Encore Wire(WIRE) - 2023 Q1 - Quarterly Report

PART I—FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited financial statements for Encore Wire Corporation, including balance sheets, statements of income, stockholders' equity, and cash flows for the quarter ended March 31, 2023, along with comparative periods and detailed notes on significant accounting policies, inventory, property, debt, and other financial items Balance Sheets The balance sheets show a slight decrease in total assets and stockholders' equity from December 31, 2022, to March 31, 2023, primarily influenced by changes in cash, accounts receivable, and treasury stock Balance Sheet Summary (in thousands) | Metric | March 31, 2023 | December 31, 2022 | | :-------------------- | :------------- | :---------------- | | Total assets | $1,996,605 | $2,018,732 | | Total liabilities | $182,701 | $200,066 | | Total stockholders' equity | $1,813,904 | $1,818,666 | | Cash and cash equivalents | $697,424 | $730,557 | | Accounts receivable, net | $479,831 | $498,762 | | Inventories, net | $173,878 | $153,187 | | Treasury stock, at cost | $(530,891) | $(402,639) | Statements of Income The statements of income reveal a decline in net sales, gross profit, and net income for the first quarter of 2023 compared to the same period in 2022, despite a significant increase in net interest and other income Statements of Income Summary (in thousands, except per share) | Metric | Quarter Ended March 31, 2023 | Quarter Ended March 31, 2022 | | :-------------------------------------- | :--------------------------- | :--------------------------- | | Net sales | $660,492 | $723,072 | | Cost of goods sold | $455,407 | $479,325 | | Gross profit | $205,085 | $243,747 | | Selling, general, and administrative expenses | $58,704 | $36,212 | | Operating income | $146,381 | $207,535 | | Net interest and other income | $9,174 | $115 | | Income before income taxes | $155,555 | $207,650 | | Provision for income taxes | $36,072 | $46,119 | | Net income | $119,483 | $161,531 | | Earnings per common and common equivalent share – diluted | $6.50 | $7.96 | Statements of Stockholders' Equity This section details the changes in stockholders' equity, showing a decrease in total equity for Q1 2023, primarily due to substantial treasury stock repurchases offsetting net income contributions Stockholders' Equity Activity (in thousands) | Metric | Balance at Dec 31, 2022 | Q1 2023 Activity | Balance at Mar 31, 2023 | | :-------------------- | :---------------------- | :--------------- | :---------------------- | | Total Stockholders' Equity | $1,818,666 | | $1,813,904 | | Net income | | $119,483 | | | Purchase of treasury stock | | $(128,252) | | | Dividend declared—$0.02 per share | | $(350) | | - The company purchased $128,252 thousand of treasury stock in Q1 2023, a significant increase from $58,383 thousand in Q1 2022[15] Statements of Cash Flow The cash flow statements indicate an increase in cash provided by operating activities but a substantial increase in cash used in financing activities, leading to a net decrease in cash and cash equivalents for Q1 2023 Cash Flow Summary (in thousands) | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Net cash provided by operating activities | $126,937 | $117,707 | | Net cash used in investing activities | $(31,768) | $(31,972) | | Net cash used in financing activities | $(128,302) | $(58,631) | | Net increase (decrease) in cash and cash equivalents | $(33,133) | $27,104 | | Cash and cash equivalents at end of period | $697,424 | $466,094 | - The significant increase in cash used in financing activities in Q1 2023 was primarily due to higher purchases of treasury stock ($128,252 thousand vs. $58,383 thousand in Q1 2022)[18][55] Notes to Financial Statements These notes provide essential details and explanations for the financial statements, covering accounting policies, inventory valuation, property, accrued liabilities, income taxes, earnings per share, debt, stockholders' equity, and contingencies NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES This note outlines the basis of presentation for the unaudited interim financial statements, confirming adherence to U.S. GAAP and SEC rules, detailing revenue recognition at the point of shipment, and noting no material impact from COVID-19 or new accounting standards adopted in 2023 - The unaudited financial statements are prepared in accordance with U.S. GAAP for interim information and SEC rules[21] - Revenue is recognized when control of ordered products (electrical building wire and cable) is transferred to the customer, typically upon shipment[23] - The Company has not experienced a material impact on its business or liquidity due to COVID-19, and no new accounting standards have been adopted in 2023[22][25] NOTE 2 – INVENTORIES Inventories are valued at the lower of cost (LIFO method) or market, with LIFO adjustments increasing cost of sales by $23.9 million in Q1 2023, and no lower of cost or market adjustment was required as of March 31, 2023 - Inventories are stated at the lower of cost, determined by the last-in, first-out (LIFO) method, or market[27] - LIFO adjustments increased cost of sales by $23.9 million in the first quarter of 2023, compared to $12.8 million in the first quarter of 2022[28] - No Lower of Cost or Market (LCM) adjustment was required as of March 31, 2023[27] Inventory Valuation (in thousands) | Inventory | March 31, 2023 | December 31, 2022 | | :----------------------- | :------------- | :---------------- | | Raw materials | $74,455 | $69,567 | | Work-in-process | $68,458 | $42,611 | | Finished goods | $152,779 | $138,943 | | Total Inventory at FIFO cost | $295,692 | $251,121 | | Adjust to LIFO cost | $(121,814) | $(97,934) | | Inventory, net | $173,878 | $153,187 | NOTE 3 - PROPERTY, PLANT and EQUIPMENT This note details the composition of property, plant, and equipment, showing an increase in net value and higher depreciation expense for Q1 2023 compared to Q1 2022 Property, Plant and Equipment Summary (in thousands) | Metric | March 31, 2023 | December 31, 2022 | | :-------------------- | :------------- | :---------------- | | Property, plant and equipment, net | $642,446 | $616,601 | | Construction-in-progress | $110,474 | $125,809 | | Buildings and improvements | $276,470 | $232,758 | | Machinery and equipment | $440,552 | $438,303 | - Depreciation expense was $7.7 million in the first quarter of 2023, compared to $6.2 million in the first quarter of 2022[29] NOTE 4 – ACCRUED LIABILITIES Accrued liabilities decreased from $81.4 million at December 31, 2022, to $64.0 million at March 31, 2023, driven by reductions in sales rebates payable and SAR Liability Accrued Liabilities Breakdown (in thousands) | Accrued Liabilities | March 31, 2023 | December 31, 2022 | | :--------------------------------- | :------------- | :---------------- | | Sales rebates payable | $27,450 | $40,909 | | SAR Liability | $17,441 | $20,282 | | Property taxes payable | $1,334 | $5,287 | | Accrued salaries | $11,601 | $7,616 | | Other accrued liabilities | $6,143 | $7,287 | | Total accrued liabilities | $63,969 | $81,381 | NOTE 5 – INCOME TAXES The effective income tax rate for Q1 2023 was 23.2%, an increase from 22.2% in Q1 2022, primarily due to state and local taxes and the Section 162(m) limitation on executive compensation - Income taxes were accrued at an effective rate of 23.2% in Q1 2023, compared to 22.2% in Q1 2022[31] - Differences from the federal statutory rate are primarily due to incremental state and local taxes and the Section 162(m) limitation on executive compensation[31] NOTE 6 – EARNINGS PER SHARE This note provides the computation of basic and diluted earnings per share, showing a decrease in both for Q1 2023 compared to Q1 2022, alongside a reduction in weighted average shares outstanding Earnings Per Share Calculation (in thousands, except per share) | Metric | Quarter Ended March 31, 2023 | Quarter Ended March 31, 2022 | | :-------------------------------------- | :--------------------------- | :--------------------------- | | Net income | $119,483 | $161,531 | | Basic earnings per share | $6.60 | $8.08 | | Diluted earnings per share | $6.50 | $7.96 | | Weighted average common and common equivalent shares outstanding – diluted | 18,369 | 20,302 | NOTE 7 – DEBT The company's 2021 Credit Agreement, amended to use BSBY as the interest rate benchmark, provides $200.0 million in maximum borrowings, with $199.6 million available as of March 31, 2023, and no outstanding borrowings - The 2021 Credit Agreement provides for maximum borrowings of $200.0 million, with an option to increase by up to $100.0 million[33][34] - The Amended 2021 Credit Agreement replaced LIBOR with BSBY for interest rate calculations[35] - As of March 31, 2023, there were no borrowings outstanding, and $199.6 million of credit was available[35] NOTE 8 – STOCKHOLDERS' EQUITY The Board of Directors authorized the repurchase of up to 2,000,000 shares of common stock, with 1,297,522 shares remaining authorized as of March 31, 2023. The company repurchased 702,478 shares in Q1 2023 - The Board of Directors authorized the repurchase of up to 2,000,000 shares of common stock on February 14, 2023[37] - As of March 31, 2023, 1,297,522 shares remained authorized for repurchase through March 31, 2024[37] - The company repurchased 702,478 shares in Q1 2023, compared to 500,917 shares in Q1 2022[37] NOTE 9 - CONTINGENCIES The company reports no material pending legal proceedings, though it is routinely involved in litigation and claims arising from its ordinary course of business - There are no material pending proceedings to which the Company is a party or to which any of its property is subject[38] - The Company is from time to time involved in litigation, certain other claims and arbitration matters arising in the ordinary course of its business[38] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, liquidity, and capital resources, highlighting key factors influencing results, such as raw material costs and competitive pricing, and outlining future capital expenditure plans Business Overview and Key Factors Encore Wire Corporation is a leading manufacturer of copper and aluminum electrical wire and cables, focusing on low-cost production. Its operating results are significantly influenced by product volume, raw material costs (especially volatile copper prices), competitive pricing, and plant efficiency - Encore Wire Corporation is a leading manufacturer of copper and aluminum electrical wire and cables, operating from a vertically-integrated, single-site Texas campus[39] - Operating results are driven by product volume, cost of copper and other raw materials, competitive pricing, and plant efficiency[41] - Copper prices are volatile due to general economic conditions, supply and demand, and the potential impact of copper exchange-traded funds (ETFs), which can also lead to increased price volatility for copper[41] Results of Operations Net sales decreased by 8.7% in Q1 2023 due to an 11.8% drop in average selling price per copper pound, despite flat unit volume. Gross profit margin declined from 33.7% to 31.1%, and G&A expenses significantly increased by $18 million, primarily due to higher Stock Appreciation Rights (SARs) charges Key Operating Metrics | Metric | Q1 2023 | Q1 2022 | Change (%) | | :-------------------------------------- | :------ | :------ | :--------- | | Net sales (in millions) | $660.5 | $723.1 | -8.7% | | Average selling price of wire per copper pound shipped | -11.8% | | | | Copper wire unit volume shipped | Flat | | | | Gross profit percentage | 31.1% | 33.7% | -2.6 pp | | Average cost of copper per pound purchased | -8.2% | | | | Total raw materials cost as a percentage of sales | 60.0% | 59.3% | +0.7 pp | | Overhead costs as a percentage of net sales | 8.9% | 7.0% | +1.9 pp | | G&A expenses (in millions) | $29.8 | $5.2 | +473.1% | | SARs expense (benefit) (in millions) | $13.2 | $(4.8) | +$18.0 | | Net interest and other income (in millions) | $9.2 | $0.1 | +9100% | - The decrease in gross profit margin was primarily driven by a larger decrease in the average selling price of wire per copper pound (11.8%) compared to the average cost of copper per pound purchased (8.2%)[47] - The significant increase in G&A expenses was primarily due to an $18 million increase in Stock Appreciation Rights (SARs) charges, resulting from an increase in the company's stock price[49] Liquidity and Capital Resources The company maintains strong liquidity, with cash provided by operating activities increasing to $126.9 million in Q1 2023. Despite a net decrease in cash due to increased treasury stock repurchases, the company expects to fund significant capital expenditures for vertical integration and capacity expansion through existing cash and operating cash flows - Cash provided by operating activities increased to $126.9 million in the first three months of 2023, up from $117.7 million in the same period of 2022[53] - Cash used in financing activities significantly increased to $128.3 million in Q1 2023, primarily due to $128.3 million paid for treasury stock purchases[55] Cash Balance (in millions) | Metric | March 31, 2023 | March 31, 2022 | | :------------------- | :------------- | :------------- | | Cash balance | $697.4 | $466.1 | - The company plans capital expenditures of $160-$180 million in 2023, $150-$170 million in 2024, and $80-$100 million in 2025, focused on vertical integration, capacity expansion, and modernization[58] - A new cross-link polyethylene (XLPE) compounding facility is expected to be substantially completed by the end of Q3 2023 to deepen vertical integration[57][58] Critical Accounting Estimates and Policies Management confirms that there have been no significant changes to the company's critical accounting policies and related estimates since the Annual Report on Form 10-K for the year ended December 31, 2022 - No significant changes to the Company's critical accounting policies and related estimates previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022[60] Information Regarding Forward-Looking Statements This section serves as a cautionary statement, indicating that the report contains forward-looking statements subject to various risks and uncertainties, such as raw material pricing and the impact of COVID-19, and that actual results may differ materially from projections - The report contains forward-looking statements that are subject to certain risks, uncertainties, and assumptions, which could cause actual results to vary materially[61] - Examples of uncertainties include the pricing environment of copper, aluminum, and other raw materials, the impact of COVID-19, profitability, and future stock purchases[61] - The company undertakes no obligation to publicly update any forward-looking statement[61] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company states that there have been no material changes to the quantitative and qualitative disclosures about market risk since its Annual Report on Form 10-K for the year ended December 31, 2022 - There have been no material changes from the market risk information provided in the Company's Annual Report on Form 10-K for the year ended December 31, 2022[62] Item 4. Controls and Procedures Management, including the Chief Executive and Chief Financial Officers, concluded that the company's disclosure controls and procedures were effective as of March 31, 2023, and reported no material changes in internal control over financial reporting during the period - The Company's disclosure controls and procedures were effective as of March 31, 2023[63] - There have been no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting during the period[64] PART II—OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 9 of the financial statements for information on legal proceedings, indicating no material pending cases - Information on the Company's legal proceedings is incorporated by reference from Note 9 to the financial statements[67] Item 1A. Risk Factors The company states that there have been no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K for the fiscal year ended December 31, 2022 - There have been no material changes to the Company's risk factors as disclosed in Item 1A of the Annual Report on Form 10-K for the fiscal year ended December 31, 2022[68] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's stock repurchase program, noting the repurchase of 702,478 shares in Q1 2023 at an average price of $180.95 per share, with 1,297,522 shares remaining authorized for repurchase Stock Repurchase Activity | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :----------- | :------------------------------- | :--------------------------- | | January 2023 | — | — | | February 2023 | 64,378 | $188.31 | | March 2023 | 638,100 | $180.21 | | Total | 702,478 | $180.95 | - As of March 31, 2023, 1,297,522 shares remained authorized for repurchase through March 31, 2024, under the stock repurchase program[70] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate organizational documents, certifications from executive officers, and XBRL-related documents - Exhibits include the Certificate of Incorporation, Bylaws, Common Stock certificate form, and certifications by the Chairman, President and CEO, and Executive Vice President and CFO[72] - XBRL Instance Document and Taxonomy Extension documents are also filed[72] Signatures The report is duly signed by Daniel L. Jones, Chairman, President and Chief Executive Officer, and Bret J. Eckert, Executive Vice President and Chief Financial Officer, on April 27, 2023 - The report was signed by Daniel L. Jones, Chairman, President and Chief Executive Officer, and Bret J. Eckert, Executive Vice President and Chief Financial Officer, on April 27, 2023[73]