ENCORE WIRE CORP /DE/ - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended
JUNE 30, 2002

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to _________

Commission file number: 0-20278

ENCORE WIRE CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 75-2274963
(State of Incorporation) (I.R.S. employer identification number)

1410 MILLWOOD ROAD
MCKINNEY, TEXAS 75069
Address of principal executive offices) (Zip code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 562-9473

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- ------

Number of shares of Common Stock outstanding as of July 31, 2002: 15,163,465

Page 1 of 23 Sequentially Numbered Pages
Index to Exhibits on Page 17

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ENCORE WIRE CORPORATION

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002

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FORM 10-Q

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

ENCORE WIRE CORPORATION

CONSOLIDATED BALANCE SHEETS

See accompanying notes

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FORM 10-Q

ENCORE WIRE CORPORATION

CONSOLIDATED BALANCE SHEETS (continued)

Note 1: The consolidated balance sheet at December 31, 2001, as presented, is
derived from the audited consolidated financial statements at that date.

See accompanying notes

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FORM 10-Q

ENCORE WIRE CORPORATION

CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

See accompanying notes

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FORM 10-Q

ENCORE WIRE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See accompanying notes

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FORM 10-Q

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 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 interim periods
presented do not necessarily indicate the results that may be expected for the
entire year. These financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.

NOTE 2 - INVENTORIES

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

Inventories (in thousands) consisted of the following:

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

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FORM 10-Q

valuation. The Company reduced the lower of cost or market reserve by $106,000
in the quarter, leaving $929,000 in the reserve to reflect the fact that the
LIFO cost basis, as currently calculated, exceeded the current market value by
that amount as of June 30, 2002.

NOTE 3 - NET INCOME PER SHARE

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

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

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

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FORM 10-Q

NOTE 4 - LONG TERM NOTE PAYABLE

Effective August 31, 1999, the Company, through its indirectly wholly owned
subsidiary Encore Wire Limited, a Texas limited partnership, completed an
unsecured loan facility with a group of banks (the "Financing Agreement"). The
Financing Agreement replaced the Company's existing credit facility, and the
Company is a guarantor of the indebtedness. The Financing Agreement has been
amended twice since August 31, 1999, to extend the term to May 31, 2003 and then
again to May 31, 2005. The second amendment was executed in June, 2002, on
substantially the same terms and conditions as the original agreement. 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, 2002, as computed under the Financing Agreement, was $65.0 million. The
Financing Agreement is unsecured and contains customary covenants and events of
default. The Company was in compliance with these covenants, as amended, as of
June 30, 2002. Pursuant to the Financing Agreement, the Company is prohibited
from declaring, paying or issuing cash dividends. At June 30, 2002, the balance
outstanding under the Financing Agreement was $42.6 million. Amounts outstanding
under the Financing Agreement are payable on May 31, 2005, with interest due
quarterly based on the bank's prime rate or LIBOR rate options, at the Company's
election.

In December 2001, the Company entered into an interest rate swap agreement on
$24.0 million of its variable rate debt in order to hedge against an increase in
variable interest rates. The terms of the agreement fix the interest rate on
$24.0 million of the Company's variable rate, long-term note payable to 4.6% per
annum plus a variable increment that is based on certain financial ratios
contained in the loan covenants. This three-year agreement expires in December
2004. For the quarter ended June 30, 2002, the Company recorded an unrealized
loss of $567,882, netting to an unrealized loss of $650,704 remaining in the
accumulated other comprehensive income line in the equity section of the balance
sheet.

NOTE 5 - STOCK REPURCHASE AUTHORIZATION

On November 6, 2001, the Board of Directors of the Company approved a new stock
repurchase program covering the purchase of up to 300,000 additional shares of
its common stock dependent upon market conditions. Common stock purchases under
the new program will be made from time to time until December 31, 2002 on the
open market or through privately negotiated transactions at prices determined by
the Chairman of the Board or the President of the Company. As of June 30, 2002,
5,000 shares had been purchased under the new authorization.

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FORM 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

GENERAL

The Company is a low-cost manufacturer of copper electrical building wire and
cable. The Company is a significant supplier of residential wire for interior
wiring in homes, apartments and manufactured housing and commercial wire for
commercial and industrial buildings.

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 66.6%, 63.9%, 60.6%, 66.2% and 73.8% of the
Company's cost of goods sold during fiscal 2001, 2000, 1999, 1998 and 1997,
respectively. The price of copper fluctuates, depending on general economic
conditions and in relation to supply and demand and other factors, which 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 periods ended June 30, 2002 and 2001.
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, 2001.

RESULTS OF OPERATIONS

Quarter Ended June 30, 2002 Compared to Quarter Ended June 30, 2001

Net sales for the second quarter of 2002 amounted to $72.2 million compared with
net sales of $75.0 million for the second quarter of 2001. This dollar decrease
was the result of a decrease in the price of wire sold. The average sales price
per copper pound of product sold was down in the second quarter of 2002,
compared to the second quarter of 2001. Fluctuations in sales prices are
primarily a result of changing copper raw material prices and product price
competition.

Cost of goods sold decreased to $62.1 million in the second quarter of 2002,
compared to $64.8 million in the second quarter of 2001. Gross profit remained
relatively flat at $10.1 million, or 13.9% of net sales, in the second quarter
of 2002 versus $10.2 million, or 13.7% of net sales, in the second quarter of
2001.

Inventories are stated at the lower of cost, using the last-in, first-out (LIFO)
method, or market. The Company maintains only one inventory pool for LIFO
purposes as all inventories held by the Company generally relate to the
Company's only business segment, the manufacture and sale of copper building
wire products. As permitted by accounting principles generally accepted in the
United States, the Company maintains its inventory costs and cost of goods sold
on a first-in, first-out (FIFO) basis and makes a quarterly adjustment to adjust
total inventory and cost of goods sold from FIFO to LIFO. The Company applies
the lower of cost or market test by comparing the LIFO cost of its

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FORM 10-Q

raw materials, work-in-process and finished goods inventories to estimated
market values, which are based primarily upon the most recent quoted market
price of copper, in pound quantities, as of the end of each reporting period.
Additionally, future reductions in the quantity of inventory on hand could cause
copper that is carried in inventory at costs different from the cost of copper
in the period in which the reduction occurs to be included in costs of goods
sold for that period at the different price.

As a result of relatively stable copper costs during the second quarter 2002, a
small LIFO adjustment was recorded increasing cost of sales by $300,000 during
the quarter. At June 30, 2002, the LIFO cost basis of the inventory exceeded the
market value by $929,000. Thus, at June 30, 2002 a $106,000 reduction was made
to the LCM reserve, which decreased cost of sales by $106,000. Future reductions
in the price of copper could require the Company to record a lower of cost or
market adjustment against the related inventory balance, which would result in a
negative impact on net income.

Selling expenses for the second quarter of 2002 were $4.5 million, or 6.3% of
net sales, compared to $4.5 million, or 6.0% of net sales, in the second quarter
of 2001. The slight percentage increase was due to a nominal increase in freight
costs as a percentage of net sales. General and administrative expenses
decreased to $1.4 million, or 1.9% of net sales, in the second quarter of 2002
compared to $1.7 million, or 2.3% of net sales, in the second quarter of 2001.
The provision for bad debts was $45,000 in the second quarter of 2002 versus
$37,500 in the second quarter of 2001.

Net interest expense was $356,000 in the second quarter of 2002 compared to
$488,000 in the second quarter of 2001. The decrease was due to lower average
interest rates during the second quarter of 2002 than the comparable period
during 2001. The other income and expense category contributed a loss of
$190,000 resulting from losses on the sales of assets.

As a result of the foregoing factors, the Company's net income increased to $2.3
million in the second quarter of 2002 from $2.2 million in the second quarter of
2001.

Six Months Ended June 30, 2002 compared to Six Months Ended June 30, 2001

Net sales for the first six months of 2002 amounted to $136.3 million compared
with net sales of $144.8 million for the first half of 2001. This dollar
decrease was the result of a decrease in the price of wire sold which more than
offset an increase in the volume of product shipped. The average sales price per
copper pound of product sold was down in the first six months of 2002, compared
to the first six months of 2001. Fluctuations in sales prices are primarily a
result of changing copper raw material prices and product price competition.

Cost of goods sold decreased to $116.5 million in the first six months of 2002,
compared to $124.7 million in the first six months of 2001. Gross profit
remained relatively flat in dollar terms at $19.8 million, or 14.5% of net
sales, in the first six months of 2002 versus $20.1 million, or 13.9% of net
sales, in the first six months of 2001. The gross profit percentage increase was
primarily attributable to percentage savings in net material costs.

Inventories are stated at the lower of cost, using the last-in, first-out (LIFO)
method, or market. The Company maintains only one inventory pool for LIFO
purposes as all

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FORM 10-Q

inventories held by the Company generally relate to the Company's only business
segment, the manufacture and sale of copper building wire products. As permitted
by accounting principles generally accepted in the United States, the Company
maintains its inventory costs and cost of goods sold on a first-in, first-out
(FIFO) basis and makes a quarterly adjustment to adjust total inventory and cost
of goods sold from FIFO to LIFO. The Company applies the lower of cost or market
test by comparing the LIFO cost of its raw materials, work-in-process and
finished goods inventories to estimated market values, which are based primarily
upon the most recent quoted market price of copper, in pound quantities, as of
the end of each reporting period. Additionally, future reductions in the
quantity of inventory on hand could cause copper that is carried in inventory at
costs different from the cost of copper in the period in which the reduction
occurs to be included in costs of goods sold for that period at the different
price.

As a result of increasing copper costs during the first six months of 2002, a
LIFO adjustment was recorded increasing cost of sales by $3.2 million during the
period. At June 30, 2002, the LIFO cost basis of the inventory exceeded the
market value by $929,000. Thus, in the first six months, a $1.7 million
reduction was made to the LCM reserve, which decreased cost of sales by $1.7
million. Future reductions in the price of copper could require the Company to
record a lower of cost or market adjustment against the related inventory
balance, which would result in a negative impact on net income.

Selling expenses for the first six months of 2002 were $8.5 million, or 6.2% of
net sales, compared to $8.8 million, or 6.1% of net sales, in the same period of
2001. The slight percentage increase was due to a nominal increase in freight
costs as a percentage of net sales. General and administrative expenses
decreased to $3.1 million, or 2.3% of net sales, in the first six months of 2002
compared to $3.4 million, or 2.4% of net sales, in the same period of 2001. The
provision for bad debts was $90,000 in the first six months of 2002 versus
$75,000 in the first half of 2001.

Net interest expense was $683,000 in the first six months of 2002 compared to
$1,150,000 in the first half of 2001. The decrease was due to lower average
interest rates during the first six months of 2002 than the comparable period
during 2001. The other income and expense category contributed a loss of
$190,000 resulting from losses on the sales of assets.

As a result of the foregoing factors, the Company's net income increased to $4.6
million in the first half of 2002 from $4.3 million in the first half of 2001.

LIQUIDITY AND CAPITAL RESOURCES

The Company maintains a substantial inventory of finished products to satisfy
customer's prompt delivery requirements. As is customary in the industry, the
Company provides payment terms to most of its customers that exceed terms that
it receives from its suppliers. Therefore, the Company's liquidity needs have
generally consisted of operating capital necessary to finance these receivables
and inventory. Capital expenditures have historically been necessary to expand
the production capacity of the Company's manufacturing operations. The Company
has satisfied its liquidity and capital expenditure needs with cash generated
from operations, borrowings under its revolving credit facilities and sales of
its common stock.

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FORM 10-Q

Effective August 31, 1999, the Company through its indirectly wholly owned
subsidiary, Encore Wire Limited, a Texas limited partnership, completed an
unsecured loan facility with a group of banks (the "Financing Agreement"). The
Financing Agreement replaced the Company's existing credit facility, and the
Company is a guarantor of the indebtedness. The Financing Agreement has been
amended twice since August 31, 1999, to extend the term to May 31, 2003 and then
again to May 31, 2005. The second amendment was executed in June 2002, on
substantially the same terms and conditions as the original agreement. 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, 2002, as computed under the Financing Agreement, was $65.0 million. The
Financing Agreement is unsecured and contains customary covenants and events of
default. The Company was in compliance with these covenants, as amended, as of
June 30, 2002. Pursuant to the Financing Agreement, the Company is prohibited
from declaring, paying or issuing cash dividends. At June 30, 2002, the balance
outstanding under the Financing Agreement was $42.6 million. Amounts outstanding
under the Financing Agreement are payable on May 31, 2005, with interest due
quarterly based on the bank's prime rate or LIBOR rate options, at the Company's
election.

In December 2001, the Company entered into an interest rate swap agreement on
$24.0 million of its variable rate debt in order to hedge against an increase in
variable interest rates. The terms of the agreement fix the interest rate on
$24.0 million of the Company's variable rate, long-term note payable to 4.6% per
annum plus a variable increment that is based on certain financial ratios
contained in the loan covenants. This three-year agreement expires in December
2004. For the six months ended June 30, 2002 the Company recorded an unrealized
loss of $387,823, netting to an unrealized loss of $650,704 remaining in the
accumulated other comprehensive income line in the equity section of the balance
sheet.

Cash provided by operations was $.3 million in the six months of 2002 compared
to $12.6 million of cash provided by operations in the first half of 2001. This
decrease in cash provided by operations primarily resulted from a increase in
accounts receivable of $5.6 million in the first six months of 2002 versus a
decrease of $.6 million in the first half of 2001, along with a $.3 million
increase in the value of inventory in the first six months of 2002 versus a $5.7
million decrease in the value of inventory in the first half of 2001. Cash used
in investing activities increased to $13.4 million in the first six months of
2002 from $2.6 million in the first six months of 2001. In 2002, these funds
were used primarily for the construction of the new 192,000 square foot "Plant
3" and the purchase of associated manufacturing equipment that has been
discussed in prior quarters. The $12.6 million of cash provided by financing
activities in the first half of 2002 was used primarily to fund the building and
equipment expansion project as well as the working capital increase described
above.

During the remainder of 2002, the Company expects its capital expenditures will
consist of additional plant and equipment for its residential and commercial
wire operations including primarily the completion of the building and equipment
expansion project mentioned above. The Company estimates these expenditures to
total approximately $4 million during the second half of 2002. The Company will
continue to manage its working capital requirements. These requirements may
increase as a result of expected continued sales increases and will be impacted
by the price of copper. The Company

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FORM 10-Q

believes that the cash flow from operations and the financing available under
the Financing Agreement will satisfy working capital and capital expenditure
requirements for the next twelve months.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes from the information provided in Item 7.A of
the Company's Annual Report on Form 10-K for the year ended December 31, 2001.

INFORMATION REGARDING FORWARD LOOKING STATEMENTS

This report on Form 10-Q contains various "forward-looking statements" (within
the meaning of Section 27A of the securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934) 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 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 7, 2002.

(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 for director as listed in the proxy statement;
and all of such nominees were duly elected as reported below.

(c) Out of a total of 15,261,285 shares of the Company's common stock
outstanding and entitled to vote, 13,461,297 shares were present in
person or by proxy, representing approximately 88.2 percent of the
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
directors. No nominee for director received less than 94% of the
shares voted. The following table presents the number of votes
received by, and withheld from, each nominee for director.

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FORM 10-Q

The second matter voted on by the stockholders, as fully
described in the proxy statement for the annual meeting, was a
resolution to approve certain amendments to the Company's 1999
Stock Option Plan. The resolution was adopted with the holders
of 13,304,151 shares voting in favor of the resolution and the
holders of 136,978 shares voting against. Holders of 20,168
shares abstained from voting.

The third matter voted on by the stockholders, as fully
described in the proxy statement for the annual meeting, was a
resolution to approve Ernst & Young LLP as the independent
auditors of the Company's financial statements for the year
ending December 31, 2002. The resolution was adopted with the
holders of 13,271,670 shares voting in favor of the resolution
and the holders of 185,343 shares voting against. Holders of
4,284 shares abstained from voting.

(d) Inapplicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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

(b) No reports on Form 8-K were filed by the Company during the
three months ended June 30, 2002.

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FORM 10-Q

SIGNATURES

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

ENCORE WIRE CORPORATION
----------------------------------------------
(Registrant)

Dated: August 12, 2002 /s/ VINCENT A. REGO
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Vincent A. Rego, Chairman of the Board and
Chief Executive Officer

Dated: August 12, 2002 /s/ DANIEL L. JONES
----------------------------------------------
Daniel L. Jones, President and
Chief Operating Officer

Dated: August 12, 2002 /s/ FRANK J. BILBAN
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Frank J. Bilban, Vice President - Finance,
Treasurer and Secretary
Chief Financial Officer

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FORM 10-Q

INDEX TO EXHIBITS