Encore believes it is a low-cost manufacturer of electrical building wire and
cable. The Company is a significant supplier of building wire for interior
electrical wiring in commercial and industrial buildings, homes, apartments, and
manufactured housing.
As discussed in Note 1, in the notes to the financial statements, the duration
and severity of the outbreak and its long-term impact on our business are
uncertain at this time. Developments surrounding the COVID-19 global pandemic
are continuing to change daily, 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. Copper accounted for approximately 69.9%, 73.0%, and 69.7% of the
Company's cost of goods sold during fiscal 2019, 2018 and 2017, respectively.
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 SEC allows
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.
With the volatility of both raw material prices and wire prices in the Company's
end market, hedging raw materials can be risky. Historically, the Company has
not engaged in hedging strategies for raw material purchases. The tables below
highlight the range of closing prices of copper on a per pound basis on the
Comex exchange for the periods shown.
COMEX COPPER CLOSING PRICE 2020
                        April               May                June            Quarter Ended June          Six Months Ended June
                         2020               2020               2020                 30, 2020                     30, 2020
High                 $    2.38          $    2.47          $    2.71          $          2.71             $           2.88
Low                       2.19               2.32               2.47                     2.19                         2.12
Average                   2.31               2.39               2.60                     2.43                         2.50

COMEX COPPER CLOSING PRICE 2019


                        April               May                June            Quarter Ended June          Six Months Ended June
                         2019               2019               2019                 30, 2019                     30, 2019
High                 $    2.98          $    2.84          $    2.74          $          2.98             $           2.98
Low                       2.88               2.65               2.63                     2.63                         2.57
Average                   2.92               2.74               2.68                     2.78                         2.80



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,
2020 and 2019. 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, 2019.
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Results of Operations
Quarter Ended June 30, 2020 Compared to Quarter Ended June 30, 2019
Net sales were $253.6 million in the second quarter of 2020 compared to $336.9
million in the second quarter of 2019. The drop in net sales dollars is the
result of an 18.6% decrease in copper wire unit volume shipped coupled with a
9.5% decrease in the average selling price of copper wire. Unit volume is
measured in pounds of copper contained in the wire shipped during the period.
The 18.6% decrease in unit volume shipped was primarily due to COVID-19-related
economic strain as parts of the country shut down job sites or significantly
curtailed construction activity in response to the pandemic, leaving some
customers unable to receive deliveries of our products during the quarter. This,
coupled with uncertainty in the market, resulted in reduced and sporadic
customer buying patterns during April, May and part of June 2020. Beginning late
in the second quarter of 2020, driven by the re-opening of many state and local
economies, customer buying patterns began to return to more historical levels.
Fluctuations in sales prices are primarily a result of changing copper and other
raw material prices and product price competition. The average cost per pound of
raw copper purchased decreased 11.4% in the second quarter of 2020 compared to
the second quarter of 2019 and was a driver of the decreased average sales price
of copper wire.
Cost of goods sold was $217.1 million, or 85.6% of net sales, in the second
quarter of 2020, compared to $291.0 million, or 86.4% of net sales, in the
second quarter of 2019. Gross profit decreased to $36.5 million, or 14.4% of net
sales, in the second quarter of 2020 from $45.9 million, or 13.6% of net sales,
in the second quarter of 2019.
Gross profit percentage for the second quarter of 2020 was 14.4% compared to
13.6% in the second quarter of 2019. The average selling price of wire per
copper pound sold decreased 9.5% in the second quarter of 2020 versus the second
quarter of 2019, while the average cost of copper per pound purchased decreased
11.4%. The percentage change on sales is on a higher nominal dollar amount than
on purchases and, therefore, spreads change on a nominal dollar basis.
Total raw materials cost decreased to 72.2% of net sales in the second quarter
of 2020, from 74.6% of net sales in the second quarter of 2019. Overhead costs
increased to 13.5% of net sales in the second quarter of 2020, from 11.8% of net
sales in the second quarter of 2019. 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 2020 were $13.5 million, or 5.3% of net sales, compared to $17.3 million, or
5.1% of net sales, in the second quarter of 2019. Commissions paid to
independent manufacturers' representatives are paid as a relatively stable
percentage of sales dollars and, therefore, exhibited little change in
percentage terms. Freight costs increased to 2.8% of net sales in the second
quarter of 2020 from 2.6% of net sales in the second quarter of 2019. General
and administrative ("G&A") expenses for the second quarter of 2020 were $7.3
million, or 2.9% of net sales, compared to $6.5 million, or 1.9% of net sales,
in the second quarter of 2019. The G&A increase was driven primarily by
increased stock compensation expense, driven primarily by an increase in our
stock price driving the mark to market accounting on stock appreciation rights.
The net stock compensation expense increased $1.4 million in the second quarter
of 2020 versus the second quarter of 2019.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
Net sales for the first six months of 2020 were $556.4 million compared to net
sales of $651.6 million for the first six months of 2019. This 14.6% decrease in
net sales is primarily the result of a 15.9% decrease in copper wire sales,
driven by a 9.2% decrease in copper wire unit volume shipped and a 7.4% decrease
in the average selling price of copper wire. 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 changing copper and other raw material prices
and product price competition. The average cost per pound of raw copper
purchased decreased 9.6% in the first six months of 2020 compared to the first
six months of 2019 and was the principal driver of the decreased average sales
price of copper wire.
Cost of goods sold decreased to $474.2 million in the first six months of 2020,
compared to $564.3 million in the first six months of 2019. Gross profit
decreased to $82.3 million, or 14.8% of net sales, in the first six months of
2020 versus $87.2 million, or 13.4% of net sales, in the first six months of
2019.
Gross profit percentage for the six months ended June 30, 2020 was 14.8%
compared to 13.4% during the same period in 2019. The average selling price of
wire per copper pound sold decreased 7.4% in the six months ended June 30, 2020
versus the six months ended June 30, 2019, while the average cost of copper per
pound purchased decreased 9.6%. 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 decreases in copper costs and a decrease in copper inventory
quantities on hand, aided somewhat by price and volume movements of other
materials in the first six months of 2020, LIFO adjustments were recorded,
decreasing cost of sales by $8.9 million. During the same period in 2019, LIFO
adjustments were recorded, increasing cost of sales by $0.5 million.
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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 2020 decreased to $28.8 million, or
5.2% of net sales, compared to $33.7 million, or 5.2% of net sales, in the same
period of 2019. Commissions paid to independent manufacturers' representatives
are paid as a relatively stable percentage of sales dollars, and therefore,
exhibited little change in percentage terms, decreasing $2.5 million in concert
with the decreased sales dollars. Freight costs for the first six months of 2020
were 2.7% of net sales, consistent with 2.7% of net sales for the first six
months of 2019. General and administrative expenses were $13.5 million, or 2.4%
of net sales, in the first half of 2020 compared to $15.1 million, or 2.3% of
net sales, in the first half of 2019. 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 $2.0 million
in the first six months of 2020 versus the first six months of 2019.
Liquidity 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 do not believe COVID-19 will materially impact our
liquidity, but we continue to assess the COVID-19 pandemic and its impact on our
business, including on our customer base and suppliers.
For more information on the Company's revolving credit facility, see Note 6 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 $60.3 million in the first six months
of 2020 compared to $27.9 million in the first six months of 2019. The following
changes in components of cash flow from operations were notable. The Company had
net income of $31.0 million in the first six months of 2020 compared to net
income of $31.2 million in the first six months of 2019. Accounts receivable
decreased $30.3 million in the first six months of 2020 compared to increasing
$20.6 million in the first six months of 2019, resulting in a positive change in
cash flow of $50.9 million in the first six months of 2020 versus the first six
months of 2019. Accounts receivable generally fluctuate 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 value decreased $1.8
million in the first six months of 2020 compared to decreasing $6.3 million in
the first six months of 2019 producing a negative swing in cash flow of $4.5
million in 2020 versus 2019. Trade accounts payable and accrued liabilities used
cash of $21.5 million in the first six months of 2020 versus providing $2.3
million in the first six months of 2019. In the first six months of 2020,
changes in current and deferred taxes provided cash of $9.4 million versus $1.1
million of cash used in the first six months of 2019. These changes in cash flow
were the primary drivers of the $32.4 million increase in cash provided by
operations in the first six months of 2020 compared to the first six months of
2019.
Cash used in investing activities increased to $21.8 million in the first six
months of 2020 from $21.2 million in the first six months of 2019 due to higher
capital expenditures on plant and equipment. Cash used in financing activities
in the first six months of 2020 consisted of $0.8 million of cash dividends
paid, $2.5 million of proceeds from exercised stock options, and $20.7 million
of purchases of treasury stock. These activities in cash flow used $19.0 million
cash in financing activities for the first six months of 2020 compared to $0.3
million used in the first six months of 2019. As of June 30, 2020, the balance
on the Company's revolving line of credit remained at zero. The Company's cash
balance was $250.4 million at June 30, 2020 versus $184.8 million at June 30,
2019.
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During the remainder of 2020, 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 construction of a new 720,000 square foot facility located
at the north end of our existing campus. This new facility will act as a service
center, modernizing our logistics to allow for increased throughput and provide
the bandwidth necessary to capture incremental sales volumes. This phase one of
our two-phase expansion plan will allow us to compete at a higher level in the
marketplace while further strengthening our industry-leading customer service
and order fill rates. We expect to complete construction in the second quarter
of 2021. The total capital expenditures for all of 2020 associated with these
projects are currently estimated to be between $85 million and $95 million. Our
strong balance sheet and ability to consistently generate high levels of
operating cash flow should provide ample allowance to fund planned capital
expenditures.
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, 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 Securities and
Exchange Commission (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, 2019, which
is hereby incorporated by reference.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes from the information provided in Item 7A,
"Quantitative and Qualitative Disclosures About Market Risk," of the Company's
Annual Report on Form 10-K for the year ended December 31, 2019.
Item 4. Controls and Procedures.
The Company maintains controls and procedures designed to ensure that
information required to be disclosed by it in the reports it files with or
submits to the SEC is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms and to ensure that
information required to be disclosed by the Company in such reports is
accumulated and communicated to the Company's management, including the Chief
Executive and Chief Financial Officers, as appropriate, to allow timely
decisions regarding required disclosure. Based on an evaluation of the Company's
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the
end of the period covered by this report conducted by the Company's management,
with the participation of the Chief Executive and Chief Financial Officers, the
Chief Executive and Chief Financial Officers concluded that the Company's
disclosure controls and procedures were effective to ensure that information
required to be disclosed by the Company in the reports it files with or submits
to the SEC is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms and to ensure that information
required to be disclosed by the Company in such reports is accumulated and
communicated to the Company's management, including the Chief Executive and
Chief Financial Officers, as appropriate, to allow timely decisions regarding
required disclosure.
There have been no changes in the Company's internal control over financial
reporting or in other factors that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting during the period covered by this report.
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