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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, 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 (Zip code)
offices)
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 October 31, 2003: 15,124,100
Page 1 of 26 Sequentially Numbered Pages
Index to Exhibits on Page 19
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1
FORM 10-Q
ENCORE WIRE CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets
September 30, 2003 (Unaudited) and December 31, 2002 3
Consolidated Statements of Income (Unaudited)
Quarter and nine months ended September 30, 2003 and September 30, 2002 5
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 2003 and September 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 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
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 2003 2002
(Unaudited) (See Note)
----------- ----------
ASSETS
Current Assets:
Cash $ 290 $ 160
Accounts receivable (net of allowance
of $459 and $480) 81,054 46,600
Inventories (Note 3) 55,407 50,165
Prepaid expenses and other assets 3,853 672
Current taxes receivable -- --
---------- ----------
Total current assets 140,604 97,597
Property, plant and equipment-on the basis of cost:
Land 5,858 5,858
Construction in progress 2,108 1,437
Buildings and improvements 30,855 30,855
Machinery and equipment 104,000 101,509
Furniture and fixtures 2,894 2,442
---------- ----------
Total property, plant, and equipment 145,715 142,101
Accumulated depreciation 65,805 56,735
---------- ----------
79,910 85,366
Other assets 85 166
---------- ----------
Total assets $ 220,599 $ 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.
3
FORM 10-Q
ENCORE WIRE CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
September 30, December 31,
In Thousands of Dollars, Except Share Data 2003 2002
(Unaudited) (See Note)
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 39,022 $ 10,735
Accrued liabilities 9,635 7,718
Current income taxes payable 4,364 2,651
Current deferred income taxes 814 814
--------- ---------
Total current liabilities 53,835 21,918
Non-current deferred income taxes 9,251 7,193
Long term notes payable 43,295 47,500
Stockholders equity:
Common stock, $.01 par value:
Authorized 20,000,000 shares; issued 16,963,400 and
16,958,365 shares; outstanding 15,124,100 and
15,119,065 shares 170 169
Additional paid-in capital 34,157 34,138
Treasury stock 1,839,300 and 1,839,300 shares at cost (15,275) (15,275)
Accumulated other comprehensive income (loss) (997) (1,319)
Retained earnings 96,163 88,805
--------- ---------
Total stockholders' equity 114,218 106,518
--------- ---------
Total liabilities and stockholders' equity $ 220,599 $ 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 Nine months Ended
September 30, September 30,
-------------- -------------
In Thousands of Dollars, Except Per Share Data 2003 2002 2003 2002
Net sales $113,877 $ 80,150 $261,614 $216,487
Cost of goods sold 96,255 72,166 226,534 188,672
-------- -------- -------- --------
Gross profit 17,622 7,984 35,080 27,815
Selling, general, and administrative expenses 8,935 6,180 21,871 17,917
-------- -------- -------- --------
Operating income 8,687 1,804 13,209 9,898
Net interest & other expenses 527 367 1,712 1,240
-------- -------- -------- --------
Income before income taxes 8,160 1,437 11,497 8,658
Provision (benefit) for income taxes 2,938 517 4,139 3,117
-------- -------- -------- --------
Net income $ 5,222 $ 920 $ 7,358 $ 5,541
======== ======== ======== ========
Net income per common and common
equivalent shares - basic $ .35 $ .06 $ .49 $ .36
======== ======== ======== ========
Weighted average common and common
equivalent shares - basic 15,120 15,168 15,120 15,231
======== ======== ======== ========
Net income per common and common
equivalent shares - diluted $ .34 $ .06 $ .48 $ .36
======== ======== ======== ========
Weighted average common and common
equivalent shares - diluted 15,305 15,282 15,205 15,381
======== ======== ======== ========
Cash dividends declared per share $ -- $ -- $ -- $ --
======== ======== ======== ========
See accompanying notes.
5
FORM 10-Q
ENCORE WIRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months Ended
September 30,
-------------
In Thousands of Dollars 2003 2002
---- ----
OPERATING ACTIVITIES
Net income (loss) $ 7,358 $ 5,541
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation and amortization 9,070 7,729
Provision for bad debts 135 90
Changes in operating assets and liabilities:
Accounts receivable (34,589) (12,082)
Inventory (5,242) 3,574
Accounts payable and accrued liabilities 30,526 (7,118)
Other assets and liabilities (3,298) (1,414)
Current income taxes receivable/payable 3,771 (314)
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 7,731 (3,994)
-------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (3,613) (17,272)
Change in long-term investments 81 (10)
Proceeds from sale of equipment 117 536
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (3,415) (16,746)
-------- --------
FINANCING ACTIVITIES
Borrowings (repayments) under notes payable (4,205) 21,000
Proceeds from issuance of common stock 19 97
Purchase of treasury stock -- (1,415)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (4,186) 19,682
-------- --------
Net increase (decrease) in cash 130 (1,058)
Cash at beginning of period 160 1,252
-------- --------
Cash at end of period $ 290 $ 194
======== ========
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 (the
"Company") 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 Nine months
Ended Ended
September 30, September 30,
------------- -------------
In Thousands of Dollars, Except Per Share Data 2003 2002 2003 2002
- ---------------------------------------------- ---- ---- ---- ----
Net income (loss), as reported 5,222 920 7,358 5,541
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 95 113 296 326
--------- --------- --------- ---------
Pro forma net income (loss) 5,127 807 7,062 5,215
========= ========= ========= =========
Net income (loss) per share
Basic, as reported $ 0.35 $ 0.06 $ 0.49 $ 0.36
Basic, pro forma $ 0.34 $ 0.05 $ 0.47 $ 0.34
Diluted, as reported $ 0.34 $ 0.06 $ 0.48 $ 0.36
Diluted, pro forma $ 0.33 $ 0.05 $ 0.46 $ 0.34
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:
September 30, December 31,
2003 2002
---- ----
Raw materials $ 8,884 $ 12,690
Work-in-process 5,758 4,231
Finished goods 38,350 30,216
-------- --------
52,992 47,137
Increase to LIFO cost 2,804 7,017
-------- --------
55,796 54,154
Lower of Cost or Market Adjustment (389) (3,989)
-------- --------
$ 55,407 $ 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 $874,000 in the quarter, leaving $389,000 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 September 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
9/30/03 9/30/02
------- -------
Numerator:
Net income $ 5,222,122 $ 919,562
=========== ===========
Denominator:
Denominator for basic earnings per
share - weighted average shares 15,120,558 15,167,958
Effect of dilutive securities:
Employee stock options 184,940 144,103
----------- -----------
Denominator for diluted earnings per
share - weighted average shares 15,305,498 15,282,061
=========== ===========
The following table sets forth the computation of basic and diluted earnings per
share:
Nine Months Nine Months
Ended Ended
9/30/03 9/30/02
------- -------
Numerator:
Net income $ 7,358,378 $ 5,540,929
=========== ===========
Denominator:
Denominator for basic earnings per
share - weighted average shares 15,119,568 15,231,225
Effect of dilutive securities:
Employee stock options 85,286 149,945
----------- -----------
Denominator for diluted earnings per
share - weighted average shares 15,204,854 15,381,170
=========== ===========
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 September 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 September 30, 2003. Pursuant
to the Financing Agreement, the Company is prohibited from declaring, paying or
issuing cash dividends. At September 30, 2003, the balance outstanding under the
Financing Agreement was $43.3 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 September 30, 2003, the Company recorded an
unrealized gain of $210,553, netting to an unrealized loss of $997,522 remaining
in the accumulated other comprehensive income (loss) 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 September 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. The
11
FORM 10-Q
Company also believes that it has adequate insurance to cover any damages that
may ultimately be awarded.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company is a low-cost manufacturer of copper electrical building wire and
cable. The Company is a significant supplier of residential wire for interior
wiring in homes, apartments and manufactured housing and commercial wire for
commercial and industrial buildings.
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 September 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 September 30, 2003 Compared to Quarter Ended September 30, 2002
Net sales for the third quarter of 2003 amounted to $113.9 million compared with
net sales of $80.2 million for the third quarter of 2002. This dollar increase
was primarily the result of a 32% increase in the volume of product shipped,
coupled with an 8% increase in the price of wire sold. The company believes the
volume of wire sold increased principally due to the reduced presence of certain
competitors in the marketplace. The average cost per pound of raw copper
purchased increased in the third quarter of 2003 compared to the third quarter
of 2002, and was the principal reason the average sales price for wire
increased. Fluctuations in sales prices are primarily a result of changing
copper raw material prices and product price competition.
Cost of goods sold increased to $96.3 million, or 84.5% of net sales, in the
third quarter of 2003, compared to $72.2 million, or 90.0% of net sales, in the
third quarter of 2002. Gross profit increased to $17.6 million, or 15.5% of net
sales, in the third quarter of 2003 versus $8.0 million, or 10.0% of net sales,
in the third quarter of 2002. The increased gross profit and gross margin
percentages were primarily the result of the efficiencies gained from the higher
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
12
FORM 10-Q
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 (LCM) test by comparing the LIFO
cost of its raw materials, work-in-process and finished goods inventories to
estimated market values, which are based primarily upon the most recent quoted
market price of copper, in pound quantities, as of the end of each reporting
period. Additionally, future reductions in the quantity of inventory on hand
could cause copper that is carried in inventory at costs different from the cost
of copper in the period in which the reduction occurs to be included in costs of
goods sold for that period at the different price.
As a result of increasing copper costs during the third quarter 2003, a LIFO
adjustment was recorded increasing cost of sales by $2,465,000 during the
quarter. At September 30, 2003, the LIFO cost basis of the inventory exceeded
the market value by $389,000. Thus, in the third quarter of 2003 an $874,000
reduction was made to the LCM reserve, decreasing cost of sales by $874,000.
Future reductions in the price of copper could require the Company to record a
LCM adjustment against the related inventory balance, which would result in a
negative impact on net income.
Selling expenses for the third quarter of 2003 were $7.1 million, or 6.3% of net
sales, compared to $4.8 million, or 6.0% of net sales, in the third quarter of
2002. The percentage increase was due to a nominal increase in freight costs and
commissions as a percentage of net sales. These are the two components of
selling expenses and remain, by their nature, fairly constant as a percentage of
sales. General and administrative expenses increased to $1.7 million, or 1.5% of
net sales, in the third quarter of 2003 compared to $1.4 million, or 1.7% of net
sales, in the third quarter of 2002. The provision for bad debts was $45,000 in
the third quarter of 2003 versus zero in the third quarter of 2002.
Net interest expense was $527,000 in the third quarter of 2003 compared to
$367,000 in the third quarter of 2002. The increase was due to slightly higher
average debt balances and interest rates during the third quarter of 2003 than
the comparable period during 2002.
As a result of the foregoing factors, the Company's net income increased to $5.2
million in the third quarter of 2003 from $.9 million in the third quarter of
2002.
Nine months Ended September 30, 2003 compared to Nine months Ended September 30,
2002
Net sales for the first nine months of 2003 amounted to $261.6 million compared
with net sales of $216.5 million for the first nine months of 2002. This dollar
increase was primarily the result of a 19% increase in the volume of product
shipped coupled with a 2% increase in the price of wire sold. The company
believes the volume of wire sold increased principally due to the reduced
presence of certain competitors in the marketplace. Fluctuations in sales prices
are primarily a result of changing copper raw material prices and product price
competition.
Cost of goods sold increased to $226.5 million in the first nine months of 2003,
compared to $188.7 million in the first nine months of 2002. Gross profit
increased to $35.1 million, or 13.4% of net sales, in the first nine months of
2003 versus $27.8 million, or 12.8% of net sales, in the first nine months of
2002. The gross profit percentage increase was primarily attributable to the
higher gross profits the company earned during the third quarter of 2003.
13
FORM 10-Q
Inventories are stated at the lower of cost, using the 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 LCM test by comparing
the LIFO cost of its raw materials, work-in-process and finished goods
inventories to estimated market values, which are based primarily upon the most
recent quoted market price of copper, in pound quantities, as of the end of each
reporting period. Additionally, future reductions in the quantity of inventory
on hand could cause copper that is carried in inventory at costs different from
the cost of copper in the period in which the reduction occurs to be included in
costs of goods sold for that period at the different price.
As a result of increasing copper costs during the first nine months of 2003, a
LIFO adjustment was recorded increasing cost of sales by $4.2 million during the
period. At September 30, 2003, the LIFO cost basis of the inventory exceeded the
market value by $389,000. Thus, in the first nine months, a $3.6 million
reduction was made to the LCM reserve, which decreased cost of sales by $3.6
million. Future reductions in the price of copper could require the Company to
record a LCM adjustment against the related inventory balance, which would
result in a negative impact on net income.
Selling expenses for the first nine months of 2003 were $16.6 million, or 6.4%
of net sales, compared to $13.3 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 $5.1 million, or 1.9% of net sales, in the first nine months of
2003 compared to $4.5 million, or 2.1% of net sales, in the same period of 2002.
The provision for bad debts was $135,000 in the first nine months of 2003,
versus $90,000 in the first nine months of 2002.
Net interest expense was $1,712,000 in the first nine months of 2003 compared to
$1,240,000 in the first nine months of 2002. The increase was due to higher
average debt balances during the first nine 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 increased to $7.4
million in the first nine months of 2003 from $5.5 million in the first nine
months 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.
14
FORM 10-Q
Effective August 31, 1999, the Company, through its indirectly wholly owned
subsidiary Encore Wire Limited, a Texas limited partnership, completed the
Financing Agreement. The Financing Agreement replaced the Company's existing
credit facility, and the Company is a guarantor of the indebtedness. Obligations
under the Financing Agreement are the only material contractual obligations or
commercial commitments of the Company. 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 September 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 September 30, 2003. Pursuant
to the Financing Agreement, the Company is prohibited from declaring, paying or
issuing cash dividends. At September 30, 2003, the balance outstanding under the
Financing Agreement was $43.3 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 nine months ended September 30, 2003, the Company recorded an
unrealized gain of $210,553, netting to an unrealized loss of $997,522 remaining
in the accumulated other comprehensive income line in the equity section of the
balance sheet.
Cash provided by operations was $7.7 million in the first nine months of 2003
compared to $4.0 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 $28.3 million in the first nine months of 2003
versus a decrease of $7.0 million in the first nine months of 2002, offset by an
increase in accounts receivable of $34.6 million in the first nine months of
2003 versus an increase of $12.1 million in the first nine months of 2002. The
company made a decision during the year 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 paid
during the third quarter. Cash used in investing activities decreased to $3.4
million in the first nine months of 2003 from $16.7 million in the first nine
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 $4.2
million of cash used by financing activities in the first three quarters 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(e)
and 15d-15(e). 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 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 October 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 third quarter of 2003. The Company filed no
other reports on Form 8-K during the three months ended September
30, 2003.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf by the
undersigned thereunto duly authorized.
ENCORE WIRE CORPORATION
--------------------------------------------
(Registrant)
Dated: November 5, 2003 /s/ VINCENT A. REGO
--------------------------------------------
Vincent A. Rego, Chairman of the Board and
Chief Executive Officer
Dated: November 5, 2003 /s/ DANIEL L. JONES
--------------------------------------------
Daniel L. Jones, President and
Chief Operating Officer
Dated: November 5, 2003 /s/ FRANK J. BILBAN
--------------------------------------------
Frank J. Bilban, Vice President - Finance,
Treasurer and Secretary
Chief Financial Officer
18
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, 2001, 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 September 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).
19
FORM 10-Q
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.
31.1 Certification by Vincent A. Rego, Chief Executive Officer of Encore
Wire Corporation, dated November 5, 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 November 5, 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 November 5, 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 November 5, 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.
20