Encore Wire (WIRE) 10-Q 2005 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period endedSeptember 30, 2005

OR

o 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) 1410 Millwood Road McKinney, Texas (Address of principal executive offices)	(I.R.S. employer identification number) 75069 (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. Yesþ Noo

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yesþ Noo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

Number of shares of Common Stock outstanding as of October 31, 2005: 23,112,228

Page 1 of 26 Sequentially Numbered Pages
Index to Exhibits on Page 20

ENCORE WIRE CORPORATION

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005

		Page No.
PART I. FINANCIAL INFORMATION
ITEM 1.	Consolidated Financial Statements
	Consolidated Balance Sheets (Unaudited) September 30, 2005 and December 31, 2004		3
	Consolidated Statements of Income (Unaudited) Quarters and Nine Months ended September 30, 2005 and September 30, 2004		5
	Consolidated Statements of Cash Flows (Unaudited) Nine Months ended September 30, 2005 and September 30, 2004		6
	Notes to Consolidated Financial Statements		7
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk		17
ITEM 4.	Controls and Procedures		17
PART II. OTHER INFORMATION
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		18
ITEM 6.	Exhibits		18
Signatures			19
Certification by Daniel L. Jones Pursuant to Seciton 302
Certification by Frank J. Bilban Pursuant to Section 302
Certification by Daniel L. Jones Pursuant to Section 906
Certification by Frank J. Bilban Pursuant to Section 906

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PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

ENCORE WIRE CORPORATION

CONSOLIDATED BALANCE SHEETS

	September 30,		December 31,
	2005		2004
In Thousands of Dollars	(Unaudited)		(See Note)
ASSETS
Current Assets:
Cash	$	2,022	$	2,640
Accounts receivable (net of allowance of $661 and $577)		159,203		108,752
Inventories		50,194		39,111
Prepaid expenses and other assets		11,707		6,910
Current taxes receivable		—		4,751
Total current assets		223,126		162,164
Property, plant and equipment-on the basis of cost:
Land		7,093		6,783
Construction in progress		6,929		3,378
Buildings and improvements		38,130		37,972
Machinery and equipment		119,835		115,866
Furniture and fixtures		3,624		3,195
Total property, plant, and equipment		175,611		167,194
Accumulated depreciation and amortization		86,433		78,515
		89,178		88,679
Other assets		123		672
Total assets	$	312,427	$	251,515

Note:   The consolidated balance sheet at December 31, 2004 as presented, is derived from the audited consolidated financial statements at that date.

See accompanying notes.

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ENCORE WIRE CORPORATION

CONSOLIDATED BALANCE SHEETS (continued)

	September 30,			December 31,
	2005			2004
In Thousands of Dollars, Except Share Data	(Unaudited)			(See Note)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	23,879		$	15,091
Accrued liabilities		15,269			13,658
Current income taxes payable		526			—
Current deferred income taxes		3,433			733
Total current liabilities		43,107			29,482
Non-current deferred income taxes		10,737			12,653
Long term notes payable		84,300			49,836
Stockholders equity:
Common stock, $.01 par value:
Authorized 40,000,000 shares; issued and outstanding shares 25,871,178 and 25,863,078		259			259
Additional paid-in capital		38,091			38,020
Treasury stock 2,758,950 and 2,758,950 shares at cost		(15,275	)		(15,275	)
Retained earnings		151,208			136,540
Total stockholders’ equity		174,283			159,544
Total liabilities and stockholders’ equity	$	312,427		$	251,515

Note:   The consolidated balance sheet at December 31, 2004, as presented, is derived from the audited consolidated financial statements at that date.

Note:   All share and per share data in this Quarterly Report have been restated to reflect the effect of the Company’s 3-for-2 stock split which was effective in August 2004.

See accompanying notes.

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ENCORE WIRE CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Quarter Ended				Nine Months Ended
	September 30,				September 30,
In Thousands of Dollars, Except Per Share Data	2005		2004		2005		2004
Net sales	$	207,459	$	158,629	$	513,917	$	455,719
Cost of goods sold		176,462		136,859		456,802		379,991
Gross profit		30,997		21,770		57,115		75,728
Selling, general, and administrative expenses		12,769		11,124		33,254		31,260
Operating income (loss)		18,228		10,646		23,861		44,468
Net interest & other expenses		1,074		661		2,676		2,055
Income (loss) before income taxes		17,154		9,985		21,185		42,413
Provision (benefit) for income taxes		5,949		3,594		6,517		15,489
Net income (loss)	$	11,205	$	6,391	$	14,668	$	26,924
Net income (loss) per common and common equivalent shares — basic	$	.48	$	.28	$	.63	$	1.17
Weighted average common and common equivalent shares — basic		23,111		23,104		23,108		22,989
Net income (loss) per common and common equivalent shares — diluted	$	.48	$	.27	$	.63	$	1.14
Weighted average common and common equivalent shares — diluted		23,495		23,478		23,447		23,545
Cash dividends declared per share	$	—	$	—	$	—	$	—

Note:   All share and per share data in this Quarterly Report have been restated to reflect the effect of the Company’s 3-for-2 stock split which was effective in August 2004.

See accompanying notes.

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ENCORE WIRE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 30,
In Thousands of Dollars	2005			2004
OPERATING ACTIVITIES
Net income (loss)	$	14,668		$	26,924
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Depreciation and amortization		9,252			8,619
Provision for bad debts		285			255
Changes in operating assets and liabilities:
Accounts receivable		(50,735	)		(35,902	)
Inventory		(11,083	)		7,598
Accounts payable and accrued liabilities		10,398			3,444
Other assets and liabilities		(4,111	)		(7,507	)
Current income taxes receivable/payable		6,062			(1,914	)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		(25,264	)		1,517
INVESTING ACTIVITIES
Purchases of property, plant and equipment		(10,105	)		(18,613	)
Change in long-term investments		15			(38	)
Proceeds from sale of equipment		202			2,603
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		(9,888	)		(16,048	)
FINANCING ACTIVITIES
Borrowings (repayments) under notes payable		34,463			15,575
Proceeds from exercise of stock options		71			2,761
Purchase of treasury stock		—			—
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		34,534			18,336
Net increase (decrease) in cash		(618	)		3,805
Cash at beginning of period		2,640			391
Cash at end of period	$	2,022		$	4,196

See accompanying notes.

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ENCORE WIRE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments considered necessary for a fair presentation, have been included. All share and per share data in this Quarterly Report have been restated to reflect the effect of the Company’s 3-for-2 stock split which was effective in August 2004. 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, 2004.

NOTE 2 — STOCK BASED EMPLOYEE COMPENSATION

The Company has a stock option plan for employees that provides for the granting of stock options. The Company accounts for stock-based compensation utilizing the intrinsic value method in accordance with the provisions of Accounting Principles Board Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees” and related interpretations. Accordingly, no compensation expense is recognized for fixed option plans because the exercise prices of employee stock options equal or exceed the market prices of the underlying stock on the dates of grant.

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment”. SFAS No. 123R is a revision of SFAS No. 123, “Accounting for Stock Based Compensation”, and supersedes APB 25. Among other items, SFAS 123R eliminates the use of APB 25 and the intrinsic value method of accounting, and requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards, in the financial statements. The revised effective date of SFAS 123R is the first annual reporting period beginning after June 15, 2005, which is the first quarter of 2006 for calendar year companies, although early adoption is allowed. SFAS 123R permits companies to adopt its requirements using either a “modified prospective” method, or a “modified retrospective” method.

The Company currently utilizes a standard option pricing model (i.e., Black-Scholes) to measure the fair value of stock options granted to employees. While SFAS 123R permits entities to continue to use such a model, the standard also permits the use of other models. The Company has not yet determined which model it will use to measure the fair value of employee stock options upon the adoption of SFAS 123R.

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The Company currently expects to adopt SFAS 123R effective in the first quarter of 2006; however, it has not yet determined which of the aforementioned adoption methods it will use.

The following table represents the effect on net income (loss) and earnings per share if the Company had applied the fair value based method and recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” to stock-based Employee compensation:

	Quarter
	Ended				Nine Months Ended
	September 30,				September 30,
In Thousands of Dollars, Except Per Share Data	2005		2004		2005		2004
Net income (loss), as reported	$	11,205	$	6,391	$	14,668	$	26,924
Add: Stock-based employee compensation expense included in reported income, net of related tax effects		—		—		—		—
Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards net of related tax effects		69		95		233		282
Pro forma net income (loss)	$	11,136	$	6,296	$	14,435	$	26,642
Net income (loss) per share
Basic, as reported	$	0.48	$	0.28	$	0.63	$	1.17
Basic, pro forma	$	0.48	$	0.27	$	0.62	$	1.16
Diluted, as reported	$	0.48	$	0.27	$	0.63	$	1.14
Diluted, pro forma	$	0.47	$	0.27	$	0.62	$	1.13

As required, the pro forma disclosures above include options granted since January 1, 1995. Consequently, the effects of applying SFAS 123 for providing pro forma disclosures may not be representative of the effects on reported net income for future years until all options outstanding are included in the pro forma disclosures. For purposes of pro forma disclosures, the estimated fair value of stock-based compensation plans and other options is amortized to expense primarily over the vesting period.

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NOTE 3 — INVENTORIES

Inventories are stated at the lower of cost, determined by the last-in, first-out (LIFO) method, or market.

Inventories (in thousands) consisted of the following:

	September 30,			December 31,
	2005			2004
Raw materials	$	9,894		$	5,026
Work-in-process		10,607			5,311
Finished goods		55,295			43,389
		75,796			53,726
Adjust to LIFO cost		(25,602	)		(14,615	)
		50,194			39,111
Lower of Cost or Market Adjustment		—			—
	$	50,194		$	39,111

An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must necessarily be based on management’s estimates of expected year-end inventory levels and costs. Because these are subject to many forces beyond management’s control, interim results are subject to the final year-end LIFO inventory valuation.

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NOTE 4 — NET INCOME PER SHARE

Net income (loss) per common and common equivalent share is computed using the weighted average number of shares of common stock and common stock equivalents outstanding during each period. If dilutive, the effect of stock options, treated as common stock equivalents, is calculated using the treasury stock method.

The following table sets forth the computation of basic and diluted net income per share:

	Quarter Ended		Quarter Ended
	9/30/05		9/30/04
Numerator:
Net income	$	11,204,923	$	6,390,548
Denominator:
Denominator for basic earnings per share — weighted average shares		23,110,539		23,104,164
Effect of dilutive securities:
Employee stock options		384,793		374,219
Denominator for diluted earnings per share — weighted average shares		23,495,332		23,478,383

The following table sets forth the computation of basic and diluted earnings per share:

	Nine Months Ended		Nine Months Ended
	9/30/05		9/30/04
Numerator:
Net income	$	14,668,152	$	26,923,819
Denominator:
Denominator for basic earnings per share — weighted average shares		23,107,940		22,988,913
Effect of dilutive securities:
Employee stock options		338,703		556,306
Denominator for diluted earnings per share — weighted average shares		23,446,643		23,545,219

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NOTE 5 — LONG TERM NOTE PAYABLE

Effective August 27, 2004, the Company through its indirectly wholly-owned subsidiary, Encore Wire Limited, a Texas Limited partnership (“Encore Wire Limited”), refinanced its unsecured loan facility with two banks (the “Financing Agreement”) and also arranged for a private placement of debt (the “Note Purchase Agreement”). The Company is the guarantor of the indebtedness. Obligations under the Financing Agreement and the Note Purchase Agreement are the only contractual obligations or commercial borrowing commitments of the Company and Encore Wire Limited. The term of the Financing Agreement extends through August 27, 2009. The Financing Agreement provides for maximum borrowings of the lesser of $85 million 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 September 30, 2005, as computed under the Financing Agreement, was $85 million. The Financing Agreement is with two banks, Bank of America, N.A., as Agent, and Wells Fargo Bank, National Association, and replaces the previous financing agreement that was effective August 31, 1999 and had been extended by amendments through May 31, 2007 with a total credit line of $125 million.

Concurrent with the Financing Agreement, Encore Wire Limited and the Company, through its agent bank, entered into the Note Purchase Agreement with Hartford Life Insurance Company, Great-West Life & Annuity Insurance Company, London Life Insurance Company and London Life and Casualty Reinsurance Corporation (collectively referred to as the “Purchasers”), whereby Encore Wire Limited issued and sold $45 million of 5.27% Senior Notes, Series 2004-A, due August 27, 2011 (the “Senior Notes”) to the Purchasers, the proceeds of which were used to repay a portion of the Company’s outstanding indebtedness under the previous bank financing agreement. Through its agent bank, the Company then entered into an interest rate swap agreement to convert the fixed rate on the Senior Notes to a variable rate based on LIBOR plus a fixed adder for the seven-year duration of these notes. As of September 30, 2005, the Company recorded an unrealized reduction to Notes Payable on the balance sheet of $355,475 to account for the fair value of the interest rate swap.

The Financing Agreement and the Senior Notes are unsecured and contain customary covenants and events of default. The Company was in compliance with these covenants, as of September 30, 2005. Under the Financing Agreement, the Company is allowed to pay cash dividends. At September 30, 2005, the total balance outstanding under the Financing Agreement and the Senior Notes was $84.3 million. Amounts outstanding under the Financing Agreement are payable on August 27, 2009, with interest payments due quarterly. Interest payments on the Senior Notes are due semi-annually.

NOTE 6 — STOCK REPURCHASE AUTHORIZATION

On November 6, 2001, the Board of Directors of the Company approved a stock repurchase program covering the purchase of up to 450,000 shares of its common stock dependent upon market conditions. Common stock purchases under this program were authorized through December 31, 2002 on the open market or through privately negotiated transactions at prices determined by the Chairman of the Board or the President of the Company. As of December 31, 2002, 225,300 shares had been purchased under this authorization. The Board of Directors has extended this program

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three times, through December 31, 2005 for the remaining 224,700 shares, however there were no repurchases of common stock in 2003, 2004 and thus far in 2005.

NOTE 7 — CONTINGENCIES

The Company is a party to litigation and claims that arise out of the ordinary business of the Company. While the results of these matters cannot be predicted with certainty, the Company does not believe the final outcome of such litigation and claims will have a material adverse effect on the financial condition, the results of operation or the cash flows of the Company. The Company also believes that it has adequate insurance to cover any damages that may ultimately be awarded.

ITEM 2. MANAGEMENT’S 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.

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 plant operates 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 73.0%, 67.1% and 63.9% of the Company’s cost of goods sold during fiscal 2004, 2003 and 2002, respectively. The price of copper fluctuates, depending on general economic conditions and in relation to supply and demand and other factors, which has caused significant 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 quarterly and nine-month periods ended September 30, 2005 and 2004. 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, 2004.

Results of Operations

Quarter Ended September 30, 2005 Compared to Quarter Ended September 30, 2004

Net sales for the third quarter of 2005 amounted to $207.5 million compared with net sales of $158.6 million for the third quarter of 2004. This dollar increase was the result of a 31% increase in the average price of wire sold. The average cost per pound of raw copper purchased increased in the third quarter of 2005 compared to the third quarter of

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2004, and was the principal reason the average sales price for wire increased. Fluctuations in sales prices are primarily a result of changing copper raw material prices and product price competition. The unit volume of wire shipped was virtually unchanged in the third quarter of 2005 versus the third quarter of 2004.

Cost of goods sold increased to $176.5 million, or 85.1% of net sales, in the third quarter of 2005, compared to $136.9 million, or 86.3% of net sales, in the third quarter of 2004. Gross profit increased to $31.0 million, or 14.9% of net sales, in the third quarter of 2005 versus $21.8 million, or 13.7% of net sales, in the third quarter of 2004. The increased gross profit and gross margin percentages were primarily the result of the higher sales dollars in 2005 absorbing more fixed costs contained in the cost of sales category.

Inventories are stated at the lower of cost, 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 building wire products. As permitted by U.S. 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 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, in pound quantities, as of the end of each reporting period. 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.

Primarily as a result of increasing copper costs and, to a lesser degree, a small increase in the amount of inventory on hand during the third quarter 2005, a LIFO adjustment was recorded, increasing cost of sales by $4.5 million during the quarter. Based on the current copper prices, there is no LCM adjustment necessary. Future reductions in the price of copper could require the Company to record a LCM adjustment against the related inventory balance, which would result in a negative impact on net income.

Selling expenses for the third quarter of 2005 were $10.7 million, or 5.1% of net sales, compared to $9.3 million, or 5.8% of net sales, for the third quarter of 2004. The percentage decrease was due to the substantial increase in the sales dollar denominator, which reduced the selling costs percentage, minimizing an increase in freight costs, offset by a decrease in commissions on sales paid to independent sales reps. Freight costs increased primarily due to higher fuel costs in the trucking industry. General and administrative expenses increased to $1.9 million, or .9% of net sales, in the third quarter of 2005 compared to $1.8 million, or 1.2% of net sales, in the third quarter of 2004. The general and administrative costs are semi-fixed by nature and therefore did not increase proportionately with sales and dropped as a percentage of sales. The provision for bad debts was $195,000 in the third quarter of 2005 versus $45,000 in the third quarter of 2004.

Net interest expense increased to $1,074,000 in the third quarter of 2005 compared to $661,000 in the third quarter of 2004 as a result of higher average debt balances outstanding during the third quarter of 2005 and higher average interest rates.

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As a result of the foregoing factors, the Company’s net income increased to $11.2 million in the third quarter of 2005 from $6.4 million in the third quarter of 2004.

Nine Months Ended September 30, 2005 compared to Nine Months Ended September 30, 2004

Net sales for the first nine months of 2005 amounted to $513.9 million compared with net sales of $455.7 million for the first nine months of 2004. This dollar increase was the result of a 2.4% decrease in the volume of product shipped, offset by a 15.2% increase in the average price of wire sold. Fluctuations in sales prices are primarily a result of fluctuations in copper raw material prices and product price competition.

Cost of goods sold increased to $456.8 million in the first nine months of 2005, compared to $380.0 million in the first nine months of 2004. Gross profit decreased to $57.1 million, or 11.1% of net sales, in the first nine months of 2005 versus $75.7 million, or 16.6% of net sales, in the first nine months of 2004. The decreased gross profit and gross margin percentages were primarily the result of margin compression in the first half of 2005 versus 2004. The margin compression in the first half of 2005 was discussed in the first two quarterly reports of 2005.

Inventories are stated at the lower of cost, 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 building wire products. As permitted by U.S. 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 adjustment to adjust total inventory and cost of goods sold from FIFO to LIFO. The Company applies the 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, in pound quantities, as of the end of each reporting period. 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.

Primarily as a result of increasing copper costs during the first nine months of 2005 and, to a lesser extent, an increased amount of inventory on hand at September 30, a LIFO adjustment was recorded increasing cost of sales by $11.0 million during the period. Based on the current copper prices, there is no LCM adjustment necessary. Future reductions in the price of copper could require the Company to record a LCM adjustment against the related inventory balance, which would result in a negative impact on net income.

Selling expenses for the first nine months of 2005 were $27.4 million, or 5.3% of net sales, compared to $25.5 million, or 5.6% of net sales, in the same period of 2004. The percentage decrease was due to the substantial increase in the sales dollar denominator, which reduced the selling costs percentage, minimizing an increase in freight costs, offset by a decrease in commissions on sales paid to independent sales reps. Freight costs increased primarily due to higher fuel costs in the trucking industry. General and administrative expenses remained relatively flat at $5.6 million, or 1.1% of net sales, in the first nine months of 2005 compared to $5.5 million, or 1.2% of net sales,

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in the same period of 2004. The provision for bad debts was $285,000 in the first nine months of 2005 versus $255,000 in the first nine months of 2004.

Net interest expense was $2,676,000 in the first nine months of 2005 compared to $2,055,000 in the first nine months of 2004. The increase was due to higher average debt balances and higher average interest rates during the first nine months of 2005 than during the comparable period of 2004.

As a result of the foregoing factors, the Company’s net income decreased to $14.7 million in the first nine months of 2005 from $26.9 million in the first nine months of 2004.

Liquidity and Capital Resources

The Company maintains a substantial inventory of finished products to satisfy customer’s 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 historically 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 27, 2004, the Company through its indirectly wholly-owned subsidiary, Encore Wire Limited, a Texas Limited partnership (“Encore Wire Limited”), refinanced its unsecured loan facility with two banks (the “Financing Agreement”) and also arranged for a private placement of debt (the “Note Purchase Agreement”). The Company is the guarantor of the indebtedness. Obligations under the Financing Agreement and the Note Purchase Agreement are the only contractual obligations or commercial borrowing commitments of the Company and Encore Wire Limited. The term of the Financing Agreement extends through August 27, 2009. The Financing Agreement provides for maximum borrowings of the lesser of $85 million 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 September 30, 2005, as computed under the Financing Agreement, was $85 million. The Financing Agreement is with two banks, Bank of America, N.A., as Agent, and Wells Fargo Bank, National Association, and replaces the previous financing agreement that was effective August 31, 1999 and had been extended by amendments through May 31, 2007 with a total credit line of $125 million.

Concurrent with the Financing Agreement, Encore Wire Limited and the Company, through its agent bank, entered into the Note Purchase Agreement with Hartford Life Insurance Company, Great-West Life & Annuity Insurance Company, London Life Insurance Company and London Life and Casualty Reinsurance Corporation (collectively referred to as the “Purchasers”), whereby Encore Wire Limited issued and sold $45 million of 5.27% Senior Notes, Series 2004-A, due August 27, 2011 (the “Senior Notes”) to the Purchasers, the proceeds of which were used to repay a portion of the Company’s outstanding indebtedness under the previous bank financing agreement. Through its agent bank, the Company then entered into an interest rate swap agreement to convert the fixed rate on the Senior Notes to a variable rate based on LIBOR plus a fixed adder for the seven-year duration of these notes. As of September 30, 2005, the

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Company recorded an unrealized reduction to Notes Payable on the balance sheet of $355,475 to account for the fair value of the interest rate swap.

The Financing Agreement and the Senior Notes are unsecured and contain customary covenants and events of default. The Company was in compliance with these covenants, as of September 30, 2005. Under the Financing Agreement, the Company is allowed to pay cash dividends. At September 30, 2005, the total balance outstanding under the Financing Agreement and the Senior Notes was $84.3 million. Amounts outstanding under the Financing Agreement are payable on August 27, 2009, with interest payments due quarterly. Interest payments on the Senior Notes are due semi-annually.

Cash used in operations was $25.3 million in the first nine months of 2005 compared to $1.5 million of cash provided by operations in the first nine months of 2004. This decrease in cash provided by operations resulted from several major factors, including, the decrease in net income to $14.7 million in the first nine months of 2005 from $26.9 million in the first nine months of 2004, an increase in accounts receivable of $50.7 million in 2005 versus and increase of $35.9 million in 2004 and an increase in inventory of $11.1 million in 2005 versus a decrease of $7.6 million in 2004, offset by an increase in accounts payable of $8.8 million in 2005 versus a decrease of $1.9 million in 2004 and a $8.0 million swing in current taxes payable/ receivable from a $1.9 million use of cash in 2004 to a $6.1 million source of cash in 2005. The increase in accounts payable is due primarily to timing differences. The change in current taxes resulted from the way in which taxes are calculated by annualizing year-to-date results. The 2004 tax accruals were driven upward by the large earnings in the first half of the year, resulting in tax overpayments in 2004. In 2005, the Company offset these tax credits against 2005 tax liabilities.

Cash used in investing activities decreased to $9.9 million in the first nine months of 2005 from $16.0 million in the first nine months of 2004, as the Company had lower capital expenditures in 2005. In 2004, the funds were used primarily to fund construction of the new 162,000 square foot addition to the Company’s distribution center as well as the purchase of manufacturing equipment. The $34.5 million of cash provided by financing activities in the first nine months of 2005 was a result of the Company’s increase in outstanding bank debt, which was required to satisfy the cash demands discussed above.

During the remainder of 2005, the Company expects its capital expenditures will consist of additional plant and equipment for its residential and commercial wire operations, primarily related to the new armored cable plant, which was discussed in a press release, dated March 21, 2005. The Company broke ground for this plant in June 2005. Current plans are to complete this plant in the first half of 2006. The total capital expenditures associated with these projects in 2005 are currently estimated to be in the $15.0 to $20.0 million range. The Company will continue to manage its working capital requirements. These requirements may increase as a result of expected continued sales increases and may be impacted by the price of copper. The Company believes that the cash flow from operations and the financing available under the amended Financing Agreement will satisfy working capital and capital expenditure requirements for the next twelve months.

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Information Regarding Forward Looking Statements

This 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. 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, 2004, 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 7.A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (the “CEO”) and the Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 and 15d-15. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures are adequately designed to ensure that the information required to be disclosed in this report has been accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions regarding such required disclosure and to ensure that the Company’s disclosure controls and procedures are functioning effectively.

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.

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PART II. OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Stock Repurchase Program

On November 6, 2001, the Board of Directors of the Company approved a stock repurchase program covering the purchase of up to 450,000 shares of its common stock dependent upon market conditions. Common stock purchases under this program were authorized through December 31, 2002 on the open market or through privately negotiated transactions at prices determined by the Chairman of the Board or the President of the Company. As of December 31, 2002, 225,300 shares had been purchased under this authorization. The Board of Directors has extended this program three times, through December 31, 2005 for the remaining 224,700 shares, however there were no repurchases of stock in 2003, 2004 and thus far in 2005.

ITEM 6. EXHIBITS

(a) The information required by this Item 6(a) is set forth in the Index to Exhibits accompanying this Form 10-Q.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on behalf by the undersigned thereunto duly authorized.

ENCORE WIRE CORPORATION  

(Registrant) 

Dated: November 2, 2005	/s/ DANIEL L. JONES
	Daniel L. Jones, President and
	Chief Executive Officer

Dated: November 2, 2005	/s/ FRANK J. BILBAN
	Frank J. Bilban, Vice President — Finance,
	Treasurer and Secretary Chief Financial Officer

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INDEX TO EXHIBITS

Exhibit
Number	Description
3.1	Certificate of Incorporation of Encore Wire Corporation, as amended through July 20, 2004 (filed on Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, and incorporated herein by reference).
3.2	Amended and Restated Bylaws of Encore Wire Corporation, as amended through July 20, 2004 (filed as Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, and incorporated herein by reference).
10.1*	1999 Stock Option Plan, as amended and restated, effective as of October 24, 2001 (filed as Exhibit 99.1 to the Company’s Registration Statement on Form S-8 (No. 333-86620), and incorporated herein by reference).
10.2*	1989 Stock Option Plan, as amended and restated (filed as Exhibit 4.1 to the Company’s Registration Statement on Form S-8 (No. 333-38729), and incorporated herein by reference), terminated except with respect to outstanding options thereunder.
31.1	Certification by Daniel L. Jones, President and Chief Executive Officer of Encore Wire Corporation, dated November 2, 2005 and submitted pursuant to Rule 13a-14(a)/15d-14(a) and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification by Frank J. Bilban, Vice President-Finance, Chief Financial Officer, Treasurer and Secretary of Encore Wire Corporation, dated November 2, 2005 and submitted pursuant to Rule 13a-14(a)/15d-14(a) and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification by Daniel L. Jones, President and Chief Executive Officer of Encore Wire Corporation, dated November 2, 2005 and submitted as required by 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification by Frank J. Bilban, Vice President-Finance, Chief Financial Officer, Treasurer and Secretary of Encore Wire Corporation, dated November 2, 2005 as required by 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*	Management contract or compensatory plan.

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