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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-20278
ENCORE WIRE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2274963
(State of incorporation) (I.R.S. employer identification number)
1410 MILLWOOD ROAD
MCKINNEY, TEXAS 75069
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 562-9473
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No
--- ---
Number of shares of Common Stock outstanding as of July 24, 1999: 15,388,547
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ENCORE WIRE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
Page No.
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PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets......................................3
June 30, 1999 (Unaudited) and December 31, 1998
Consolidated Statements of Income (Unaudited)....................5
Quarters and six months ended June 30, 1999 and June 30, 1998
Consolidated Statements of Cash Flows (Unaudited)................6
Six months ended June 30, 1999 and June 30, 1998
Notes to Consolidated Financial Statements (Unaudited)...........7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................10
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings..............................................17
ITEM 4. Submission of Matters to a Vote of Security Holders............17
ITEM 6. Exhibits and Reports on Form 8-K...............................18
Signatures...................................................................19
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ENCORE WIRE CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
In Thousands of Dollars 1999 1998
(Unaudited) (See Note 1)
----------- ------------
ASSETS
Current assets:
Cash ........................................ $ 1,161 $ 1,431
Accounts receivable (net of allowance of
$507 and $500) .......................... 48,330 37,946
Inventories (Note 2) ........................ 38,546 37,859
Prepaid expenses and other assets ........... 695 247
Current taxes receivable .................... -- 582
--------- ---------
Total current assets .................... 88,732 78,065
Property, plant and equipment-on the basis of cost:
Land ........................................ 3,575 3,569
Construction in Progress .................... 13,040 12,296
Buildings and improvements .................. 25,548 25,363
Machinery and equipment ..................... 61,607 56,874
Furniture and fixtures ...................... 1,288 1,212
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Total property, plant, and equipment .... 105,058 99,314
Accumulated depreciation and
Amortization ........................ 24,315 20,654
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80,743 78,660
Other assets ......................................... 197 223
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Total assets ......................................... $169,672 $156,948
========= =========
See accompanying notes
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ENCORE WIRE CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
June 30, December 31,
In Thousands of Dollars, Except Share Data 1999 1998
(Unaudited) (See Note 1)
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ............................. $ 20,253 $ 16,848
Accrued liabilities ................................ 5,984 7,877
Current income taxes payable ....................... 2,012 --
Current deferred income taxes ...................... 516 516
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Total current liabilities .......................... 28,765 25,241
Non-current deferred income taxes ........................... 4,053 4,053
Long term notes payable ..................................... 52,700 44,000
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued and outstanding shares - (15,393,547
at June 30, 1999 and 15,601,554 at
December 31, 1998)............. ............. 163 163
Additional paid-in capital .................................. 30,624 30,591
Treasury stock - 941,000 at June 30, 1999 and 702,575 at
December 31, 1998 .................................. (8,544) (6,167)
Retained earnings ........................................... 61,911 59,067
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Total stockholders' equity ......................... 84,154 83,654
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Total liabilities and stockholders' equity .................. $ 169,672 $ 156,948
========= =========
Note: The consolidated balance sheet at December 31, 1998, as presented, is
derived from the audited consolidated financial statements at that
date.
See accompanying notes
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ENCORE WIRE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Quarter Ended Six Months Ended
June 30, June 30,
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In Thousands of Dollars, Except Per Share Data 1999 1998 1999 1998
------- ------- -------- --------
Net sales ........................................... $55,442 $63,906 $118,966 $126,833
Cost of goods sold .................................. 49,379 51,446 103,721 98,924
------- ------- -------- --------
Gross profit ....................................... 6,063 12,460 15,245 27,909
Selling, general, and administrative expense ....... 4,483 4,513 9,476 9,071
------- ------- -------- --------
Operating income ................................... 1,580 7,947 5,769 18,838
Interest expense (net) ............................. 630 267 1,148 520
------- ------- -------- --------
Income before income taxes ......................... 950 7,680 4,621 18,318
Provision for income taxes ......................... 364 3,114 1,777 7,316
------- ------- -------- --------
Net income ......................................... $ 586 $ 4,566 $ 2,844 $ 11,002
======= ======= ======== ========
Net income per common and common
equivalent share - basic ........................ $ .04 $ .29 $ .18 $ .69
======= ======= ======== ========
Weighted average common and common
equivalent shares - basic ....................... 15,530 15,949 15,576 15,925
======= ======= ======== ========
Net income per common and common
equivalent share - diluted ...................... $ .04 $ .27 $ .18 $ .66
======= ======= ======== ========
Weighted average common and common
equivalent shares - diluted ..................... 15,871 16,613 15,923 16,586
======= ======= ======== ========
Cash dividends declared per share .................. $ -- $ -- $ -- $ --
======= ======= ======== ========
See accompanying notes
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ENCORE WIRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
In Thousands of Dollars 1999 1998
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OPERATING ACTIVITIES
Net income ................................................. $ 2,844 $ 11,002
Adjustments to reconcile net income to cash provided by
(used in) operating
activities:
Depreciation and amortization ...................... 3,812 2,569
Provision for bad debts ............................ -- 375
Changes in operating assets and liabilities:
Accounts receivable ............................ (10,384) (7,928)
Inventory ...................................... (687) (5,881)
Accounts payable and accrued liabilities ....... 1,512 (1,946)
Other assets and liabilities ................... (433) (387)
Current income taxes payable ................... 2,594 1,487
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NET CASH USED IN OPERATING ACTIVITIES ....... (742) (709)
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INVESTING ACTIVITIES
Purchases of property, plant and equipment ................. (5,978) (15,459)
Increase in Long Term Investments .......................... 5 170
Proceeds from Sale of Equipment ............................ 89 12
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NET CASH USED IN INVESTING ACTIVITIES .................. (5,884) (15,277)
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FINANCING ACTIVITIES
Borrowings (repayments) under notes payable ................ 8,700 15,800
Purchases of Treasury Stock ................................ (2,377) --
Proceeds from issuance of common stock ..................... 33 392
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NET CASH PROVIDED BY FINANCING ACTIVITIES .............. 6,356 16,192
-------- --------
NET DECREASE IN CASH ........................................... (270) 206
Cash at beginning of period .................................... 1,431 1,165
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Cash at end of period .......................................... $ 1,161 $ 1,371
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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 have been prepared in accordance with generally accepted accounting
principles for interim financial information and the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair presentation have been included. Results of operations for
the periods presented are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. These financial statements
should be read in conjunction with the audited financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
NOTE 2 - INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined by the last-in, first-out (LIFO) method.
Inventories (in thousands) consisted of the following:
JUNE 30, DECEMBER 31,
1999 1998
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Raw materials ........................... $ 6,333 $ 6,152
Work-in-process ......................... 2,647 4,339
Finished goods .......................... 24,404 23,356
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33,384 33,847
Increase to LIFO cost ................... 7,351 6,637
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40,735 40,484
Lower of Cost or Market Adjustment ...... (2,189) (2,625)
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$ 38,546 $ 37,859
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An actual valuation of inventory under the LIFO method can be made only
at the end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations are based on management's estimates of
expected year-end inventory levels and costs. Because these are subject to
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many forces beyond management's control, interim results are subject to the
final year-end LIFO inventory valuation.
NOTE 3 - INCOME PER SHARE
Income per common and common equivalent share is computed using the
weighted average number of shares of common stock and common stock equivalents
outstanding during each period. If dilutive, the effect of stock options,
treated as common stock equivalents, is calculated using the treasury stock
method.
The following table sets forth the computation of basic and diluted earnings per
share:
Quarter Ending Quarter Ending
June 30, 1999 June 30, 1998
Numerator:
Net Income $ 586,000 $ 4,566,000
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Denominator:
Denominator for basic earnings per share -
weighted average shares 15,529,901 15,948,891
Effect of dilutive securities:
Employee stock options 340,908 664,361
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Denominator for diluted earnings per share -
weighted average shares 15,870,809 16,613,252
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The following table sets forth the computation of basic and diluted earnings
per share:
Six Months Ending Six Months Ending
June 30, 1999 June 30, 1998
Numerator:
Net Income $ 2,844,000 $11,002,000
=========== ===========
Denominator:
Denominator for basic earnings per share -
weighted average shares 15,575,987 15,924,930
Effect of dilutive securities:
Employee stock options 347,214 661,181
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Denominator for diluted earnings per share -
weighted average shares 15,923,201 16,586,111
=========== ===========
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NOTE 4 - LONG TERM NOTE PAYABLE
Effective June 9, 1997, the Company completed an unsecured loan
facility with a group of banks (the "Financing Agreement"). The Financing
Agreement has been amended six times since June 9, 1997 to change, among other
items, the maximum borrowing amount, the term of the loan covenants and the
allowable purchases of the Company's common stock. The Financing Agreement
provides for maximum borrowings of the lesser of $65.0 million or the amount of
eligible accounts receivable plus the amount of eligible finished goods and raw
materials, less any available reserves established by the banks. The calculated
maximum borrowing amount available at June 30, 1999, as computed under the
Financing Agreement, was $62.9 million. The Financing Agreement is unsecured and
contains customary covenants and events of default. The Company was in
compliance with these covenants, as amended, as of June 30, 1999. Pursuant to
the Financing Agreement, the Company is prohibited from declaring, paying or
issuing cash dividends. At June 30, 1999, the balance outstanding under the
Financing Agreement was $52.7 million. Amounts outstanding under the Financing
Agreement are payable on May 31, 2001 with interest due quarterly based on the
bank's prime rate or LIBOR Rate options, at the Company's election.
NOTE 5 - STOCK REPURCHASE AUTHORIZATION
On March 24, 1995, the Company announced that its Board of Directors
had authorized it to purchase up to 900,000 shares, or approximately 5.6%, of
its outstanding common stock dependent upon market conditions. Subsequent Board
actions increased this authorization to 946,000. As of July 31, 1999, the
Company had repurchased an aggregate of 946,000 shares of its common stock in
the open market completing this program.
NOTE 6 - STOCK DIVIDEND
On May 5, 1998 the Board of Directors of the Company declared a 3-for-2
stock split to be paid as a 50% stock dividend on its common stock. The stock
dividend was payable June 15, 1998 to stockholders of record at the close of
business on June 8, 1998. The per share amounts disclosed in this filing have
been restated to reflect the stock dividend.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is a low-cost manufacturer of copper electrical building
wire and cable. The Company is a significant supplier of residential wire for
interior wiring in homes, apartments and manufactured housing and commercial
wire for commercial and industrial buildings.
Price competition for electrical wire and cable is intense, and the
Company sells its products in accordance with prevailing market prices. Copper
is the principal raw material used by the Company in manufacturing its products.
Copper accounted for approximately 66.2%, 73.8%, 77.4%, 76.8%, and 67.9% of the
Company's cost of goods sold during fiscal 1998, 1997, 1996, 1995 and 1994,
respectively. The price of copper fluctuates, depending on general economic
conditions and in relation to supply and demand and other factors, and has
caused monthly variations in the cost of copper purchased by the Company. The
Company cannot predict copper prices in the future or the effect of fluctuations
in the cost of copper on the Company's future operating results.
The following discussion and analysis relates to factors that have
affected the operating results of the Company for the three month and six month
periods ended June 30, 1998 and 1999. Reference should also be made to the
audited financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
RESULTS OF OPERATIONS
Quarter Ended June 30, 1999 Compared to Quarter Ended June 30, 1998
Net sales for the second quarter of 1999 amounted to $55.4 million
compared with net sales of $63.9 million for the second quarter of 1998. This
decrease was due to a decrease in the average sales price per copper pound of
the Company's products, offset in part by an 8% increase in the pounds of copper
shipped during the period. The decrease in the average sales price per copper
pound of the Company's products was due to a 19% decrease in the average cost of
copper from the second quarter of 1998 to the same period in 1999, as well as
competitive pricing pressure for the Company's products. Sales volume increased
due to several factors, including increases in customer acceptance and product
availability. Sales volume of residential wire remained relatively constant
whereas the sales volume of commercial products increased during the second
quarter of 1999 compared to the second quarter of 1998. The average sales price
per copper pound of product sold was $1.28 in the second quarter of 1999,
compared to $1.59 in the second quarter of 1998. Fluctuations in sales prices
are primarily a result of price competition and changing copper raw material
prices.
Cost of goods sold decreased to $49.4 million in the second quarter of
1999, from $51.4 million in the second quarter of 1998. Copper costs decreased
to $28.7 million in the second quarter of 1999 from $34.7 million in the second
quarter of 1998. The average cost per copper pound purchased decreased to $.69
in the second quarter of 1999 from $.85 in the second quarter of 1998. Copper
costs as a percentage of net sales decreased to 51.8% in the second quarter of
1999 from 54.3% in the second quarter of 1998. This decrease as a percentage of
net sales in the second quarter of 1999 from the comparable quarter in 1998 was
due primarily to lower copper costs per pound of product sold partially offset
by a decreased
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differential between what the Company pays per pound of copper purchased and the
Company's net sales price per copper pound. This differential decreased in the
second quarter of 1999 because the average cost per copper pound purchased
decreased less than the sales price per copper pound. The decreased differential
resulted from competitive pricing conditions. Other raw material costs as a
percentage of net sales increased to 18.7% in the second quarter of 1999,
compared with 14.6% in the second quarter of 1998. This increase is due to raw
materials per pound of copper sold remaining relatively constant while the sales
price per copper pound of product sold decreased as discussed above.
Depreciation, labor and overhead costs as a percentage of net sales increased to
19.2% in the second quarter of 1999, compared with 12.9% in the second quarter
of 1998 due to an increase in depreciation, labor and overhead per pound of
copper sold relating to the Company's expansion projects and a lower sales price
per copper pound of product sold as discussed above.
Inventories are stated at the lower of cost, determined by the last in,
first out (LIFO) method, or market. As permitted by generally accepted
accounting principles, the Company maintains its inventory costs and cost of
goods sold on a first in, first out (FIFO) basis and makes a quarterly LIFO
adjustment to adjust total inventory and cost of goods sold to LIFO. The price
of copper increased during the second quarter of 1999 (as compared to the first
quarter of 1999), necessitating an increase in the LIFO reserve of $971,000 and
a corresponding increase in cost of goods sold. In the second quarter of 1998,
the price of copper decreased necessitating a decrease in the LIFO reserve that
resulted in an increase to the inventory value and a decrease to the cost of
goods sold of $835,000. At June 30, 1999, LIFO cost exceeded the market value of
the inventory. The amount in which the June 30, 1999 LIFO cost exceeded the
market value of the inventory was less than the amount established at March 31,
1999. Therefore, there was a reduction in the lower of cost or market reserve
and a decrease in the cost of goods sold in the amount of $1.3 million. The
resulting lower of cost or market reserve at June 30, 1999 was $2.2 million. At
June 30, 1998, LIFO cost exceeded the market value of the inventory. However,
the excess did not require an addition to the lower of cost or market reserve
because the reserve previously established, in the amount of $1.3 million, was
adequate to adjust for the amount of cost over market. Future reductions in the
price of copper could require the Company to record lower of cost or market
adjustments against the related inventory balance which would result in a
negative impact on net income. In addition, if the quantity of inventory
decreases in any period, copper that is carried in inventory at a cost different
from the cost of copper in the period in which the reduction occurs will be
included in cost of goods sold at the different price.
Due to the items discussed above, gross profit decreased to $6.1
million, or 10.9% of net sales, for the second quarter of 1999 compared to $12.5
million, or 19.5% of net sales, for the second quarter of 1998.
General and administrative expenses were $1.3 million, or 2.3% of net
sales, in the second quarter of 1999 compared to $1.0 million, or 1.7% of net
sales, in the second quarter of 1998. This increase in general and
administrative expenses was due to increased expenses related to the Company's
increased volume. As a percentage of sales, this increase was caused by the
increase in general and administrative costs as well as a decrease in the sales
price per copper pound sold. There was no provision for bad debts in the second
quarter of 1999 compared to $117,000 in the second quarter of 1998. Selling
expenses for the second quarter of 1999 were $3.2 million, or 5.8% of net sales,
compared to $3.3 million, or 5.1% of net sales, in the second quarter of 1998.
Freight charges per copper pound of product shipped decreased because the
Company shipped a greater percentage of its sales to geographic locations closer
to the Company's plant in the second quarter of 1999 compared to the same
quarter of 1998. This decrease was partially offset by the decrease in the sales
price per copper pound sold.
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Net interest expense was $631,000 in the second quarter of 1999
compared to $267,000 in the second quarter of 1998. The increase was due to a
higher average debt balance outstanding during the second quarter of 1999 than
the comparable period during 1998, reduced by the capitalization of interest
related to the Company's copper rod fabrication facility construction during the
second quarter of 1998. This increase in average debt outstanding was the result
of capital expenditures and additional working capital. As a result of the
decreased cost of copper in the second quarter of 1999 compared to the second
quarter of 1998, the amount of working capital necessary for inventory decreased
but this was offset by increased quantities of inventory and an increased
accounts receivable balance.
The Company's effective tax rate decreased to 38.3% in the second
quarter of 1999 compared to 40.5% in the second quarter of 1998. The higher
effective tax rate in 1998 was partly due to the accrual for a non-deductible
penalty in the second quarter of 1998 (See Part II - Item 1. Legal Proceedings).
Without the accrual of this amount in the second quarter of 1998, the Company's
effective tax rate in the second quarter of 1998 would have been 39.5%.
As a result of the foregoing factors, the Company's net income was
$586,000 in the second quarter of 1999 compared to $4.6 million in the second
quarter of 1998.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Net sales for the first six months of 1999 amounted to $118.9 million
compared with net sales of $126.8 million for the first six months of 1998. This
decrease was due to a decrease in the average sales price per copper pound of
the Company's products, offset in part by a 21% increase in the pounds of copper
shipped during the period. The decrease in the average sales price per copper
pound of the Company's products was caused by a 20% decrease in the average cost
of copper from the first six months of 1998 to the same period in 1999, as well
as competitive pricing pressure on the Company's products in the first six
months of 1999. Sales volume increased due to several factors, including
increases in customer acceptance and product availability. Sales volume of the
Company's residential and commercial products increased during the first six
months of 1999 compared to the first six months of 1998. The average sales price
per copper pound of product sold was $1.29 in the first six months of 1999,
compared to $1.66 in the first six months of 1998. Fluctuations in sales prices
are primarily a result of price competition and changing copper raw material
prices.
Cost of goods sold was $103.7 million in the first six months of 1999,
compared to $98.9 million in the first six months of 1998. Copper costs
decreased to $63.4 million in the first six months of 1999 from $67.2 million in
the first six months of 1998. The average cost per copper pound purchased
decreased to $.68 in the first six months of 1999 from $.85 in the first six
months of 1998. Copper costs as a percentage of net sales remained relatively
constant at 53.3% in the first six months of 1999 compared to 53.0% in the first
six months of 1998. The lower copper cost per pound of product sold in the first
six months of 1999 as compared to the same period of 1998 was partially offset
by a slightly decreased differential between what the Company pays per pound of
copper purchased and the Company's net sales price per copper pound. This
differential decreased in the first six months of 1999 because the average cost
per copper pound purchased decreased less than the sales price per copper pound.
The decreased differential was a result of competitive pricing conditions in the
first six months of 1999. Other raw material costs as a percentage of net sales
increased to 17.6% in the first six months of 1999, compared with 14.8% in the
first six months of 1998. This increase is due to a decrease in the sales price
per copper
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pound sold, as discussed above, which more than offset the slight decrease in
raw materials per pound of copper sold. Depreciation, labor and overhead costs
as a percentage of net sales increased to 17.7% in the first six months of 1999
compared to 11.8% in the first six months of 1998. This increase is due to an
increase in depreciation labor and overhead per pound of copper sold relating to
the Company's expansion projects as well as a lower sales price per copper pound
of product sold as discussed above.
Inventories are stated at the lower of cost, determined by the last in,
first out (LIFO) method, or market. As permitted by generally accepted
accounting principles, the Company maintains its inventory costs and cost of
goods sold on a first in, first out (FIFO) basis and makes a quarterly LIFO
adjustment to adjust total inventory and cost of goods sold to LIFO. The price
of copper decreased during the first six months of 1999, necessitating a
decrease in the LIFO reserve of $1.3 million that resulted in an increase to the
inventory value and a decrease in cost of goods sold. In the first six months of
1998, the price of copper decreased, necessitating a decrease in the LIFO
reserve that resulted in an increase to the inventory value and a decrease to
the cost of goods sold of $2.0 million. At June 30, 1999, LIFO cost exceeded the
market value of the inventory. The amount in which the June 30, 1999 LIFO cost
exceeded the market value of the inventory was less than the amount established
at March 31, 1999. Therefore, there was a reduction in the lower of cost or
market reserve and a decrease in the cost of goods sold in the amount of $1.3
million. The resulting lower of cost or market reserve at June 30, 1999 was $2.2
million. At June 30, 1998, LIFO cost exceeded the market value of the inventory.
However, the excess did not require an addition to the lower of cost or market
reserve because the reserve previously established, in the amount of $1.3
million, was adequate to adjust for the amount of cost over market. Future
reductions in the price of copper could require the Company to record lower of
cost or market adjustments against the related inventory balance which would
result in a negative impact on net income. In addition, if the quantity of
inventory decreases in any period, copper that is carried in inventory at a cost
different from the cost of copper in the period in which the reduction occurs
will be included in cost of goods sold at the different price.
Due to the items discussed above, Gross profit decreased to $15.2
million, or 12.8% of net sales, for the first six months of 1999 compared to
$27.9 million, or 22.0% of net sales, for the first six months of 1998.
General and administrative expenses were $2.4 million, or 2.1% of net
sales, in the first six months of 1999 compared to $2.1 million, or 1.7% of net
sales, in the first six months of 1998. This increase in general and
administrative expenses was due to increased expenses related to the Company's
increased sales volume. As a percentage of sales, this increase was caused by
the dollar increase in general and administrative costs as well as the decrease
in the sales price per copper pound sold. There was no provision for bad debts
in the first six months of 1999 compared to $375,000 in the first six months of
1999. Selling expenses for the first six months of 1999 were $7.0 million, or
5.9% of net sales, compared to $6.6 million, or 5.2% of net sales, in the first
six months of 1998. Freight charges per copper pound of product shipped
decreased slightly because the Company shipped a greater percentage of its sales
to geographic locations closer to the Company's plant in the first six months of
1999 compared to the same period of 1998. This decrease was offset in part by
the decrease in the sales price per copper pound sold.
Net interest expense increased to $1.1 million in the first six months
of 1999 compared to $520,000 in the first six months of 1998. The increase was
due to a higher average debt balance outstanding during the first six months of
1999 than the comparable period during 1998, and reduced by the capitalization
of interest related to the Company's copper rod fabrication facility
construction in the first six months of 1998. This increase in average debt
outstanding funded capital expenditures and additional
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working capital. As a result of the decreased cost of copper in the first six
months of 1999 compared to the comparable period of 1998, the amount of working
capital necessary for inventory decreased, but was offset by increased
quantities of inventory and an increased accounts receivable balance.
The Company's effective tax rate decreased to 38.5% in the first six
months of 1999 compared to 39.9% in the first six months of 1998. This decrease
was due to the accrual for a non deductible penalty in the first six months of
1998 (See Part II - Item 1. Legal Proceedings). Without the accrual of this
amount, the Company's effective tax rate in the first six months of 1998 would
have been 39.5%.
As a result of the foregoing factors, the Company's net income
decreased to $2.8 million in the first six months of 1999 from $11.0 million in
the first six months of 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a substantial inventory of finished products to
satisfy customers' prompt delivery requirements. As is customary in the
industry, the Company provides payment terms to most of its customers that
exceed terms that it receives from its suppliers. Therefore, the Company's
liquidity needs have generally consisted of operating capital necessary to
finance these receivables and inventory. Capital expenditures have historically
been necessary to expand the production capacity of the Company's manufacturing
operations. The Company has satisfied its liquidity and capital expenditure
needs with cash generated from operations, borrowings under its revolving credit
facilities and sales of its common stock.
Effective June 9, 1997, the Company completed an unsecured loan
facility with a group of banks (the "Financing Agreement"). The Financing
Agreement has been amended six times since June 9, 1997 to change, among other
items, the maximum borrowing amount, the term of the loan covenants and the
allowable purchases of the Company's common stock. The Financing Agreement
provides for maximum borrowings of the lesser of $65.0 million or the amount of
eligible accounts receivable plus the amount of eligible finished goods and raw
materials, less any available reserves established by the banks. The calculated
maximum borrowing amount available at June 30, 1999, as computed under the
Financing Agreement, was $62.9 million. The Financing Agreement is unsecured and
contains customary covenants and events of default. The Company was in
compliance with these covenants, as amended, as of June 30, 1999. Pursuant to
the Financing Agreement, the Company is prohibited from declaring, paying or
issuing cash dividends. At June 30, 1999, the balance outstanding under the
Financing Agreement was $52.7 million. Amounts outstanding under the Financing
Agreement are payable on May 31, 2001 with interest due quarterly based on the
bank's prime rate or LIBOR Rate options, at the Company's election.
Cash used by operations was $762,000 in the first six months of 1999
compared to $709,000 million in the first six months of 1998. This increase in
cash used by operations is primarily the result of a decrease in net income and
a greater increase in accounts receivable during the first six months of 1999
compared to 1998 offset by lower copper prices in the first six months of 1999
compared to 1998. Cash used in investing activities decreased from $15.3 million
in the first six months of 1998 to $5.9 million in the first six months of 1999.
In both periods, these funds were used primarily to increase the Company's
production capacity and to purchase equipment for use in the Company's vertical
integration projects that are discussed in the following paragraph. The increase
in cash provided by financing activities was due primarily to borrowings in the
first six months of 1999 and 1998, the proceeds of which were used to fund the
activities discussed above.
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During 1999, the Company expects to expend capital for additional
manufacturing equipment for its residential and commercial wire operations. In
addition, the Company plans to complete the construction of its new facility to
manufacture polyvinyl chloride ("PVC") which was substantially complete at June
30, 1999. This PVC manufacturing facility will allow the Company to produce its
own PVC instead of purchasing it from outside sources. During 1998 the Company
completed the construction of its copper rod fabrication facility which allows
the Company to manufacture a portion of its own copper rod requirements instead
of purchasing rod from outside vendors. The Company believes that both of these
vertical integration projects will reduce the cost of the Company's raw
materials. The total capital expenditures in 1999 associated with the PVC
facility and the additional manufacturing equipment are estimated to be
approximately $10.0 million. The Company also expects its working capital
requirements to increase during 1999 as a result of expected continued increases
in sales. Moreover, the Company expects that the inventory levels necessary to
support sales of additional wire products will continue to grow. These
requirements will be impacted by the price of copper. The Company believes that
the cash flow from operations and the financing that it expects to receive from
its banks under the Financing Agreement will satisfy working capital and capital
expenditure requirements for the next twelve months.
On March 24, 1995, the Company announced that its Board of Directors
had authorized it to purchase up to 900,000 shares, or approximately 5.6%, of
its outstanding common stock dependent upon market conditions. Subsequent Board
actions increased this authorization to 946,000. As of July 31, 1999, the
Company had repurchased an aggregate of 946,000 shares of its common stock in
the open market completing this program.
IMPACT OF YEAR 2000
The year 2000 issue is the result of computer programs being written to
use two digits rather than four digits to define the applicable year. Any
computer program that has date sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a
temporary inability to process transactions or engage in normal manufacturing or
other business activities.
The Company has completed its initial review of the impact of the year
2000 issue on the Company's information systems and support systems, including
hardware and software used in the manufacture and distribution of its products.
Based on the Company's initial inventory and assessment of its systems, the
Company does not believe that any modifications to or replacement of its
information technology or other systems are necessary as a result of the year
2000 problem. Unrelated to any potential year 2000 issues, the Company is in the
process of replacing its financial accounting software, and the Company expects
the new system to be operational by year-end 1999 and to be fully Year 2000
compliant.
The Company has initiated communications with its significant third
party suppliers and customers to determine the extent to which the Company may
be vulnerable to their failure to correct their own year 2000 issues. The
Company intends to continue such communications in 1999. The Company does not
participate in any electronic data interchange with any of its principal vendors
and only participates with a limited number of customers. As a result, the
Company's vulnerability to third party Year 2000 failures should be limited. The
Company believes its significant trading partners have addressed year 2000
issues, but their failure to do so could have a material adverse effect on the
Company's operations.
A contingency plan has been developed for dealing with the most
reasonably likely year 2000 worst case scenario. The Company currently plans to
implement the steps necessary to carry out the contingency plan by December 31,
1999.
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The Company believes that the cost of its year 2000 identification,
assessment, remediation and testing efforts will not exceed $100,000, and, to
date, the Company has incurred costs significantly less than that amount in
connection with such efforts. The costs and timing of such efforts by the
Company are based on management's current evaluation using available
information. Factors that might cause material changes include, but are not
limited to availability of key year 2000 personnel, the readiness of third
parties and the Company's ability to respond to unforeseen year 2000
complications.
While the Company believes its efforts to address the year 2000 issue
will allow the Company to successfully avoid any material adverse effect on the
Company's operations or financial condition, it recognizes that failure by the
Company, its customers or vendors to resolve adequately the year 2000 problem on
a timely basis could, in a most reasonably likely worst case scenario, limit its
ability to manufacture and distribute its products and process its daily
business transactions for a period of time, especially if such failure is
coupled with infrastructure failures.
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
This report contains various forward-looking statements and information
that are based on management's belief as well as assumptions made by and
information currently available to management. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. Such statements are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those expected. Among the key factors that may have a direct
bearing on the Company's operating results are fluctuations in the economy and
in the level of activity in the building and construction industry, demand for
the Company's products, the impact of price competition and fluctuations in the
price of copper.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL MATTERS
On August 20, 1997, the Company was inspected by the U.S. Environmental
Protection Agency (the "EPA") to determine the Company's compliance with the
requirements of the Emergency Planning and Community Right-to-Know Act
provisions ("EPCRA") of the Comprehensive Environmental Response, Compensation
and Liability Act, as amended. In general, EPCRA requires private businesses to
maintain and file with the government specified documents concerning the on-site
recycling and off-site management of a defined group of chemicals, including
metal compounds. The Company was required to provide the EPA by September 12,
1997 with information concerning its processing of copper, lead compounds,
antimony compounds and methyl ethyl ketone for calendar years 1994 and 1995.
This information was researched by the Company, and the required documents were
timely filed with the EPA.
In a separate matter, by letter dated February 17, 1998, the Company
was issued "Findings of Violation and Order for Compliance" by the EPA. In this
document, the EPA alleged that the Company had failed to obtain a federal storm
water discharge permit pursuant to the Clean Water Act ("CA") for its past and
current ongoing operations in McKinney, Texas, and to otherwise meet the terms
of this permitting program. The Company was ordered timely to (1) apply for a
federal storm water discharge permit, (2) prepare and submit a Storm Water
Pollution Prevention Plan and (3) prepare and file a report with the EPA
describing actions that the Company has taken or would take to correct
violations alleged by the EPA. On March 6, 1998, the Company applied for a
federal storm water discharge permit. On March 23, 1998, the Company filed the
Storm Water Pollution Prevention Plan and the written report required by the
"Findings of Violation and Order for Compliance" with the EPA.
In addition, the "Findings of Violation and Order for Compliance"
offered the Company the opportunity to contact the EPA to schedule a Show Cause
hearing to demonstrate to the EPA why it should not take further enforcement
action against the Company relating to the matters stated in this document. The
Company requested a Show Cause Hearing, and it was held on April 13, 1998.
On April 17, 1998, the Company was issued a consolidated "Complaint and
Notice of Opportunity for Hearing" by the EPA (the "1998 Complaint"). In the
1998 Complaint, the EPA proposed a civil penalty of $151,000 for seven alleged
violations of EPCRA's reporting requirements and proposed a civil penalty of
$27,500 for the alleged failure to have a federal storm water discharge permit.
In accordance with the EPA's Rule of Practice, the Company has filed an Answer
to the Complaint and has requested an informal settlement conference and a
hearing on all matters alleged by the EPA. The Company intends to vigorously
defend itself in this matter.
ITEM 4. SUBMISSION OF MATTERS IN A VOTE OF SECURITY HOLDERS
(a) The annual meeting of the stockholders of the Company was held in
McKinney, Texas at 9:00 a.m., local time, on May 4, 1999.
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(b) Proxies were solicited by the Board of Directors of the Company
pursuant to Regulation 14A under the Securities and Exchange Act of
1934. There was no solicitation in opposition to the Board of Directors
nominees as listed in the proxy statement and all of such nominees were
duly elected.
(c) Out of a total of 15,628,222 shares of the Company's common stock
outstanding and entitled to vote, 14,678,834 shares were present in
person or by proxy, representing approximately 94 percent of
outstanding shares. The first matter voted on by the stockholders, as
fully described in the proxy statement for the annual meeting was the
election of Donald E. Courtney, Joseph M. Brito, Daniel L. Jones, John
P. Pringle, Vincent A. Rego, William R. Thomas and John Wilson as
directors of the Company. No nominee received less than 99% of the
shares voted.
The second matter voted on by the stockholders was a resolution to
approve Ernst & Young as the auditor of the Company's financial
statements for the year ending December 31, 1999. The resolution was
adopted with the holders of 14,634,874 shares voting in favor of the
resolution and 32,233 voting against the resolution. Holders of 11,727
abstained from voting on the resolution.
(d) Inapplicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Fifth Amendment to Second Amended and Restated Financing
Agreement dated as of May 10, 1999 by and among Encore Wire
Corporation, NationsBank of Texas, N.A. and Comerica Bank -
Texas.
10.2 Sixth Amendment to Second Amended and Restated Financing
Agreement dated as of June 24, 1999 by and among Encore Wire
Corporation, NationsBank of Texas, N.A. and Comerica Bank -
Texas.
(b) No reports on Form 8-K were filed by the Company during the
three months ended June 30, 1999.
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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 its behalf by the
undersigned thereunto duly authorized.
ENCORE WIRE CORPORATION
(Registrant)
Date: August 13, 1999 /s/ Vincent A. Rego
--------------------------------------------------
Vincent A. Rego,
Chief Executive Officer
Date: August 13, 1999 /s/ Daniel L. Jones
--------------------------------------------------
Daniel L. Jones, President
Chief Operating Officer
Date: August 13, 1999 /s/ Scott D. Weaver
--------------------------------------------------
Scott D. Weaver, Vice President - Finance,
Treasurer and Secretary
(Principal Financial Officer)
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INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Description Page
- ------- ----------- ------------
10.1 Fifth Amendment to Second Amended and Restated Financing Agreement
dated as of May 10, 1999 by and among Encore Wire Corporation,
NationsBank of Texas, N.A. and Comerica Bank - Texas 22
10.2 Sixth Amendment to Second Amended and Restated Financing Agreement
dated as of June 24, 1999 by and among Encore Wire Corporation,
NationsBank of Texas, N.A. and Comerica Bank - Texas 29
27 Financial Data Schedule