Encore Wire(WIRE) - 2023 Q2 - Quarterly Report

PART I—FINANCIAL INFORMATION This section provides the company's unaudited interim financial statements and management's analysis of financial condition and results of operations Item 1. Financial Statements This section presents the unaudited interim financial statements, including Balance Sheets, Statements of Income, Stockholders' Equity, and Cash Flow, along with detailed notes explaining significant accounting policies, inventory valuation, property, plant and equipment, accrued liabilities, income taxes, earnings per share, debt, stockholders' equity, and contingencies Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and stockholders' equity at specific points in time Balance Sheet Highlights (In thousands) | Metric | June 30, 2023 (Unaudited) | December 31, 2022 (Audited) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Cash and cash equivalents | $667,790 | $730,557 | | Accounts receivable, net | $463,318 | $498,762 | | Inventories, net | $163,215 | $153,187 | | Total current assets | $1,328,514 | $1,401,641 | | Property, plant and equipment, net| $683,747 | $616,601 | | Total assets | $2,012,779 | $2,018,732 | | Total current liabilities | $161,450 | $144,161 | | Total liabilities | $215,887 | $200,066 | | Total stockholders' equity | $1,796,892 | $1,818,666 | - Total assets decreased slightly from $2,018.7 million at December 31, 2022, to $2,012.8 million at June 30, 2023, while total liabilities increased from $200.1 million to $215.9 million[10] - Cash and cash equivalents decreased by $62.8 million, from $730.6 million at December 31, 2022, to $667.8 million at June 30, 2023[10] Statements of Income This section outlines the company's financial performance over specific periods, including net sales, gross profit, operating income, and net income Statements of Income Highlights (In thousands, except per share data) | Metric | Quarter Ended June 30, 2023 | Quarter Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | :----------------------------- | :----------------------------- | | Net sales | $636,460 | $838,235 | $1,296,952 | $1,561,307 | | Gross profit | $166,148 | $320,772 | $371,233 | $564,519 | | Operating income | $127,477 | $270,367 | $273,858 | $477,903 | | Net interest and other income | $8,067 | $647 | $17,241 | $762 | | Net income | $104,741 | $210,538 | $224,224 | $372,070 | | Diluted EPS | $6.01 | $10.71 | $12.53 | $18.62 | - Net sales decreased by 24.1% for Q2 2023 and 16.9% for 6M 2023 compared to the same periods in 2022[13] - Net income decreased by 50.2% for Q2 2023 and 39.7% for 6M 2023 year-over-year, while diluted EPS saw similar declines[13] - Net interest and other income significantly increased to $8.1 million in Q2 2023 (from $0.6 million in Q2 2022) and $17.2 million in 6M 2023 (from $0.8 million in 6M 2022)[13] Statements of Stockholders' Equity This section details changes in the company's equity accounts, including net income, treasury stock transactions, and dividends Stockholders' Equity Changes (In thousands) | Item | Balance at Dec 31, 2022 | Balance at June 30, 2023 | Change | | :-------------------------- | :---------------------- | :--------------------- | :----- | | Total Stockholders' Equity | $1,818,666 | $1,796,892 | $(21,774) | | Net income (6M 2023) | N/A | $224,224 | N/A | | Purchase of treasury stock (6M 2023) | N/A | $(256,159) | N/A | | Dividends declared (6M 2023)| N/A | $(686) | N/A | - Total stockholders' equity decreased by $21.8 million from December 31, 2022, to June 30, 2023, primarily due to significant treasury stock repurchases offsetting net income[16] - The company purchased $256.2 million in treasury stock during the first six months of 2023[16] Statements of Cash Flow This section reports the cash generated and used by the company across operating, investing, and financing activities Cash Flow Highlights (In thousands) | Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $266,036 | $238,289 | | Net cash used in investing activities | $(74,734) | $(75,246) | | Net cash used in financing activities | $(254,069) | $(132,493) | | Net increase (decrease) in cash and cash equivalents | $(62,767) | $30,550 | | Cash and cash equivalents at end of period | $667,790 | $469,540 | - Net cash provided by operating activities increased by $27.7 million to $266.0 million in the first six months of 2023 compared to the same period in 2022[19][59] - Net cash used in financing activities significantly increased to $254.1 million in 6M 2023, primarily due to higher treasury stock purchases ($253.8 million)[19][61] - The company experienced a net decrease of $62.8 million in cash and cash equivalents in 6M 2023, contrasting with a $30.6 million increase in 6M 2022[19] Notes to Financial Statements This section provides detailed explanations and disclosures regarding the significant accounting policies and specific financial statement line items NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES This note outlines the key accounting principles and methods used in preparing the interim financial statements - The unaudited financial statements are prepared in accordance with U.S. GAAP for interim information and include normal recurring adjustments[22] - COVID-19 has not materially impacted the company's business or liquidity, but potential long-term impacts remain uncertain[23] - Revenue is recognized when control of products (electrical building wire and cable) transfers to the customer, typically upon shipment, with estimates for trade payment discounts and customer rebates[24][25] - No new accounting standards have been adopted in 2023[26] NOTE 2 – INVENTORIES This note details the composition and valuation methods for the company's inventory, including LIFO adjustments Inventory Composition (In thousands) | In Thousands | June 30, 2023 | December 31, 2022 | | :----------- | :------------ | :---------------- | | Raw materials | $55,886 | $69,567 | | Work-in-process | $62,132 | $42,611 | | Finished goods | $148,409 | $138,943 | | Total Inventory at FIFO cost | $266,427 | $251,121 | | Adjust to LIFO cost | $(103,212) | $(97,934) | | Inventory, net | $163,215 | $153,187 | - Inventories are stated at the lower of LIFO cost or market; no LCM adjustment was required as of June 30, 2023[28] - LIFO adjustments decreased cost of goods sold by $18.6 million in Q2 2023 (vs. $11.5 million decrease in Q2 2022) and increased cost of goods sold by $5.3 million in 6M 2023 (vs. $1.4 million increase in 6M 2022)[29] NOTE 3 - PROPERTY, PLANT and EQUIPMENT This note provides information on the company's fixed assets, including their net value and depreciation expense Property, Plant and Equipment, Net (In thousands) | In Thousands | June 30, 2023 | December 31, 2022 | | :----------- | :------------ | :---------------- | | Property, plant and equipment, net | $683,747 | $616,601 | - Net property, plant, and equipment increased by $67.1 million from December 31, 2022, to June 30, 2023[30] - Depreciation expense increased to $8.1 million in Q2 2023 (from $6.3 million in Q2 2022) and $15.7 million in 6M 2023 (from $12.5 million in 6M 2022)[30] NOTE 4 – ACCRUED LIABILITIES This note details the various accrued liabilities, including sales rebates, SAR liability, and accrued salaries Accrued Liabilities (In thousands) | In Thousands | June 30, 2023 | December 31, 2022 | | :----------- | :------------ | :---------------- | | Sales rebates payable | $29,768 | $40,909 | | SAR Liability | $16,419 | $20,282 | | Accrued salaries | $15,716 | $7,616 | | Total accrued liabilities | $70,725 | $81,381 | - Total accrued liabilities decreased by $10.7 million from $81.4 million at December 31, 2022, to $70.7 million at June 30, 2023, mainly due to lower sales rebates payable and SAR liability, partially offset by higher accrued salaries[31] NOTE 5 – INCOME TAXES This note explains the company's effective income tax rate and the factors influencing it for the reporting periods - The effective income tax rate was 22.7% in Q2 2023, up from 22.3% in Q2 2022, primarily due to state and local taxes and the Section 162(m) limitation[32] NOTE 6 – EARNINGS PER SHARE This note presents the calculation of basic and diluted earnings per share, along with weighted average shares outstanding Earnings Per Share (In thousands, except per share data) | Metric | Quarter Ended June 30, 2023 | Quarter Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | :----------------------------- | :----------------------------- | | Net income | $104,741 | $210,538 | $224,224 | $372,070 | | Basic EPS | $6.13 | $10.84 | $12.75 | $18.88 | | Diluted EPS | $6.01 | $10.71 | $12.53 | $18.62 | | Weighted average shares outstanding – basic | 17,093 | 19,419 | 17,593 | 19,709 | | Weighted average shares outstanding – diluted | 17,431 | 19,666 | 17,897 | 19,982 | - Diluted EPS decreased by 43.9% in Q2 2023 and 32.7% in 6M 2023 year-over-year[33] - Weighted average diluted shares outstanding decreased by 11.4% in Q2 2023 and 10.4% in 6M 2023 year-over-year, reflecting share repurchases[33] NOTE 7 – DEBT This note describes the company's credit facilities, outstanding borrowings, and compliance with debt covenants - The company has a $200.0 million unsecured credit agreement, amended in October 2022 to replace LIBOR with BSBY, extending through February 9, 2026[34][35][36] - As of June 30, 2023, there were no outstanding borrowings under the credit agreement, with $199.7 million of credit available[36] - The company was in compliance with all debt covenants as of and for the period ended June 30, 2023[37] NOTE 8 – STOCKHOLDERS' EQUITY This note details the company's stock repurchase programs and share repurchase activities during the period - The Board of Directors authorized a stock repurchase program, most recently in June 2023, for up to 2,000,000 shares through March 31, 2024[38] - The company repurchased 1,475,409 shares in the first six months of 2023, an increase from 1,108,022 shares in the same period of 2022[38] NOTE 9 - CONTINGENCIES This note addresses any material legal proceedings or other contingent liabilities affecting the company - There are no material pending legal proceedings to which the company is a party[39] 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, highlighting key factors influencing results such as sales volume, raw material costs (especially copper), competitive pricing, and operational efficiency. It details the results for the quarter and six months ended June 30, 2023, compared to the prior year, and discusses liquidity, capital resources, and critical accounting estimates Business Overview and Key Factors This section describes the company's core business as a wire and cable manufacturer and the primary factors influencing its operating results - Encore Wire Corporation is a leading manufacturer of copper and aluminum electrical wire and cables, focusing on low-cost production, customer service, and quick shipping from its vertically-integrated Texas campus[40] - Operating results are significantly influenced by product volume, the fluctuating cost of copper and other raw materials, the competitive pricing environment, and plant efficiency[42] - The acquisition of copper by ETFs could decrease availability, increase costs, and lead to higher price volatility for copper[42] COMEX Copper Closing Price Averages (per pound) | Period | Average Price | | :----- | :------------ | | Q2 2023 | $3.84 | | Q2 2022 | $4.33 | | 6M 2023 | $3.96 | | 6M 2022 | $4.44 | Results of Operations This section analyzes the company's financial performance for the quarter and six months ended June 30, 2023, compared to prior periods Quarter Ended June 30, 2023 Compared to Quarter Ended June 30, 2022 This subsection provides a detailed comparison of the company's financial results for the second quarter of 2023 versus 2022 Q2 2023 vs Q2 2022 Performance Highlights | Metric | Q2 2023 | Q2 2022 | Change (YoY) | | :----------------------------------- | :------ | :------ | :----------- | | Net sales | $636.5M | $838.2M | -24.1% | | Copper unit volume increase | 1.3% | N/A | +1.3% | | Gross profit | $166.1M | $320.8M | -48.2% | | Gross profit percentage | 26.1% | 38.3% | -12.2 pp | | Average selling price per copper pound decrease | 24.5% | N/A | -24.5% | | Average cost of copper per pound purchased decrease | 11.2% | N/A | -11.2% | | Raw material cost as % of sales | 63.9% | 55.1% | +8.8 pp | | Overhead costs as % of net sales | 10.0% | 6.6% | +3.4 pp | | Net interest and other income | $8.1M | $0.6M | +$7.5M | - Net sales decreased significantly due to a 24.5% decrease in the average selling price of wire per copper pound, despite a 1.3% increase in copper unit volume[46][48] - Gross profit percentage declined by 12.2 percentage points, primarily because the decrease in average selling price outpaced the decrease in the average cost of copper[48] Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022 This subsection provides a detailed comparison of the company's financial results for the first six months of 2023 versus 2022 6M 2023 vs 6M 2022 Performance Highlights | Metric | 6M 2023 | 6M 2022 | Change (YoY) | | :----------------------------------- | :------ | :------ | :----------- | | Net sales | $1.297B | $1.561B | -16.9% | | Copper unit volume increase | 0.7% | N/A | +0.7% | | Gross profit | $371.2M | $564.5M | -34.2% | | Gross profit percentage | 28.6% | 36.2% | -7.6 pp | | Average selling price per copper pound decrease | 18.5% | N/A | -18.5% | | Average cost of copper per pound purchased decrease | 9.6% | N/A | -9.6% | | LIFO adjustments (impact on COGS) | +$5.3M | +$1.4M | +$3.9M | | G&A expenses as % of net sales | 3.2% | 1.3% | +1.9 pp | | SARs expense (benefit) | +$14.6M | -$3.9M | +$18.5M | - Net sales decreased by 16.9% for the first six months of 2023, driven by an 18.5% decrease in the average selling price of wire per copper pound, despite a 0.7% increase in copper unit volume[52][54] - Gross profit percentage decreased by 7.6 percentage points, as the average selling price decline outpaced the average cost of copper decline[54] - G&A expenses increased significantly due to a $14.6 million SARs expense in 6M 2023, compared to a $3.9 million SARs benefit in 6M 2022, resulting in an $18.5 million period-over-period increase[56] Liquidity and Capital Resources This section discusses the company's cash flow, working capital management, and future capital expenditure plans - The company maintains substantial inventory and provides longer payment terms to customers than it receives from suppliers, requiring sufficient cash and capital resources to finance working capital needs[57] - Cash provided by operating activities increased to $266.0 million in 6M 2023 (from $238.3 million in 6M 2022), primarily due to a decrease in accounts receivable and favorable changes in trade payables and accrued liabilities[58][59] - Cash used in financing activities significantly increased to $254.1 million in 6M 2023 (from $132.5 million in 6M 2022), mainly driven by $253.8 million in treasury stock purchases[61] - Capital expenditures are projected to be $160-$180 million in 2023, $150-$170 million in 2024, and $80-$100 million in 2025, focused on vertical integration, modernization, and capacity expansion[63] - A new cross-link polyethylene (XLPE) compounding facility, aimed at deepening vertical integration, is expected to be substantially complete by the end of Q3 2023[63] Critical Accounting Estimates and Policies This section confirms the consistency of critical accounting policies and estimates with prior annual disclosures - There have been 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[65] Information Regarding Forward-Looking Statements This section highlights the inherent uncertainties and risks associated with forward-looking statements within the report - The report contains forward-looking statements subject to risks and uncertainties, including those related to copper/aluminum pricing, COVID-19 impact, order fill rates, profitability, dividends, and stock purchases[67] - The company does not undertake any obligation to publicly update forward-looking statements[67] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there have been no material changes to the company's market risk disclosures since the Annual Report on Form 10-K for the year ended December 31, 2022 - No material changes to market risk disclosures have occurred since the December 31, 2022, Annual Report on Form 10-K[68] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2023, ensuring timely and accurate reporting. No material changes to internal control over financial reporting occurred during the period - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective as of June 30, 2023[69] - There have been no material changes in the company's internal control over financial reporting during the period[70] PART II—OTHER INFORMATION This section covers non-financial information, including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings This section refers to Note 9 of the financial statements, indicating no material pending legal proceedings - No material pending legal proceedings are reported, as referenced in Note 9 to the financial statements[73] Item 1A. Risk Factors There have been no material changes to the company's risk factors since the Annual Report on Form 10-K for the fiscal year ended December 31, 2022 - No material changes to the company's risk factors have occurred since the December 31, 2022, Annual Report on Form 10-K[74] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's stock repurchase activities during the quarter ended June 30, 2023, under its authorized program Stock Repurchases (Three Months Ended June 30, 2023) | 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 | | :----- | :------------------------------- | :--------------------------- | :----------------------------------------------------------------------------- | :-------------------------------------------------------------------------- | | April 2023 | 50,400 | $155.74 | 50,400 | 1,247,122 | | May 2023 | 722,531 | $164.43 | 722,531 | 524,591 | | June 2023 | — | — | — | 2,000,000 | | Total | 772,931 | $163.87 | 772,931 | N/A | - The company repurchased 772,931 shares of common stock during the second quarter of 2023 at an average price of $163.87 per share[76] - As of June 30, 2023, 2,000,000 shares remained authorized for repurchase through March 31, 2024, under the stock repurchase program[76] Item 5. Other Information This section states that no executive officers or directors adopted or terminated Rule 10b5-1 trading plans during the quarter or six months ended June 30, 2023 - No executive officers or directors adopted or terminated any Rule 10b5-1 trading plans during the quarter or six months ended June 30, 2023[77] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, certifications, and XBRL-related documents - The report includes various exhibits such as the Certificate of Incorporation, Bylaws, Common Stock certificate form, and certifications from the CEO and CFO (Exhibits 31.1, 31.2, 32.1, 32.2)[78] - XBRL instance document and taxonomy extension documents are also filed[78] SIGNATURES This section formally certifies the accuracy of the report through the signatures of key executive officers Signatures This section contains the signatures of the Chairman, President, and Chief Executive Officer, Daniel L. Jones, and the Executive Vice President and Chief Financial Officer, Bret J. Eckert, certifying the report - The report is signed by Daniel L. Jones (Chairman, President, and CEO) and Bret J. Eckert (Executive Vice President and CFO) on July 27, 2023[79]