Encore Wire Corp. (WIRE, Financial) filed Quarterly Report for the period ended 2009-06-30.
Encore Wire Corporation is a low-cost manufacturer of copper electrical building wire and cable. The Company is a significant supplier ofboth residential wire for interior electrical wiring in homes apartments and manufactured housing as well as building wire for electrical distribution in commercial and industrial buildings. Encore Wire Corp. has a market cap of $520.9 million; its shares were traded at around $22.65 with a P/E ratio of 17.6 and P/S ratio of 0.5. The dividend yield of Encore Wire Corp. stocks is 0.4%. Encore Wire Corp. had an annual average earning growth of 16.9% over the past 10 years.
Selling expenses for the second quarter of 2009 were $8.0 million, or 5.0% of net sales, compared to $14.2 million, or 4.4% of net sales, in the second quarter of 2008. The dramatic drop in selling expense dollars was due to the fact that commissions paid to independent manufacturers representatives are relatively constant as a percentage of sales, and therefore, fell in relative proportion to the decreased sales dollars. This was offset somewhat on a percentage basis by freight costs which although down in dollar terms, still rose in percentage terms due to the decrease in sales. Commissions and freight are the only two components of selling expenses. General and administrative expenses remained flat at $2.7 million, or 1.7% of net sales, in the second quarter of 2009 compared to $2.7 million, or 0.8% of net sales, in the second quarter of 2008. The general and administrative costs are semi-fixed by nature and therefore do not fluctuate proportionately with sales, resulting in the percentage of sales increase in 2009 in concert with the lower sales prices per pound as discussed above. The provision for bad debts was $75,000 in the second quarter of both 2009 and 2008.
Selling expenses for the first six months of 2009 decreased to $15.6 million, or 5.1% of net sales, compared to $26.0 million, or 4.3% of net sales, in the same period of 2008. The dramatic drop in selling expense dollars was due to the fact that commissions paid to independent manufacturers representatives are relatively constant as a percentage of sales, and therefore, fell in relative proportion to the decreased sales dollars. Those commissions amounted to 2.7% and 2.6% in the first six months of 2009 and 2008, respectively. General and administrative expenses increased marginally to $5.6 million, or 1.9% of net sales, in the first six months of 2009 compared to $5.2 million, or 0.9% of net sales, in the same period of 2008. The general and administrative costs are semi-fixed by nature and therefore do not fluctuate proportionately with sales, resulting in the increased percentage of net sales in 2009. The provision for bad debts was $150,000 in the first six months of both 2009 and 2008.
The Company, through its agent bank, is also a party to a Note Purchase Agreement (the 2004 Note Purchase Agreement) with Hartford Life Insurance Company, Great-West Life & Annuity Insurance Company, London Life Insurance Company and London Life and Casualty Reinsurance Corporation (collectively, the 2004 Purchasers), whereby the Company issued and sold $45,000,000 of 5.27% Senior Notes, Series 2004-A, due August 27, 2011 (the Fixed Rate Senior Notes) to the 2004 Purchasers, the proceeds of which were used to repay a portion of the Companys outstanding indebtedness under its previous financing agreement. Through its agent bank, the Company was also a party to an interest rate swap agreement to convert the fixed rate on the Fixed Rate Senior Notes to a variable rate based on LIBOR plus a fixed adder for the seven-year duration of these notes. Commensurate with declining interest rates, the Company elected to terminate, prior to its maturity, this swap agreement on November 29, 2007. As a result of this swap termination, the Company received cash proceeds and realized a net settlement gain of $929,231 that was recorded as an adjustment to the carrying amount of the related debt in the consolidated balance sheet. This settlement gain is being amortized into earnings over the remaining term of the associated long term notes payable. During the six months ended June 30, 2009 and 2008, $121,121 and $116,356 was recognized as a reduction in interest expense in the accompanying consolidated statements of income. The unamortized balance remaining at June 30, 2009 was $553,873.
Cash provided by operations was $31.4 million in the first six months of 2009 compared to $37.6 million of cash provided by operations in the first six months of 2008. There are notable changes in components that deserve mention. Net income decreased $9.7 million in the first six months of 2009 versus the same period in 2008, reducing cash flow. Net income decreased due to the reasons highlighted in Results of Operations, above. Cash flow was increased significantly by a $14.4 million decrease in accounts receivable in the first six months of 2009 versus a use of cash of $23.2 million due to an increase in accounts receivable in the first six months of 2008, resulting in a $37.6 million increase in the first six months of 2009 versus the same period in 2008. This increase in cash flow in the first six months of 2009 was offset by a decrease in cash flow of $9.6 million due to a smaller reduction in inventory levels in the first six months of 2009 versus the same period in 2008. The Company reduced inventory dollars by reducing the units of inventory on hand in both years. The Company has made a concerted effort to manage inventory levels in the last two years in concert with lower sales volumes. Other decreases in cash flow between the first six months of 2008 and the same period in 2009 resulted from an $11.0 million dollar decrease in cash flow from the accounts payable and accrued liabilities category, which produced only $1.2 million in the first six months of 2009 and a $7.3 million reduction in the cash flow from current income taxes payable, due primarily to reduced earnings in the first six months of 2009.
Cash used in investing activities increased to $15.9 million in the first six months of 2009 from $9.1 million in the first six months of 2008. In both 2009 and 2008, the funds were used primarily for equipment purchases. Cash used in financing activities in the first six months of 2009 decreased to $799,000 from $2.8 million during the same period in 2008. Cash dividends of $920,000 and $927,000 were paid in the first six months of 2009 and 2008, respectively. However, in the first half of 2008, an additional $2.1 million was used to repurchase the Companys common stock. The Companys borrowings against its revolving line of credit remained at $0 throughout the first half of 2009, while the cash balance as of June 30, 2009, was $232.3 million.
Read the The complete ReportWIRE is in the portfolios of Third Avenue Management.
Encore Wire Corporation is a low-cost manufacturer of copper electrical building wire and cable. The Company is a significant supplier ofboth residential wire for interior electrical wiring in homes apartments and manufactured housing as well as building wire for electrical distribution in commercial and industrial buildings. Encore Wire Corp. has a market cap of $520.9 million; its shares were traded at around $22.65 with a P/E ratio of 17.6 and P/S ratio of 0.5. The dividend yield of Encore Wire Corp. stocks is 0.4%. Encore Wire Corp. had an annual average earning growth of 16.9% over the past 10 years.
Highlight of Business Operations:
Cost of goods sold decreased to $147.5 million, or 92.6% of net sales, in the second quarter of 2009, compared to $303.3 million, or 94.0% of net sales, in the second quarter of 2008. Gross profit decreased to $11.9 million, or 7.4% of net sales, in the second quarter of 2009 versus $19.5 million, or 6.0% of net sales, in the second quarter of 2008. The decreased gross profit dollars were primarily the result of the decreased wire prices which fell in concert with raw material costs in 2009 versus 2008. However, in comparing the second quarter of 2009 to the second quarter of 2008, the average sales price of wire that contained a pound of copper decreased more than the average price of copper purchased during the quarter. Margins were compressed as the spread between the price of wire sold and the cost of raw copper purchased decreased by 9.4%, in addition to the volume decrease discussed above. This compression occurred as a result of competitive industry pricing. The Company attempted to lead the industry with several price increases during the quarter, but met limited success, as the average price of wire increased less than the cost of raw copper increased, measured in dollars per pound of copper contained in the wire, as stated above.Selling expenses for the second quarter of 2009 were $8.0 million, or 5.0% of net sales, compared to $14.2 million, or 4.4% of net sales, in the second quarter of 2008. The dramatic drop in selling expense dollars was due to the fact that commissions paid to independent manufacturers representatives are relatively constant as a percentage of sales, and therefore, fell in relative proportion to the decreased sales dollars. This was offset somewhat on a percentage basis by freight costs which although down in dollar terms, still rose in percentage terms due to the decrease in sales. Commissions and freight are the only two components of selling expenses. General and administrative expenses remained flat at $2.7 million, or 1.7% of net sales, in the second quarter of 2009 compared to $2.7 million, or 0.8% of net sales, in the second quarter of 2008. The general and administrative costs are semi-fixed by nature and therefore do not fluctuate proportionately with sales, resulting in the percentage of sales increase in 2009 in concert with the lower sales prices per pound as discussed above. The provision for bad debts was $75,000 in the second quarter of both 2009 and 2008.
Selling expenses for the first six months of 2009 decreased to $15.6 million, or 5.1% of net sales, compared to $26.0 million, or 4.3% of net sales, in the same period of 2008. The dramatic drop in selling expense dollars was due to the fact that commissions paid to independent manufacturers representatives are relatively constant as a percentage of sales, and therefore, fell in relative proportion to the decreased sales dollars. Those commissions amounted to 2.7% and 2.6% in the first six months of 2009 and 2008, respectively. General and administrative expenses increased marginally to $5.6 million, or 1.9% of net sales, in the first six months of 2009 compared to $5.2 million, or 0.9% of net sales, in the same period of 2008. The general and administrative costs are semi-fixed by nature and therefore do not fluctuate proportionately with sales, resulting in the increased percentage of net sales in 2009. The provision for bad debts was $150,000 in the first six months of both 2009 and 2008.
The Company, through its agent bank, is also a party to a Note Purchase Agreement (the 2004 Note Purchase Agreement) with Hartford Life Insurance Company, Great-West Life & Annuity Insurance Company, London Life Insurance Company and London Life and Casualty Reinsurance Corporation (collectively, the 2004 Purchasers), whereby the Company issued and sold $45,000,000 of 5.27% Senior Notes, Series 2004-A, due August 27, 2011 (the Fixed Rate Senior Notes) to the 2004 Purchasers, the proceeds of which were used to repay a portion of the Companys outstanding indebtedness under its previous financing agreement. Through its agent bank, the Company was also a party to an interest rate swap agreement to convert the fixed rate on the Fixed Rate Senior Notes to a variable rate based on LIBOR plus a fixed adder for the seven-year duration of these notes. Commensurate with declining interest rates, the Company elected to terminate, prior to its maturity, this swap agreement on November 29, 2007. As a result of this swap termination, the Company received cash proceeds and realized a net settlement gain of $929,231 that was recorded as an adjustment to the carrying amount of the related debt in the consolidated balance sheet. This settlement gain is being amortized into earnings over the remaining term of the associated long term notes payable. During the six months ended June 30, 2009 and 2008, $121,121 and $116,356 was recognized as a reduction in interest expense in the accompanying consolidated statements of income. The unamortized balance remaining at June 30, 2009 was $553,873.
Cash provided by operations was $31.4 million in the first six months of 2009 compared to $37.6 million of cash provided by operations in the first six months of 2008. There are notable changes in components that deserve mention. Net income decreased $9.7 million in the first six months of 2009 versus the same period in 2008, reducing cash flow. Net income decreased due to the reasons highlighted in Results of Operations, above. Cash flow was increased significantly by a $14.4 million decrease in accounts receivable in the first six months of 2009 versus a use of cash of $23.2 million due to an increase in accounts receivable in the first six months of 2008, resulting in a $37.6 million increase in the first six months of 2009 versus the same period in 2008. This increase in cash flow in the first six months of 2009 was offset by a decrease in cash flow of $9.6 million due to a smaller reduction in inventory levels in the first six months of 2009 versus the same period in 2008. The Company reduced inventory dollars by reducing the units of inventory on hand in both years. The Company has made a concerted effort to manage inventory levels in the last two years in concert with lower sales volumes. Other decreases in cash flow between the first six months of 2008 and the same period in 2009 resulted from an $11.0 million dollar decrease in cash flow from the accounts payable and accrued liabilities category, which produced only $1.2 million in the first six months of 2009 and a $7.3 million reduction in the cash flow from current income taxes payable, due primarily to reduced earnings in the first six months of 2009.
Cash used in investing activities increased to $15.9 million in the first six months of 2009 from $9.1 million in the first six months of 2008. In both 2009 and 2008, the funds were used primarily for equipment purchases. Cash used in financing activities in the first six months of 2009 decreased to $799,000 from $2.8 million during the same period in 2008. Cash dividends of $920,000 and $927,000 were paid in the first six months of 2009 and 2008, respectively. However, in the first half of 2008, an additional $2.1 million was used to repurchase the Companys common stock. The Companys borrowings against its revolving line of credit remained at $0 throughout the first half of 2009, while the cash balance as of June 30, 2009, was $232.3 million.
Read the The complete ReportWIRE is in the portfolios of Third Avenue Management.
