period ........................................... 1,256 1,431
-------- --------
Cash at end of period ................................................. $ 1,334 $ 1,161
======== ========
</TABLE>
See accompanying notes
6
<PAGE> 7
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, 2000. 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, 1999.
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,
2000 1999
-------- ------------
<S> <C> <C>
Raw materials .......................... $ 4,320 $ 9,015
Work-in-process ........................ 4,409 5,961
Finished goods ......................... 33,675 36,545
-------- --------
42,404 51,521
Increase to LIFO cost .................. 2,212 3,276
-------- --------
44,616 54,797
Lower of Cost or Market Adjustment ..... (370) (159)
-------- --------
$ 44,246 $ 54,638
======== ========
</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 subject to many
forces beyond management's control, interim results are subject to the final
year-end LIFO inventory valuation.
7
<PAGE> 8
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, 2000 June 30, 1999
<S> <C> <C>
Numerator:
Net Income $ 1,708,000 $ 586,000
=========== ===========
Denominator:
Denominator for basic earnings per share -
weighted average shares 15,263,652 15,529,901
Effect of dilutive securities:
Employee stock options 211,262 340,908
----------- -----------
Denominator for diluted earnings per share -
weighted average shares 15,474,914 15,870,809
=========== ===========
</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, 2000 June 30, 1999
<S> <C> <C>
Numerator:
Net Income $ 3,239,000 $ 2,844,000
=========== ===========
Denominator:
Denominator for basic earnings per share -
weighted average shares 15,281,997 15,575,987
Effect of dilutive securities:
Employee stock options 323,744 347,214
----------- -----------
Denominator for diluted earnings per share -
weighted average shares 15,605,742 15,923,201
=========== ===========
</TABLE>
8
<PAGE> 9
NOTE 4 - LONG TERM NOTE PAYABLE
Effective August 31, 1999, the Company through its indirectly wholly
owned subsidiary, Encore Wire Limited, a Texas limited partnership, completed an
unsecured loan facility with a group of banks (the "Financing Agreement"). The
Financing Agreement replaced the Company's existing credit facility, and the
Company is a guarantor of the indebtedness. The Financing Agreement has been
amended once since August 31, 1999, to extend the contract term to May 31, 2003.
The Financing Agreement provides for maximum borrowings of the lesser of $65.0
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 banks. The calculated maximum borrowing amount available at
June 30, 2000, as computed under the Financing Agreement, was $65.0 million. The
Financing Agreement is unsecured and contains customary covenants and events of
default. The Company was in compliance with these covenants, as amended, as of
June 30, 2000. Pursuant to the Financing Agreement, the Company is prohibited
from declaring, paying or issuing cash dividends. At June 30, 2000, the balance
outstanding under the Financing Agreement was $55.0 million. Amounts outstanding
under the Financing Agreement are payable on May 31, 2003 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. Subsequent Board
actions increased this authorization. As of July 31, 2000, the Company had
repurchased an aggregate of 1,443,800 shares of its common stock in the open
market.
9
<PAGE> 10
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 and 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
is the principal raw material used by the Company in manufacturing its products.
Copper accounted for approximately 60.6%, 66.2%, 73.8%, 77.4% and 76.8% of the
Company's cost of goods sold during fiscal 1999, 1998, 1997, 1996 and 1995
respectively. The price of copper fluctuates, depending on general economic
conditions and in relation to supply and demand and other factors, and has
caused monthly variations in the cost of copper purchased by the Company. The
Company cannot predict copper prices in the future or the effect of fluctuations
in the cost of copper on the Company's future operating results.
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, 2000 and 1999. 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, 1999.
RESULTS OF OPERATIONS
Quarter Ended June 30, 2000 Compared to Quarter Ended June 30, 1999
Net sales for the second quarter of 2000 amounted to $73.0 million
compared with net sales of $55.4 million for the second quarter of 1999. This
increase was due to a increase in the average sales price per copper pound of
the Company's products, together with a 16% increase in the pounds of copper
shipped during the period. The increase in the average sales price per copper
pound of the Company's products was due to a 20% increase in the average cost of
copper from the second quarter of 1999 to the same period in 2000, offset
somewhat by competitive pricing pressure for the Company's products. Sales
volume increased due to several factors, including increases in customer
acceptance and product availability. The average sales price per copper pound of
product sold was $1.46 in the second quarter of 2000, compared to $1.28 in the
second quarter of 1999. Fluctuations in sales prices are primarily a result of
price competition and changing copper raw material prices.
Cost of goods sold increased to $63.2 million in the second quarter of
2000 from $49.4 million in the second quarter of 1999. Copper costs increased to
$40.8 million in the second quarter of 2000 from $28.7 million in the second
quarter of 1999. The average cost per copper pound purchased increased to $.83
in the second quarter of 2000 from $.69 in the second quarter of 1999. Copper
costs as a percentage of net sales increased to 55.9% in the second quarter of
2000 from 51.8% in the second quarter of 1999. This increase as a percentage of
net sales in the second quarter of 2000 from the comparable quarter in 1999 was
due primarily to higher copper costs per pound of product sold partially offset
by a increased differential between what the Company pays per pound of copper
purchased and the Company's net sales price per copper pound. This differential
increased in the second quarter of 2000 because the average cost per copper
pound purchased
10
<PAGE> 11
increased less than the sales price per copper pound. Other raw material costs
as a percentage of net sales decreased to 14.8% in the second quarter of 2000,
compared with 17.6% in the second quarter of 1999. This decrease is due to raw
materials per pound of copper sold remaining relatively constant while the sales
price per copper pound of product sold increased as discussed above.
Depreciation, labor and overhead costs as a percentage of net sales decreased to
16% in the second quarter of 2000, compared with 19.2% in the second quarter of
1999 due to the higher 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 increased during the second quarter of 2000 (as compared to the first
quarter of 2000), necessitating an increase in the LIFO reserve of $222,000 and
a corresponding decrease in cost of goods sold. In the second quarter of 1999,
the price of copper increased necessitating an decrease in the LIFO reserve that
resulted in an decrease to the inventory value and a increase to the cost of
goods sold of $1,586,000. At June 30, 2000, LIFO cost exceeded the market value
of the inventory. The amount in which the June 30, 2000 LIFO cost exceeded the
market value of the inventory was more than the amount established at March 31,
2000. Therefore, there was a increase in the lower of cost or market reserve and
a increase in the cost of goods sold in the amount of $210,000. The resulting
lower of cost or market reserve at June 30, 2000 was $370,000
Due to the items discussed above, gross profit increased to $9.8
million, or 13.4% of net sales, for the second quarter of 2000 compared to $6.1
million, or 10.9% of net sales, for the second quarter of 1999.
General and administrative expenses were $1.5 million, or 2.1% of net
sales, in the second quarter of 2000 compared to $1.3 million, or 2.3% of net
sales, in the second quarter of 1999. The percentage to sales decreased. The
increase in general and administrative dollar expenses was due primarily to
expenses related to the Company's new ERP (sales, distribution and accounting)
system. The provision for bad debts in the second quarter of 2000 was $50,000
compared to zero in the second quarter of 1999. Selling expenses for the second
quarter of 2000 were $4.5 million, or 6.2% of net sales, compared to $3.2
million, or 5.8% of net sales, in the second quarter of 1999. This increase is
due to the mix of products sold shifting to items with higher commissions in
2000.
11
<PAGE> 12
Net interest expense was $1.1 million in the second quarter of 2000
compared to $631,000 in the second quarter of 1999. The increase was due to a
higher average debt balance outstanding during the second quarter of 2000 than
the comparable period during 1999, and higher floating interest rates on the
debt in 2000 versus 1999. This increase in average debt outstanding was
primarily the result of additional working capital. Inventory levels were higher
at the beginning of the second quarter of 2000 versus the same quarter of 1999
and although the level of inventory was reduced by strong sales, those dollars
moved into accounts receivable. Inventory levels are higher at the end of the
second quarter of 2000 versus the second quarter of 1999, due in part to the
need to support higher levels of sales volume.
The Company's effective tax rate decreased to 36.0% in the second
quarter of 2000 compared to 38.3% in the second quarter of 1999. The lower
effective tax rate in 2000 is the result of a lower state tax rate due to a
subsidiary restructuring completed in the third quarter of 1999.
As a result of the foregoing factors, the Company's net income was $1.7
million in the second quarter of 2000 compared to $586,000 in the second quarter
of 1999.
Six Months Ended June 30, 2000 compared to Six Months Ended June 30, 1999
Net sales for the first six months of 2000 amounted to $140.1 million
compared with net sales of $118.9 million for the first six months of 1999. This
increase was due to an increase in the average sales price per copper pound of
the Company's products and an increase in the pounds of copper shipped during
the period. The increase in the average sales price per copper pound of the
Company's products was caused by a 23% increase in the average cost of copper
from the first six months of 1999 to the same period in 2000, offset somewhat by
competitive pricing pressure on the Company's products in the first six months
of 2000. Sales volume increased due to several factors, including increases in
customer acceptance and product availability. Sales volume of the Company's
residential and commercial products increased during the first six months of
2000 compared to the first six months of 1999. The average sales price per
copper pound of product sold was $1.49 in the first six months of 2000, compared
to $1.29 in the first six months of 1999. Fluctuations in sales prices are
primarily a result of price competition and changing copper raw material prices.
Cost of goods sold was $121.1 million in the first six months of 2000,
compared to $103.7 million in the first six months of 1999. Copper costs
increased to $76.7 million in the first six months of 2000 from $63.4 million in
the first six months of 1999. The average cost per copper pound purchased
increased to $.84 in the first six months of 2000 from $.68 in the first six
months of 1999. Copper costs as a percentage of net sales increased to 54.7% in
the first six months of 2000 compared to 53.3% in the first six months of 1999.
The higher copper cost per pound of product sold in the first six months of 2000
as compared to the same period of 1999 did not adversely affect margins. The
differential between what the Company pays per pound of copper purchased and the
Company's net sales price per copper pound increased in the first half of 2000
compared to the first half of 1999. Other raw material costs as a percentage of
net sales decreased to 14.9% in the first six months of 2000, compared with
17.6% in the first six months of 1999. This decrease is due to the increase in
the sales price per copper pound sold, as discussed above. Depreciation, labor
and overhead costs as a percentage of net sales decreased to 15.9% in the first
six months of 2000 compared to 17.7% in the first six months of 1999. This
decrease is due to an increase in volume resulting in economies of scale as well
as the higher sales price per copper pound of product sold as discussed above.
12
<PAGE> 13
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 was relatively stable during the first six months of 2000. The
inventory level, however, decreased by $9.1 million. This resulted in a decrease
in the LIFO reserve of $1.1 million that resulted in an decrease to the
inventory value and a increase in cost of goods sold. In the first six months of
1999, the price of copper decreased, necessitating a decrease in the LIFO
reserve that resulted in an increase to the inventory value and a decrease to
the cost of goods sold of $731,000. At June 30, 2000, LIFO cost exceeded the
market value of the inventory. The amount in which the June 30, 2000 LIFO cost
exceeded the market value of the inventory was less than the amount established
at December 31, 1999. Therefore, there was an increase in the lower of cost or
market reserve and an increase in the cost of goods sold in the amount of
$211,000. The resulting lower of cost or market reserve at June 30, 2000 was
$370,000. At June 30, 1999, LIFO cost exceeded the market value of the
inventory. This resulted in a reduction of the lower of cost or market reserve
and a reduction of cost of sales in the first half of 1999. 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
decreases 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.
Due to the items discussed above, gross profit increased to $19.0
million, or 13.5% of net sales, for the first six months of 2000 compared to
$15.2 million, or 12.8% of net sales, for the first six months of 1999.
General and administrative expenses were $3.0 million, or 2.2% of net
sales, in the first six months of 2000 compared to $2.4 million, or 2.1% of net
sales, in the first six months of 1999. This increase in general and
administrative expenses was due primarily to the Company's new ERP system. There
was a $50,000 provision for bad debts in the first six months of 2000 compared
to zero in the first six months of 1999. Selling expenses for the first six
months of 2000 were $8.8 million, or 6.3% of net sales, compared to $7.0
million, or 5.9% of net sales, in the first six months of 1999. As explained in
the quarterly review, this increase is due to the mix of products sold shifting
to items with higher commissions in 2000.
Net interest expense increased to $2.1 million in the first six months
of 2000 compared to $1.1 million in the first six months of 1999. The increase
was due to a higher average debt balance outstanding during the first six months
of 2000 than the comparable period during 1999, due primarily to the higher
working capital required to grow the business and higher floating interest rates
in 2000 versus 1999, as discussed in the quarterly review above.
The Company's effective tax rate decreased to 36% in the first six
months of 2000 compared to 38.5% in the first six months of 1999. The lower
effective tax rate is the result of a lower state tax rate due to a subsidiary
restructuring completed in the third quarter of 1999.
As a result of the foregoing factors, the Company's net income
increased to $3.2 million in the first six months of 2000 from $2.8 million in
the first six months of 1999.
13
<PAGE> 14
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 payment terms to most of its customers that
exceed terms that it receives from its suppliers. Therefore, the Company's
liquidity needs have generally consisted of operating capital necessary to
finance these receivables and inventory. Capital expenditures have historically
been necessary to expand the production capacity of the Company's manufacturing
operations. The Company has 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 August 31, 1999, the Company through its indirectly wholly
owned subsidiary, Encore Wire Limited, a Texas limited partnership, completed an
unsecured loan facility with a group of banks (the "Financing Agreement"). The
Financing Agreement replaced the Company's existing credit facility, and the
Company is a guarantor of the indebtedness. The Financing Agreement has been
amended once since August 31, 1999, to extend the contract term to May 31, 2003.
The Financing Agreement provides for maximum borrowings of the lesser of $65.0
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 banks. The calculated maximum borrowing amount available at
June 30, 2000, as computed under the Financing Agreement, was $65.0 million. The
Financing Agreement is unsecured and contains customary covenants and events of
default. The Company was in compliance with these covenants, as amended, as of
June 30, 2000. Pursuant to the Financing Agreement, the Company is prohibited
from declaring, paying or issuing cash dividends. At June 30, 2000, the balance
outstanding under the Financing Agreement was $55.0 million. Amounts outstanding
under the Financing Agreement are payable on May 31, 2003 with interest due
quarterly based on the bank's prime rate or LIBOR Rate options, at the Company's
election.
Cash provided by operations was $9.1 million in the first six months of
2000 compared to cash used by operations of $742,000 in the first six months of
1999. This increase of $9.8 million in cash provided by operations is primarily
the result of a $10.3 million reduction of inventory in the first half of 2000.
Cash used in investing activities decreased from $5.9 million in the first six
months of 1999 to $2.5 million in the first six months of 2000. In both periods,
these funds were used primarily to increase the Company's production capacity
and to purchase equipment for use in the Company's vertical integration projects
that are discussed in the following paragraph. The $6.5 million decrease in cash
provided by financing activities was due primarily to the $5.6 million of debt
the Company was able to pay down in the first six months of 2000.
During 2000, the Company expects to expend less capital for additional
manufacturing equipment than it spent in 1999. During 2000, the Company expects
its capital expenditures will consist of additional manufacturing equipment for
its wire operations. The Company expects to continue to manage its working
capital requirements during 2000. These requirements may increase as a result of
expected continued sales increases. These requirements will be impacted by the
price of copper. The Company believes that the cash flow from operations and the
financing that it expects to receive from its banks under the Financing
Agreement will satisfy working capital and capital expenditure requirements for
the next twelve months.
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. Subsequent Board
actions increased this authorization. As of July 31, 2000, the Company had
repurchased an aggregate of 1,443,800 shares of its common stock in the open
market.
14
<PAGE> 15
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from the information provided in
Item 7.A. of the Company's Annual Report on Form 10-K for the year ended
December 31,1999.
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL MATTERS
On July 19, 1999, a lawsuit styled Jose Delgado et al v. Encore Wire
Corporation, was filed in the District Court of Collin County, Texas against the
Company. The plaintiffs are former employees of the Company who allege that they
were discharged in retaliation for seeking workers' compensation benefits in
violation of chapter 451 of the Texas Labor Code. The plaintiffs also claim
intentional infliction of emotional distress. The Company denies the allegations
and will contest the claims vigorously. The plaintiffs claim that they are
entitled to recover over $50 million. The Company believes the plaintiffs'
claims are without merit. On May 22, 2000, the district court granted the
Company's motion to sever the case into eight separate cases.
In addition, the Company is a defendant from time to time in lawsuits
incidental to its business. Based on currently available information, the
Company believes that resolution of all known contingencies including the above
described cases, would not have a material adverse impact on the Company's
financial statements. However, there can be no assurances that future costs
would not be material to the results of operations of the Company for a
particular future period. In addition, the Company's estimates of future costs
are subject to change as circumstances change and additional information becomes
available during the course of litigation.
ITEM 4. SUBMISSION OF MATTERS IN A VOTE OF SECURITY HOLDERS
(a) The annual meeting of the stockholders of the Company was held in
McKinney, Texas at 9:00 a.m., local time, on May 8, 2000.
(b) Proxies were solicited by the Board of Directors of the Company
pursuant to Regulation 14A under the Securities and Exchange Act of
1934. There was no solicitation in opposition to the Board of Directors
nominees as listed in the proxy statement and all of such nominees were
duly elected.
(c) Out of a total of 15,227,122 shares of the Company's common stock
outstanding and entitled to vote, 13,724,137 shares were present in
person or by proxy, representing approximately 90 percent of
outstanding shares. The first matter voted on by the stockholders, as
fully described in the proxy
15
<PAGE> 16
statement for the annual meeting was the election of Donald E.
Courtney, Joseph M. Brito, Daniel L. Jones, John P. Pringle, Vincent A.
Rego, William R. Thomas and John Wilson as directors of the Company. No
nominee received less than 99% of the shares voted.
The second matter voted on by the stockholders was a resolution to
approve the Company's 1999 Stock Option Plan. The resolution was
adopted with 13,260,213 shares voting in favor of the resolution and
418,860 voting against. Holders of 45,064 shares abstained from voting.
The third matter voted on by the stockholders was a resolution to
approve Ernst & Young as the auditor of the Company's financial
statements for the year ending December 31, 2000. The resolution was
adopted with the holders of 13,706,425 shares voting in favor of the
resolution and 9,980 voting against. Holders of 7,732 abstained from
voting.
(d) Inapplicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 First Amendment to Financing Agreement dated as of June 27,
2000 by and among Encore Wire Limited, NationsBank of Texas,
N.A. and Comerica Bank - Texas.
27 Financial Data Schedule
(b) No reports on Form 8-K were filed by the Company during the
three months ended June 30, 2000.
16
<PAGE> 17
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 10, 2000 /s/ Vincent A. Rego
------------------------------------------
Vincent A. Rego,
Chief Executive Officer
Date: August 10, 2000 /s/ Daniel L. Jones
------------------------------------------
Daniel L. Jones, President
Chief Operating Officer
Date: August 10, 2000 /s/ Frank J. Bilban
------------------------------------------
Frank J. Bilban, Vice President - Finance,
Treasurer and Secretary
(Chief Financial Officer)
17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<S> <C>
10.1 First Amendment to Financing Agreement dated as of June 27, 2000 by and
among Encore Wire Limited, NationsBank of Texas, N.A. and Comerica Bank
- Texas
27 Financial Data Schedule
</TABLE>
