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, 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
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COMEX COPPER CLOSING PRICE 2022
January February March 2022 2022 2022 Quarter Ended March 31, 2022 High$ 4.58 $ 4.66 $ 4.93 $ 4.93 Low 4.30 4.43 4.50 4.30 Average 4.43 4.50 4.68 4.55
COMEX COPPER CLOSING PRICE 2021
January February March 2021 2021 2021 Quarter Ended March 31, 2021 High$ 3.70 $ 4.30 $ 4.23 $ 4.30 Low 3.55 3.54 3.98 3.54 Average 3.62 3.86 4.09 3.87
The following discussion and analysis relate to factors that have affected the
operating results of the Company for the quarters and three months ended
Results of Operations
Quarter Ended
Net sales were
Cost of goods sold was
The increase in gross profit margin was the result of an 8.6% increase in copper unit volume and an 86.1% increase in 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 in the first quarter of 2022 when compared to the first quarter of 2021. The spread increased as a result of the average selling price per pound of copper sold in the first quarter of 2022 increasing 43.3% while the per pound cost of raw copper purchased increased 19.3% in the same period compared to the first quarter of 2021. 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 59.3% in the first quarter of 2022, from 71.6% in the first quarter of 2021. Overhead costs decreased to 7.0% of net sales in the first quarter of 2022, from 9.4% of net sales in the first 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 first quarter
of 2022 were
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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 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
Cash used in investing activities increased to
Cash used in financing activities in the first three months of 2022 consisted of
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 will be completed in the second quarter of 2022. The
incremental investments announced in
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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
As of
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
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