Encore Wire(WIRE) - 2022 Q4 - Annual Report

PART I Item 1. Business Encore Wire Corporation manufactures electrical wire and cables from a single, vertically-integrated Texas campus, focusing on market share expansion and profitability through efficient production and customer service - Encore Wire Corporation manufactures electrical wire and cables for residential, commercial, industrial, and renewable energy sectors from a single, vertically-integrated campus in McKinney, Texas[11][12][13] - Key strategic advantages include industry-leading delivery, world-class operations, customer service, product innovation (e.g., SmartColor ID®, PullPro®, Reel Payoff®), and low-cost production through efficient plant design and an incentivized workforce[14][15][16][17][18][19][20][21][22] - The company sells products through manufacturers' representatives to wholesale electrical distributors across the U.S., with two customers each accounting for slightly over 10% of total sales[13][26] - As of December 31, 2022, Encore had 1,672 employees, with 1,406 hourly workers, and maintains good employee relations without collective bargaining agreements[34] - Copper is the principal raw material, constituting 78.6% of raw material dollar value in 2022, with the company producing its own copper rod and PVC compounds[38][39][40] Item 1A. Risk Factors The company faces significant risks from raw material price volatility, intense competition, cyclical construction markets, operational challenges, and regulatory compliance - Supply chain constraints and raw material price volatility, particularly for copper, significantly impact profitability, with no assurance that price increases can be passed to customers[51][52][53][54][55] - The electrical wire and cable industry is highly competitive, and the company's sales are tied to the cyclical residential, commercial, and industrial construction sectors, which are sensitive to economic conditions and interest rates[56][57][58] - Operational risks include fluctuating results due to demand, raw material costs, competitive pricing, utility costs, and reliance on key senior management. Cybersecurity breaches and climate change also pose risks[59][60][61][62][63][64] - Risks related to stock ownership include price fluctuations, concentrated beneficial ownership (over 35% by a small number of stockholders), and potential adverse effects from future large sales of common stock[65][66][67][68] - Regulatory risks include environmental liabilities, costs associated with conflict-free minerals compliance, and potential adverse impacts from changes in tax laws, though the Inflation Reduction Act is not expected to have a material adverse impact[69][70][71][72][73][74] Item 1B. Unresolved Staff Comments This section confirms the absence of any unresolved staff comments from the SEC - No unresolved staff comments[76] Item 2. Properties All corporate and manufacturing facilities are company-owned, unmortgaged, and located on a single 460-acre site in McKinney, Texas - The company's corporate office and manufacturing plants are located on a combined 460-acre site in McKinney, Texas, with over 3.0 million square feet of floor space[77] - All plants and equipment are owned by the company, not mortgaged, and are considered suited to present needs, compliant with laws, and adequately insured[77] Item 3. Legal Proceedings Legal proceedings information is incorporated by reference from Note 10 to the financial statements - Legal proceedings information is detailed in Note 10 of the financial statements[78] Item 4. Mine Safety Disclosures This item is not applicable to Encore Wire Corporation's operations - Not applicable[79] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Encore Wire's common stock trades on NASDAQ, with the company continuing cash dividends and executing a stock repurchase program - Common stock is traded on NASDAQ Global Select Market under the symbol "WIRE"[82] - The company intends to continue periodic cash dividends and retain the majority of future earnings for business operations and expansion[83] Issuer Purchases of Equity Securities (Q4 2022) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | | :--------------------------------- | :------------------------------- | :--------------------------- | :-------------------------------------------------------------------------- | :-------------------------------------------------------------------------- | | October 1, 2022 – October 31, 2022 | — | $ — | — | 1,214,253 | | November 1, 2022 – November 30, 2022 | — | — | — | 1,214,253 | | December 1, 2022 – December 31, 2022 | 161,701 | $ 138.38 | 161,701 | 1,052,552 | | Total (Q4 2022) | 161,701 | $ 138.53 | 161,701 | | - The Board of Directors authorized the repurchase of up to 2,000,000 shares, with 1,052,552 shares remaining authorized as of December 31, 2022, and the program extended through March 31, 2024. The company repurchased 2,055,470 shares in 2022[85][120][211] Cumulative Total Stockholder Return (2017-2022) | Total Return For: | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | | :------------------------ | :----- | :----- | :----- | :----- | :----- | :----- | | Encore Wire Corporation | $100.00 | $103.31 | $118.35 | $125.14 | $295.88 | $284.58 | | Russell 2000 Index | 100.00 | 88.99 | 111.70 | 134.00 | 153.85 | 122.41 | | Peer Group | 100.00 | 61.70 | 88.27 | 112.78 | 148.95 | 143.67 | | Prior Peer Group | 100.00 | 63.84 | 94.55 | 98.08 | 166.07 | 158.45 | Item 6. [Reserved] This item is reserved and contains no information - Item 6 is reserved[91] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Operating results are driven by product volume, raw material costs, and pricing, with significant net sales and income growth supported by strong liquidity and strategic investments - Key drivers of operating results include product volume, copper and other raw material costs, competitive pricing, and plant efficiency. Copper price fluctuations significantly impact financial results[95][96] COMEX Copper Closing Price Averages (2020-2022) | Period | 2022 Average ($) | 2021 Average ($) | 2020 Average ($) | | :---------------- | :------------- | :------------- | :------------- | | Q4 Average | $3.66 | $4.38 | $3.27 | | Year-to-Date Average | $4.00 | $4.25 | $2.80 | Key Financial Performance (2020-2022) | Metric | 2022 (in thousands) | 2021 (in thousands) | 2020 (in thousands) | YoY Change (2022 vs 2021) | | :----------------------------------- | :------------- | :------------- | :------------- | :-------------------------- | | Net sales | $3,017,555 | $2,592,721 | $1,276,948 | +16.4% | | Cost of goods sold | $1,905,134 | $1,724,975 | $1,082,413 | +10.5% | | Gross profit | $1,112,421 | $867,746 | $194,535 | +28.2% | | Operating income | $915,003 | $699,203 | $97,527 | +30.9% | | Net income | $717,841 | $541,422 | $76,067 | +32.6% | | Diluted EPS | $36.91 | $26.22 | $3.68 | +40.8% | | Gross profit % of net sales | 36.9% | 33.5% | 15.2% | +3.4 pp | | Operating income % of net sales | 30.4% | 27.0% | 7.6% | +3.4 pp | | Net income % of net sales | 23.8% | 20.9% | 5.9% | +2.9 pp | Cash Flow Activities (2020-2022) | Cash Flow Activity (in thousands) | 2022 | 2021 | 2020 | | :-------------------------------- | :--------- | :--------- | :--------- | | Net cash provided by operating activities | $688,883 | $418,418 | $57,462 | | Net cash used in investing activities | $(148,350) | $(118,155) | $(85,991) | | Net cash used in financing activities | $(248,966) | $(44,396) | $(19,313) | | Net increase (decrease) in cash and cash equivalents | $291,567 | $255,867 | $(47,842) | - The company had no debt outstanding at December 31, 2022 and 2021, and maintains a $200.0 million credit facility (Amended 2021 Credit Agreement) with $199.7 million available as of December 31, 2022[116][117][118] - The company is making incremental investments to broaden its position as a low-cost manufacturer and increase capacity, including a new XLPE compounding facility expected to be completed by Q3 2023, and further vertical integration and modernization through 2025. Capital expenditures were $148.4 million in 2022, projected at $160-$180 million in 2023, $150-$170 million in 2024, and $80-$100 million in 2025[124][126] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to commodity price risk, primarily from copper fluctuations, and interest rate risk related to its credit facility - The company is exposed to commodity price risk due to purchasing copper cathode at prices based on COMEX closing prices, which can significantly affect financial results[137][138] - Interest rate risk is attributable to the Amended 2021 Credit Agreement, which bears variable interest rates, but no amounts were outstanding as of December 31, 2022[139] Item 8. Financial Statements and Supplementary Data This section presents audited financial statements, including balance sheets, income statements, and cash flows, with an unqualified audit opinion and identified critical audit matters - Ernst & Young LLP issued an unqualified opinion on the financial statements for the periods ended December 31, 2022, 2021, and 2020[143] - A critical audit matter identified was the valuation of inventories, specifically the complexities of manually calculating adjustments from FIFO to LIFO[147][149] Balance Sheet Highlights (in thousands) | Metric | 2022 | 2021 | | :-------------------------- | :--------- | :--------- | | Total current assets | $1,401,641 | $1,035,050 | | Property, plant and equipment, net | $616,601 | $494,916 | | Total assets | $2,018,732 | $1,530,536 | | Total current liabilities | $144,161 | $154,100 | | Total stockholders' equity | $1,818,666 | $1,339,089 | Income Statement Highlights (in thousands) | Metric | 2022 | 2021 | 2020 | | :----------------------------------- | :--------- | :--------- | :--------- | | Net sales | $3,017,555 | $2,592,721 | $1,276,948 | | Gross profit | $1,112,421 | $867,746 | $194,535 | | Operating income | $915,003 | $699,203 | $97,527 | | Net income | $717,841 | $541,422 | $76,067 | | Diluted EPS | $36.91 | $26.22 | $3.68 | Cash Flow Highlights (in thousands) | Cash Flow Activity | 2022 | 2021 | 2020 | | :-------------------------------- | :--------- | :--------- | :--------- | | Net cash provided by operating activities | $688,883 | $418,418 | $57,462 | | Net cash used in investing activities | $(148,350) | $(118,155) | $(85,991) | | Net cash used in financing activities | $(248,966) | $(44,396) | $(19,313) | | Net increase (decrease) in cash and cash equivalents | $291,567 | $255,867 | $(47,842) | Notes to Financial Statements This section provides detailed notes explaining the company's significant accounting policies, inventory, property, debt, income taxes, stock-based compensation, earnings per share, stockholders' equity, contingencies, 401(k) plan, and unaudited quarterly financial information 1. Significant Accounting Policies This note outlines the company's key accounting principles, including revenue recognition, inventory valuation, and fair value measurements - The company operates in one segment: the manufacture of electric building wire, with copper as the principal raw material[163][164] - Revenue is recognized upon shipment when control transfers to the customer, with estimates for payment discounts and rebates[168][169] - Inventories are stated at the lower of cost, using the LIFO method, or market, with a quarterly LCM calculation[179][130] - The company uses a three-level hierarchy for fair value measurements, with cash and cash equivalents based on Level 1[172][173][174] 2. Inventories This note details the composition and valuation of the company's inventories, including raw materials, work-in-process, and finished goods Inventories (in thousands) | In Thousands | 2022 | 2021 | | :------------- | :--------- | :--------- | | Raw materials | $69,567 | $54,012 | | Work-in-process | $42,611 | $40,422 | | Finished goods | $138,943 | $123,401 | | Total | $251,121 | $217,835 | | Adjust to LIFO cost | $(97,934) | $(117,019) | | Inventory, net | $153,187 | $100,816 | - No liquidations of inventories had a material impact on the company's results of operations for any period presented[186] 3. Property, Plant and Equipment, net This note provides a breakdown of the company's property, plant, and equipment, net of accumulated depreciation Property, Plant and Equipment, net (in thousands) | In Thousands | 2022 | 2021 | | :-------------------------- | :--------- | :--------- | | Land and land improvements | $85,286 | $72,897 | | Construction-in-progress | $125,809 | $92,414 | | Buildings and improvements | $232,758 | $217,985 | | Machinery and equipment | $438,303 | $362,996 | | Furniture and fixtures | $15,178 | $13,805 | | Property, plant and equipment, gross | $897,334 | $760,097 | | Accumulated depreciation | $(280,733) | $(265,181) | | Property, plant and equipment, net | $616,601 | $494,916 | - Depreciation expense was $26.1 million in 2022, $23.2 million in 2021, and $19.4 million in 2020[188] 4. Accrued Liabilities This note details the company's accrued liabilities, including sales rebates, SAR liability, property taxes, and salaries Accrued Liabilities (in thousands) | In Thousands | 2022 | 2021 | | :-------------------------- | :--------- | :--------- | | Sales rebates payable | $40,909 | $40,657 | | Stock Appreciation Rights (SAR) Liability | $20,282 | $22,095 | | Property taxes payable | $5,287 | $5,018 | | Accrued salaries | $7,616 | $4,778 | | Other accrued liabilities | $7,287 | $6,199 | | Total accrued liabilities | $81,381 | $78,747 | 5. Debt This note confirms the absence of outstanding debt and details the available credit facility - The company had no debt outstanding at December 31, 2022 and 2021[190] - A $200.0 million credit agreement (Amended 2021 Credit Agreement) extends through February 9, 2026, with $199.7 million available as of December 31, 2022[191][192] - Interest paid totaled $0.4 million in 2022 and 2021, and $0.2 million in 2020[193] 6. Income Taxes This note outlines the company's income tax provisions, effective tax rates, and the impact of recent tax legislation - The Inflation Reduction Act (IRA) was enacted on August 16, 2022, but the company does not expect it to have a material adverse impact on its financial statements[195] Provision for Income Tax Expense (in thousands) | In Thousands | 2022 | 2021 | 2020 | | :------------- | :--------- | :--------- | :--------- | | Current Federal | $175,090 | $143,392 | $14,277 | | Current State | $12,379 | $12,319 | $2,024 | | Deferred Federal | $19,797 | $2,132 | $6,285 | | Deferred State | $(257) | $132 | $143 | | Total income tax expense | $207,009 | $157,975 | $22,729 | - The effective tax rate was 22.4% in 2022, 22.6% in 2021, and 23.0% in 2020[113] - The company's federal income tax returns for years subsequent to December 31, 2018, and major state jurisdictions subsequent to December 31, 2017, remain subject to examination[197] 7. Stock-Based Compensation This note details the various types of stock-based compensation, including RSUs, stock grants, options, and SARs, and their associated expenses Total Stock-Based Compensation Expense by Award Type (in thousands) | In Thousands | 2022 | 2021 | 2020 | | :-------------------------- | :--------- | :--------- | :--------- | | Restricted Stock Units | $9,054 | $1,889 | $— | | Stock grants | $724 | $489 | $244 | | Stock options | $289 | $435 | $561 | | Stock appreciation rights ("SARs") | $7,319 | $22,188 | $3,377 | | Restricted Stock Awards | $1,005 | $1,005 | $1,101 | | Total stock-based compensation expense | $18,391 | $26,006 | $5,283 | - As of December 31, 2022, 706,600 securities remained available for grant under the 2020 Long Term Incentive Plan (2020 LTIP)[198] - Restricted Stock Units granted in 2022 and 2021 had weighted grant date fair values of $127.58 and $61.92 per unit, respectively, with $17.6 million in unrecognized compensation cost remaining[199] - No stock option awards were granted in 2022, 2021, or 2020. The total intrinsic value of options exercised was $0.2 million in 2022[202][203] - Stock Appreciation Rights (SARs) are cash-settled liability awards. The liability balances were $20.3 million in 2022 and $22.1 million in 2021. No SARs were granted after 2020[204] 8. Earnings Per Share This note provides the computation of basic and diluted earnings per share Earnings Per Share Computation (in thousands, except per share data) | In Thousands | 2022 | 2021 | 2020 | | :---------------------------------------------------- | :--------- | :--------- | :--------- | | Net income | $717,841 | $541,422 | $76,067 | | Denominator for basic earnings per share – weighted average shares | 19,159 | 20,439 | 20,599 | | Effect of dilutive securities: Employee stock awards | 287 | 210 | 54 | | Denominator for diluted earnings per share – weighted average shares | 19,446 | 20,649 | 20,653 | 9. Stockholders' Equity This note details changes in stockholders' equity, including the stock repurchase program and shares outstanding - The Board of Directors approved a stock repurchase program, authorizing the repurchase of up to 2,000,000 shares. As of December 31, 2022, 1,052,552 shares remained authorized, and the program was extended through March 31, 2024[210][211] - The company repurchased 2,055,470 shares in 2022, 475,557 shares in 2021, and 441,250 shares in 2020[211] 10. Contingencies This note addresses any material pending legal proceedings or other contingencies affecting the company - There are no material pending legal proceedings to which the company is a party[212] 11. Encore Wire Corporation 401(k) Profit Sharing Plan This note outlines the company's contributions to the 401(k) profit sharing plan - Company matching contributions to the 401(k) profit sharing plan were $3.7 million in 2022, $3.0 million in 2021, and $2.5 million in 2020[213] 12. Quarterly Financial Information (Unaudited) This note provides unaudited quarterly financial data, including net sales, gross profit, net income, and diluted EPS Unaudited Quarterly Financial Information (in thousands, except per share data) | 2022 | March 31 | June 30 | September 30 | December 31 | | :----------- | :--------- | :-------- | :----------- | :---------- | | Net sales | $723,072 | $838,235 | $762,363 | $693,885 | | Gross profit | $243,747 | $320,772 | $299,447 | $248,455 | | Net income | $161,531 | $210,538 | $191,773 | $153,998 | | Diluted EPS | $7.96 | $10.71 | $9.97 | $8.28 | | 2021 | March 31 | June 30 | September 30 | December 31 | | :----------- | :--------- | :-------- | :----------- | :---------- | | Net sales | $444,140 | $744,408 | $716,320 | $687,853 | | Gross profit | $84,504 | $277,342 | $270,766 | $235,134 | | Net income | $41,189 | $183,053 | $175,538 | $141,642 | | Diluted EPS | $1.99 | $8.82 | $8.51 | $6.91 | Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure This item confirms no changes in or disagreements with accountants regarding accounting and financial disclosure - No changes in or disagreements with accountants on accounting and financial disclosure[215] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[217] - Management assessed and concluded that the company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO 2013 Framework[220] - Ernst & Young LLP issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2022[225] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to Encore Wire Corporation - Not applicable[231] PART III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 proxy statement - Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 proxy statement[233] - The company has adopted a Code of Business Conduct and Ethics applicable to all employees, officers, directors, and advisors, available on its website[234] Item 11. Executive Compensation Executive compensation details are incorporated by reference from the 2023 proxy statement - Executive compensation details are incorporated by reference from the 2023 proxy statement[235] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information for beneficial owners and management is incorporated by reference from the 2023 proxy statement - Security ownership information is incorporated by reference from the 2023 proxy statement[236] Equity Compensation Plan Information (as of December 31, 2022) | PLAN CATEGORY | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (c) | | :------------------------------------------------ | :-------------------------------------------------------------------------- | :-------------------------------------------------------------------------- | :-------------------------------------------------------------------------- | | Equity compensation plans approved by security holders | 275,500 | $43.06 | 706,600 | Item 13. Certain Relationships and Related Transactions, and Director Independence Details on certain relationships, related transactions, and director independence are incorporated by reference from the 2023 proxy statement - Details on certain relationships, related transactions, and director independence are incorporated by reference from the 2023 proxy statement[240] Item 14. Principal Accounting Fees and Services Information on principal accounting fees and services is incorporated by reference from the 2023 proxy statement - Information on principal accounting fees and services is incorporated by reference from the 2023 proxy statement[242] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists all exhibits filed with the 10-K report, with financial statement schedules omitted as information is included elsewhere - The report includes a list of exhibits such as corporate governance documents, equity compensation plans, credit agreements, and certifications[244][245] - Financial statement schedules are omitted because the required information is included in the financial statements or their notes[244] Item 16. Form 10-K Summary The company has not provided a Form 10-K Summary - No Form 10-K Summary is provided[246] SIGNATURES The report is officially signed by the Chairman, President, CEO, and CFO, along with other directors, as of February 16, 2023 - The report is signed by Daniel L. Jones (Chairman, President, and CEO) and Bret J. Eckert (Executive Vice President and CFO), along with other directors, on February 16, 2023[249][250]