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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q x        QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period endedSeptember 30, 2004 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _________ Commission File Number: 0-20278 ENCORE WIRE CORPORATION (Exact name of registrant as specified in its charter)
 Delaware
(State of Incorporation)
    
    75-2274963
(I.R.S. employer identification number)1410 Millwood Road
McKinney, Texas
(Address of principal executive offices)
    
    75069
(Zip code)
 Registrants telephone number, including area code: (972) 562-9473 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such Reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes x No Number of shares of Common Stock outstanding as of October 31, 2004: 23,104,164 Page 1 of 21 Sequentially Numbered Pages
Index to Exhibits on Page 20




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FORM 10-Q ENCORE WIRE CORPORATION FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004 Page No.PART I. FINANCIAL INFORMATIONITEM 1. Consolidated Financial StatementsConsolidated Balance Sheets September 30, 2004 (Unaudited) and December 31, 2003
    
    
    3Consolidated Statements of Income (Unaudited) Quarters and Nine Months ended September 30, 2004 and
September 30, 2003
    
    
    5Consolidated Statements of Cash Flows (Unaudited) Nine Months ended September 30, 2004 and September 30, 2003
    
    
    6Notes to Consolidated Financial Statements
    
    
    7ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    17ITEM 4. Controls and Procedures
    
    
    17PART II. OTHER INFORMATIONITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    18ITEM 6. Exhibits
    
    
    18Signatures
    
    
    19Credit AgreementNote Purchase AgreementCertification by Chairman & CEO Pursuant to Section 302Certification by Vice President, CFO, Treasurer & Secretary Pursuant to Section 302Certification by Chairman & CEO Pursuant to Section 906Certification by Vice President, CFO, Treasurer & Secretary Pursuant to Section 906
  2




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FORM 10-Q 
 PART I. FINANCIAL INFORMATION 
 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS ENCORE WIRE CORPORATION 
 CONSOLIDATED BALANCE SHEETS September 30,
    
    December 31,2004
    
    2003In Thousands of Dollars
    
    (Unaudited)
    
    (See Note)ASSETSCurrent Assets:Cash
    
    $
    4,196
    
    
    $
    391Accounts receivable (net of allowance
of $532 and $490)
    
    
    117,076
    
    
    
    81,430Inventories (Note 3)
    
    
    51,746
    
    
    
    59,344Prepaid expenses and other assets
    
    
    7,925
    
    
    
    5,112Current taxes receivable
    
    
    4,613
    
    
    
    Total current assets
    
    
    185,556
    
    
    
    146,277Property, plant and equipment-on the basis of cost:Land
    
    
    5,894
    
    
    
    5,858Construction in progress
    
    
    6,325
    
    
    
    2,396Buildings and improvements
    
    
    31,120
    
    
    
    30,855Machinery and equipment
    
    
    115,747
    
    
    
    104,849Furniture and fixtures
    
    
    2,992
    
    
    
    2,942Total property, plant, and equipment
    
    
    162,078
    
    
    
    146,900Accumulated depreciation and amortization
    
    
    75,672
    
    
    
    67,97686,406
    
    
    
    78,924Other assets
    
    
    126
    
    
    
    98Total assets
    
    $
    272,088
    
    
    $
    225,299
  Note:
    The consolidated balance sheet at December 31, 2003 as
presented, is derived from the audited consolidated financial statements at
that date. See accompanying notes. 3




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FORM 10-Q ENCORE WIRE CORPORATION CONSOLIDATED BALANCE SHEETS (continued) September 30,
    
    December 31,2004
    
    2003In Thousands of Dollars, Except Share Data
    
    (Unaudited)
    
    (See Notes)LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Trade accounts payable
    
    $
    26,343
    
    
    $
    24,430Accrued liabilities
    
    
    11,231
    
    
    
    10,432Current income taxes payable
    
    
    
    
    
    
    5,158Current deferred income taxes
    
    
    1,165
    
    
    
    Total current liabilities
    
    
    38,739
    
    
    
    40,020Non-current deferred income taxes
    
    
    12,157
    
    
    
    10,078Long-term notes payable
    
    
    69,000
    
    
    
    53,425Stockholders equity:Common stock, $.01 par value:Authorized 40,000,000 shares; issued
25,863,114 and 25,450,125 shares;
outstanding 23,104,164 and 22,691,175
shares
    
    
    259
    
    
    
    255Additional paid-in capital
    
    
    36,865
    
    
    
    34,108Treasury stock 2,758,950 and 2,758,950 shares
at cost
    
    
    (15,275
    )
    
    
    (15,275
    )Accumulated other comprehensive income (loss)
    
    
    239
    
    
    
    (492
    )Retained earnings
    
    
    130,104
    
    
    
    103,180Total stockholders equity
    
    
    152,192
    
    
    
    121,776Total liabilities and stockholders equity
    
    $
    272,088
    
    
    $
    225,299
  Note:
    The consolidated balance sheet at December 31, 2003, as
presented, is derived from the audited consolidated financial statements at
that date.  Note:
    All share and per share data in this Quarterly Report have
been restated to reflect the effect of the Companys 3-for-2 stock split which
was effective in August 2004. See accompanying notes. 4




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FORM 10-Q ENCORE WIRE CORPORATION 
 CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) Quarter Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,In Thousands of Dollars, Except Per Share Data
    
    2004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    158,629
    
    
    $
    113,877
    
    
    $
    455,719
    
    
    $
    261,614Cost of goods sold
    
    
    136,859
    
    
    
    96,255
    
    
    
    379,991
    
    
    
    226,534Gross profit
    
    
    21,770
    
    
    
    17,622
    
    
    
    75,728
    
    
    
    35,080Selling, general, and
administrative expenses
    
    
    11,124
    
    
    
    8,935
    
    
    
    31,260
    
    
    
    21,871Operating income (loss)
    
    
    10,646
    
    
    
    8,687
    
    
    
    44,468
    
    
    
    13,209Net interest & other expenses
    
    
    661
    
    
    
    527
    
    
    
    2,055
    
    
    
    1,712Income (loss) before income taxes
    
    
    9,985
    
    
    
    8,160
    
    
    
    42,413
    
    
    
    11,497Provision (benefit) for income taxes
    
    
    3,594
    
    
    
    2,938
    
    
    
    15,489
    
    
    
    4,139Net income (loss)
    
    $
    6,391
    
    
    $
    5,222
    
    
    $
    26,924
    
    
    $
    7,358Net income (loss) per common and
common equivalent shares  basic
    
    $
    .28
    
    
    $
    .23
    
    
    $
    1.17
    
    
    $
    .32Weighted average common and common
equivalent shares  basic
    
    
    23,104
    
    
    
    22,681
    
    
    
    22,989
    
    
    
    22,679Net income (loss) per common and
common equivalent shares - diluted
    
    $
    .27
    
    
    $
    .23
    
    
    $
    1.14
    
    
    $
    .32Weighted average common and common
equivalent shares - diluted
    
    
    23,478
    
    
    
    22,958
    
    
    
    23,545
    
    
    
    22,807
  Note:
    All share and per share data in this Quarterly Report have been
restated to reflect the effect of the Companys 3-for-2 stock split which was
effective in August 2004. See accompanying notes. 5




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FORM 10-Q ENCORE WIRE CORPORATION 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) Nine Months EndedSeptember 30,In Thousands of Dollars
    
    2004
    
    2003OPERATING ACTIVITIESNet income (loss)
    
    $
    26,924
    
    
    $
    7,358Adjustments to reconcile net income to cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    8,619
    
    
    
    9,070Provision for bad debts
    
    
    255
    
    
    
    135Changes in operating assets and liabilities:Accounts receivable
    
    
    (35,902
    )
    
    
    (34,589
    )Inventory
    
    
    7,598
    
    
    
    (5,242
    )Accounts payable and accrued liabilities
    
    
    3,444
    
    
    
    30,526Other assets and liabilities
    
    
    (7,507
    )
    
    
    (3,298
    )Current income taxes receivable/payable
    
    
    (1,914
    )
    
    
    3,771NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
    
    
    1,517
    
    
    
    7,731INVESTING ACTIVITIESPurchases of property, plant and equipment
    
    
    (18,613
    )
    
    
    (3,613
    )Change in long-term investments
    
    
    (38
    )
    
    
    81Proceeds from sale of equipment
    
    
    2,603
    
    
    
    117NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
    
    
    (16,048
    )
    
    
    (3,415
    )FINANCING ACTIVITIESBorrowings (repayments) under notes payable
    
    
    15,575
    
    
    
    (4,205
    )Proceeds from exercise of stock options
    
    
    2,761
    
    
    
    19Purchase of treasury stock
    
    
    
    
    
    
    NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
    
    
    18,336
    
    
    
    (4,186
    )Net increase (decrease) in cash
    
    
    3,805
    
    
    
    130Cash at beginning of period
    
    
    391
    
    
    
    160Cash at end of period
    
    $
    4,196
    
    
    $
    290
 See accompanying notes. 6




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FORM 10-Q ENCORE WIRE CORPORATION 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) NOTE 1  BASIS OF PRESENTATION The unaudited consolidated financial statements of Encore Wire Corporation (the Company) have been
prepared in accordance with U.S. generally accepted accounting principles for
interim information and the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by U.S. generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments considered necessary for a fair
presentation, have been included. All share and per share data in
this Quarterly Report have been restated to reflect the effect of the
Companys 3-for-2 stock split which was effective in
August 2004. Results of operations for interim periods
presented do not necessarily indicate the results that may be expected for the
entire year. These financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto included in the
Companys Annual Report on Form 10-K for the year ended December 31, 2003. NOTE 2  STOCK BASED EMPLOYEE COMPENSATION The Company has a stock option plan for employees that provides for the granting of stock options. The Company
accounts for stock-based compensation utilizing the intrinsic value method in
accordance with the provisions of Accounting Principles Board Opinion No. 25
(APB 25), Accounting for Stock Issued to Employees and related
interpretations. Accordingly, no compensation expense is recognized for fixed
option plans because the exercise prices of employee stock options equal or
exceed the market prices of the underlying stock on the dates of grant. 7




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FORM 10-Q The following table represents the effect on net income (loss) and
earnings per share if the Company had applied the fair value based method and
recognition provisions of Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation, to stock-based Employee
compensation: ($s in 000s) Quarter Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,In Thousands of Dollars, Except Per Share Data
    
    2004
    
    2003
    
    2004
    
    2003Net income (loss), as reported
    
    $
    6,391
    
    
    $
    5,222
    
    
    $
    26,924
    
    
    $
    7,358Add: Stock-based employee
compensation expense included in
reported income, net of related
tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deduct: Total stock-based
employee compensation expense
determined under fair value based
methods for all awards net of
related tax effects
    
    
    95
    
    
    
    95
    
    
    
    282
    
    
    
    296Pro forma net income (loss)
    
    $
    6,296
    
    
    $
    5,127
    
    
    $
    26,642
    
    
    $
    7,062Net income (loss) per shareBasic, as reported
    
    $
    0.28
    
    
    $
    0.23
    
    
    $
    1.17
    
    
    $
    0.32Basic, pro forma
    
    $
    0.27
    
    
    $
    0.23
    
    
    $
    1.16
    
    
    $
    0.31Diluted, as reported
    
    $
    0.27
    
    
    $
    0.23
    
    
    $
    1.14
    
    
    $
    0.32Diluted, pro forma
    
    $
    0.27
    
    
    $
    0.22
    
    
    $
    1.13
    
    
    $
    0.31
 As required, the pro forma disclosures above include options granted since
January 1, 1995. Consequently, the effects of applying SFAS 123 for providing
pro forma disclosures may not be representative of the effects on reported net
income for future years until all options outstanding are included in the pro
forma disclosures. For purposes of pro forma disclosures, the estimated fair
value of stock-based compensation plans and other options is amortized to
expense primarily over the vesting period. 8




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FORM 10-Q NOTE 3  INVENTORIES Inventories are stated at the lower of cost, determined by the last-in, first-out (LIFO) method, or market. Inventories (in thousands) consisted of the following: September 30,
    
    December 31,2004
    
    2003Raw materials
    
    $
    9,330
    
    
    $
    12,976Work-in-process
    
    
    8,234
    
    
    
    5,490Finished goods
    
    
    52,322
    
    
    
    43,50769,886
    
    
    
    61,973Adjust to LIFO cost
    
    
    (18,140
    )
    
    
    (2,629
    )51,746
    
    
    
    59,344Lower of Cost or Market Adjustment
    
    
    
    
    
    
    $
    51,746
    
    
    $
    59,344
 An actual valuation of inventory under the LIFO method can be made only at
the end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations must necessarily be based on
managements estimates of expected year-end inventory levels and costs.
Because these are subject to many forces beyond managements control, interim
results are subject to the final year-end LIFO inventory valuation. During the
third quarter of 2004, the Company liquidated the LIFO inventory layer
established in 2003 and a portion of the layer established in 2002. Under
LIFO, these prior year layers were liquidated at historical costs that were
substantially less than current cost. The net effect of these prior year
inventory layer liquidations was to reduce cost of sales by $3.6 million in the
quarter, which resulted in a $2.3 million increase in net income after tax. NOTE 4  NET INCOME PER SHARE Net income (loss) per common and common
equivalent share is computed using the weighted average number of shares of
common stock and common stock equivalents outstanding during each period. If
dilutive, the effect of stock options, treated as common stock equivalents, is
calculated using the treasury stock method. 9




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FORM 10-Q The following table sets forth the computation of basic and diluted net
income per share: Quarter Ended
    
    Quarter Ended9/30/04
    
    9/30/03Numerator:Net income
    
    $
    6,390,548
    
    
    $
    5,222,122Denominator:Denominator for basic
earnings per share 
weighted average
shares
    
    
    23,104,164
    
    
    
    22,680,837Effect of dilutive securities:Employee stock options
    
    
    374,219
    
    
    
    277,410Denominator for diluted earnings per share
 weighted average shares
    
    
    23,478,383
    
    
    
    22,958,247
 The following table sets forth the computation of basic and diluted earnings per share: Nine Months
    
    Nine MonthsEnded
    
    Ended9/30/04
    
    9/30/03Numerator:Net income
    
    $
    26,923,819
    
    
    $
    7,358,378Denominator:Denominator for basic earnings per share  weighted average
shares
    
    
    22,988,913
    
    
    
    22,679,352Effect of dilutive securities:Employee stock options
    
    
    556,306
    
    
    
    127,929Denominator for diluted earnings per share  weighted average shares
    
    
    23,545,219
    
    
    
    22,807,281
 10




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FORM 10-Q NOTE 5  LONG TERM NOTE PAYABLE Effective August 27, 2004, the Company through its indirectly wholly-owned subsidiary, Encore Wire Limited, a Texas
Limited partnership (Encore Wire Limited), refinanced its unsecured loan
facility with two banks (the Financing Agreement) and also arranged for a
private placement of debt (the Note Purchase Agreement). The Company is the
guarantor of the indebtedness. Obligations under the Financing Agreement and
the Note Purchase Agreement are the only contractual obligations or commercial
borrowing commitments of the Company. The term of the Financing Agreement
extends through August 27, 2009. The Financing Agreement provides for maximum
borrowings of the lesser of $85 million or the amount of eligible accounts
receivable plus the amount of eligible finished goods and raw materials, less
any reserves established by the banks. The calculated maximum borrowing amount
available at September 30, 2004, as computed under the Financing Agreement, was
$85 million. The Financing Agreement is with two banks, Bank of America, N.A.,
as Agent, and Wells Fargo Bank, National Association, and replaces the previous
financing agreement that was effective August 31, 1999 and had been extended by
amendments through May 31, 2007 with a total credit line of $125 million. Concurrent with the Financing Agreement, Encore Wire Limited and the Company,
through its agent bank, entered into the 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 referred to as the Purchasers), whereby Encore Wire Limited
issued and sold $45 million of 5.27% Senior Notes, Series 2004-A, due August
27, 2011 (the Senior Notes) to the Purchasers, the proceeds of which were
used to repay a portion of the Companys outstanding indebtedness under the
previous financing agreement. Through its agent bank, the Company then entered
into an interest rate swap agreement to convert the fixed rate on the Senior
Notes to a variable rate based on LIBOR plus a fixed adder for the seven year
duration of these notes. The Financing Agreement and the Senior Notes are
unsecured and contain customary covenants and events of default. The Company
was in compliance with these covenants, as of September 30, 2004. Under the
Financing Agreement, the Company is allowed to pay cash dividends. At
September 30, 2004, the total balance outstanding under the Financing Agreement
and the Senior Notes was $69.0 million. Amounts outstanding under the
Financing Agreement are payable on August 27, 2009, with interest payments due
quarterly. Interest payments on the Senior Notes are due semi-annually. In December 2001, the Company entered into an interest rate swap agreement on
$24.0 million of its variable rate debt in order to hedge against an increase
in variable interest rates. The terms of the agreement fix the interest rate
on $24.0 million of the Companys variable rate, long-term note payable to 4.6%
per annum plus a variable adder that is based on certain financial ratios
contained in the loan covenants. This three-year agreement expires on December
20, 2004. For the nine months ended September 30, 2004, the Company recorded
an unrealized gain of $731,032, resulting in a net unrealized gain of $238,578
recorded in accumulated other comprehensive income 11




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FORM 10-Q (loss) as of September 30, 2004 in the equity section of the balance sheet to
account for the net effect of the two interest rate swaps. NOTE 6  STOCK REPURCHASE AUTHORIZATION On November 6, 2001, the Board of Directors of the
Company approved a stock repurchase program covering the purchase of up to
450,000 shares of its common stock dependent upon market conditions. Common
stock purchases under this program were authorized through December 31, 2002 on
the open market or through privately negotiated transactions at prices
determined by the Chairman of the Board or the President of the Company. As of
December 31, 2002, 225,300 shares had been purchased under this authorization.
Early in 2003, the Board of Directors extended this program through December
31, 2003 for the remaining 224,700 shares. There were no repurchases of stock
in 2003. In February 2004, the Board of Directors extended this program
through December 31, 2004 for the remaining 224,700 shares. There were no
repurchases of stock during the first three quarters of 2004. NOTE 7  CONTINGENCIES The Company is a party to litigation and claims that arise out
of the ordinary business of the Company. While the results of these matters
cannot be predicted with certainty, the Company does not believe the final
outcome of such litigation and claims will have a material adverse effect on
the financial condition, the results of operation or the cash flows of the
Company. The Company also believes that it has adequate insurance to cover any
damages that may ultimately be awarded. 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Company is a low-cost manufacturer of copper electrical building
wire and cable. The Company is a significant supplier of residential wire for
interior wiring in homes, apartments and manufactured housing and commercial
wire for commercial and industrial buildings. The Companys operating results in any given time 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 margins and the efficiency with which the
Companys plant operates 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 is the principal raw material
used by the Company in manufacturing its products. Copper accounted for
approximately 67.1%, 63.9% and 66.6% of the Companys cost of goods sold during
fiscal 2003, 2002 and 2001, respectively. The price of copper fluctuates,
depending on general economic conditions and in relation to supply and demand
and other factors, which has caused significant variations in the cost of
copper purchased by the Company. The Company cannot predict copper prices in
the future or the effect of fluctuations in the cost of copper on the Companys
future operating results. 12




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FORM 10-Q The following discussion and analysis relates to factors that have affected the
operating results of the Company for the quarterly and nine-month periods ended
September 30, 2004 and 2003. 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, 2003. Results of Operations Quarter Ended September 30, 2004 Compared to Quarter Ended September 30, 2003 Net sales for the third quarter of 2004 amounted to $158.6 million compared
with net sales of $113.9 million for the third quarter of 2003. This 39%
dollar increase was primarily the result of a 38% increase in the average price
of wire sold. The average cost per pound of raw copper purchased increased in
the third quarter of 2004 compared to the third quarter of 2003, and was the
principal reason the average sales price for wire increased. Fluctuations in
sales prices are primarily a result of changing copper raw material prices and
product price competition. Cost of goods sold increased to $136.9 million, or
86.3% of net sales, in the third quarter of 2004, compared to $96.3 million, or
84.5% of net sales, in the third quarter of 2003. Gross profit increased to
$21.8 million, or 13.7% of net sales, in the third quarter of 2004 versus $17.6
million, or 15.5% of net sales, in the third quarter of 2003. The increased
gross profit dollar increase was primarily the result of the increased prices
in 2004 versus 2003 while gross margin percentages were negatively impacted by
price competition. Inventories are stated at the lower of cost, using the
last-in, first-out (LIFO) method, or market. The Company maintains only one
inventory pool for LIFO purposes as all inventories held by the Company
generally relate to the Companys only business segment, the manufacture and
sale of copper building wire products. As permitted by U.S. generally accepted
accounting principles, the Company maintains its inventory costs and cost of
goods sold on a first-in, first-out (FIFO) basis and makes a quarterly
adjustment to adjust total inventory and cost of goods sold from FIFO to LIFO.
The Company applies the lower of cost or market (LCM) test by comparing the
LIFO cost of its raw materials, work-in-process and finished goods inventories
to estimated market values, which are based primarily upon the most recent
quoted market price of copper, in pound quantities, as of the end of each
reporting period. Additionally, future reductions in the quantity of inventory
on hand could cause copper that is carried in inventory at costs different from
the cost of copper in the period in which the reduction occurs to be included
in costs of goods sold for that period. Despite increasing copper costs during the third quarter 2004, a LIFO adjustment was recorded decreasing cost of sales
by $.8 million. During the quarter, the Company liquidated the LIFO inventory
layer established in 2003 and a portion of the layer established in 2002.
Under LIFO, these prior year layers were liquidated at historical costs that
were substantially less than current cost. The net effect of these prior year
inventory layer liquidations was to reduce cost of sales by $3.6 million in the
quarter, which resulted in a $2.3 million increase in net income after tax.
Based on the current copper prices, there is no LCM adjustment necessary.
Future reductions in the price of copper could require the Company to record a
LCM adjustment against the related inventory balance, which would result in a
negative impact on net income. 13




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FORM 10-Q Selling expenses for the third quarter of 2004 were $9.3 million, or 5.8%
of net sales, compared to $7.1 million, or 6.3% of net sales, in the third
quarter of 2003. The percentage decrease was due to the increase in selling
prices per pound of wire that reduced the freight costs as a percentage of net
sales. General and administrative expenses increased to $1.8 million, or 1.2%
of net sales, in the third quarter of 2004 compared to $1.7 million, or 1.5% of
net sales, in the third quarter of 2003. The General and Administrative costs
are semi-fixed by nature and therefore did not increase proportionately with
sales and dropped as a percentage of sales. The provision for bad debts was
$45,000 in the third quarter of 2004 versus $45,000 in the third quarter of
2003. Net interest expense was $661,000 in the third quarter of 2004 compared
to $527,000 in the third quarter of 2003. The increase was due to slightly
higher average debt balances and interest rates during the third quarter of
2004 than in the comparable period during 2003. As a result of the foregoing factors, the Companys net income increased to $6.4 million in the third
quarter of 2004 from $5.2 million in the third quarter of 2003. Nine Months Ended September 30, 2004 compared to Nine Months Ended September 30, 2003 Net sales for the first nine months of 2004 amounted to $455.7 million compared
with net sales of $261.6 million for the first nine months of 2003. This
dollar increase was the result of a 18% increase in the volume of product
shipped, coupled with a 49% increase in the average price of wire sold.
Fluctuations in sales prices are primarily a result of changing copper raw
material prices and product price competition. Cost of goods sold increased to $380.0 million in the first nine months of 2004, compared to $226.5 million in
the first nine months of 2003. Gross profit increased to $75.7 million, or
16.6% of net sales, in the first nine months of 2004 versus $35.1 million, or
13.4% of net sales, in the first nine months of 2003. The increased gross
profit and gross margin percentages were primarily the result of the increased
volumes and prices in 2004 versus 2003. Inventories are stated at the lower of cost, using the last-in, first-out (LIFO) method, or market. The Company
maintains only one inventory pool for LIFO purposes as all inventories held by
the Company generally relate to the Companys only business segment, the
manufacture and sale of copper building wire products. As permitted by
accounting principles generally accepted in the United States, the Company
maintains its inventory costs and cost of goods sold on a first-in, first-out
(FIFO) basis and makes a quarterly adjustment to adjust total inventory and
cost of goods sold from FIFO to LIFO. The Company applies the lower of cost or
market test by comparing the LIFO cost of its raw materials, work-in-process
and finished goods inventories to estimated market values, which are based
primarily upon the most recent quoted market price of copper, in pound
quantities, as of the end of each reporting period. Future reductions in the
quantity of inventory on hand could cause copper that is carried in inventory
at costs different from the cost of copper in the period in which the reduction
occurs to be included in costs of goods sold for that period at the different
price. 14




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FORM 10-Q As a result of increasing copper costs during the first nine months of 2004, a
LIFO adjustment was recorded increasing cost of sales by $15.5 million during
the period. The $15.5 million net LIFO adjustment was partially offset by the
$3.6 million effect of the liquidation of the LIFO inventory layer established
in 2003 and a portion of the 2002 layer, as discussed in the quarterly section
above. Based on the current copper prices, there is no LCM adjustment
necessary. Future reductions in the price of copper could require the Company
to record a lower of cost or market adjustment against the related inventory
balance, which would result in a negative impact on net income. Selling expenses for the first nine months of 2004 were $25.5 million, or 5.6% of net
sales, compared to $16.6 million, or 6.4% of net sales, in the same period of
2003. The percentage decrease was due to a decrease in freight costs as a
percentage of net sales, attributable to freight becoming relatively lower as
sales prices increased substantially in 2004. General and administrative
expenses increased to $5.5 million, or 1.2% of net sales, in the first nine
months of 2004 compared to $5.1 million, or 1.9% of net sales, in the same
period of 2003. General and administrative costs are semi-fixed in nature and
decreased dramatically in percentage terms as the Company dramatically
increased sales dollars in 2004 versus 2003. The provision for bad debts was
$255,000 in the first nine months of 2004 versus $135,000 in the first nine
months of 2003, as the Company added to its provision to reflect the larger
accounts receivable balances outstanding consistent with the rapid growth of
sales. Net interest expense was $2,055,000 in the first nine months of 2004
compared to $1,712,000 in the first nine months of 2003. The increase was due
to higher average debt balances during the first nine months of 2004 than
during the comparable period of 2003. As a result of the foregoing factors, the Companys net income increased to $26.9 million in the first nine months of
2004 from $7.4 million in the first nine months of 2003. Liquidity and Capital Resources The Company maintains a substantial inventory of finished products
to satisfy customers prompt delivery requirements. As is customary in the
industry, the Company provides payment terms to most of its customers that
exceed terms that it receives from its suppliers. Therefore, the Companys
liquidity needs have generally consisted of operating capital necessary to
finance these receivables and inventory. Capital expenditures have
historically been necessary to expand 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, borrowings
under its revolving credit facilities and sales of its common stock. The
Company uses its revolving credit facility to manage day to day operating cash
needs as required by daily fluctuations in working capital. The total debt
balance fluctuates daily as cash inflows differ from cash outflows. The ending
balance of debt outstanding at the end of a quarter, coupled with explanations
detailing cash flows and changes in the debt balance in these quarterly
reports, is representative of the net effect of these cash flows during the
period. Effective August 27, 2004, the Company through its indirectly
wholly-owned subsidiary, Encore Wire Limited, a Texas Limited partnership
(Encore Wire Limited), refinanced its unsecured loan facility with two banks
(the Financing Agreement) and also arranged 15




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FORM 10-Q for a private placement of debt (the Note Purchase Agreement). The Company
is the guarantor of the indebtedness. Obligations under the Financing
Agreement and the Note Purchase Agreement are the only contractual obligations
or commercial borrowing commitments of the Company. The term of the Financing
Agreement extends through August 27, 2009. The Financing Agreement provides
for maximum borrowings of the lesser of $85 million or the amount of eligible
accounts receivable plus the amount of eligible finished goods and raw
materials, less any reserves established by the banks. The calculated maximum
borrowing amount available at September 30, 2004, as computed under the
Financing Agreement, was $85 million. The Financing Agreement is with two
banks, Bank of America, N.A., as Agent, and Wells Fargo Bank, National
Association, and replaces the previous financing agreement that was effective
August 31, 1999 and had been extended by amendments through May 31, 2007 with a
total credit line of $125 million. Concurrent with the Financing Agreement, Encore Wire Limited and the Company, through its agent bank, entered into the
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 referred to as the
Purchasers), whereby Encore Wire Limited issued and sold $45 million of 5.27%
Senior Notes, Series 2004-A, due August 27, 2011 (the Senior Notes) to the
Purchasers, the proceeds of which were used to repay a portion of the Companys
outstanding indebtedness under the previous financing agreement. Through its
agent bank, the Company then entered into an interest rate swap agreement to
convert the fixed rate on the Senior Notes to a variable rate based on LIBOR
plus a fixed adder for the seven year duration of these notes. The Financing Agreement and the Senior Notes are unsecured and contain customary covenants
and events of default. The Company was in compliance with these covenants, as
of September 30, 2004. Under the Financing Agreement, the Company is allowed
to pay cash dividends. At September 30, 2004, the total balance outstanding
under the Financing Agreement and the Senior Notes was $69.0 million. Amounts
outstanding under the Financing Agreement are payable on August 27, 2009, with
interest payments due quarterly. Interest payments on the Senior Notes are due
semi-annually. In December 2001, the Company entered into an interest rate
swap agreement on $24.0 million of its variable rate debt in order to hedge
against an increase in variable interest rates. The terms of the agreement fix
the interest rate on $24.0 million of the Companys variable rate, long-term
note payable to 4.6% per annum plus a variable adder that is based on certain
financial ratios contained in the loan covenants. This three-year agreement
expires on December 20, 2004. For the nine months ended September 30, 2004,
the Company recorded an unrealized gain of $731,032, resulting in a net
unrealized gain of $238,578 recorded in accumulated other comprehensive income
(loss) as of September 30, 2004 in the equity section of the balance sheet to
account for the net effect of the two interest rate swaps. Cash provided by operations was $1.5 million in the first nine months of 2004 compared to $7.7
million of cash provided by operations in the first nine months of 2003. This
decrease in cash provided by operations resulted primarily from a shift in
income taxes payable / receivable of $5.7 million from 2003 to 2004. The
decrease in taxes payable is primarily the result of the company taking
advantage of accelerated depreciation under 16




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FORM 10-Q current tax laws and changing its tax inventory accounting method from FIFO to
LIFO. All other items that changed from year to year were associated with the
growth in earnings in 2004 and timing differences. Cash used in investing
activities increased to $16.0 million in the first nine months of 2004 from
$3.4 million in the first nine months of 2003. In 2004, the funds were used
primarily to construct the new 162,000 square foot addition to the Companys
distribution center as well as the purchase of associated manufacturing
equipment that was part of the Companys capital plan announced in a press
release issued on February 3, 2004. The $18.3 million of cash provided by
financing activities in the first nine months of 2004 was a result of the
Companys increase in outstanding bank debt and from the sale of common stock
through option exercises. During the remainder of 2004, the Company expects its capital expenditures will consist of additional plant and equipment for its
residential and commercial wire operations. The total capital expenditures
associated with these projects are currently estimated to be in the $19.0 to
$21.0 million range in 2004. The Company will continue to manage its working
capital requirements. These requirements may increase as a result of expected
continued sales increases and may be impacted by the price of copper. The
Company believes that the cash flow from operations and the financing available
under the new Financing Agreement will satisfy working capital and capital
expenditure requirements for the next twelve months. Information Regarding Forward Looking Statements This 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) and information that are based on managements belief
as well as assumptions made by and information currently available to
management. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct. 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 expected. Among the
key factors that may have a direct bearing on the Companys operating results
are fluctuations in the economy and in the level of activity in the building
and construction industry, demand for the Companys products, the impact of
price competition and fluctuations in the price of copper. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes from the information provided in Item 7.A of the Companys
Annual Report on Form 10-K for the year ended December 31, 2003. 
 ITEM 4. CONTROLS AND PROCEDURES As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of
the Companys management, including the Chief Executive Officer (the CEO) and
the Chief Financial Officer (the CFO), of the effectiveness of the design and
operation of the Companys disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15 and 15d-15. Based on that 17




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FORM 10-Q evaluation, the Companys management, including the CEO and CFO, concluded that
the Companys disclosure controls and procedures are adequately designed to
ensure that the information required to be disclosed in this report has been
accumulated and communicated to management, including the CEO and CFO, as
appropriate, to allow timely decisions regarding such required disclosure and
that the Companys disclosure controls and procedures are functioning
effectively. 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, internal control over financial
reporting during the period covered by this report. 
 Part II. OTHER INFORMATION 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Stock Repurchase Program On November 6, 2001, the Board of Directors of the Company approved a stock repurchase program covering the purchase of up
to 450,000 shares of its common stock dependent upon market conditions. Common
stock purchases under this program were authorized through December 31, 2002 on
the open market or through privately negotiated transactions at prices
determined by the Chairman of the Board or the President of the Company. As of
December 31, 2002, 225,300 shares had been purchased under this authorization.
Early in 2003, the Board of Directors extended this program through December
31, 2003 for the remaining 224,700 shares. There were no repurchases of stock
in 2003. In February 2004, the Board of Directors extended this program
through December 31, 2004 for the remaining 224,700 shares. There were no
repurchases of stock during the first three quarters of 2004. 
 ITEM 6. EXHIBITS The information required by this Item 6 is set forth in the Index to
Exhibits accompanying this Form 10-Q. 18




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FORM 10-Q 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on
behalf by the undersigned thereunto duly authorized. ENCORE WIRE CORPORATION(Registrant)Dated: November 8, 2004
    
    /s/ VINCENT A. REGOVincent A. Rego, Chairman of the Board and
Chief Executive OfficerDated: November 8, 2004
    
    /s/ DANIEL L. JONESDaniel L. Jones, President and
Chief Operating OfficerDated: November 8, 2004
    
    /s/ FRANK J. BILBANFrank J. Bilban, Vice President  Finance,
Treasurer and Secretary
Chief Financial Officer
 19




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FORM 10-Q 
 INDEX TO EXHIBITS ExhibitNumber
    
    Description3.1
    
    Certificate of Incorporation of Encore Wire Corporation, as
amended through July 20, 2004 (filed on Exhibit 3.1 to the
Companys Quarterly Report on Form 10-Q for the quarter
ended June 30, 2004, and incorporated herein by reference).3.2
    
    Amended and Restated Bylaws of Encore Wire Corporation, as
amended through July 20, 2004 (filed as Exhibit 3.2 to the
Companys Quarterly Report on Form 10-Q for the quarter
ended June 30, 2004, and incorporated herein by reference).10.1
    
    Credit Agreement by and among Encore Wire Limited, as
Borrower, Bank of America, N.A., as Agent, and Bank of
America, N.A. and Wells Fargo Bank, National Association,
as Lenders, dated August 27, 2004 (included herein).10.2
    
    Note Purchase Agreement by and among Encore Wire Limited
and Encore Wire Corporation, as Debtors, and Hartford Life
Insurance Company, Great-West Life & Annuity Insurance
Company, London Life Insurance Company and London Life and
Casualty Reinsurance Corporation, as Purchasers, dated
August 27, 2004 (included herein).10.3*
    
    1999 Stock Option Plan, as amended and restated, effective
as of October 24, 2001 (filed as Exhibit 99.1 to the
Companys Registration Statement on Form S-8 (No.
333-86620), and incorporated herein by reference).10.4*
    
    1989 Stock Option Plan, as amended and restated (filed as
Exhibit 4.1 to the Companys Registration Statement on Form
S-8 (No. 333-38729), and incorporated herein by reference),
terminated except with respect to outstanding options
thereunder.31.1
    
    Certification by Vincent A. Rego, Chairman and Chief
Executive Officer of Encore Wire Corporation, dated
November 8, 2004 and submitted pursuant to Rule
13a-14(a)/15d-14(a) and pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification by Frank J. Bilban, Vice President-Finance,
Chief Financial Officer, Treasurer and Secretary of Encore
Wire Corporation, dated November 8, 2004 and submitted
pursuant to Rule 13a-14(a)/15d-14(a) and pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
 20




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FORM 10-Q Exhibit
Number
    
    Description32.1
    
    Certification by Vincent A. Rego, Chairman and Chief
Executive Officer of Encore Wire Corporation, dated
November 8, 2004 and submitted as required by 18 U.S.C.
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification by Frank J. Bilban, Vice President-Finance,
Chief Financial Officer, Treasurer and Secretary of Encore
Wire Corporation, dated November 8, 2004 as required by 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
    
    Management contract or compensatory plan.
 21