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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
[ ] FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 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 __________
Commission file number: 0-20278
ENCORE WIRE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2274963
(State of incorporation) (I.R.S. employer identification number)
1410 MILLWOOD ROAD
MCKINNEY, TEXAS 75069
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 562-9473
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
Number of shares of Common Stock outstanding as of October 29, 1999: 15,366,922
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FORM 10-Q
ENCORE WIRE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
Page No.
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PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets.....................................................................3
September 30, 1999 (Unaudited) and December 31, 1998
Consolidated Statements of Income (Unaudited)...................................................5
Quarters and nine months ended September 30, 1999 and September 30, 1998
Consolidated Statements of Cash Flows (Unaudited)...............................................6
Nine months ended September 30, 1999 and September 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 6. Exhibits and Reports on Form 8-K...............................................................18
Signatures.......................................................................................................19
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FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ENCORE WIRE CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
In Thousands of Dollars 1999 1998
(Unaudited) (See Note 1)
------------- ------------
ASSETS
Current assets:
Cash ..................................... $ 1,270 $ 1,431
Accounts receivable (net of allowance of
$488 and $500) ....................... 44,697 37,946
Inventories (Note 2) ..................... 48,294 37,859
Prepaid expenses and other assets ........ 510 247
Current taxes receivable ................. -- 582
------------ ------------
Total current assets ................. 94,771 78,065
Property, plant and equipment-on the basis of cost:
Land ..................................... 3,575 3,569
Construction in Progress ................. 2,256 12,296
Buildings and improvements ............... 25,845 25,363
Machinery and equipment .................. 73,386 56,874
Furniture and fixtures ................... 1,325 1,212
------------ ------------
Total property, plant, and equipment . 106,387 99,314
Accumulated depreciation and
Amortization ..................... 26,377 20,654
------------ ------------
80,010 78,660
Other assets ...................................... 190 223
------------ ------------
Total assets ...................................... $ 174,971 $ 156,948
============ ============
See accompanying notes
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ENCORE WIRE CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
September 30, December 31,
In Thousands of Dollars, Except Share Data 1999 1998
(Unaudited) (See Note 1)
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ............................. $ 20,137 $ 16,848
Accrued liabilities ................................ 6,677 7,877
Current income taxes payable ....................... 2,504 --
Current deferred income taxes ...................... 516 516
------------ ------------
Total current liabilities .......................... 29,834 25,241
Non-current deferred income taxes ........................... 4,053 4,053
Long term notes payable ..................................... 55,300 44,000
Stockholders' equity:
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued and outstanding shares - (15,366,922
at September 30, 1999 and 15,601,554 at
December 31, 1998) .......................... 163 163
Additional paid-in capital .................................. 30,634 30,591
Treasury stock - 971,000 at September 30, 1999 and 702,575 at
December 31, 1998 .................................. (8,832) (6,167)
Retained earnings ........................................... 63,819 59,067
------------ ------------
Total stockholders' equity ......................... 85,784 83,654
------------ ------------
Total liabilities and stockholders' equity .................. $ 174,971 $ 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 Nine Months Ended
September 30, September 30,
------------------------- -------------------------
In Thousands of Dollars, Except Per Share Data 1999 1998 1999 1998
---------- ---------- ---------- ----------
Net sales .................................................. $ 53,063 $ 69,557 $ 172,029 $ 196,390
Cost of goods sold ......................................... 45,009 54,220 148,730 153,144
---------- ---------- ---------- ----------
Gross profit ............................................... 8,054 15,337 23,299 43,246
Selling, general, and administrative expense ............... 4,366 4,992 13,842 14,062
---------- ---------- ---------- ----------
Operating income ........................................... 3,688 10,345 9,457 29,184
Interest expense (net) ..................................... 705 589 1,854 1,109
---------- ---------- ---------- ----------
Income before income taxes ................................. 2,983 9,756 7,603 28,075
Provision for income taxes ................................. 1,074 3,854 2,851 11,170
---------- ---------- ---------- ----------
Net income ................................................. $ 1,909 $ 5,902 $ 4,752 $ 16,905
========== ========== ========== ==========
Net income per common and common
equivalent share - basic ................................ $ .12 $ .37 $ .31 $ 1.06
========== ========== ========== ==========
Weighted average common and common
equivalent shares - basic ............................... 15,380 15,913 15,510 15,921
========== ========== ========== ==========
Net income per common and common
equivalent share - diluted .............................. $ .12 $ .36 $ .30 $ 1.02
========== ========== ========== ==========
Weighted average common and common
equivalent shares - diluted ............................. 15,718 16,336 15,857 16,499
========== ========== ========== ==========
Cash dividends declared per share .......................... $ -- $ -- $ -- $ --
========== ========== ========== ==========
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 1999 1998
---------- ----------
OPERATING ACTIVITIES
Net income ................................................................ $ 4,752 $ 16,905
Adjustments to reconcile net income to cash provided by (used in) operating
activities:
Depreciation and amortization ..................................... 5,895 4,137
Provision for bad debts ........................................... -- 500
Gain (loss) on disposal of assets ................................. -- (15)
Changes in operating assets and liabilities:
Accounts receivable ........................................... (6,751) (16,938)
Inventory ..................................................... (10,434) (1,328)
Accounts payable and accrued liabilities ...................... 2,089 (9,231)
Other assets and liabilities .................................. (235) (216)
Current income taxes payable .................................. 3,086 2,705
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES ...................... (1,598) (3,481)
---------- ----------
INVESTING ACTIVITIES
Purchases of property, plant and equipment ................................ (7,378) (26,179)
Decrease in Long Term Investments ......................................... 5 226
Proceeds from Sale of Equipment ........................................... 132 12
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES ...................... (7,241) (25,941)
---------- ----------
FINANCING ACTIVITIES
Borrowings (repayments) under notes payable ............................... 11,300 31,800
Purchases of Treasury Stock ............................................... (2,665) (2,859)
Proceeds from issuance of common stock .................................... 43 414
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................. 8,678 29,355
---------- ----------
NET INCREASE/(DECREASE) IN CASH ............................................... (161) (67)
Cash at beginning of period ................................................... 1,431 1,165
---------- ----------
Cash at end of period ......................................................... $ 1,270 $ 1,098
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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:
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
Raw materials.................................. $ 5,898 $ 6,152
Work-in-process ............................... 5,936 4,339
Finished goods ................................ 33,522 23,356
---------- ----------
45,356 33,847
Increase to LIFO cost ......................... 4,255 6,637
---------- ----------
49,611 40,484
Lower of Cost or Market Adjustment ............ (1,317) (2,625)
---------- ----------
$ 48,294 $ 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 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 Ended Quarter Ended
September 30, 1999 September 30, 1998
------------------ ------------------
Numerator:
Net Income $ 1,909,000 $ 5,902,000
================== ==================
Denominator:
Denominator for basic earnings per share -
weighted average shares 15,380,148 15,912,527
Effect of dilutive securities:
Employee stock options 337,981 423,780
------------------ ------------------
Denominator for diluted earnings per share -
weighted average shares 15,718,129 16,336,307
================== ==================
The following table sets forth the computation of basic and diluted earnings per
share:
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
Numerator:
Net Income $ 4,752,000 $ 16,905,000
================== ==================
Denominator:
Denominator for basic earnings per share -
weighted average shares 15,509,990 15,920,751
Effect of dilutive securities:
Employee stock options 347,412 577,820
------------------ ------------------
Denominator for diluted earnings per share -
weighted average shares 15,857,402 16,498,571
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NOTE 4 - LONG TERM NOTE PAYABLE
Effective August 31, 1999, the Company through its indirectly
wholly-owned subsidiary, Encore Wire Limited, a Texas limited partnership,
completed an unsecured loan facility with a group of banks (the "Financing
Agreement"). The Financing Agreement replaced the Company's existing credit
facility, and the Company is a guarantor of the indebtedness. The Financing
Agreement 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 September 30, 1999, as
computed under the Financing Agreement, was $64.8 million. The Financing
Agreement is unsecured and contains customary covenants and events of default.
The Company was in compliance with these covenants as of September 30, 1999.
Pursuant to the Financing Agreement, the Company is prohibited from declaring,
paying or issuing cash dividends. At September 30, 1999, the balance outstanding
under the Financing Agreement was $55.3 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 971,000. As of October 31, 1999, the
Company had repurchased an aggregate of 971,000 shares of its common stock in
the open market completing this program.
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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 nine month
periods ended September 30, 1999 and 1998. Reference should also be made to the
audited financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
RESULTS OF OPERATIONS
Quarter Ended September 30, 1999 Compared to Quarter Ended September 30, 1998
Net sales for the third quarter of 1999 amounted to $53.1 million
compared with net sales of $69.6 million for the third quarter of 1998. This
decrease was due to a decrease in the average sales price per copper pound of
the Company's products and a 17% decrease 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 competitive pricing pressure for the Company's
products. Sales volume of residential wire decreased whereas the sales volume of
commercial products remained relatively constant during the third quarter of
1999 compared to the third quarter of 1998. The average sales price per copper
pound of product sold was $1.45 in the third quarter of 1999, compared to $1.58
in the third 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 $45.0 million in the third quarter of
1999 from $54.2 million in the third quarter of 1998. Copper costs decreased to
$25.4 million in the third quarter of 1999 from $35.7 million in the third
quarter of 1998. The average cost per copper pound purchased remained constant
at $.79 in the third quarter of 1999 and 1998. Copper costs as a percentage of
net sales decreased to 47.9% in the third quarter of 1999 from 51.4% in the
third quarter of 1998. The differential between the price the Company pays per
pound of copper purchased and the Company's net sales price per copper pound
decreased in the third quarter of 1999 compared to the third quarter of 1998
because the average cost per copper pound purchased remained constant while the
sales price per copper pound decreased. The decreased differential resulted from
competitive pricing conditions. Other raw material costs as a percentage of net
sales increased to 15.7% in the third quarter of 1999, compared with 13.0% in
the third quarter of 1998. This increase is due to raw
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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
17.0% in the third quarter of 1999, compared with 13.7% in the third 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 third quarter of 1999 (as compared to the second
quarter of 1999), necessitating a decrease in the LIFO reserve of $3.1 million
and a corresponding increase in cost of goods sold. In the third quarter of
1998, the price of copper decreased necessitating an increase in the LIFO
reserve that resulted in an increase to the inventory value and a decrease to
the cost of goods sold of $995,000. At September 30, 1999, LIFO cost exceeded
the market value of the inventory. The amount in which the September 30, 1999
LIFO cost exceeded the market value of the inventory was less than the amount
established at June 30, 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
$872,000. The resulting lower of cost or market reserve at September 30, 1999
was $1.3 million. At September 30, 1998, LIFO cost exceeded the market value of
the inventory. The amount in which the September 30, 1998 LIFO cost exceeded the
market value of the inventory was more than the amount established at June 30,
1998. Therefore, there was an increase in the lower of cost or market reserve
and an increase in the cost of goods sold in the amount of $886,000. The
resulting lower of costs or market reserve at September 30, 1998 was $2.2
million. 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 $8.1
million, or 15.2% of net sales, for the third quarter of 1999 compared to $15.3
million, or 22.0% of net sales, for the third quarter of 1998.
General and administrative expenses were $1.3 million, or 2.5% of net
sales, in the third quarter of 1999 compared to $1.1 million, or 1.6% of net
sales, in the third quarter of 1998. This increase in general and administrative
expenses was due to increased expenses related to the Company's increased
capacity. 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 third quarter of
1999 compared to $125,000 in the third quarter of 1998. Selling expenses for the
third quarter of 1999 were $3.0 million, or 5.7% of net sales, compared to $3.7
million, or 5.4% of net sales, in the third 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 third 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.
Net interest expense was $705,000 in the third quarter of 1999 compared
to $589,000 in the third quarter of 1998. The increase was due to a higher
average debt balance outstanding during the third quarter of 1999 than the
comparable period during 1998, reduced by the capitalization of interest related
to the
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Company's copper rod fabrication facility and PVC manufacturing facility
construction during the third quarter of 1998. This increase in average debt
funded capital expenditures and additional working capital. The amount of
working capital increased due to increased inventory and an increased accounts
receivable balance.
The Company's effective tax rate decreased to 36.0% in the third
quarter of 1999 compared to 39.5% in the third quarter of 1998. The lower
effective tax rate in 1999 is a result of the Company's restructuring completed
in the third quarter of 1999.
As a result of the foregoing factors, the Company's net income was $1.9
million in the third quarter of 1999 compared to $5.9 million in the third
quarter of 1998.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Net sales for the first nine months of 1999 amounted to $172.0 million
compared with net sales of $196.4 million for the first nine 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 7% 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 14% decrease in the
average cost of copper from the first nine months of 1998 to the same period in
1999 and competitive pricing pressure on the Company's products in the first
nine 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 products remained relatively constant while the sales
volume of the Company's commercial products increased during the first nine
months of 1999 compared to the first nine months of 1998. The average sales
price per copper pound of product sold was $1.33 in the first nine months of
1999, compared to $1.63 in the first nine 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 $148.7 million in the first nine months of 1999,
compared to $153.1 million in the first nine months of 1998. Copper costs
decreased to $88.9 million in the first nine months of 1999 from $102.9 million
in the first nine months of 1998. The average cost per copper pound purchased
decreased to $.72 in the first nine months of 1999 from $.83 in the first nine
months of 1998. Copper costs as a percentage of net sales remained relatively
constant at 51.7% in the first nine months of 1999 compared to 52.4% in the
first nine months of 1998. The lower cost per copper pound of product sold in
the first nine months of 1999 as compared to the same period of 1998 was
partially offset by a slightly decreased differential between the price the
Company pays per pound of copper purchased and the Company's net sales price per
copper pound. This differential decreased in the first nine 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 nine months of 1999. Other raw
material costs as a percentage of net sales increased to 17.0% in the first nine
months of 1999, compared with 14.4% in the first nine months of 1998. This
increase is due to a decrease in the sales price per copper pound sold, as
discussed above, as well as a slight increase in raw materials per pound of
copper sold. Depreciation, labor and overhead costs as a percentage of net sales
increased to 17.5% in the first nine months of 1999 compared to 12.2% in the
first nine months of 1998, 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.
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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 first nine months of 1999, necessitating a
decrease in the LIFO reserve of $1.7 million that resulted in a decrease to the
inventory value and an increase in cost of goods sold. In the first nine months
of 1998, the price of copper decreased, necessitating an increase in the LIFO
reserve that resulted in an increase to the inventory value and a decrease to
the cost of goods sold of $3.0 million. At September 30, 1999, LIFO cost
exceeded the market value of the inventory. The amount in which the September
30, 1999 LIFO cost exceeded the market value of the inventory was less than the
amount established at June 30, 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
September 30, 1999 was $1.3 million. At September 30, 1998, LIFO cost exceeded
the market value of the inventory. The amount in which the September 30, 1998
LIFO cost exceeded the market value of the inventory was less than the amount
established at December 31, 1997. Therefore, there was an increase in the lower
of cost or market reserve and an increase in the cost of goods sold in the
amount of $886,000. The resulting lower of cost or market reserve at September
30, 1998 was $2.2 million. Future reductions in the price of copper could
require the Company to record a 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 $23.3
million, or 13.5% of net sales, for the first nine months of 1999 compared to
$43.2 million, or 22.0% of net sales, for the first nine months of 1998.
General and administrative expenses were $3.8 million, or 2.2% of net
sales, in the first nine months of 1999 compared to $3.2 million, or 1.6% of net
sales, in the first nine months of 1998. This increase in general and
administrative expenses was due to increased expenses related to the Company's
increased sales volume and capacity. 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 nine months of 1999 compared to $500,000 in the first
nine months of 1998. Selling expenses for the first nine months of 1999 were
$10.1 million, or 5.9% of net sales, compared to $10.4 million, or 5.3% of net
sales, in the first nine 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 nine 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 $1.9 million in the first nine months
of 1999 compared to $1.1 million in the first nine months of 1998. The increase
was due to a higher average debt balance outstanding during the first nine
months of 1999 than the comparable period during 1998, reduced by the
capitalization of interest related to the Company's copper rod fabrication
facility and PVC manufacturing facilities construction in the first nine months
of 1998. This increase in average debt outstanding funded capital expenditures
and additional working capital. As a result of the decreased cost of copper in
the first nine 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.
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The Company's effective tax rate decreased to 37.5% in the first nine
months of 1999 compared to 39.8% in the first nine months of 1998. This decrease
was due to the accrual for a non deductible penalty in the first nine 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 nine months of 1998 would
have been 39.5%. Additionally, in the third quarter of 1999, the Company
completed an internal restructuring that contributed to the reduction in its
effective tax rate.
As a result of the foregoing factors, the Company's net income
decreased to $4.8 million in the first nine months of 1999 from $16.9 million in
the first nine 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 August 31, 1999, the Company through its indirectly
wholly-owned subsidiary, Encore Wire Limited, a Texas limited partnership,
completed an unsecured loan facility with a group of banks (the "Financing
Agreement"). The Financing Agreement replaced the Company's existing credit
facility, and the Company is a guarantor of the indebtedness. The Financing
Agreement 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 September 30, 1999, as
computed under the Financing Agreement, was $64.8 million. The Financing
Agreement is unsecured and contains customary covenants and events of default.
The Company was in compliance with these covenants as of September 30, 1999.
Pursuant to the Financing Agreement, the Company is prohibited from declaring,
paying or issuing cash dividends. At September 30, 1999, the balance outstanding
under the Financing Agreement was $55.3 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 $1.6 million in the first nine months of
1999 compared to $3.5 million in the first nine months of 1998. This decrease in
cash used by operations is primarily the result of a decrease in net income and
an increase in inventory quantities in the first nine months of 1999 compared to
1998 offset by lower copper prices and by a smaller increase in accounts
receivable during the first nine months of 1999 compared to 1998. Cash used in
investing activities decreased from $25.9 million in the first nine months of
1998 to $7.2 million in the first nine 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 decrease in cash provided by
financing activities was due primarily to borrowings in the first nine months of
1999 amounting to less that the borrowings in the first nine months of 1998, the
proceeds of which were used to fund the activities discussed above.
Through the remainder of 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
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at September 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 971,000. As of October 31, 1999, the
Company had repurchased an aggregate of 971,000 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 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 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 has replaced its
financial accounting software. This software became operational in the third
quarter of 1999 and is fully Year 2000 compliant.
The Company continues 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 throughout 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.
The Company developed a contingency plan for dealing with the most
reasonably likely worst case year 2000 scenario. The Company currently plans to
implement the steps necessary to carry out the contingency plan by December 31,
1999.
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
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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 year 2000 problems 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.
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
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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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Financing Agreement by and among Encore Wire Limited, as
Borrower, Bank of America, National Association, as Agent, and
Bank of America, National Association, and Comerica Bank-Texas,
as Lenders, dated August 31, 1999.
(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: November 14, 1999 /s/ Vincent A. Rego
----------------------------------------------
Vincent A. Rego,
Chief Executive Officer
Date: November 14, 1999 /s/ Daniel L. Jones
----------------------------------------------
Daniel L. Jones, President
Chief Operating Officer
Date: November 14, 1999 /s/ Scott D. Weaver
----------------------------------------------
Scott D. Weaver, Vice President - Finance,
Treasurer and Secretary
(Principal Financial Officer)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1 Financing Agreement by and among Encore Wire Limited, as
Borrower, Bank of America, National Association, as Agent, and
Bank of America, National Association, and Comerica Bank-Texas,
as Lenders, dated August 31, 1999.
27 Financial Data Schedule