e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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| ý
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended
March 31, 2011
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or |
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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: 000-20278
ENCORE WIRE CORPORATION
(Exact name of registrant as specified in its charter)
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| Delaware
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75-2274963 |
| (State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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| 1329 Millwood Road |
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| McKinney, Texas
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75069 |
| (Address of principal executive offices)
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(Zip Code) |
Registrant’s telephone number, including area code: (972) 562-9473
N/A
(Former name, former address and former fiscal year, if changed since last report)
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 ý No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to
submit and post such files). Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer [ ]
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Accelerated filer ý |
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
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Smaller reporting company [ ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes
[ ] No ý
Number of
shares of Common Stock, par value $0.01, outstanding as of May 5, 2011: 23,221,475
ENCORE WIRE CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
ENCORE WIRE CORPORATION
CONSOLIDATED BALANCE SHEETS
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March 31, |
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December 31, |
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| In Thousands of Dollars |
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2011 |
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|
2010 |
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(Unaudited) |
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(See Note) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
75,233 |
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$ |
103,252 |
|
Accounts receivable (net of allowance
of $2,582 and $2,582) |
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234,851 |
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190,364 |
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Inventories |
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47,974 |
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42,104 |
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Current deferred income taxes |
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6,915 |
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4,485 |
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Prepaid expenses and other |
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2,578 |
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1,892 |
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Total current assets |
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367,551 |
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342,097 |
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Property, plant and equipment - at cost: |
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Land and land improvements |
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17,971 |
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17,971 |
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Construction-in-progress |
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12,954 |
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15,564 |
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Buildings and improvements |
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69,920 |
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69,440 |
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Machinery and equipment |
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179,136 |
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174,916 |
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Furniture and fixtures |
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7,133 |
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7,066 |
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Total property, plant and equipment |
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287,114 |
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284,957 |
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Accumulated depreciation |
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(153,288 |
) |
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(149,972 |
) |
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Property, plant and equipment - net |
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133,826 |
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134,985 |
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Other assets |
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622 |
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194 |
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Total assets |
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$ |
501,999 |
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$ |
477,276 |
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| Note: |
|
The consolidated balance sheet at December 31, 2010, as presented, is
derived from the audited consolidated financial statements at that date. |
See accompanying notes.
1
ENCORE WIRE CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
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March 31, |
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December 31, |
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| In
Thousands of Dollars, Except Share Data |
|
2011 |
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2010 |
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|
(Unaudited) |
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|
(See Note) |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Trade accounts payable |
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$ |
46,975 |
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$ |
32,897 |
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Accrued liabilities |
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18,030 |
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|
23,191 |
|
Current income taxes payable |
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7,485 |
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|
2,065 |
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Total current liabilities |
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72,490 |
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58,153 |
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Non-current deferred income taxes |
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11,766 |
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11,746 |
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Commitments and contingencies |
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Stockholders’ equity: |
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Preferred stock, $.01 par value: |
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Authorized shares – 2,000,000; none issued |
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– |
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– |
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Common stock, $.01 par value: |
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Authorized shares – 40,000,000;
Issued shares – 26,371,752 and 26,366,752 |
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264 |
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264 |
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Additional paid-in capital |
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45,217 |
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45,040 |
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Treasury stock, at cost – 3,150,277 and 3,150,277 shares |
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(21,294 |
) |
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(21,294 |
) |
Retained earnings |
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393,556 |
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383,367 |
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Total stockholders’ equity |
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417,743 |
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|
407,377 |
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Total liabilities and stockholders’ equity |
|
$ |
501,999 |
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|
$ |
477,276 |
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|
|
|
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|
|
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| Note: |
|
The consolidated balance sheet at December 31, 2010, as presented, is
derived from the audited consolidated financial statements at that date. |
See accompanying notes.
2
ENCORE WIRE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Quarter Ended |
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March 31, |
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| In Thousands, Except Per Share Data |
|
2011 |
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2010 |
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Net sales |
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$ |
303,351 |
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$ |
175,229 |
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Cost of goods sold |
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269,596 |
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164,628 |
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Gross profit |
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33,755 |
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|
10,601 |
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Selling, general, and administrative expenses |
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18,149 |
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11,985 |
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Operating income (loss) |
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15,606 |
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(1,384 |
) |
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Net interest and other (income) expense |
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|
(6 |
) |
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2,702 |
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Income (loss) before income taxes |
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|
15,612 |
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|
(4,086 |
) |
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|
|
|
|
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Provision (benefit) for income taxes |
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|
4,958 |
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|
(1,620 |
) |
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|
|
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Net income (loss) |
|
$ |
10,654 |
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|
$ |
(2,466 |
) |
|
|
|
|
|
|
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|
|
|
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|
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Net income (loss) per common and common
equivalent share – basic |
|
$ |
0.46 |
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|
$ |
(0.11 |
) |
|
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|
|
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|
|
|
|
|
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Weighted average common and common
equivalent shares – basic |
|
|
23,217 |
|
|
|
23,159 |
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common and common
equivalent share – diluted |
|
$ |
0.46 |
|
|
$ |
(0.11 |
) |
|
|
|
|
|
|
|
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|
|
|
|
|
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|
Weighted average common and common
equivalent shares – diluted |
|
|
23,378 |
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|
23,159 |
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|
|
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|
Cash dividends declared per share |
|
$ |
0.02 |
|
|
$ |
0.02 |
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|
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|
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|
See accompanying notes.
3
ENCORE WIRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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|
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Quarters Ended |
|
| |
|
March 31, |
|
| In Thousands of Dollars |
|
2011 |
|
|
2010 |
|
| |
|
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
10,654 |
|
|
$ |
(2,466 |
) |
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: |
|
|
3,425 |
|
|
|
3,473 |
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
(2,410 |
) |
|
|
(3,249 |
) |
Other |
|
|
109 |
|
|
|
(251 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(44,487 |
) |
|
|
(9,439 |
) |
Inventories |
|
|
(5,870 |
) |
|
|
10,033 |
|
Trade accounts payable and accrued liabilities |
|
|
8,917 |
|
|
|
14,558 |
|
Other assets and liabilities |
|
|
(1,122 |
) |
|
|
(6,990 |
) |
Current income taxes receivable / payable |
|
|
5,419 |
|
|
|
1,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES |
|
|
(25,365 |
) |
|
|
7,207 |
|
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INVESTING ACTIVITIES |
|
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|
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|
Purchases of property, plant and equipment |
|
|
(2,258 |
) |
|
|
(3,150 |
) |
Proceeds from sale of assets |
|
|
11 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
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|
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES |
|
|
(2,247 |
) |
|
|
(3,140 |
) |
|
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|
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FINANCING ACTIVITIES |
|
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|
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|
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|
Repayment of notes payable |
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|
— |
|
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|
(100,000 |
) |
Deferred financing fees |
|
|
— |
|
|
|
(50 |
) |
Proceeds from issuances of common stock |
|
|
57 |
|
|
|
34 |
|
Dividend paid |
|
|
(464 |
) |
|
|
(464 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES |
|
|
(407 |
) |
|
|
(100,480 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net increase (decrease) in cash and cash equivalents |
|
|
(28,019 |
) |
|
|
(96,413 |
) |
Cash and cash equivalents at beginning of period |
|
|
103,252 |
|
|
|
226,769 |
|
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|
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|
|
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|
|
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|
|
|
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Cash and cash equivalents at end of period |
|
$ |
75,233 |
|
|
$ |
130,356 |
|
|
|
|
|
|
|
|
See accompanying notes.
4
ENCORE WIRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2011
NOTE 1 – BASIS OF PRESENTATION
The unaudited consolidated financial statements of Encore Wire Corporation (the “Company”) have
been prepared in accordance with U.S. generally accepted accounting principles for interim
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 U.S. generally accepted accounting
principles for complete annual 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 interim periods presented do not
necessarily indicate the results that may be expected for the entire year. These financial
statements should be read in conjunction with the audited consolidated financial statements and
notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31,
2010.
NOTE 2 – INVENTORIES
Inventories are stated at the lower of cost, determined by the last-in, first-out (LIFO) method, or
market.
Inventories consist of the following:
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March 31, |
|
|
December 31, |
|
In Thousands of Dollars |
|
2011 |
|
|
2010 |
|
| |
|
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
27,094 |
|
|
$ |
27,092 |
|
Work-in-process |
|
|
24,033 |
|
|
|
19,889 |
|
Finished goods |
|
|
91,922 |
|
|
|
81,940 |
|
| |
|
|
|
|
|
|
|
143,049 |
|
|
|
128,921 |
|
Adjust to LIFO cost |
|
|
(95,075 |
) |
|
|
(86,817 |
) |
Lower of cost or market adjustment |
|
|
– |
|
|
|
– |
|
| |
|
|
|
|
|
|
$ |
47,974 |
|
|
$ |
42,104 |
|
| |
|
|
|
|
LIFO pools are established at the end of each fiscal year. During the first three quarters of
every year, LIFO calculations are based on the inventory levels and costs at that time.
Accordingly, interim LIFO balances will fluctuate up and down in tandem with inventory levels and
costs.
During the first quarter of 2011, the Company did not liquidate any LIFO inventory layers
established in prior years. During the first quarter of 2010, the Company liquidated a portion of
the layer established in 2005. As a result, under the LIFO method, this inventory layer was
liquidated at historical costs that were less than current costs, which favorably impacted net
income for the quarter by $836,000.
5
NOTE 3 – ACCRUED LIABILITIES
Accrued liabilities consist of the following:
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|
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|
|
|
|
| |
| |
|
March 31, |
|
|
December 31, |
|
In Thousands of Dollars |
|
2011 |
|
|
2010 |
|
| |
|
|
|
|
|
|
|
|
|
Sales volume discounts payable |
|
$ |
12,629 |
|
|
$ |
14,997 |
|
Property taxes payable |
|
|
678 |
|
|
|
2,648 |
|
Commissions payable |
|
|
2,989 |
|
|
|
2,290 |
|
Accrued salaries |
|
|
1,097 |
|
|
|
2,591 |
|
Other accrued liabilities |
|
|
637 |
|
|
|
665 |
|
| |
|
|
|
|
$ |
18,030 |
|
|
$ |
23,191 |
|
| |
|
|
NOTE 4 – INCOME TAXES
Income taxes were accrued at an effective rate of 31.8% in the first quarter of 2011, versus
providing a benefit at an effective rate of 39.7% in the first quarter of 2010. It is difficult to
compare the tax rates in these two quarters, due to the fact that the Company produced a $4.1
million pre-tax loss in the first quarter of 2010, versus a $15.6 million pre-tax profit in the
first quarter of 2011, along with the impact of significant permanent book to tax differences,
including the domestic production activity deduction. Additionally, as earnings approach zero, as
was the case in 2010, certain permanent differences between the Company’s financial and tax
accounting become more significant and skew the quarterly tax accrual on a percentage basis as the
Company accrues to the proper year to date rate.
NOTE 5 – NET EARNINGS (LOSS) PER SHARE
Net earnings (loss) per common and common equivalent share are 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.
6
The following table sets forth the computation of basic and diluted net earnings (loss) per share:
| |
|
|
|
|
|
|
|
|
| |
|
Quarters Ended |
|
| |
|
March 31, |
|
|
March 31, |
|
In Thousands |
|
2011 |
|
|
2010 |
|
| |
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
10,654 |
|
|
$ |
(2,466 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Denominator for basic
earnings per share
–
weighted average
shares |
|
|
23,217 |
|
|
|
23,159 |
|
|
|
|
|
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Effect of dilutive securities: |
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|
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|
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|
Employee stock options |
|
|
161 |
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|
– |
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| |
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|
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|
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|
Denominator for diluted earnings per share
– weighted average shares |
|
|
23,378 |
|
|
|
23,159 |
|
| |
|
|
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|
The number of weighted average employee stock options excluded from the
determination of diluted earnings per share for the first quarter was 80,500 in
2011 and 483,659 in 2010. Such options were anti-dilutive for the respective
periods. In the first quarter of 2010, all outstanding options were
anti-dilutive because of the Company’s net loss for that quarter.
NOTE 6 – LONG TERM NOTES PAYABLE
The Company is party to a Financing Agreement with two banks, Bank of America, N.A., as Agent, and
Wells Fargo Bank, National Association (as amended, the “Financing Agreement”). The Financing
Agreement extends through August 6, 2013, and provides for maximum borrowings of the lesser of
$150,000,000 or the amount of eligible accounts receivable plus the amount of eligible finished
goods and raw materials, less any reserves established by the banks. The calculated maximum
borrowing amount available at March 31, 2011, as computed under the Financing Agreement, was
$149,660,000. Borrowings under the line of credit bear interest, at the Company’s option, at either
(1) LIBOR plus a margin that varies from 1.0% to 1.75% depending upon the ratio of debt outstanding
to adjusted earnings or (2) the base rate (which is the higher of the federal funds rate plus 0.5%
or the prime rate) plus 0% to 0.25% (depending upon the ratio of debt outstanding to adjusted
earnings). A commitment fee ranging from 0.20% to 0.375% (depending upon the ratio of debt
outstanding to adjusted earnings) is payable on the unused line of credit. At March 31, 2011, there
were no borrowings outstanding under the Financing Agreement. Obligations under the Financing
Agreement are the only contractual borrowing obligations or commercial borrowing commitments of the
Company.
Obligations under the Financing Agreement are unsecured and contain customary covenants and events
of default. The Company was in compliance with the covenants as of March 31, 2011.
7
NOTE 7 – STOCK REPURCHASE AUTHORIZATION
On November 10, 2006, the Board of Directors approved a stock repurchase program authorizing the
Company to repurchase up to 1,000,000 shares of its common stock through December 31, 2007 on the
open market or through privately negotiated transactions at prices determined by the President of
the Company. The Company’s Board of Directors has subsequently authorized annual extensions of
this stock repurchase program through March 31, 2012 and has authorized the repurchase of up to
2,610,000 shares of its common stock. The Company did not repurchase any shares of its stock in
the first quarter of 2011 or 2010.
NOTE 8 – CONTINGENCIES
On July 7, 2009, Southwire Company, a Delaware corporation (“Southwire”), filed a complaint for
patent infringement against the Company and Cerro Wire, Inc. (“Cerro”) in the United States
District Court for the Eastern District of Texas. In the complaint, Southwire alleged that the
Company infringed one or more claims of United States Patent No. 7,557,301 (the “‘301 patent”),
entitled “Method of Manufacturing Electrical Cable Having Reduced Required Force for Installation,”
by making and selling electrical cables, including the Company’s Super Slick cables. The case has
been stayed pending reexamination by the United States Patent and Trademark Office (the “USPTO”)
for six (6) months after the USPTO rejected all claims of Southwire’s 301 patent. The
reexamination continues pending the USPTO’s next action.
On August 24, 2009, Southwire filed a second complaint for patent and trademark infringement
against the Company. In the second complaint, Southwire alleged that the Company infringed one or
more of the claims of United States Patent No. 6,486,395 entitled “Interlocked Metal Clad Cable” by
making and selling electrical cables, including the Company’s MCMP Multipurpose cables. Southwire
also alleged that the Company infringed Southwire’s United States Trademark registration for the
mark, “MCAP”, Registration No. 3,292,777. The second complaint also alleged violations
of Federal, State and Common law unfair competition claims. The Company filed counterclaims against
Southwire alleging claims of statutory and common law unfair competition violations, tortious
interference with existing and prospective business relations, misappropriation and claims for
declaratory relief. The case has been dismissed without prejudice by the parties and a dismissal
order was entered April 14, 2011.
On July 2, 2010, the Company filed a complaint against Southwire in the Northern District of
Georgia. The complaint alleged that Southwire was using a misdescriptive trademark on its Simpull
products, and that Southwire had made false statements about the Company’s slick wire products. On
July 6, 2010, the Company amended its complaint to seek a declaratory judgment that the Company’s
slick wire products do not infringe Southwire’s United States Patent No. 7,749,024 (“the ‘024
patent”). Later on July 6, 2010, Southwire filed a separate complaint against the Company and Cerro
Wire in the Eastern District of Texas for infringement of the ‘024 patent. On October 8, 2010, the
Company filed a request with the USPTO for an inter partes reexamination of the ‘024 patent. On
November 9, 2010, the USPTO ordered the reexamination of the ‘024 patent. In ordering
reexamination of Southwire’s ‘024 patent, the USPTO determined that the Company’s submission of
prior art not previously considered during the original examination of the ‘024 patent raised a
substantial new question of patentability of the
8
claims of the ‘024 patent. On December 3, 2010, the USPTO issued a non-final office action
rejecting all of the claims under reexamination. Southwire filed a response to the non-final
office action on February 3, 2011, which included legal arguments and supporting technical
declarations. The Company filed its comments to the Southwire response on March 3, 2011, including
points and authorities, legal arguments, and supporting technical declarations. The reexamination
continues, pending the Examiner’s next action responding to Southwire’s response and the Company’s
comments. The Company’s complaint against Southwire filed on July 2, 2010 was stayed on April 11,
2011 until the USPTO issues a certificate of reexamination of the ‘024 patent. The complaint filed
by Southwire in the Eastern District of Texas on July 6, 2010 awaits the Court’s ruling on the
Joint Motion to Dismiss filed by the Company and Southwire on March 29, 2011. Once this motion is
granted the issues will be subject to one proceeding in the Northern District of Georgia.
Southwire’s complaints sought unspecified damages and injunctive relief. At this time, all pending
litigation between Encore and Southwire is dismissed, stayed, or awaiting a ruling on a joint
motion to dismiss.
Regarding the claims asserted against the Company referenced above, potentially applicable factual
and legal issues have not been resolved, the Company has yet to determine if a liability is
probable, and the Company cannot reasonably estimate the amount of any loss associated with these
matters. Accordingly, the Company has not recorded a liability for these pending lawsuits. The
Company disputes all of Southwire’s claims and alleged damages and intends to vigorously defend the
lawsuits and vigorously pursue its own claims, should dismissal not
occur. The Company is also a party to litigation and
claims arising out of the ordinary business of the Company.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
General
Encore is a low-cost manufacturer of copper electrical building wire and cable. The Company is a
significant supplier of building wire for interior electrical wiring in commercial and industrial
buildings, homes, apartments, and manufactured housing.
The Company’s operating results in any given time period are driven by several key factors,
including the volume of product produced and shipped, the cost of copper and other raw materials,
the competitive pricing environment in the wire industry and the resulting influence on gross
margins and the efficiency with which the Company’s plants operate during the period, among others.
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 81.1% and 73.5% of the Company’s
cost of goods sold during fiscal 2010 and 2009, respectively. The price of copper fluctuates,
depending on general economic conditions and in relation to supply and demand and other factors,
which causes monthly variations in the cost of copper purchased by the Company. The Company cannot
predict future copper prices or the effect of fluctuations in the cost of copper on the Company’s
future operating results.
9
The following discussion and analysis relates to factors that have affected the operating results
of the Company for the quarters ended March 31, 2011 and 2010. 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, 2010.
Results of Operations
Quarter Ended March 31, 2011 Compared to Quarter Ended March 31, 2010
Net sales for the first quarter of 2011 amounted to $303.4 million compared with net sales of
$175.2 million for the first quarter of 2010. This dollar increase was primarily the result of a
34.4% increase in the price of wire sold and a 28.9% increase in the unit volume of product
shipped. Unit volume is measured in pounds of copper contained in the wire shipped during the
period. The average cost per pound of raw copper purchased increased 32.3% in the first quarter of
2011 compared to the first quarter of 2010, and was the principal driver of the increased average
sales price of wire. Fluctuations in sales prices are primarily a result of changing copper raw
material prices and product price competition.
Cost of goods sold increased to $269.6 million, or 88.9% of net sales, in the first quarter of
2011, compared to $164.6 million, or 94.0% of net sales, in the first quarter of 2010. Gross
profit increased to $33.8 million, or 11.1% of net sales, in the first quarter of 2011 versus $10.6
million, or 6.0% of net sales, in the first quarter of 2010. The increased gross profit and gross
profit margin percentages were primarily the result of the increased spread between what the
Company paid for a pound of copper and the price of wire that contained a pound of copper. In
comparing the first quarter of 2011 to the first quarter of 2010, this spread increased by 42.2%
resulting in the increased margins. Spreads increased as a result of improved industry pricing
discipline in the first quarter of 2011 versus the first quarter of 2010. Additionally, the
Company believes that the exit of a former competitor in the first quarter of 2010 has had a
positive impact on industry pricing levels and margins in the four subsequent quarters.
Inventories are stated at the lower of cost, as calculated using the last-in, first out (LIFO)
method, or market. The Company maintains only one inventory pool for LIFO purposes as all
inventories held by the Company generally relate to the Company’s only business segment, the
manufacture and sale of copper electrical building wire products. The Company maintains its inventory costs and cost of goods sold on
a first-in, first-out (FIFO) basis and makes a monthly adjustment to adjust total inventory and
cost of goods sold from FIFO to LIFO. The Company applies the lower of cost or market (LCM) test
by comparing the LIFO cost of its raw materials, work-in-process and finished goods inventories to
estimated market values, which are based primarily upon the most recent quoted market price of
copper and finished wire prices as of the end of each reporting period. The Company performs a
lower of cost or market calculation quarterly. Based on copper prices as of March 31, 2011, no LCM
adjustment was required. However, decreases in copper prices could necessitate establishing an LCM
reserve in future periods. Additionally, future reductions in the quantity of inventory on hand
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 costs of goods sold for that period at the
different price.
10
Primarily as a result of increasing copper costs and a small increase in the quantity of inventory
on hand during the first quarter of 2011, a LIFO adjustment was recorded increasing cost of sales
by $8.3 million during the quarter.
Selling expenses, consisting of commissions and freight, for the first quarter of 2011 were $11.7
million, or 3.8% of net sales, compared to $7.6 million, or 4.3% of net sales, in the first quarter
of 2010. Commissions paid to independent manufacturers’ representatives are paid as a relatively
stable percentage of sales, and therefore, rose $3.1 million in concert with the increased sales
dollars. Additionally, freight costs increased by $1.0 million due to the 28.9% increase in unit
sales, but declined as a percentage of net sales due to the fact that freight remained relatively
fixed on a cost per pound basis. General and administrative expenses increased to $6.5 million, or
2.1% of net sales, in the first quarter of 2011 compared to $4.3 million, or 2.4% of net sales, in
the first quarter of 2010. The general and administrative dollar costs rose primarily due to
increased legal and administrative costs, but also declined as a percentage of net sales due to the
semi-fixed nature of these costs. The provision for bad debts was $0 and $75,000 in the first
quarters of 2011 and 2010, respectively.
Net interest and other (income) expense decreased to $6,000 of income in the first quarter of 2011
from $2.7 million of expense in the first quarter of 2010, due primarily to the $2.6 million
one-time charge associated with the early retirement of the Company’s $100 million in long-term
notes payable in the first quarter of 2010. Income taxes were accrued at an effective rate of
31.8% in the first quarter of 2011, versus providing a tax benefit at a rate of 39.7% in the first
quarter of 2010. It is difficult to compare the tax rates in these two quarters, due to the fact
that the Company produced a $4.1 million pre-tax loss in the first quarter of 2010, versus a $15.6
million pre-tax profit in the first quarter of 2011, along with the impact of significant permanent
book to tax differences, including the domestic production activity deduction. Additionally, as
earnings approach zero, as was the case in 2010, certain permanent differences between the
Company’s financial and tax accounting become more significant and skew the quarterly tax accrual
on a percentage basis as the Company accrues to the proper year to date rate.
As a result of the foregoing factors, the Company had net income of $10.7 million in the first
quarter of 2011 versus a net loss of $2.5 million in the first quarter of 2010.
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 working capital necessary to finance receivables and
inventory. Capital expenditures have historically been necessary to expand and update the
production capacity of the Company’s manufacturing operations. The Company has historically
satisfied its liquidity and capital expenditure needs with cash generated from operations,
borrowings under its various debt arrangements and sales of its common stock. Prior to building
the current substantial cash balance, the Company historically used its revolving credit facility
to manage day to day operating cash needs as required by daily fluctuations in working capital, and
has the facility in place should such a need arise in the future.
11
The Company is party to a Financing Agreement with two banks, Bank of America, N.A., as Agent, and
Wells Fargo Bank, National Association (as amended, the “Financing Agreement”). The Financing
Agreement extends through August 6, 2013, and provides for maximum borrowings of the lesser of
$150,000,000 or the amount of eligible accounts receivable plus the amount of eligible finished
goods and raw materials, less any reserves established by the banks. The calculated maximum
borrowing amount available at March 31, 2011, as computed under the Financing Agreement was
$149,660,000. Borrowings under the line of credit bear interest, at the Company’s option, at either
(1) LIBOR plus a margin that varies from 1.0% to 1.75% depending upon the ratio of debt outstanding
to adjusted earnings or (2) the base rate (which is the higher of the federal funds rate plus 0.5%
or the prime rate) plus 0% to 0.25% (depending upon the ratio of debt outstanding to adjusted
earnings). A commitment fee ranging from 0.20% to 0.375% (depending upon the ratio of debt
outstanding to adjusted earnings) is payable on the unused line of credit. At March 31, 2011, there
were no borrowings outstanding under the Financing Agreement. Obligations under the Financing
Agreement are the only contractual borrowing obligations or commercial borrowing commitments of the
Company.
Obligations under the Financing Agreement are unsecured and contain customary covenants and events
of default. The Company was in compliance with the covenants as of March 31, 2011.
Cash used in operating activities was $25.4 million in the first quarter of 2011 compared to cash
provided of $7.2 million in the first quarter of 2010. The following changes in components of cash
flow were notable. The Company had net income of $10.7 million in the first quarter of 2011 versus
a net loss of $2.5 million in the first quarter of 2010. Accounts receivable increased in the
first quarters of 2011 and 2010, resulting in a $44.5 million and a $9.4 million use of cash,
respectively. Accounts receivable increased in concert with the increased dollar sales in 2011.
Inventory increased in 2011, resulting in a $5.9 million use of cash, while inventory decreased in
the first quarter of 2010, which provided a $10.0 million source of cash. The net difference
between the two years is a decrease in cash provided of $15.9 million. Trade accounts payable and
accrued liabilities resulted in a $5.6 million decrease in cash provided in the first quarter of
2011 versus the first quarter of 2010 due primarily to the increase in accounts payable,
attributable to increased sales and production along with the timing of inventory receipts at
quarter end. Other assets and liabilities decreased cash flow by $1.1 million in the first quarter
of 2011 versus a $7.0 million decrease in cash flow in the first quarter of 2010, primarily due to
a $7.1 million increase in prepaid assets associated with prepaid copper inventory at March 31,
2010. These changes in cash flow were the primary drivers of the $32.6 million decrease in cash
flow from operations in the first quarter of 2011 versus the first quarter of 2010.
Cash used in investing activities decreased to $2.2 million in the first quarter of 2011 from $3.1
million in the first quarter of 2010. The funds were used primarily for equipment purchases in
both years. The Company used $0.4 million of cash in financing activities in the first quarter of
2011 for dividends versus the $100.5 million of cash used in the first quarter 2010, which was
primarily the result of the Company’s early retirement of long-term notes payable. In the first
quarter of 2011, the Company’s revolving line of credit remained at $0. The Company’s cash balance
was $75.2 million at March 31, 2011.
12
During the remainder of 2011, the Company expects its capital expenditures will consist primarily
of purchases of additional plant and equipment for its building wire operations. The total capital
expenditures for all of 2011 associated with these projects are currently estimated to be between
$10 million and $12 million. The Company will continue to manage its working capital requirements.
These requirements may increase as a result of increased sales and may be impacted by the price of
copper. The Company believes that the current cash balance, cash flow from operations, and the
financing available under the Financing Agreement will satisfy working capital and capital
expenditure requirements during 2011.
Information Regarding Forward Looking Statements
This quarterly report on Form 10-Q contains various “forward-looking statements” (within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended) and information that are based on management’s belief as well as
assumptions made by and information currently available to management. The words “believes”,
“estimates”, “anticipates”, “plans”, “seeks”, “expects”, “intends” and similar expressions identify
some of the forward-looking statements. 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. For more information regarding “forward looking statements” see “Information
Regarding Forward Looking Statements” in Part II, Item 7 of the Company’s Annual Report on Form
10-K for the year ended December 31, 2010, which is hereby incorporated by reference.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes from the information provided in Item 7A, “Quantitative and
Qualitative Disclosures About Market Risk,” of the Company’s Annual Report on Form 10-K for the
year ended December 31, 2010.
Item 4. Controls and Procedures.
The Company maintains controls and procedures designed to ensure that information required to be
disclosed by it in the reports it files with or submits to the Securities and Exchange Commission
(the “SEC”) is recorded, processed, summarized and reported, within the time periods specified in
the SEC’s rules and forms and to ensure that information required to be disclosed by the Company in
such reports is accumulated and communicated to the Company’s management, including the Chief
Executive and Chief Financial Officers, as appropriate to allow timely decisions regarding required
disclosure. Based on an evaluation of the Company’s disclosure controls and procedures (as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended) as of the end of the period covered by this report conducted by the Company’s management,
with the participation of the Chief Executive and Chief Financial Officers, the Chief Executive and
Chief Financial Officers concluded that the
13
Company’s disclosure controls and procedures were effective to ensure that information required to
be disclosed by the Company in the reports it files with or submits to the SEC is recorded,
processed, summarized and reported, within the time periods specified in the SEC’s rules and forms
and to ensure that information required to be disclosed by the Company in such reports is
accumulated and communicated to the Company’s management, including the Chief Executive and Chief
Financial Officers, as appropriate to allow timely decisions regarding required disclosure.
There have been no changes in the Company’s internal control over financial reporting or in other
factors that have materially affected, or are reasonably likely to materially affect, internal
control over financial reporting during the period covered by this report.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
Please refer to Note 8 – “Contingencies” in Notes to Consolidated Financial Statements of this
quarterly report on Form 10-Q for information on legal proceedings.
Item 1A. Risk Factors.
There have been no material changes to the Company’s risk factors as disclosed in Item 1A, “Risk
Factors,” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On November 10, 2006, the Board of Directors approved a stock repurchase program authorizing the
Company to repurchase up to 1,000,000 shares of its common stock through December 31, 2007 on the
open market or through privately negotiated transactions at prices determined by the President of
the Company. The Company’s Board of Directors has subsequently authorized annual extensions of
this stock repurchase program through March 31, 2012 and has authorized the repurchase of up to
2,610,000 shares of its common stock. The Company did not repurchase any shares of its stock in
the first quarter of 2011 or 2010.
Item 6. Exhibits.
The information required by this Item 6 is set forth in the Index to Exhibits accompanying this
Form 10-Q.
14
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.
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ENCORE WIRE CORPORATION |
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(Registrant) |
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Dated: May 5, 2011
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/s/ DANIEL L. JONES |
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Daniel L. Jones, President and |
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Chief Executive Officer |
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Dated: May 5, 2011
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/s/ FRANK J. BILBAN |
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Frank J. Bilban, Vice President – Finance, |
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Chief Financial Officer, |
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Treasurer and Secretary |
15
INDEX TO EXHIBITS
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Exhibit |
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Number |
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Description |
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3.1
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Certificate of Incorporation of Encore Wire Corporation and all
amendments thereto (filed as Exhibit 3.1 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended March 31,
2009, and incorporated herein by reference).
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3.2
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Second Amended and Restated Bylaws of Encore Wire Corporation, as
amended through December 13, 2007 (filed as Exhibit 3.2 to the
Company’s Annual Report on Form 10-K for the year ended December
31, 2007, and incorporated herein by reference).
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31.1
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Certification by Daniel L. Jones, President and Chief Executive
Officer of the Company, dated May 5, 2011 and submitted pursuant
to Rule 13a-14(a)/15d-14(a) and pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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31.2
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Certification by Frank J. Bilban, Vice President – Finance,
Treasurer, Secretary and Chief Financial Officer of the Company,
dated May 5, 2011 and submitted pursuant to Rule
13a-14(a)/15d-14(a) and pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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32.1
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Certification by Daniel L. Jones, President and Chief Executive
Officer of the Company, dated May 5, 2011 as required by 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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32.2
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Certification by Frank J. Bilban, Vice President – Finance,
Treasurer, Secretary and Chief Financial Officer, dated May 5, 2011 as required by 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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