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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, 2003
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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
Number of shares of Common Stock outstanding as of July 31, 2003: 15,119,065
Page 1 of 27 Sequentially Numbered Pages
Index to Exhibits on Page 20
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FORM 10-Q
ENCORE WIRE CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets
June 30, 2003 (Unaudited) and December 31, 2002 3
Consolidated Statements of Income (Unaudited)
Quarter and six months ended June 30, 2003 and June 30, 2002 5
Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 30, 2003 and June 30, 2002 6
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 16
ITEM 4. Controls and Procedures 16
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 17
ITEM 6. Exhibits and Reports on Form 8-K 18
Signatures 19
2
FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ENCORE WIRE CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
In Thousands of Dollars 2003 2002
(Unaudited) (See Note)
----------- ----------
ASSETS
Current Assets:
Cash $ 1,400 $ 160
Accounts receivable (net of allowance
of $417 and $480) 61,799 46,600
Inventories (Note 3) 43,860 50,165
Prepaid expenses and other assets 2,867 672
Current taxes receivable -- --
-------- --------
Total current assets 109,926 97,597
Property, plant and equipment-on the basis of cost:
Land 5,858 5,858
Construction in progress 2,281 1,437
Buildings and improvements 30,855 30,855
Machinery and equipment 103,002 101,509
Furniture and fixtures 2,958 2,442
-------- --------
Total property, plant, and equipment 144,954 142,101
Accumulated depreciation 62,892 56,735
-------- --------
82,062 85,366
Other assets 176 166
-------- --------
Total assets $192,164 $183,129
======== ========
See accompanying notes
3
FORM 10-Q
ENCORE WIRE CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
June 30, December 31,
In Thousands of Dollars, Except Share Data 2003 2002
(Unaudited) (See Note)
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 23,090 $ 10,735
Accrued liabilities 7,692 7,718
Current income taxes payable 2,551 2,651
Current deferred income taxes 814 814
--------- ---------
Total current liabilities 34,147 21,918
Non-current deferred income taxes 9,251 7,193
Long term notes payable 40,000 47,500
Stockholders equity:
Common stock, $.01 par value:
Authorized 20,000,000 shares; issued 16,958,365 and
16,958,365 shares; outstanding 15,119,065 and
15,119,065 shares 170 169
Additional paid-in capital 34,138 34,138
Treasury stock 1,839,300 and 1,839,300 shares at cost (15,275) (15,275)
Accumulated other comprehensive income (1,208) (1,319)
Retained earnings 90,941 88,805
--------- ---------
Total stockholders' equity 108,766 106,518
--------- ---------
Total liabilities and stockholders' equity $ 192,164 $ 183,129
========= =========
Note: The consolidated balance sheet at December 31, 2002, as presented,
is derived from the audited consolidated financial statements at
that date.
See accompanying notes
4
FORM 10-Q
ENCORE WIRE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Quarter Ended Six Months Ended
June 30, June 30,
-------------------- ------------------------
In Thousands of Dollars, Except Per Share Data 2003 2002 2003 2002
- ---------------------------------------------- ---- ---- ---- ----
Net sales $80,584 $72,154 $147,737 $136,337
Cost of goods sold 68,783 62,102 130,279 116,505
------- ------- -------- --------
Gross profit 11,801 10,052 17,458 19,832
Selling, general, and administrative expenses 6,982 5,966 12,936 11,738
------- ------- -------- --------
Operating income (loss) 4,819 4,086 4,522 8,094
Net interest & other expenses 674 546 1,184 873
------- ------- -------- --------
Income (loss) before income taxes 4,145 3,540 3,338 7,221
Provision (benefit) for income taxes 1,492 1,275 1,202 2,600
Net income (loss) $ 2,653 $ 2,265 $ 2,136 $ 4,621
======= ======= ======== ========
Net income (loss) per common and common
equivalent shares - basic $ .18 $ .15 $ .14 $ .30
======= ======= ======== ========
Weighted average common and common
equivalent shares - basic 15,119 15,267 15,119 15,263
======= ======= ======== ========
Net income (loss) per common and common
equivalent shares - diluted $ .17 $ .15 $ .14 $ .30
======= ======= ======== ========
Weighted average common and common
equivalent shares - diluted 15,212 15,514 15,193 15,494
======= ======= ======== ========
Cash dividends declared per share $ -- $ -- $ -- $ --
======= ======= ======== ========
See accompanying notes
5
FORM 10-Q
ENCORE WIRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
In Thousands of Dollars 2003 2002
- ----------------------- ---- ----
OPERATING ACTIVITIES
Net income (loss) $ 2,136 $ 4,621
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation and amortization 6,157 4,997
Provision for bad debts 90 90
Changes in operating assets and liabilities:
Accounts receivable (15,289) (5,592)
Inventory 6,304 (323)
Accounts payable and accrued liabilities 12,440 (3,466)
Other assets and liabilities (2,224) (531)
Current income taxes receivable/payable 1,958 535
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 11,572 331
-------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (2,852) (13,937)
Change in long-term investments (10) 24
Proceeds from sale of equipment 30 503
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (2,832) (13,410)
-------- --------
FINANCING ACTIVITIES
Borrowings (repayments) under notes payable (7,500) 12,600
Proceeds from issuance of common stock -- 91
Purchase of treasury stock -- (64)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (7,500) 12,627
-------- --------
Net increase (decrease) in cash 1,240 (452)
Cash at beginning of period 160 1,252
-------- --------
Cash at end of period $ 1,400 $ 800
======== ========
See accompanying notes
6
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, 2002.
NOTE 2 - STOCK BASED EMPLOYEE COMPENSATION
The Company has a stock option plan for employees that provides for the granting
of stock options. The Company accounts for stock-based compensation utilizing
the intrinsic value method in accordance with the provisions of Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees" and related interpretations. Accordingly, no compensation expense is
recognized for fixed option plans because the exercise prices of Employee stock
options equal or exceed the market prices of the underlying stock on the dates
of grant.
7
FORM 10-Q
The following table represents the effect on net income (loss) and earnings per
share if the Company had applied the fair value based method and recognition
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," to stock-based Employee compensation:
($'s in 000's)
Quarter Six Months
Ended Ended
June 30, June 30,
------------------------- -------------------------
In Thousands of Dollars, Except Per Share Data 2003 2002 2003 2002
- ---------------------------------------------- ---- ---- ---- ----
Net income (loss), as reported 2,653 2,265 2,136 4,621
Add:
Stock-based employee compensation expense
included in reported income, net of related tax effects -- -- -- --
Deduct: Total stock-based employee compensation expense
determined under fair value based methods for all
awards net of related tax effects 100 108 201 213
---------- ---------- ---------- ----------
Pro forma net income (loss) 2,553 2,157 1,935 4,408
========== ========== ========== ==========
Net income (loss) per share
Basic, as reported $ 0.18 $ 0.15 $ 0.14 $ 0.30
Basic, pro forma $ 0.17 $ 0.14 $ 0.13 $ 0.29
Diluted, as reported $ 0.17 $ 0.15 $ 0.14 $ 0.30
Diluted, pro forma $ 0.17 $ 0.14 $ 0.13 $ 0.28
As required, the pro forma disclosures above include options granted since
January 1, 1995. Consequently, the effects of applying SFAS 123 for providing
pro forma disclosures may not be representative of the effects on reported net
income for future years until all options outstanding are included in the pro
forma disclosures. For purposes of pro forma disclosures, the estimated fair
value of stock-based compensation plans and other options is amortized to
expense primarily over the vesting period.
8
FORM 10-Q
NOTE 3 - INVENTORIES
Inventories are stated at the lower of cost, determined by the last-in,
first-out (LIFO) method, or market.
Inventories (in thousands) consisted of the following:
June 30, December 31,
2003 2002
---- ----
Raw materials $ 5,631 $ 12,690
Work-in-process 4,413 4,231
Finished goods 29,810 30,216
-------- --------
39,854 47,137
Increase to LIFO cost 5,268 7,017
-------- --------
45,122 54,154
Lower of Cost or Market Adjustment (1,262) (3,989)
-------- --------
$ 43,860 $ 50,165
======== ========
An actual valuation of inventory under the LIFO method can be made only at the
end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations must necessarily be based on management's
estimates of expected year-end inventory levels and costs. Because these are
subject to many forces beyond management's control, interim results are subject
to the final year-end LIFO inventory valuation. The Company reduced the lower of
cost or market reserve by $2,112,000 in the quarter, leaving $1,262,000 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, 2003.
9
FORM 10-Q
NOTE 4 - NET INCOME PER SHARE
Net income (loss) per common and common equivalent share is computed using the
weighted average number of shares of common stock and common stock equivalents
outstanding during each period. If dilutive, the effect of stock options,
treated as common stock equivalents, is calculated using the treasury stock
method.
The following table sets forth the computation of basic and diluted net income
per share:
Quarter Ended Quarter Ended
6/30/03 6/30/02
------- -------
Numerator:
Net income $ 2,652,965 $ 2,264,549
=========== ===========
Denominator:
Denominator for basic earnings per share - weighted
average shares 15,119,065 15,266,916
Effect of dilutive securities:
Employee stock options 92,911 247,541
----------- -----------
Denominator for diluted earnings per share - weighted
average shares 15,211,976 15,514,457
=========== ===========
The following table sets forth the computation of basic and diluted earnings per
share:
Six Months Six Months
Ending Ending
6/30/03 6/30/02
------- -------
Numerator:
Net income $ 2,136,255 $ 4,621,367
=========== ===========
Denominator:
Denominator for basic earnings per share - weighted
average shares 15,119,065 15,263,383
Effect of dilutive securities:
Employee stock options 73,821 231,081
----------- -----------
Denominator for diluted earnings per share - weighted
average shares 15,192,886 15,494,464
=========== ===========
10
FORM 10-Q
NOTE 5 - 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 three times since August 31, 1999. The first two amendments extended the
term to May 31, 2003 and then again to May 31, 2005. The third amendment was
made effective March 31, 2003, to amend certain provisions, including financial
covenants, of the Financing 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, 2003, 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, 2003. Pursuant to
the Financing Agreement, the Company is prohibited from declaring, paying or
issuing cash dividends. At June 30, 2003, the balance outstanding under the
Financing Agreement was $40.0 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, 2003, the Company recorded an unrealized
gain of $70,074, netting to an unrealized loss of $1,208,075 remaining in the
accumulated other comprehensive income line in the equity section of the balance
sheet.
NOTE 6 - STOCK REPURCHASE AUTHORIZATION
On November 6, 2001, the Board of Directors of the Company approved a stock
repurchase program covering the purchase of up to 300,000 shares of its common
stock dependent upon market conditions. Common stock purchases under this
program were authorized through December 31, 2002 on the open market or through
privately negotiated transactions at prices determined by the Chairman of the
Board or the President of the Company. As of December 31, 2002, 150,200 shares
had been purchased under this authorization. Early in 2003, the Board of
Directors extended this program through December 31, 2003 for the remaining
149,800 shares. As of June 30, 2003, there had been no shares purchased under
the extended authorization.
NOTE 7 - CONTINGENCIES
The Company is a party to litigation and claims that arise out of the ordinary
business of the Company. While the results of these matters cannot be predicted
with certainty, the Company does not believe the final outcome of such
litigation and claims will have a material adverse effect on the financial
condition, the results of operation or the cash flows of the Company, because
the Company believes that it has adequate insurance and reserves to cover any
damages that may ultimately be awarded.
11
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 63.9%, 66.6% and 63.9% of the Company's cost of
goods sold during fiscal 2002, 2001 and 2000, 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 quarterly periods ended June 30, 2003
and 2002. 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, 2002.
RESULTS OF OPERATIONS
Quarter Ended June 30, 2003 Compared to Quarter Ended June 30, 2002
Net sales for the second quarter of 2003 amounted to $80.6 million compared with
net sales of $72.2 million for the second quarter of 2002. This dollar increase
was the result of an increase in the volume of product shipped, offset somewhat
by 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 2003, compared to the
second quarter of 2002. Fluctuations in sales prices are primarily a result of
changing copper raw material prices and product price competition.
Cost of goods sold increased to $68.7 million, or 85.4% of net sales, in the
second quarter of 2003, compared to $62.1 million, or 86.1% of net sales, in the
second quarter of 2002. Gross profit increased to $11.8 million, or 14.6% of net
sales, in the second quarter of 2003 versus $10.1 million, or 13.9% of net
sales, in the second quarter of 2002. The increased gross profit and gross
margin resulted primarily from the higher sales volumes in 2003.
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 (LCM) 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
12
FORM 10-Q
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 second quarter 2003, a LIFO
adjustment was recorded decreasing cost of sales by $129,000 during the quarter.
At June 30, 2003, the LIFO cost basis of the inventory exceeded the market value
by $1,262,000. Thus, at June 30, 2003 a $2,112,000 reduction was made to the LCM
reserve, which decreased cost of sales by $2,112,000. 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 2003 were $5.1 million, or 6.4% of
net sales, compared to $4.5 million, or 6.3% of net sales, in the second quarter
of 2002. The percentage increase was due to a nominal increase in freight costs
as a percentage of net sales. General and administrative expenses increased to
$1.8 million, or 2.2% of net sales, in the second quarter of 2003 compared to
$1.4 million, or 1.9% of net sales, in the second quarter of 2002. The second
quarter of 2002 had lower than usual general and administrative expense. The
provision for bad debts was $45,000 in the second quarter of 2003 and 2002.
Net interest expense was $673,000 in the second quarter of 2003 compared to
$356,000 in the second quarter of 2002. The increase was due to higher average
debt balances during the second quarter of 2003 than the comparable period
during 2002. The other income and expense category contributed a loss of
$190,000 resulting from losses on the sales of assets in 2002.
As a result of the foregoing factors, the Company's net income increased to $2.7
million in the second quarter of 2003 from $2.3 million in the second quarter of
2002.
Six Months Ended June 30, 2003 compared to Six Months Ended June 30, 2002
Net sales for the first six months of 2003 amounted to $147.7 million compared
with net sales of $136.3 million for the first half of 2002. This dollar
increase was the result of an increase in the volume of product shipped, offset
somewhat by a decrease in the price of wire sold. The average sales price per
copper pound of product sold was down in the first six months of 2003, compared
to the first six months of 2002. Fluctuations in sales prices are primarily a
result of changing copper raw material prices and product price competition.
Cost of goods sold increased to $130.3 million in the first six months of 2003,
compared to $116.5 million in the first six months of 2002. Gross profit
decreased to $17.5 million, or 11.8% of net sales, in the first six months of
2003 versus $19.8 million, or 14.5% of net sales, in the first six months of
2002. The gross profit percentage decrease was attributable to low gross profits
the company endured during the first quarter of 2003.
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
13
FORM 10-Q
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 2003, a
LIFO adjustment was recorded increasing cost of sales by $1.7 million during the
period. At June 30, 2003, the LIFO cost basis of the inventory exceeded the
market value by $1,262,000. Thus, in the first six months, a $2.7 million
reduction was made to the LCM reserve, which decreased cost of sales by $2.7
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 2003 were $9.5 million, or 6.4% of
net sales, compared to $8.5 million, or 6.2% of net sales, in the same period of
2002. The slight percentage increase was due to a nominal increase in freight
costs as a percentage of net sales. General and administrative expenses
increased to $3.3 million, or 2.3% of net sales, in the first six months of 2003
compared to $3.1 million, or 2.3% of net sales, in the same period of 2002. The
provision for bad debts was $90,000 in the first six months of both years.
Net interest expense was $1,184,000 in the first six months of 2003 compared to
$683,000 in the first half of 2002. The increase was due to higher average debt
balances during the first six months of 2003 than the comparable period during
2002. In 2002, 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 decreased to $2.1
million in the first half of 2003 from $4.6 million in the first half of 2002.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a substantial inventory of finished products to satisfy
customer's prompt delivery requirements. As is customary in the industry, the
Company provides payment terms to most of its customers that exceed terms that
it receives from its suppliers. Therefore, the Company's liquidity needs have
generally consisted of operating capital necessary to finance these receivables
and inventory. Capital expenditures have historically been necessary to expand
the production capacity of the Company's manufacturing operations. The Company
has historically satisfied its liquidity and capital expenditure needs with cash
generated from operations, borrowings under its revolving credit facilities and
sales of its common stock.
Effective August 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 three times since August 31, 1999. The first two amendments extended the
term to May 31, 2003 and then again to May 31, 2005. The third amendment was
made effective March 31, 2003, to amend certain provisions, including financial
covenants, of the
14
FORM 10-Q
Financing 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, 2003, 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, 2003. Pursuant to the Financing Agreement, the Company
is prohibited from declaring, paying or issuing cash dividends. At June 30,
2003, the balance outstanding under the Financing Agreement was $40.0 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, 2003, the Company recorded an unrealized
gain of $110,699, netting to an unrealized loss of $1,208,075 remaining in the
accumulated other comprehensive income line in the equity section of the balance
sheet.
Cash provided by operations was $11.6 million in the first six months of 2003
compared to $.3 million of cash provided by operations in the first half of
2002. This increase in cash provided by operations primarily resulted from an
increase in accounts payable of $12.3 million in the first six months of 2003
versus an increase of $1.4 million in the first half of 2002. The company made a
decision during the quarter to accept vendor terms in lieu of paying cash on raw
material purchases. This shift in cash flow management enabled the Company to
reduce its' borrowings which reduced the interest rate it will pay in the next
quarter, maximizing cash savings. Cash used in investing activities decreased to
$2.8 million in the first six months of 2003 from $13.4 million in the first six
months of 2002. 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 $7.5
million of cash used by financing activities in the first half of 2003 was a
result of the Company's reduction in outstanding bank debt.
During the remainder of 2003, the Company expects its capital expenditures will
consist of additional plant and equipment for its residential and commercial
wire operations. The Company will continue to manage its working capital
requirements. These requirements may increase as a result of expected continued
sales increases and may be impacted by the price of copper. The Company believes
that the cash flow from operations and the financing available under the
Financing Agreement will satisfy working capital and capital expenditure
requirements for the next twelve months.
15
FORM 10-Q
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from the information provided in Item 7.A of
the Company's Annual Report on Form 10-K for the year ended December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was performed
under the supervision and with the participation of the Company's management,
including the Chief Executive Officer (the "CEO") and the Chief Financial
Officer (the "CFO"), of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act 13a-15 and
15d-15. Based on that evaluation, the Company's management, including the CEO
and CFO, concluded that the Company's disclosure controls and procedures are
adequately designed to ensure that the information that we are required to
disclose in this report has been accumulated and communicated to our management,
including our CEO and CFO, as appropriate, to allow timely decisions regarding
such required disclosure.
There have been no significant changes in the Company's internal controls or in
other factors that have materially affected, or are reasonably likely to
materially affect, internal controls over financial reporting subsequent to the
period covered by this report.
16
FORM 10-Q
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 6, 2003.
(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 15,119,065 shares of the Company's common stock
outstanding and entitled to vote, 14,442,667 shares were present in
person or by proxy, representing approximately 95.5 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 92.9% of the
shares voted. The following table presents the number of votes
received by, and withheld from, each nominee who was elected as a
director.
NOMINEE FOR NUMBER OF VOTES NUMBER OF VOTES
DIRECTOR RECEIVED WITHHELD
Vincent A. Rego 14,222,289 220,378
Donald E. Courtney 14,339,576 103,091
Daniel L. Jones 14,044,164 398,503
William R. Thomas 14,376,777 65,890
John H. Wilson 14,339,576 103,091
Joseph M. Brito 14,335,076 107,591
Scott D. Weaver 14,376,652 66,015
John P. Pringle, who was a nominee for a directorship, died prior to
the annual meeting of the stockholders of the Company on May 6,
2003. Following the annual meeting, Thomas L. Cunningham was
appointed by unanimous consent of the Board of Directors of the
Company to fill the directorship vacancy.
The second 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,
2003. The resolution was adopted with the holders of 14,296,421
shares voting in favor of the resolution and the holders of 141,798
shares voting against. Holders of 4,448 shares abstained from
voting.
(d) Inapplicable.
17
FORM 10-Q
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) On July 29, 2003, the Company filed a report on Form 8-K to furnish,
pursuant to Items 7(c), 9 and 12, a copy of the Company's earnings
release for the second quarter of 2003. The Company filed no other
reports on Form 8-K during the three months ended June 30, 2003.
18
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 11, 2003 /s/ VINCENT A. REGO
--------------------------------------------
Vincent A. Rego, Chairman of the Board and
Chief Executive Officer
Dated: August 11, 2003 /s/ DANIEL L. JONES
--------------------------------------------
Daniel L. Jones, President and
Chief Operating Officer
Dated: August 11, 2003 /s/ FRANK J. BILBAN
--------------------------------------------
Frank J. Bilban, Vice President - Finance,
Treasurer and Secretary
Chief Financial Officer
19
FORM 10-Q
INDEX TO EXHIBITS
Exhibit
Number Description
3.1 Certificate of Incorporation of Encore Wire Corporation, as
amended (filed as Exhibit 3.1 to the Company's Registration
Statement on Form S-1, as amended (No. 33-47696), and
incorporated herein by reference).
3.2 Amended and Restated Bylaws of Encore Wire Corporation, as
amended through February 7, 2002 (filed as Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 2002, and incorporated herein by reference).
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 (filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999, and incorporated
herein by reference).
10.2 First amendment to Financing Agreement of August 31, 1999,
dated June 27, 2000 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 (filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2000, and incorporated herein by reference).
10.3 Second amendment to Financing Agreement of August 31, 1999,
dated June 28, 2002 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 (filed as Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002, and incorporated herein by reference).
10.4 Third Amendment to Financing Agreement of August 31, 1999,
dated March 31, 2003 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 (filed as Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2003, and incorporated herein by reference).
10.5* 1999 Stock Option Plan, as amended and restated, effective as
of October 24, 2001 (filed as Exhibit 99.1 to the Company's
Registration Statement on Form S-8 (No. 333-86620), and
incorporated herein by reference).
10.6* 1989 Stock Option Plan, as amended and restated (filed as
Exhibit 4.1 to the Company's Registration Statement on Form
S-8 (No. 333-38729), and incorporated herein by reference),
terminated except with respect to outstanding options
thereunder.
20
FORM 10-Q
21.1 Subsidiaries (filed as Exhibit 21.1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2002, and
incorporated herein by reference).
31.1 Certification by Vincent A. Rego, Chief Executive Officer of
Encore Wire Corporation, dated August 8, 2003 and submitted
pursuant to Rule 13a-15(e)/15d-15(e) and pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by Frank J. Bilban, Chief Financial Officer of
Encore Wire Corporation, dated August 8, 2003 and submitted
pursuant to Rule 13a-15(e)/15d-15(e) and pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification by Vincent A. Rego, Chief Executive Officer of
Encore Wire Corporation, dated August 8, 2003 and submitted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. Section 1350).
32.2 Certification by Frank J. Bilban, Chief Financial Officer of
Encore Wire Corporation, dated August 8, 2003 and submitted
pursuant to Section 906 of the Sarbanes-Oxley act of 2002 (18
U.S.C. Section 1350).
* Management contract or compensatory plan.
21