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Encore Wire Corp. (WIRE) filed Quarterly Report for the period ended 2011-09-30.
Encore Wire Corp. has a market cap of $609.5 million; its shares were traded at around $26.17 with a P/E ratio of 15.9 and P/S ratio of 0.7. The dividend yield of Encore Wire Corp. stocks is 0.3%. Encore Wire Corp. had an annual average earning growth of 3.1% over the past 10 years.
This is the annual revenues and earnings per share of WIRE over the last 10 years. For detailed 10-year financial data and charts, go to 10-Year Financials of WIRE.
Highlight of Business Operations:
shipped during the period. The average cost per pound of raw copper purchased increased 24.7% in the third quarter of 2011 compared to the third quarter of 2010, and was the principal driver of the increased average sales price of wire. Fluctuations in sales prices are primarily a result of changing copper raw material prices and product price competition. Cost of goods sold increased to $281.5 million, or 88.2% of net sales, in the third quarter of 2011, compared to $220.0 million, or 90.6% of net sales, in the third quarter of 2010. Gross profit increased to $37.8 million, or 11.8% of net sales, in the third quarter of 2011 versus $22.8 million, or 9.4% of net sales, in the third quarter of 2010. The increased gross profit dollars and gross profit margin percentages were primarily the result of the large sales dollar increase and the increased spread between what the Company paid for a pound of copper and the price of wire the Company sold that contained a pound of copper. In comparing the third quarter of 2011 to the third quarter of 2010, this spread increased by 41.2% resulting in the increased margins. Spreads increased as a result of improved industry pricing discipline in the third quarter of 2011 versus the third quarter of 2010. Spreads improved dramatically in the second half of the third quarter of 2011 as the industry dropped wire prices slower than the copper costs declined. Inventories are stated at the lower of cost, as calculated 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 electrical building wire products. The Company maintains its inventory costs and cost of goods sold on a first-in, first-out (FIFO) basis and makes a monthly 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 and finished wire prices as of the end of each reporting period. The Company performs a lower of cost or market calculation quarterly. Based on copper prices as of September 30, 2011, no LCM adjustment was required. However, decreases in copper prices could necessitate establishing an LCM reserve in future periods. 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. Copper costs were volatile during the quarter, beginning the quarter at a Comex closing price of $4.29 per pound on July 1, peaking at $4.47 per pound on July 29 and falling to $3.14 by the end of the quarter. Primarily due to decreasing copper costs, slightly offset by a small increase in inventory quantities on hand during the third quarter of 2011, a LIFO adjustment was recorded decreasing cost of sales by $5.6 million during the quarter. Selling expenses, consisting of commissions and freight, for the third quarter of 2011 were $12.9 million, or 4.1% of net sales, compared to $10.5 million, or 4.3% of net sales, in the third quarter of 2010. Commissions paid to independent manufacturers’ representatives are paid as a relatively stable percentage of sales, and therefore, rose $1.6 million in concert with the increased sales dollars. Additionally, freight costs increased by $0.9 million due partially to the 2.3% increase in unit sales. Freight barely declined as a percentage of net sales due to the fact that freight rose on a cost per 11pound basis as a result of increased fuel prices, smaller customer order quantities and small shifts in demand from various areas of the country. General and administrative expenses decreased to $3.5 million, or 1.1% of net sales, in the third quarter of 2011 compared to $5.0 million, or 2.0% of net sales, in the third quarter of 2010. The provision for bad debts was $0 and $75,000 in the third quarters of 2011 and 2010, respectively. Net interest and other (income) expense was $88,000 in the third quarter of 2011 versus $73,000 in the third quarter of 2010. Income taxes were accrued at an effective rate of 35.7% in the third quarter of 2011, versus an effective rate of 29.2% in the third quarter of 2010. The increase in the effective rate is due to the impact of the permanent book versus tax adjustments as compared to pre-tax book earnings. As a result of the foregoing factors, the Company’s net income increased to $13.7 million in the third quarter of 2011 from $5.1 million in the third quarter of 2010. Nine Months Ended September 30, 2011 compared to Nine Months Ended September 30, 2010 Net sales for the first nine months of 2011 were $932.2 million compared with net sales of $654.1 million for the first nine months of 2010. This dollar increase was the result of a 30.4% increase in the average price of wire sold and a 9.4% increase in the unit volume of wire sold, measured in pounds of copper contained in the wire. The average cost per pound of raw copper purchased increased 29.3% in the first nine months of 2011 compared to the first nine months of 2010. In comparing the first nine months of 2011 to the first nine months of 2010, the average sales price of wire that contained a pound of copper increased more than the average price of copper purchased during the period. Therefore, margins expanded as the spread between the price of wire sold and the cost of raw copper purchased increased by 34.2%, due primarily to industry pricing discipline. Fluctuations in sales prices are primarily a result of changing copper raw material prices and product price competition. Cost of goods sold increased to $829.9 million in the first nine months of 2011, compared to $593.8 million in the first nine months of 2010. Gross profit increased to $102.2 million, or 11.0% of net sales, in the first nine months of 2011 versus $60.3 million, or 9.2% of net sales, in the first nine months of 2010. The increased gross profit dollars were primarily the result of the 42.5% increase in net sales dollars and the increased copper spreads in the first nine months of 2011 versus the same period in 2010 as discussed above. As a result of fluctuating copper costs in the first nine months of 2011 offset by a small increase in the amount of inventory on hand, a LIFO adjustment was recorded decreasing cost of sales by $4.2 million during the nine month period. Based on the current copper prices, there is no LCM adjustment necessary. Future reductions in the price of copper could require the Company to record an 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 2011 increased to $37.2 million, or 4.0% of net sales, compared to $28.1 million, or 4.3% of net sales, in the same period of 2010. Commissions paid to independent manufacturers’ representatives are calculated as a percentage of sales, and therefore, rose $6.3 million in concert with the increased sales 12
dollars. Freight costs increased $2.8 million due to the increase in unit sales and other factors noted in the quarterly analysis above, but declined as a percentage of net sales due to the large net sales dollar increase. Commissions were 2.5% and 2.6% in the first nine months of 2011 and 2010, respectively. General and administrative expenses increased slightly to $13.5 million, or 1.4% of net sales, in the first nine months of 2011 compared to $13.2 million, or 2.0% of net sales, in the same period of 2010. The provision for bad debts was $0 and $225,000 in the first nine months of 2011 and 2010, respectively. Net interest and other expense (income) was $83,000 in the first nine months of 2011 compared to $2.9 million in the first nine months of 2010, due primarily to a $2.6 million one-time charge associated with the early retirement of the Company’s $100 million in long-term notes payable in 2010. Income taxes were accrued at an effective rate of 34.3% in the first nine months of 2011 versus 32.1% in the first nine months of 2010 consistent with the Company’s estimated liabilities. As a result of the foregoing factors, the Company’s net income increased to $33.8 million in the first nine months of 2011 from $10.8 million in the first nine months of 2010. Liquidity and Capital Resources The Company maintains a substantial inventory of finished products to satisfy customers’ prompt delivery requirements. As is customary in the building wire industry, the Company provides payment terms to most of its customers that exceed terms that it receives from its suppliers. Copper suppliers generally give very short payment terms, (less than 15 days) while the Company and the building wire industry give customers much longer terms. As a result of this timing difference, building wire companies must have sufficient cash and access to capital resources to finance their working capital needs, thereby creating a barrier to entry for companies who do not have sufficient liquidity and capital resources. The Company’s liquidity needs have generally arisen to fund the two largest components of working capital, receivables and inventory, and to some extent, capital expenditures. Generally, this will cause the cash balance to rise and fall inversely to the receivables and inventory balances. The receivables and inventories will rise and fall in concert with several factors, most notably the price of copper and other raw materials and the level of unit sales. Receivables will go up at the end of quarters with strong dollar sales and down as those sales decline. Inventory balances will rise and fall with the raw material price fluctuations and the level of units on hand at the end of any given quarter. Capital expenditures have historically been necessary to expand and update 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 various debt arrangements and sales of its common stock. The Company historically uses its revolving credit facility to manage day to day operating cash needs as required by daily fluctuations in working capital, and has the facility in place should such a need arise in the future. For more information on the Company’s revolving credit facility, see Note 6 to the Company’s consolidated financial statements included in Item 1 to this report and is incorporated herein by reference. 13
Cash used in operating activities was $78.0 million in the first nine months of 2011 compared to $17.2 million in the first nine months of 2010. The following changes in components of cash flow were notable. The Company had net income of $33.8 million in the first nine months of 2011 versus net income of $10.8 million in the first nine months of 2010. Accounts receivable increased in the first nine months of 2011 and 2010, resulting in a use of cash of $69.1 million and $62.8 million, respectively. Accounts receivable increased in concert with the increased dollar sales in both years versus the prior years. Inventory increased in 2011, resulting in a $34.7 million use of cash, while inventory decreased in 2010, which provided a $0.8 million source of cash. This resulted in an overall decrease in cash provided of $35.5 million. Trade accounts payable and accrued liabilities resulted in a $30.2 million decrease in cash provided in the first nine months of 2011 versus the first nine months of 2010 due primarily to the decrease in accounts payable, attributable primarily to the timing of inventory receipts at quarter end. These changes in cash flow were the primary drivers of the $60.8 million decrease in cash flow from operations in the first nine months of 2011 versus the first nine months of 2010. Cash used in investing activities decreased to $10.2 million in the first nine months of 2011 from $15.2 million in the first nine months of 2010. The funds were used primarily for equipment purchases in 2011 and used for equipment and the construction of a new research and development building in 2010. Cash provided by financing activities in the first nine months of 2011 was $0.2 million versus cash used of $103.9 million in the first nine months of 2010. The large amount of cash used in 2010 was primarily the result of the Company’s early retirement of long-term notes payable. In the first nine months of 2011, the Company briefly borrowed relatively minor amounts under its revolving line of credit, with a balance at September 30, 2011 of $0. The Company’s cash balance was $15.2 million at September 30, 2011, down from $46.8 million at June 30, 2011 and $103.3 million at December 31, 2010, principally as a result of the Company’s increased accounts receivable, and to a lesser extent, the inventory balances at September 30, 2011 versus such balances at December 31, 2010, along with the other more minor cash flow items discussed above. During the remainder of 2011, the Company expects its capital expenditures will consist primarily of purchases of additional plant and equipment for its building wire operations. The total capital expenditures for all of 2011 associated with these projects are currently estimated to be between $21 million and $25 million. The Company will continue to manage its working capital requirements. These requirements may increase as a result of increased sales and may be impacted by the price of copper. The Company believes that the current cash balance, cash flow from operations, and the financing available under the Financing Agreement will satisfy working capital and capital expenditure requirements during 2011. Information Regarding Forward Looking Statements This quarterly report on Form 10-Q contains various “forward-looking statements” (within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended) and information that are based on management’s belief as well as assumptions made by and information currently available to management. The words “believes”, “estimates”, “anticipates”, “plans”, “seeks”, “expects”, “intends” and similar expressions identify some of the forward-looking statements. Although the Company believes that the expectations reflected in such 14
Cash used in operating activities was $78.0 million in the first nine months of 2011 compared to $17.2 million in the first nine months of 2010. The following changes in components of cash flow were notable. The Company had net income of $33.8 million in the first nine months of 2011 versus net income of $10.8 million in the first nine months of 2010. Accounts receivable increased in the first nine months of 2011 and 2010, resulting in a use of cash of $69.1 million and $62.8 million, respectively. Accounts receivable increased in concert with the increased dollar sales in both years versus the prior years. Inventory increased in 2011, resulting in a $34.7 million use of cash, while inventory decreased in 2010, which provided a $0.8 million source of cash. This resulted in an overall decrease in cash provided of $35.5 million. Trade accounts payable and accrued liabilities resulted in a $30.2 million decrease in cash provided in the first nine months of 2011 versus the first nine months of 2010 due primarily to the decrease in accounts payable, attributable primarily to the timing of inventory receipts at quarter end. These changes in cash flow were the primary drivers of the $60.8 million decrease in cash flow from operations in the first nine months of 2011 versus the first nine months of 2010.
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