Encore Wire(WIRE) - 2022 Q3 - Quarterly Report

PART I—FINANCIAL INFORMATION This part presents the unaudited interim financial statements and management's discussion and analysis of Encore Wire Corporation Item 1. Financial Statements This section presents Encore Wire Corporation's unaudited interim financial statements, covering balance sheets, income, equity, cash flow, and detailed notes Balance Sheets This section details the company's financial position, including assets, liabilities, and equity, at specific reporting dates Balance Sheet Data | Metric | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :-------------------------- | :-------------------------- | :-------------------------- | | Cash and cash equivalents | $573,582 | $438,990 | | Total current assets | $1,294,702 | $1,035,050 | | Total assets | $1,883,050 | $1,530,536 | | Total current liabilities | $151,616 | $154,100 | | Total stockholders' equity | $1,684,717 | $1,339,089 | Statements of Income This section presents the company's financial performance for the quarter and nine months ended September 30, 2022 and 2021 Income Statement Data | Metric | Q3 2022 (in thousands) | Q3 2021 (in thousands) | 9M 2022 (in thousands) | 9M 2021 (in thousands) | | :----------------------------------- | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Net sales | $762,363 | $716,320 | $2,323,670 | $1,904,869 | | Gross profit | $299,447 | $270,766 | $863,966 | $632,613 | | Operating income | $244,156 | $226,950 | $722,058 | $516,504 | | Net income | $191,773 | $175,538 | $563,843 | $399,780 | | Basic EPS | $10.11 | $8.60 | $28.98 | $19.48 | | Diluted EPS | $9.97 | $8.51 | $28.57 | $19.31 | | Cash dividends declared per share | $0.02 | $0.02 | $0.06 | $0.06 | Statements of Stockholders' Equity This section outlines changes in stockholders' equity, including retained earnings and treasury stock, for the reported periods Stockholders' Equity Data | Metric (in thousands) | Dec 31, 2021 | Sep 30, 2022 | | :-------------------- | :----------- | :----------- | | Retained Earnings | $1,421,079 | $1,983,778 | | Treasury Stock (Amount) | $(155,014) | $(380,262) | | Total Stockholders' Equity | $1,339,089 | $1,684,717 | - Net income for the nine months ended September 30, 2022, contributed $563,843 thousand to retained earnings, compared to $399,780 thousand for the same period in 2021[16] - The Company purchased $225,248 thousand of treasury stock in the nine months ended September 30, 2022, significantly higher than $32,732 thousand in the same period of 2021[16] Statements of Cash Flow This section details cash inflows and outflows from operating, investing, and financing activities for the nine months ended September 30, 2022 and 2021 Cash Flow Data | Activity | 9M 2022 (in thousands) | 9M 2021 (in thousands) | | :-------------------------------- | :--------------------- | :--------------------- | | Net cash provided by operating activities | $466,313 | $230,924 | | Net cash used in investing activities | $(105,509) | $(85,084) | | Net cash used in financing activities | $(226,212) | $(34,103) | | Net increase in cash and cash equivalents | $134,592 | $111,737 | | Cash and cash equivalents at end of period | $573,582 | $294,860 | Notes to Financial Statements This section provides detailed explanations of significant accounting policies and specific financial statement line items NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES This note describes key accounting principles and methods, including revenue recognition and interim reporting standards - The unaudited financial statements are prepared in accordance with U.S. GAAP for interim information and do not include all footnotes required for complete annual financial statements[21] - Revenue is recognized at the point control of products is transferred to the customer, typically upon shipment, and includes estimates for trade payment discounts and customer rebates[23][24] - The Company has not adopted any new accounting standards in 2022[25] - The long-term impact of COVID-19 on the Company's financial position and operating results remains uncertain[22] NOTE 2 – INVENTORIES This note details the company's inventory valuation methods and provides a breakdown of inventory components - Inventories are stated at the lower of cost, determined by the last-in, first-out (LIFO) method, or market[27] Inventory Components | Inventory Component (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :--------------------------------- | :----------- | :----------- | | Raw materials | $48,713 | $54,012 | | Work-in-process | $47,912 | $40,422 | | Finished goods | $133,561 | $123,401 | | Total Inventory at FIFO cost | $230,186 | $217,835 | | Adjust to LIFO cost | $(93,999) | $(117,019) | | Inventory, net | $136,187 | $100,816 | - LIFO adjustments decreased cost of sales by $24.4 million in Q3 2022, compared to an increase of $0.6 million in Q3 2021[28] - For the nine months, LIFO adjustments decreased cost of sales by $23.0 million in 2022, versus an increase of $46.6 million in 2021[28] NOTE 3 - PROPERTY, PLANT and EQUIPMENT This note provides a breakdown of property, plant, and equipment, along with related depreciation expenses Property, Plant and Equipment Breakdown | PP&E Component (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :------------------------------ | :----------- | :----------- | | Land and land improvements | $84,616 | $72,897 | | Construction-in-progress | $158,403 | $92,414 | | Buildings and improvements | $218,579 | $217,985 | | Machinery and equipment | $394,704 | $362,996 | | Furniture and fixtures | $14,056 | $13,805 | | Property, plant and equipment, gross | $870,358 | $760,097 | | Accumulated depreciation | $(282,532) | $(265,181) | | Property, plant and equipment, net | $587,826 | $494,916 | - Depreciation expense was $6.5 million in Q3 2022 (vs. $6.1 million in Q3 2021) and $19.0 million in 9M 2022 (vs. $17.1 million in 9M 2021)[29] NOTE 4 – ACCRUED LIABILITIES This note details the components of accrued liabilities, including sales rebates, SAR liability, and accrued salaries Accrued Liabilities Breakdown | Accrued Liability (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :------------------------------- | :----------- | :----------- | | Sales rebates payable | $42,121 | $40,657 | | SAR Liability | $14,089 | $22,095 | | Property taxes payable | $3,766 | $5,018 | | Accrued salaries | $15,459 | $4,778 | | Other accrued liabilities | $7,605 | $6,199 | | Total accrued liabilities | $83,040 | $78,747 | NOTE 5 – INCOME TAXES This note discusses the company's effective income tax rates for the reporting periods - The effective income tax rate was 22.4% in Q3 2022, slightly down from 22.7% in Q3 2021[31] NOTE 6 – EARNINGS PER SHARE This note details the calculation of basic and diluted earnings per share, including net income and weighted average shares Earnings Per Share Data | Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 | | :------------------------------------------------ | :------ | :------ | :------ | :------ | | Net income (in thousands) | $191,773 | $175,538 | $563,843 | $399,780 | | Basic EPS | $10.11 | $8.60 | $28.98 | $19.48 | | Diluted EPS | $9.97 | $8.51 | $28.57 | $19.31 | | Weighted average shares outstanding – basic (in thousands) | 18,968 | 20,421 | 19,459 | 20,523 | | Weighted average shares outstanding – diluted (in thousands) | 19,243 | 20,629 | 19,733 | 20,703 | NOTE 7 – DEBT This note outlines the company's credit agreement, borrowing capacity, and interest rate benchmarks - The Company's 2021 Credit Agreement provides for maximum borrowings of $200.0 million, extending through February 9, 2026[33] - On October 20, 2022, the First Amendment to the 2021 Credit Agreement replaced LIBOR with BSBY as the interest rate benchmark[34] - As of September 30, 2022, there were no outstanding borrowings under the 2021 Credit Agreement, with $199.6 million of credit available[34] NOTE 8 – STOCKHOLDERS' EQUITY This note details changes in stockholders' equity, including stock repurchase programs and shares authorized for repurchase - The Board of Directors authorized a stock repurchase program, most recently on August 1, 2022, for up to 2,000,000 shares[36] - The Company repurchased 1,893,769 shares in the nine months ended September 30, 2022, compared to 393,379 shares in the same period of 2021[36] - As of September 30, 2022, 1,214,253 shares remained authorized for repurchase through March 31, 2023[36] NOTE 9 - CONTINGENCIES This note addresses any material pending legal proceedings or other contingent liabilities - There are no material pending legal proceedings to which the Company is a party[37] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of financial condition, results of operations, liquidity, and capital resources Company Overview and Key Factors This section introduces Encore Wire Corporation and discusses primary drivers of its operating results, including raw material costs and market conditions - Encore Wire Corporation is a leading manufacturer of copper and aluminum electrical wire and cables, operating a vertically-integrated, single-site campus in Texas[38] - Operating results are primarily driven by product volume, copper and other raw material costs, competitive pricing, and plant efficiency[40] - Copper prices are volatile due to general economic conditions, supply/demand, and the potential impact of copper exchange-traded funds (ETFs) on availability and price volatility[40][41] - The long-term impact of COVID-19 and its variants on the business remains uncertain[39] Results of Operations This section analyzes the company's financial performance for the reported periods, detailing changes in net sales, gross profit, and expenses Quarter Ended September 30, 2022 Compared to Quarter Ended September 30, 2021 This section compares financial results for Q3 2022 against Q3 2021, focusing on sales, costs, and profitability Q3 2022 vs Q3 2021 Financial Highlights | Metric | Q3 2022 (in millions) | Q3 2021 (in millions) | Change (%) | | :-------------------------------- | :-------------------- | :-------------------- | :--------- | | Net Sales | $762.4 | $716.3 | +6.4% | | Cost of Goods Sold | $462.9 | $445.6 | +3.9% | | Gross Profit | $299.4 | $270.8 | +10.6% | | Gross Profit % | 39.3% | 37.8% | +1.5 pp | | Selling Expenses | $34.8 (4.6% of sales) | $29.9 (4.2% of sales) | +16.4% | | G&A Expenses | $20.5 (2.7% of sales) | $14.0 (1.9% of sales) | +46.4% | - The 6.4% increase in net sales was driven by a 12.9% increase in copper wire unit volume shipped and an increase in aluminum net sales from 9.1% to 17.4% of total net sales[44] - Gross profit percentage increased to 39.3% from 37.8%, primarily due to increased aluminum spreads and overall higher volumes, despite a 14.4% decrease in average selling price of wire per copper pound and a 14.1% decrease in average cost of copper per pound purchased[46] Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021 This section compares financial results for the first nine months of 2022 against the same period in 2021, analyzing sales, costs, and profitability 9M 2022 vs 9M 2021 Financial Highlights | Metric | 9M 2022 (in billions) | 9M 2021 (in billions) | Change (%) | | :-------------------------------- | :-------------------- | :-------------------- | :--------- | | Net Sales | $2.324 | $1.905 | +22.0% | | Cost of Goods Sold | $1.460 | $1.272 | +14.8% | | Gross Profit | $0.864 | $0.633 | +36.5% | | Gross Profit % | 37.2% | 33.2% | +4.0 pp | | Selling Expenses | $101.7 (4.4% of sales) | $79.4 (4.2% of sales) | +28.1% | | G&A Expenses | $40.2 (1.7% of sales) | $35.3 (1.9% of sales) | +13.9% | - The 22.0% increase in net sales was primarily due to a 12.5% increase in copper wire sales (4.3% price, 7.9% volume) and an increase in aluminum net sales from 7.5% to 14.7% of total net sales[50] - Gross profit percentage rose to 37.2% from 33.2%, driven by increased copper and aluminum spreads and higher total volumes, with the average selling price of wire per copper pound increasing 4.3% and average cost of copper per pound purchased increasing 1.5%[52] - LIFO adjustments decreased cost of sales by $23.0 million in the first nine months of 2022, contrasting with an increase of $46.6 million in the same period of 2021[53] Liquidity and Capital Resources This section discusses the company's cash flow, capital expenditures, and overall financial flexibility, including sources and uses of cash - Cash provided by operating activities increased to $466.3 million in 9M 2022 from $230.9 million in 9M 2021, primarily due to higher net income and favorable changes in accounts receivable and inventory[57] - Cash used in investing activities increased to $105.5 million in 9M 2022 (from $85.1 million in 9M 2021) due to higher capital expenditures[58] - Cash used in financing activities significantly increased to $226.2 million in 9M 2022 (from $34.1 million in 9M 2021), mainly driven by $225.2 million in stock repurchases[59] - The Company's cash balance was $573.6 million at September 30, 2022, up from $294.9 million at September 30, 2021[60] Projected Capital Expenditures | Year | Projected Capital Expenditures (in millions) | | :--- | :----------------------------------------- | | 2022 | $140 - $150 | | 2023 | $150 - $170 | | 2024 | $80 - $100 | - Capital expenditures are focused on expanding manufacturing capacity, vertical integration, and modernizing facilities to drive growth and improve sustainability[61] Critical Accounting Estimates and Policies This section addresses significant judgments and assumptions in financial statements and confirms no material changes to these policies - There have been no significant changes to the Company's critical accounting policies and related estimates as of September 30, 2022, compared to those disclosed in the 2021 Annual Report on Form 10-K[63] Information Regarding Forward-Looking Statements This section highlights inherent risks and uncertainties associated with forward-looking statements, cautioning against reliance on projections - This report contains forward-looking statements subject to risks, uncertainties, and assumptions, including those related to raw material pricing, the COVID-19 pandemic, competitive pricing, and future dividends/stock purchases[65] - Actual results may vary materially from anticipated outcomes, and the Company undertakes no obligation to publicly update any forward-looking statements[65] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section confirms no material changes to the Company's market risk disclosures since its last annual report - 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, 2021[66] Item 4. Controls and Procedures This section details the effectiveness of disclosure controls and procedures and confirms no material changes to internal control over financial reporting - The Company's management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of September 30, 2022[67] - 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, these controls during the reporting period[68] PART II—OTHER INFORMATION This part covers legal proceedings, risk factors, equity sales, exhibits, and official signatures Item 1. Legal Proceedings This section refers to Note 9 for legal proceedings information, indicating no material pending cases - For information on legal proceedings, refer to Note 9 to the Company's financial statements, which states there are no material pending proceedings[71][37] Item 1A. Risk Factors This section states no material changes to the Company's risk factors since its last annual report - There have been no material changes to the Company's risk factors as disclosed in its Annual Report on Form 10-K for the fiscal year ended December 31, 2021[72] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the Company's stock repurchase activities during the third quarter of 2022 Stock Repurchases - Q3 2022 | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :------- | :------------------------------- | :--------------------------- | | July 2022 | — | $— | | August 2022 | — | $— | | September 2022 | 785,747 | $118.86 | | Total | 785,747 | $118.86 | - As of September 30, 2022, 1,214,253 shares remained authorized for repurchase under the Company's stock repurchase program through March 31, 2023[74] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including corporate documents, credit agreement amendments, and certifications - Exhibits include the Certificate of Incorporation, Bylaws, First Amendment to Credit Agreement (dated October 20, 2022), and certifications by the CEO and CFO[75] Signatures This section contains the official signatures of the Company's authorized officers, affirming the report submission - The report was signed on October 27, 2022, by Daniel L. Jones, Chairman, President and Chief Executive Officer, and Bret J. Eckert, Vice President-Finance, Treasurer, Secretary and Chief Financial Officer[76]