ENCORE WIRE CORPORATION 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 or re-emergence of the COVID-19 outbreak and its 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. Copper accounted for approximately 69.6%, 69.9%, and 73.0% of the Company's cost of goods sold during fiscal 2020, 2019 and 2018, 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, theSEC 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 inthe 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 2021 July August September Quarter Ended Nine Months Ended 2021 2021 2021 September 30, 2021 September 30, 2021 High$ 4.59 $ 4.43 $ 4.45 $ 4.59 $ 4.78 Low 4.21 4.04 4.09 4.04 3.54 Average 4.35 4.29 4.27 4.30 4.20
COMEX COPPER CLOSING PRICE 2020
July August September Quarter Ended Nine Months Ended
2020 2020 2020 September 30, 2020 September 30, 2020
High $ 2.94 $ 3.04 $ 3.11 $ 3.11 $ 3.11
Low 2.72 2.79 2.96 2.72 2.12
Average 2.87 2.92 3.02 2.93 2.65
The following discussion and analysis relate to factors that have affected the
operating results of the Company for the quarters and nine months ended
September 30, 2021 and 2020. 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, 2020 .
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Results of Operations
Quarter Ended September 30, 2021 Compared to Quarter Ended September 30, 2020
Net sales were $716.3 million in the third quarter of 2021 compared to $339.7
million in the third quarter of 2020. The increase in net sales dollars is the
result of a 95.5% increase in the average selling price of copper wire and a
7.9% 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 selling prices are primarily a result of changing prices for copper and other
raw materials and product price competition. The average cost per pound of raw
copper purchased increased 48.0% in the third quarter of 2021 compared to the
third quarter of 2020 and was a driver of the increased average selling price of
copper wire.
Cost of goods sold was $445.6 million , or 62.2% of net sales, in the third
quarter of 2021, compared to $286.2 million , or 84.3% of net sales, in the third
quarter of 2020. Gross profit increased to $270.8 million , or 37.8% of net
sales, in the third quarter of 2021 from $53.5 million , or 15.7% of net sales,
in the third quarter of 2020.
The increase in gross profit margin was the result of two factors. Copper unit
volumes increased 7.9%, while the spread between the average price paid for a
pound of raw copper and the average selling price for a pound of copper
contained in finished wire increased 181.1% in the third quarter of 2021 when
compared to the third quarter of 2020. The spread increased as a result of the
average selling price per pound of copper sold in the third quarter of 2021
increasing 95.5% while the per pound cost of raw copper purchased increased
48.0% in the same period compared to the third quarter of 2020. 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 as a percentage of sales decreased to 55.2% in the
third quarter of 2021, from 72.2% in the third quarter of 2020. Overhead costs
decreased to 7.0% of net sales in the third quarter of 2021, from 12.1% of net
sales in the third quarter of 2020. 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 third quarter
of 2021 were $29.9 million , or 4.2% of net sales, compared to $19.2 million , or
5.7% of net sales, in the third quarter of 2020. 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 decreased to 1.7% of net sales in the third quarter of 2021 from
3.2% of net sales in the third quarter of 2020. General and administrative
("G&A") expenses for the third quarter of 2021 were $14.0 million , or 1.9% of
net sales, compared to $7.1 million , or 2.1% of net sales, in the third quarter
of 2020. The G&A expense increase was driven by increased bonus and stock
compensation expense as our stock price increased from $75.79 on June 30, 2021
to $94.83 on September 30, 2021 .
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30,
2020
Net sales for the first nine months of 2021 were $1.905 billion compared to net
sales of $896.1 million for the first nine months of 2020. This 112.6% increase
in net sales is primarily the result of a 116.5% increase in copper wire sales,
driven by a 91.0% increase in the average selling price of copper wire and a
13.3% 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 changing prices for copper and other
raw materials and product price competition. The average cost per pound of raw
copper purchased increased 55.6% in the first nine months of 2021 compared to
the first nine months of 2020 and was the principal driver of the increased
average selling price of copper wire.
Cost of goods sold increased to $1.272 billion in the first nine months of 2021,
compared to $760.4 million in the first nine months of 2020. Gross profit
increased to $632.6 million , or 33.2% of net sales, in the first nine months of
2021 versus $135.7 million , or 15.1% of net sales, in the first nine months of
2020.
The increase in gross profit margin was the result of two factors. Copper unit
volumes increased 13.3%, while the spread between the average price paid for a
pound of raw copper and the average selling price for a pound of copper
contained in finished wire increased 155.1% in the first nine months of 2021
when compared to the first nine months of 2020. The spread increased as a result
of the average selling price per pound of copper sold in the first nine months
of 2021 increasing 91.0% while the per pound cost of raw copper purchased
increased 55.6% in the same period compared to the first nine months of 2020.
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, and aided somewhat by price and volume movements of other
materials in the first nine months of 2021, LIFO adjustments were recorded,
increasing cost of
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sales by $46.6 million . During the same period in 2020, LIFO adjustments were
recorded, increasing cost of sales by $5.6 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 nine months of 2021 increased to $79.4 million ,
or 4.2% of net sales, compared to $48.0 million , or 5.4% of net sales, in the
same period of 2020. 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 $23.3 million
in concert with the increased sales dollars. Freight costs for the first nine
months of 2021 were 1.8% of net sales, compared to 2.9% of net sales for the
first nine months of 2020. General and administrative expenses were $35.3
million , or 1.9% of net sales, in the first nine months of 2021 compared to
$20.7 million , or 2.3% of net sales, in the first nine months of 2020. The G&A
expense increase was driven by increased bonus expense and stock compensation
expense driven by the mark to market accounting on stock appreciation rights.
The net stock compensation expense increased $10.2 million in the first nine
months of 2021 versus the first nine months of 2020.
The favorable market conditions in the third quarter and year-to-date periods
ended September 30, 2021 were partially driven by rising raw material prices
coupled with demand recovery for our products. In addition, production
challenges across the sector, including inconsistent access to raw materials,
disruptions in the manufacturing and distribution network, and access to skilled
labor, created unique market conditions in the first nine months of 2021.
Although we were largely able to avoid these factors, we do expect these
disruptions will begin to abate during the remainder of 2021.
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 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 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 $230.9 million in the first nine
months of 2021 compared to cash provided of $54.5 million in the first nine
months of 2020. The following changes in components of cash flow from operations
were notable. The Company had net income of $399.8 million in the first nine
months of 2021 compared to net income of $52.0 million in the first nine months
of 2020. Accounts receivable increased $261.9 million in the first nine months
of 2021 compared to increasing $34.8 million in the first nine months of 2020,
resulting in a negative impact to cash flow of $227.1 million in the first nine
months of 2021 versus the first nine months of 2020. 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, net decreased $1.6 million in the first nine months of
2021 compared to decreasing $2.5 million in the first nine months of 2020
producing a negative impact to cash flow of $0.9 million in 2021 versus 2020.
Trade accounts payable and accrued liabilities favorably impacted cash by $50.7
million in the first nine months of 2021 versus favorably impacting cash by
$11.8 million in the first nine months of 2020. In the first nine months of
2021, changes in current and deferred taxes favorably impacted cash by $16.5
million versus $8.1 million of favorable impact in the first nine months of
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2020. These changes in cash flow were the primary drivers of the $176.4 million
increase in positive cash flow provided by operations in the first nine months
of 2021 compared to the first nine months of 2020.
Cash used in investing activities increased to $85.1 million in the first nine
months of 2021 from $49.5 million in the first nine months of 2020 due to higher
capital expenditures on plant and equipment, among other factors.
Cash used in financing activities in the first nine months of 2021 consisted of
$32.7 million paid to purchase our own stock, $1.2 million of cash dividends
paid, $0.4 million of proceeds from exercised stock options, and $0.6 million of
financing fees for the new credit agreement. These activities in cash flow used
$34.1 million cash in financing activities for the first nine months of 2021
compared to $18.9 million used in the first nine months of 2020. As of
September 30, 2021 , the balance on the Company's revolving line of credit
remained at zero.
The Company's cash balance was $294.9 million at September 30, 2021 versus
$217.1 million at September 30, 2020 .
During the remainder of 2021, 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 new service
center opened in mid-May and is fully operational today. Phase two, which is
focused on repurposing our now vacated distribution center to expand
manufacturing capacity and extend our market reach, is on schedule for an early
2022 opening. As announced in July of 2021, current market conditions have
afforded us the opportunity to accelerate our capital expenditure plans and
incrementally invest across our campus. We continue to believe these investments
will broaden our position as a low-cost manufacturer in the sector and further
increase manufacturing capacity to accelerate growth. The incremental spending
in 2021 through 2023 will expand vertical integration in our manufacturing
processes to reduce costs as well as modernize select wire manufacturing
facilities to increase capacity and efficiency. Capital expenditures are now
expected to range from $115 - $125 million in 2021, $150 - $170 million in 2022,
and $120 - $140 million in 2023. We expect 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 accounting principles generally accepted in the U.S.
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 September 30, 2021 , 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, 2020 .
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 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, 2020 , which is hereby incorporated by reference.
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