ENCORE WIRE CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations. (Form 10-Q)
Encore Wire Corporationis a leading manufacturer of a broad range of copper and aluminum electrical wire and cables, supplying power generation and distribution solutions to meet our customers' needs today and in the future. The Company focuses on maintaining a low-cost of production while providing exceptional customer service, quickly shipping complete orders coast-to-coast. Our products are proudly made in America at our vertically-integrated, single-site, Texascampus. As discussed in Note 1, in the notes to the financial statements, the duration or re-emergence of the COVID-19, or any of its ongoing variants, outbreak and their long-term impact on our business remain uncertain. Developments surrounding COVID-19, and any of the ongoing variants, continue to change, and we have limited visibility into the extent to which market demand for our products, as well as sector manufacturing and distribution capacity, will be impacted. The Company's operating results in any given period are driven by several key factors, including the volume of product produced and shipped, the cost of copper and other raw materials, the competitive pricing environment in the wire industry and the resulting influence on gross margin and the efficiency with which the Company's plants operate during the period, among others. Price competition for electrical wire and cable is intense, and the Company sells its products in accordance with prevailing market prices. Copper, a commodity product, is the principal raw material used by the Company in manufacturing its products. The price of copper fluctuates depending on general economic conditions and in relation to supply and demand and other factors, which causes monthly variations in the cost of the Company's purchased copper. Additionally, the SECallows shares of certain physically backed copper exchange-traded funds ("ETFs") to be listed and publicly traded. Such funds and other copper ETFs like them hold copper cathode as collateral against their shares. The acquisition of copper cathode by copper ETFs may materially decrease or interrupt the availability of copper for immediate delivery in the United States, which could materially increase the Company's cost of copper. In addition to raising copper prices and potential supply shortages, we believe that ETFs and similar copper-backed derivative products could lead to increased price volatility for copper. The Company cannot predict copper prices or the effect of fluctuations in the cost of copper on the Company's future operating results. Wire prices can, and frequently do, change on a daily basis. This competitive pricing market for wire does not always mirror changes in copper prices, making margins highly volatile. The tables below highlight the range of closing prices of copper on a per pound basis on the Comex exchange for the periods shown. 8 --------------------------------------------------------------------------------
COMEX COPPER 2022 CLOSING AWARD
April May June Quarter Ended June Six Months Ended 2022 2022 2022 30, 2022 June 30, 2022 High
$ 4.80 $ 4.35 $ 4.55$ 4.80 $ 4.93 Low 4.40 4.11 3.71 3.71 3.71 Average 4.64 4.25 4.13 4.33 4.44
COMEX COPPER 2021 CLOSING AWARD
April May June
Quarter ended in June Semester ended
2021 2021 2021 30, 2021 June 30, 2021 High
$ 4.74 $ 4.78 $ 4.66$ 4.78 $ 4.78 Low 4.00 4.50 4.16 4.00 3.54 Average 4.25 4.64 4.40 4.42 4.15 The following discussion and analysis relate to factors that have affected the operating results of the Company for the quarters and six months ended June 30, 2022and 2021. Reference should also be made to the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
Net sales were
$838.2 millionin the second quarter of 2022 compared to $744.4 millionin the second quarter of 2021. The 12.6% increase in net sales was due to a 2.7% increase in the volume of copper shipped. Additionally, aluminum sales dollars increased from 6.1% of net sales to 15.0% of net sales due to an increase in both price and volume shipped. Cost of goods sold was $517.5 million, or 61.7% of net sales, in the second quarter of 2022, compared to $467.1 million, or 62.7% of net sales, in the second quarter of 2021. Gross profit increased to $320.8 million, or 38.3% of net sales, in the second quarter of 2022 from $277.3 million, or 37.3% of net sales, in the second quarter of 2021.
The slight increase in gross profit margin is mainly attributable to the aforementioned sales and volume increases.
Total raw materials cost as a percentage of sales decreased to 55.1% in the second quarter of 2022, from 55.9% in the second quarter of 2021. Overhead costs decreased to 6.6% of net sales in the second quarter of 2022, from 6.8% of net sales in the second quarter of 2021. Overheads contain some fixed and semi-fixed components which do not fluctuate as much as sales dollars fluctuate. Selling expenses, consisting of commissions and freight, for the second quarter of 2022 were
$35.8 million, or 4.3% of net sales, compared to $28.9 million, or 3.9% of net sales, in the second quarter of 2021. Commissions paid to independent manufacturers' representatives are paid as a relatively stable percentage of sales dollars and, therefore, exhibited little change as a percentage of sales. Freight costs increased to 1.8% of net sales in the second quarter of 2022 from 1.5% of net sales in the second quarter of 2021. General and administrative ("G&A") expenses for the second quarter of 2022 were $14.6 million, or 1.7% of net sales, compared to $10.8 million, or 1.5% of net sales, in the second quarter of 2021.
Net sales for the first six months of 2022 were
$1.561 billioncompared to net sales of $1.189 billionfor the first six months of 2021. The 31.4% increase in net sales was primarily the result of a 21.9% increase in copper wire sales, driven by an 15.6% increase in the average selling price of copper wire and a 5.5% increase in copper wire unit volume shipped. Unit volume is measured in pounds of copper contained in the wire shipped during the period. Fluctuations in sales prices are primarily a result of raw material input costs and availability, order specifications and overall product demand in the market. Cost of goods sold was $996.8 million, or 63.8% of net sales, in the first six months of 2022, compared to $826.7 million, or 69.6% of net sales, in the first six months of 2021. Gross profit increased to $564.5 million, or 36.2% of net sales, in the first six months of 2022 versus $361.8 million, or 30.4% of net sales, in the first six months of 2021.
Gross profit percentage for the six months ended
9 -------------------------------------------------------------------------------- increased 15.6% in the six months ended
June 30, 2022, when compared to the six months ended June 30, 2021, while the average cost of copper per pound purchased increased 10.2%. The percentage change on sales is on a higher nominal dollar amount than on purchases and, therefore, spreads change on a nominal dollar basis. Due primarily to increases in copper costs and an increase in copper inventory quantities on hand, aided somewhat by price and volume movements of other materials in the first six months of 2022, LIFO adjustments were recorded, increasing cost of sales by $1.4 million. During the same period in 2021, LIFO adjustments were recorded, increasing cost of sales by $46.0 million. Based on 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 six months of 2022 increased to $66.9 million, or 4.3% of net sales, compared to $49.5 million, or 4.2% of net sales, in the same period of 2021. Commissions paid to independent manufacturers' representatives are paid as a relatively stable percentage of sales dollars, and therefore, exhibited little change in percentage terms, increasing $9.8 millionin concert with the increased sales dollars. Freight costs for the first six months of 2022 were 1.9% of net sales, compared to 1.8% of net sales for the first six months of 2021. General and administrative expenses were $19.7 million, or 1.3% of net sales, in the first six months of 2022 compared to $21.3 million, or 1.8% of net sales, in the first six months of 2021. The G&A decrease was driven by decreased stock compensation expense driven by the mark-to-market accounting on stock appreciation rights. The net stock compensation expense decreased $4.9 millionin the first six months of 2022 versus the first six months of 2021.
Cash and capital resources
The Company maintains a substantial inventory of finished products to satisfy customers' delivery requirements promptly. 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. In general, the Company's standard payment terms result in the collection of a significant majority of net sales within approximately 75 days of the date of invoice. 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 two largest components of working capital, receivables and inventory, and to a lesser extent, capital expenditures, are the primary drivers of the Company's liquidity needs. Generally, these needs will cause the Company's cash balance to rise and fall inversely to the receivables and inventory balances. The Company's 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. 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 and borrowings under its various debt arrangements. 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. We believe that the Company has sufficient liquidity, and will continue to have sufficient liquidity beyond the short-term outlook, and do not believe COVID-19, or any of the ongoing variants, will materially impact our liquidity, but we continue to assess COVID-19, and any ongoing variants, and their impact on our business, including on our customer base and suppliers. For more information on the Company's revolving credit facility, see Note 7 to the Company's financial statements included in Item 1 to this report, which is incorporated herein by reference. Cash provided by operating activities was
$238.3 millionin the first six months of 2022 compared to cash provided of $34.3 millionin the first six months of 2021. The following changes in components of cash flow from operations were notable. The Company had net income of $372.1 millionin the first six months of 2022 compared to net income of $224.2 millionin the first six months of 2021. Accounts receivable increased $115.0 millionin the first six months of 2022 compared to increasing $299.9 millionin the first six months of 2021. Accounts receivable generally fluctuates in proportion to dollar sales and, to a lesser extent, are affected by the timing of when sales occur during a given quarter. With an average of 60 to 75 days of sales outstanding, quarters in which sales are more back-end loaded will have higher accounts receivable balances outstanding at quarter-end. Inventory net increased $20.6 millionin the first six months of 2022 compared to decreasing $4.4 millionin the first six months of 2021. Trade accounts payable and accrued liabilities negatively impacted cash by $15.1 millionin the first six months of 2022 versus favorably impacting cash by $47.2 millionin the first six months of 2021. In the first six months of 2022, changes in current and deferred taxes favorably impacted cash by $6.0 millionversus $41.4 millionof favorable impact in the first six months of 2021. These changes in cash flow were the primary drivers of the $204.0 millionincrease in positive cash flow provided by operations in the first six months of 2022 compared to the first six months of 2021. 10 -------------------------------------------------------------------------------- Cash used in investing activities increased to $75.2 millionin the first six months of 2022 from $58.6 millionin the first six months of 2021 due to higher capital expenditures on plant and equipment, among other factors. Cash used in financing activities in the first six months of 2022 consisted of $131.9 millionpaid to purchase our own stock, $0.8 millionof cash dividends paid, and $0.2 millionof proceeds from exercised stock options. These activities in cash flow used $132.5 millioncash in financing activities for the first six months of 2022 compared to $1.0 millionused in the first six months of 2021. For the quarter and six months ended June 30, 2022and 2021, the Company did not access its revolving line of credit.
The Company’s cash balance was
During the remainder of 2022, the Company expects its capital expenditures will consist primarily of expenditures related to the purchases of manufacturing equipment throughout its facilities to update equipment and the previously-announced expansion plans which remain on schedule. The repurposing of our vacated distribution center to expand manufacturing capacity and extend our market reach was substantially completed in the second quarter of 2022. The incremental investments announced in
July 2021continue in earnest, focused on broadening our position as a low-cost, sustainable manufacturer in the sector and increasing manufacturing capacity to drive growth. Capital spending in 2022 through 2024 will expand vertical integration in our manufacturing processes to reduce costs as well as modernize select wire manufacturing facilities to increase capacity and efficiency, and improve our position as a sustainable and environmentally responsible leader in our industry. Total capital expenditures were $118 millionin 2021. We expect total capital expenditures to range from $150- $170 millionin 2022, $150- $170 millionin 2023, and $80- $100 millionin 2024. We expect to continue to fund these investments with existing cash reserves and operating cash flows.
Critical accounting estimates and policies
Management's discussion and analysis of its financial condition and results of operations are based upon the Company's financial statements, which have been prepared in accordance with
U.S.GAAP. The Company's unaudited financial statements are impacted by the accounting policies used and the estimates and assumptions made by management in their preparation. See Note 1 to the notes to the financial statements for information on the Company's significant accounting policies. As of June 30, 2022, there have been no significant changes to the Company's critical accounting policies and related estimates previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
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. Forward-looking statements can be identified by words such as: "anticipate", "intend", "plan", "goal", "seek", "believe", "project", "estimate", "expect", "strategy", "future", "likely", "may", "should", "will" and similar references to future periods. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Therefore, you should not rely on any of these forward-looking statements. Examples of such uncertainties and risks include, but are not limited to, statements about the pricing environment of copper, aluminum and other raw materials, the duration, magnitude and impact of the ongoing COVID-19 global pandemic, along with any ongoing variants, our order fill rates, profitability and stockholder value, payment of future dividends, future purchases of stock, the impact of competitive pricing and other risks detailed from time to time in the Company's reports filed with the
SEC. Actual results may vary materially from those anticipated. Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise. For more information regarding "forward-looking statements," see "Information Regarding Forward-Looking Statements" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2021, which is hereby incorporated by reference.
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