10-K 1 wire-2018x12x31x10k.htm 10-K Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
FORM 10-K
 
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
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: 000-20278
 
ENCORE WIRE CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware
 
75-2274963
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
1329 Millwood Road
McKinney, Texas
 
75069
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (972) 562-9473
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $.01 per share
 
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ¨  Yes    ý  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ¨  Yes    ý  No
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.
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.                ý  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).                                ý  Yes    ¨  No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.                ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
 
¨ 
Smaller reporting company
¨
 
 
 
 
 
 
 
 
Emerging growth company
o
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ¨  Yes    ý  No
The aggregate market value of the Common Stock held by non-affiliates of the registrant computed by reference to the price at which the Common Stock was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was $832,604,533 (Note: The aggregate market value of Common Stock held by the Company’s directors, executive officers, immediate family members of such directors and executive officers, 10% or greater stockholders and other stockholders deemed to be affiliates was excluded from the computation of the foregoing amount. The characterization of such persons as “affiliates” should not be construed as an admission that any such person is an affiliate of the Registrant for any other purpose).
Number of shares of Common Stock outstanding as of February 21, 2019: 20,879,148
DOCUMENTS INCORPORATED BY REFERENCE
Listed below are documents, parts of which are incorporated herein by reference, and the part of this report into which the document is incorporated:
(1)
Proxy statement for the 2019 annual meeting of stockholders – Part III




ENCORE WIRE CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2018

Table of Contents

PAGE
 
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
 
Item 16. Form 10-K Summary

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PART I
Item 1. Business.
General
Encore Wire Corporation is a Delaware corporation, incorporated in 1989, with its principal executive office and manufacturing plants located at 1329 Millwood Road, McKinney, Texas 75069. The Company’s telephone number is (972) 562-9473. As used in this annual report, unless otherwise required by the context, the terms “we,” “our,” “Company,” “Encore” and “Encore Wire” refer to 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.
The principal customers for Encore’s wire are wholesale electrical distributors, who sell building wire and a variety of other products to electrical contractors. The Company sells its products primarily through independent manufacturers’ representatives located throughout the United States and, to a lesser extent, through its own direct in-house marketing efforts.
Strategy
Encore’s strategy is to further expand its share of the building wire market primarily by emphasizing a high level of customer service and the addition of new products that complement its current product line, while maintaining and enhancing its low-cost production capabilities. Encore’s low-cost production capability features an efficient plant design incorporating highly automated manufacturing equipment, an integrated production process and a highly-motivated work force. Encore's plants are all located on one large campus. This single-site campus enables and enhances low-cost manufacturing, distribution and administration, as well as helping to build and maintain a cohesive company culture.
Customer Service: Encore is highly focused on responding to customer needs, with an emphasis on building and maintaining strong customer relationships. Encore seeks to establish customer loyalty by achieving a high order fill rate and rapidly handling customer orders, shipments, inquiries and returns. The Company maintains product inventories sufficient to meet anticipated customer demand and believes that the speed and completeness with which it fills orders are key competitive advantages critical to marketing its products.
Product Innovation: Encore has been a leader in bringing new ideas to a commodity product. Encore pioneered the widespread use of color feeder sizes of commercial wire and colors in residential non-metallic cable. The colors have improved on-the-job safety, reduced installation times for contractors and enabled building inspectors to rapidly and accurately inspect construction projects. Encore Wire’s patented SmartColor ID® system for metal-clad and armor-clad cables allows for quick and accurate identification of gauge, number of conductors, wire and jacket type. Additionally, Encore currently has multiple patents and patent-pending innovations that range from process improvements to packaging solutions.
Low-Cost Production: Encore’s low-cost production capability features an efficient plant design and an incentivized work force.
Efficient Plant Design: Encore’s highly automated wire manufacturing equipment is integrated in an efficient design that reduces material handling, labor and in-process inventory.
Incentivized Work Force: The Company has a stock option plan and a stock appreciation rights plan that enhance the motivation of its salaried manufacturing supervisors. The Company also has a comprehensive safety program that emphasizes employee participation. The Company provides a 401(k) retirement savings plan to all employees.
Products
Encore offers an electrical building wire product line that consists primarily of NM-B cable, UF-B cable, THHN/THWN-2, XHHW-2, RHH/RHW-2 and other types of wire products, including tray cable, metal-clad and armored cable. All of these products are manufactured with copper or aluminum as the current-carrying component of the conductor. The principal bases for differentiation among stock-keeping units (“SKUs”) are product type, conductor type, diameter, insulation, length, color and packaging.
Manufacturing
The efficiency of Encore’s highly automated manufacturing facility is a key element of its low-cost production capability. Encore’s wire manufacturing lines have been integrated so that the handling of product is substantially reduced throughout the production process. The manufacturing process for the Company’s various products involves multiple steps, including: casting, drawing, stranding, compounding, insulating, cabling, jacketing and armoring.

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Encore manufactures and tests all of its products in accordance with the Underwriters Laboratories (UL) standards, a nationally recognized testing and standards agency. Additionally, UL representatives routinely visit and test products from each area of manufacturing.
Customers
Encore sells its wire to wholesale electrical distributors throughout the United States. Most distributors supply products to electrical contractors. Encore’s customers are numerous and diversified. Encore has three customers, each of whom slightly exceeds 10% of the Company's total sales. Encore has no customer, the loss of which would have a material adverse effect on the Company.
Encore believes that the speed and completeness with which it fills customers’ orders is crucial to its ability to expand the market share for its products. The Company also believes that, for a variety of reasons, many customers strive to maintain lean inventories. Because of this trend, the Company seeks to maintain sufficient inventories to satisfy customers’ prompt delivery requirements.
Marketing and Distribution
Encore markets its products throughout the United States primarily through independent manufacturers’ representatives and, to a lesser extent, through its own direct marketing efforts.
Encore maintains the majority of its finished product inventory at its plant in McKinney, Texas. In order to provide flexibility in handling customer requests for immediate delivery, additional product inventories are maintained at warehouses owned and operated by some of the Company's independent manufacturers’ representatives located strategically across the country.
Finished goods are typically delivered to customers by trucks operated by common carriers. The decision regarding the carrier to be used is based primarily on availability and cost.
The Company invoices its customers directly for products purchased and, if an order has been obtained through a manufacturer’s representative, pays the representative a commission based on pre-established rates. The Company determines customer credit limits. The Company recorded no bad debt charges in 2018, 2017, and 2016. The manufacturers’ representatives have no discretion to determine prices charged for the Company’s products, and all sales are subject to Company approval.
Employees
Encore believes that its hourly employees are highly motivated and that their motivation contributes significantly to Encore’s efficient operation. The Company believes that competitive hourly compensation coupled with sound management practices focuses its employees on maintaining high production standards and product quality.
As of December 31, 2018, Encore had 1,278 employees, 1,061 of whom were paid hourly wages and were primarily engaged in the operation and maintenance of the Company’s manufacturing and warehouse facilities. The Company’s remaining employees were executive, supervisory, administrative, sales and clerical personnel. The Company considers its relations with its employees to be generally positive. The Company has no collective bargaining agreements with any of its employees.
Raw Materials
The principal raw materials used by Encore in manufacturing its products are copper cathode, copper scrap, PVC thermoplastic compounds, XLPE compounds, aluminum, steel, paper and nylon, all of which are readily available from a number of suppliers. Copper is the principal raw material used by the Company in manufacturing its products, constituting 83.5% of the dollar value of all raw materials used by the Company during 2018. Copper requirements are purchased primarily from miners and commodity brokers at prices determined each month primarily based on the average daily COMEX closing prices for copper for that month, plus a negotiated premium. The Company also purchases raw materials necessary to manufacture various PVC thermoplastic compounds. These raw materials include PVC resin, clay and plasticizer.
The Company produces copper rod from purchased copper cathode and copper scrap in its own rod fabrication facility. The Company reprocesses copper scrap generated by its operations as well as copper scrap purchased from others. In 2018, the Company’s copper rod fabrication facility manufactured virtually all of the Company’s copper rod requirements. The Company purchases aluminum rod from various suppliers for aluminum wire production.
The Company also compounds its own wire jacket and insulation compounds. The process involves the mixture of PVC raw material components to produce the PVC used to insulate the Company’s wire and cable products. The raw materials include PVC resin, clay and plasticizer. During the last year, the Company’s plastic compounding facility produced the vast majority of the Company’s PVC requirements.


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Competition
The electrical wire and cable industry is highly competitive. The Company competes with several companies who manufacture and sell wire and cable products beyond the building wire segment in which the Company competes. The Company’s primary competitors include Southwire Company, Cerro Wire LLC, General Cable (a company of the Prysmian Group) and AFC Cable Systems, Inc.
For our copper products, the Company believes that it is competitive with respect to all relevant factors, including order fill rate, quality, pricing, and, in some instances, breadth of product line.
For aluminum products, which represented 7.3% of net sales in 2018, the Company has encountered significant price-based import competition from aluminum wire imports from China, which are sold through U.S. based distributors. In September 2018, the Company joined with another U.S. producer in filing petitions with the U.S. Commerce Department and International Trade Commission (ITC), requesting that they investigate whether aluminum wire and cable imports into the United States are being illegally dumped and subsidized. The Commerce Department initiated these investigations in October 2018, and the ITC issued preliminary affirmative determinations in November 2018. These investigations are still pending and final results are not expected before the fourth quarter of 2019.
Compliance with Environmental Regulations
The Company is subject to federal, state and local environmental protection laws and regulations governing the Company’s operations and the use, handling, disposal and remediation of hazardous substances currently or formerly used by the Company. Management believes the Company is in compliance with all such rules including permitting and reporting requirements. Historically, compliance with such laws and regulations has not had a material impact on the capital expenditures, earnings and competitive position of the Company.
Environmental, Social and Governance
Encore Wire is very committed to the philosophy supporting good stewardship of the environment, focusing on being good corporate citizens, and practicing good corporate governance. The Company has been committed to robust environmental, social and governance (“ESG”) practices since long before the term “ESG” became commonly used with respect to corporate governance. Encore Wire puts these principles at the forefront of its company culture. Below are some key highlights of ESG efforts that we have exhibited:
We believe we are a leading scrap recycler in our industry. We have a system to reclaim copper scrap that converts both internal and external scrap copper wire back into usable copper rod. This operation consumes tens of millions of pounds of scrap copper per year. Our process utilizes multiple steps to recover the greatest amount of copper possible.
We recycle plastic and metals used in our operations as much as possible throughout our manufacturing process.
We are committed to exploring numerous options to recycle any residual copper and plastic to third party recyclers to avoid taking scrap to landfills.
We make an effort to recycle all materials used on site, including pallets, cardboard and other materials.
We voluntarily installed major air pollution control equipment, water treatment/recycle systems, wastewater minimization units, and storm water/spill control structures which are not required by regulation.
Our wastewater monitoring program far exceeds the monitoring required by our wastewater permit, and we have been recognized by the City of McKinney for our commitment to the wastewater pretreatment program.
We installed new cutting-edge equipment on our campus to reduce natural gas, electricity and water usage. We did this to be as environmentally friendly as possible and to aid in cost savings. This is in keeping with one of our core corporate mottos: “Do the Right Thing”.
Our Research and Development building was built to “LEED Platinum” standards and has been recognized for its low environmental impact.
We have won civic recognition for our charitable giving in the local communities where our employees live. We give to numerous causes with a particular focus on organizations that serve children and women, including people who are going through tough times as well as youth sports and churches.
Members of our management team have served on numerous boards of civic and charitable organizations.
Our Board is focused on and committed to making sure the Company is managed in an ethical fashion.
The Company has been managed to grow and enhance shareholder value, while being cognizant of industry cyclicality and avoiding excess leverage to the balance sheet.

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We have maintained a focus on these and many other areas of corporate responsibility throughout our history, with minimal publicity. “Doing the Right Thing” is much more than a slogan and will continue to be a key focus throughout the Company, including in areas such as our increasing commitment to Board diversity.
Intellectual Property Matters
From time to time, the Company files patent applications with the United States Patent and Trademark Office. The Company currently owns several patents and pending patent applications. The Company also owns several registered trademarks and pending trademark applications with the U.S. Patent and Trademark Office. The current registrations for the marks will expire on various dates from 2019 to 2025, but each registration can be renewed indefinitely as long as the respective mark continues to be used in commerce and the requisite proof of continued use or renewal application, as applicable, is filed. These trademarks provide source identification for the goods manufactured and sold by the Company and allow the Company to achieve brand recognition within the industry.
Internet Address/SEC Filings
The Company’s Internet address is https://www.encorewire.com. Under the “Investors” section of our website, the Company provides a link to our electronic Securities and Exchange Commission (“SEC”) filings, including our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, director and officer beneficial ownership reports filed pursuant to Section 16 of the Securities Exchange Act of 1934, as amended, and any amendments to these reports. All such reports are available free of charge and are available as soon as reasonably practicable after the Company files such material with, or furnishes it to, the SEC.
The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at https://www.sec.gov.
Executive Officers of the Registrant
Information regarding Encore’s executive officers including their respective ages as of February 22, 2019, is set forth below:
Name
Age
 
Position with Company
Daniel L. Jones
55
 
Chairman of the Board of Directors, President and Chief Executive Officer
 
 
 
 
Frank J. Bilban
62
 
Vice President – Finance, Treasurer, Secretary, and Chief Financial Officer
Mr. Jones has held the office of President and Chief Executive Officer of the Company since February 2006. He performed the duties of the Chief Executive Officer in an interim capacity from May 2005 to February 2006. From May 1998 until February 2005, Mr. Jones was President and Chief Operating Officer of the Company. He previously held the positions of Chief Operating Officer from October 1997 until May 1998, Executive Vice President from May 1997 to October 1997, Vice President-Sales and Marketing from 1992 to May 1997, after serving as Director of Sales since joining the Company in November 1989. He has also served as a member of the Board of Directors since May 1992, and was named Chairman of the Board in 2014.
Mr. Bilban has served as Vice President-Finance, Treasurer, Secretary and Chief Financial Officer of Encore since June 2000. From 1998 until joining the Company in June 2000, Mr. Bilban was Executive Vice President and Chief Financial Officer of Alpha Holdings, Inc., a plastics manufacturing conglomerate. From 1996 until 1998, Mr. Bilban was Vice President and Chief Financial Officer of Wedge Dia-Log Inc., an oil field services company.
All executive officers are elected annually by the Board of Directors to serve until the next annual meeting of the Board or until their respective successors are chosen and qualified.
Item 1A. Risk Factors.
The following are risk factors that could affect the Company’s business, financial results and results of operations. These risk factors should be considered in connection with evaluating the forward-looking statements contained in this Annual Report on Form 10-K because these factors could cause the actual results and conditions to differ materially from those projected in forward-looking statements. Before purchasing the Company’s stock, an investor should know that making such an investment involves

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some risks, including the risks described below. If any of the risks mentioned below or other unknown risks actually occur, the Company’s business, financial condition or results of operations could be negatively affected. In that case, the trading price of its stock could fluctuate significantly.
Product Pricing and Volatility of Copper Market
Price competition for copper electrical wire and cable is intense, and the Company sells its products in accordance with prevailing market prices. 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. Copper, a commodity product, is the principal raw material used in the Company’s manufacturing operations. Copper accounted for approximately 73.0%, 69.7% and 65.2% of the costs of goods sold by the Company during 2018, 2017 and 2016, respectively, and the Company expects that copper will continue to account for a significant portion of these costs in the future. The price of copper fluctuates depending on general economic conditions and in relation to supply and demand and other factors, and it causes monthly variations in the cost of copper purchased by the Company. The SEC allows shares of physically backed copper exchange traded funds (“ETFs”) to be listed and publicly traded. Such funds and other copper ETFs like them hold copper cathode as collateral against their shares. The acquisition of copper cathode by copper ETFs may materially decrease or interrupt the availability of copper for immediate delivery in the United States, which could materially increase the Company’s cost of copper. In addition to rising copper prices and potential supply shortages, we believe that ETFs and similar copper-backed derivative products could lead to increased copper price volatility. The Company cannot predict future copper prices or the effect of fluctuations in the costs of copper on the Company’s future operating results. Consequently, fluctuations in copper prices caused by market forces can significantly affect the Company’s financial results. 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.
Operating Results May Fluctuate
Encore’s results of operations may fluctuate as a result of a number of factors, including fluctuation in the demand for and shipments of the Company’s products. Therefore, comparisons of results of operations have been and will be impacted by the volume of such orders and shipments. In addition, the Company's operating results could be adversely affected by the following factors, among others, such as variations in the mix of product sales, price changes in response to competitive factors, increases in raw material costs, freight costs, and other significant costs, the loss of key manufacturer’s representatives who sell the Company’s product line, increases in utility costs (particularly electricity and natural gas) and various types of insurance coverage and interruptions in plant operations resulting from the interruption of raw material supplies and other factors.
Reliance on Senior Management
Encore’s future operating results depend, in part, upon the continued service of its senior management, including, Mr. Daniel L. Jones, Chairman, President and Chief Executive Officer, and Mr. Frank J. Bilban, the Company’s Vice President and Chief Financial Officer (neither of whom are bound by an employment agreement). The Company’s future success will depend upon its continuing ability to attract and retain highly qualified managerial and technical personnel. Competition for such personnel is intense, and there can be no assurance that the Company will retain its key managerial and technical employees or that it will be successful in attracting, assimilating or retaining other highly qualified personnel in the future.
Industry Conditions and Cyclicality
The residential, commercial and industrial construction industry, which is the end user of the Company’s products, is cyclical and is affected by a number of factors, including the general condition of the economy, market demand and changes in interest rates. Industry sales of electrical wire and cable products tend to parallel general construction activity, which includes remodeling. Construction began to pick up strongly in 2013 after five to seven years of recession, and continued doing well through 2018. According to various industry and national economic forecasts, the future is unclear. Data on remodeling is not as readily available. However, remodeling activity historically trends up when new construction slows down.
Deterioration in the financial condition of the Company’s customers due to industry and economic conditions may result in reduced sales, an inability to collect receivables and payment delays or losses due to a customer’s bankruptcy or insolvency. Although the Company’s bad debt experience has been low in recent years, the Company’s inability to collect receivables may increase the amounts the Company must expense against its bad debt reserve, decreasing the Company’s profitability. A downturn in the residential, commercial or industrial construction industries and general economic conditions may have a material adverse effect on the Company.
Environmental Liabilities

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The Company is subject to federal, state and local environmental protection laws and regulations governing the Company’s operations and the use, handling, disposal and remediation of hazardous substances currently or formerly used by the Company. A risk of environmental liability is inherent in the Company’s current manufacturing activities in the event of a release or discharge of a hazardous substance generated by the Company. Under certain environmental laws, the Company could be held jointly and severally responsible for the remediation of any hazardous substance contamination at the Company’s facilities and at third party waste disposal sites and could also be held liable for any consequences arising out of human exposure to such substances or other environmental damage. There can be no assurance that the costs of complying with environmental, health and safety laws and requirements in the Company’s current operations or the liabilities arising from past releases of, or exposure to, hazardous substances, will not result in future expenditures by the Company that could materially and adversely affect the Company’s financial results, cash flow or financial condition.
Competition
The electrical wire and cable industry is highly competitive. The Company competes with several manufacturers of wire and cable products that have substantially greater resources than the Company. Some of these competitors are owned and operated by large, diversified companies. The principal elements of competition in the wire and cable industry are, in the opinion of the Company, pricing, product availability and quality and, in some instances, breadth of product line. The Company believes that it is competitive with respect to all of these factors. While the number of firms producing wire and cable has declined in the past, there can be no assurance that new competitors will not emerge or that existing producers will not employ or improve upon the Company’s manufacturing and marketing strategy.
Patent and Intellectual Property Disputes
Disagreements about patents and intellectual property rights occur in the wire and cable industry. The unfavorable resolution of a patent or intellectual property dispute could preclude the Company from manufacturing and selling certain products or could require the Company to pay a royalty on the sale of certain products. Patent and intellectual property disputes could also result in substantial legal fees and other costs.
Common Stock Price May Fluctuate
Future announcements concerning Encore or its competitors or customers, quarterly variations in operating results, announcements of technological innovations, the introduction of new products or changes in product pricing policies by the Company or its competitors, developments regarding proprietary rights, changes in earnings estimates by analysts or reports regarding the Company or its industry in the financial press or investment advisory publications, among other factors, could cause the market price of the common stock to fluctuate substantially. These fluctuations, as well as general economic, political and market conditions, such as recessions, world events, military conflicts or market or market-sector declines, may materially and adversely affect the market price of the common stock.
Beneficial Ownership of the Company’s Common Stock by a Small Number of Stockholders
A small number of significant stockholders beneficially own greater than 44% of the Company’s outstanding common stock. Depending on stockholder turnout for a stockholder vote, these stockholders, acting together, could be able to control the election of directors and certain matters requiring majority approval by the Company’s stockholders. The interests of this group of stockholders may not always coincide with the Company’s interests or the interests of other stockholders.
In the future, these stockholders could sell large amounts of common stock over relatively short periods of time. The Company cannot predict if, when or in what amounts stockholders may sell any of their shares. Sales of substantial amounts of the Company’s common stock in the public market by existing stockholders or the perception that these sales could occur, may adversely affect the market price of our common stock by creating a public perception of difficulties or problems with the Company’s business.
Future Sales of Common Stock Could Affect the Price of the Common Stock
No prediction can be made as to the effect, if any, that future sales of shares or the availability of shares for sale will have on the market price of the common stock prevailing from time to time. Sales of substantial amounts of common stock, or the perception that such sales might occur, could adversely affect prevailing market prices of the common stock.
Cybersecurity Breaches and other Disruptions to our Information Technology Systems
The efficient operation of our business is dependent on our information technology systems to process, transmit and store sensitive electronic data, including employee, distributor and customer records, and to manage and support our business operations and manufacturing processes.  The secure maintenance of this information is critical to our operations. Despite our security measures,

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our information technology system may be vulnerable to attacks by hackers or breaches due to errors or malfeasance by employees and others who have access to our system, or other disruptions during the process of upgrading or replacing computer software or hardware, power outages, computer viruses, telecommunication or utility failures or natural disasters. Any such event could compromise our information technology system, expose our customers, distributors and employees to risks of misuse of confidential information, impair our ability to effectively and timely operate our business and manufacturing processes, and cause other disruptions, which could result in legal claims or proceedings, disrupt our operations and the services we provide to customers,  damage our reputation, and cause a loss of confidence in our products and services, any of which could adversely affect our results of operations and competitive position.
Regulations Related to Conflict-free Minerals May Force Us to Incur Additional Expenses.

In August 2012, the SEC adopted disclosure requirements related to certain minerals sourced from the Democratic Republic of Congo or adjoining countries, as required by Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The SEC rules implementing Section 1502 of the Dodd-Frank Act require us to perform due diligence, and report whether “conflict minerals,” which are defined as tin, tantalum, tungsten and gold, necessary to the functionality of a product we purchase originated from the Democratic Republic of Congo or an adjoining country. Since 2014, we have been required to file with the SEC on an annual basis a specialized disclosure report on Form SD regarding such matters. As our supply chain is complex, we may incur significant costs to determine the source and custody of conflict minerals that are used in the manufacture of our products in order to comply with these regulatory requirements in the future. We may also face reputation challenges if we are unable to verify the origins for all conflict minerals used in our products, or if we are unable to conclude that our products are “conflict free.” Over time, conflict minerals reporting requirements may affect the sourcing, price and availability of our products, and may affect the availability and price of conflict minerals that are certified as conflict free. Accordingly, we may incur significant costs as a consequence of regulations related to conflict-free minerals, which may adversely affect our business, financial condition or results of operations.

Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Encore maintains its corporate office and manufacturing plants in McKinney, Texas, approximately 32 miles north of downtown Dallas. The Company’s facilities are located on a combined site of approximately 430 acres and consist of buildings containing approximately 2.1 million square feet of floor space. The corporate office, plants and equipment are owned by the Company and are not mortgaged to secure any of the Company’s existing indebtedness. Encore believes that its plants and equipment are suited to its present needs, comply with applicable federal, state and local laws and regulations, and are properly maintained and adequately insured.
Item 3. Legal Proceedings.
For information on the Company’s legal proceedings see Note 9 to the Company’s financial statements included in Item 8 to this report and incorporated herein by reference.
Item 4. Mine Safety Disclosures.
Not applicable.

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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Company’s common stock is traded and quoted on the NASDAQ Stock Market’s Global Select Market under the symbol “WIRE.” As of February 21, 2019, there were 26 holders of record of the Company’s common stock.
Aside from periodic cash dividends, which the Company currently expects to continue to make consistent with its historical practice, management and the Board currently intend to retain the majority of future earnings for the operation and expansion of the Company’s business.
Issuer Purchases of Equity Securities
On November 10, 2006, the Board of Directors approved a stock repurchase program authorizing the Company to repurchase up to an authorized number of shares of its common stock on the open market or through privately negotiated transactions at prices determined by the President of the Company during the term of the program. The Company’s Board of Directors has authorized several increases and annual extensions of this stock repurchase program, and, as of December 31, 2018, 1,132,946 shares remained authorized for repurchase through March 31, 2019. The Company did not repurchase any shares of its stock in 2018, 2017 or 2016. The Company also has a broker agreement to repurchase stock in the open market at certain trigger points pursuant to a Rule 10b5-1 plan announced on November 28, 2007.
Equity Compensation Plan Information
The following table provides information about the Company’s equity compensation plans as of December 31, 2018.
 
Number of securities to be
issued upon exercise of outstanding options, warrants and rights
 
Weighted-average exercise
price of outstanding
options, warrants and rights
 
Number of securities
remaining available for future issuance under equity compensation plans
(excluding securities
reflected in column (a))
PLAN CATEGORY
(a)
 
(b)
 
(c)
Equity compensation plans approved by security holders
415,000

 
$
41.53

 
474,800


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Performance Graph
The following graph is not “soliciting material,” is not deemed filed with the SEC, and is not to be incorporated by reference into any of the Company’s filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, as amended, respectively.
The graph below sets forth the cumulative total stockholder return, which assumes reinvestment of dividends, of a $100 investment in the Company’s common stock, the Russell 2000 Index, the Company’s self-determined peer group for the year ended December 31, 2017 (the “Old Peer Group”), and the Company’s self-determined peer group for the year ended December 31, 2018 (the “New Peer Group”) for the five years ended December 31, 2018
The Old Peer Group consists of General Cable Corporation and Belden, Inc. For the year ended December 31, 2018, the Company changed the Old Peer Group by replacing General Cable Corporation with Patrick Industries, Inc., Apogee Enterprises, Inc., Gibraltar Industries, Inc., Quanex Building Products Corporation, and Atkore International Group, Inc. to form the New Peer Group. The Company changed its peer group because the Prysmian Group, an Italy-based public company listed on the Milan Stock Exchange in the FTSE MIB Index, acquired General Cable Corporation in June 2018. The Company believes that the five companies added to the New Peer Group have market capitalizations comparable to the Company and compete in the building products and electrical components industries.
chart-bacb2c3542ec5dc280ea01.jpg
 
 
 
 
As of December 31,
Symbol
 
Total Return For:
 
2013
 
2014
 
2015
 
2016
 
2017
 
2018
Û
 
Encore Wire Corporation
 
100.00
 
69.00
 
68.67
 
80.43
 
90.43
 
93.42
£
 
Russell 2000 Index
 
100.00
 
104.89
 
100.26
 
121.63
 
139.44
 
124.09
r
 
New Peer Group
 
100.00
 
108.83
 
90.24
 
114.74
 
116.12
 
74.12
q
 
Old Peer Group
 
100.00
 
92.95
 
61.73
 
95.91
 
112.00
 
77.66

9



Notes
(1)
Data presented in the performance graph is complete through December 31, 2018 for all but the Old Peer Group, which only includes General Growth Corporation cumulative total stockholder return through their last trading date of June 5, 2018. Belden, Inc. is complete through December 31, 2018.
(2)
The Old Peer Group is self-determined and consists of the following companies: General Cable Corporation and Belden, Inc.
(3)
The New Peer Group is self-determined and consists of the following companies: Belden, Inc., Patrick Industries, Inc., Apogee Enterprises, Inc., Gibraltar Industries, Inc., Quanex Building Products Corporation, and Atkore International Group, Inc.
(4)
Each peer group index uses only such peer group’s performance and excludes the performance of the Company. Each peer group index uses beginning of period market capitalization weighting.
(5)
Each data line represents annual index levels derived from compounded daily returns that include all dividends.
(6)
The index level for all data lines was set to $100.00 on December 31, 2013.

Item 6. Selected Financial Data.
The following financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 8, “Financial Statements and Supplementary Data.” The table below presents, as of and for the dates indicated, selected historical financial information for the Company.
 
Year Ended December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
 
(in thousands, except per share data)
Statement of Income Data:
 
 
 
 
 
Net sales
$
1,288,683

 
$
1,164,248

 
$
940,790

 
$
1,017,622

 
$
1,166,979

Cost of goods sold
1,098,961

 
1,008,073

 
820,673

 
880,900

 
1,042,002

Gross profit
189,722

 
156,175

 
120,117

 
136,722

 
124,977

Selling, general and administrative expenses
90,212

 
76,726

 
69,351

 
64,493

 
68,876

Operating income
99,510

 
79,449

 
50,766

 
72,229

 
56,101

Net interest and other income
2,174

 
427

 
48

 
155

 
56

Income before income taxes
101,684

 
79,876

 
50,814

 
72,384

 
56,157

Provision for income taxes
23,534

 
12,859

 
16,975

 
24,779

 
19,034

Net income
$
78,150

 
$
67,017

 
$
33,839

 
$
47,605

 
$
37,123

Earnings per common and common equivalent shares – basic
$
3.75

 
$
3.23

 
$
1.63

 
$
2.30

 
$
1.79

Weighted average common and common equivalent shares – basic
20,845

 
20,767

 
20,704

 
20,713

 
20,714

Earnings per common and common equivalent shares – diluted
$
3.74

 
$
3.21

 
$
1.63

 
$
2.29

 
$
1.78

Weighted average common and common equivalent shares – diluted
20,910

 
20,847

 
20,773

 
20,787

 
20,821

Annual dividends paid per common share
$
0.08

 
$
0.08

 
$
0.08

 
$
0.08

 
$
0.08


10



 
As of December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
 
(in thousands)
Balance Sheet Data:
 
 
 
 
 
Working capital
$
445,665

 
$
375,353

 
$
325,500

 
$
315,913

 
$
284,671

Total assets
818,060

 
733,975

 
657,964

 
628,116

 
572,751

Long-term debt

 

 

 

 

Stockholders’ equity
720,456

 
641,345

 
573,109

 
538,639

 
493,187


11



Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Introduction
The following management’s discussion and analysis is intended to provide a better understanding of key factors, drivers and risks regarding the Company and the building wire industry.
Executive Overview
Encore Wire sells a commodity product in a highly competitive market. Management believes that the historical strength of the Company’s growth and earnings is in large part attributable to the following main factors:
industry leading order fill rates and responsive customer service
product innovations and product line expansions based on listening to and understanding customer needs and market trends
low cost manufacturing operations, resulting from a state-of-the-art manufacturing complex
low distribution and freight costs due in large part to the “one campus” business model
a focused management team leading an incentivized work force
low general and administrative overhead costs, and
a team of experienced independent manufacturers’ representatives with strong customer relationships across the United States.
These factors, and others, have allowed Encore Wire to grow from a startup in 1989 to what management believes is one of the largest electric building wire companies in the United States of America. Encore has built a loyal following of customers throughout the United States. These customers have developed a brand preference for Encore Wire in a commodity product line due to the reasons noted above, among others. The Company prides itself on striving to grow sales by expanding its product offerings where profit margins are acceptable. Senior management monitors gross margins daily, frequently extending down to the individual order level. Management strongly believes that this “hands-on” focused approach to the building wire business has been an important factor in the Company's success, and will lead to continued success.
The construction and remodeling industries drive demand for building wire. In 2018, unit sales were up 4.5% in copper wire versus 2017. In 2017, unit sales increased 5.6% in copper wire versus 2016. In 2016, unit sales of copper wire sold increased 2.4% versus 2015.
General
The Company’s operating results 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 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 73.0%, 69.7% and 65.2% of the Company’s cost of goods sold during 2018, 2017 and 2016, 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 copper purchased by the Company. Additionally, the SEC allows shares of physically backed copper exchange traded funds (“ETFs”) to be listed and publicly traded. Such funds and other copper ETFs like it hold copper cathode as collateral against their shares. The acquisition of copper cathode by Copper ETFs may materially decrease or interrupt the availability of copper for immediate delivery in the United States, which could materially increase the Company’s cost of copper. In addition to rising 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 in the future 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. Historically, the cost of aluminum has been much lower and less volatile than copper. 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 the Comex exchange for the periods shown.


12



COMEX COPPER CLOSING PRICE 2018
 
October
2018

 
November
2018

 
December
2018

 
Quarter Ended
Dec. 31, 2018

 
Year Ended
Dec. 31, 2018

High
$
2.82

 
$
2.80

 
$
2.80

 
$
2.82

 
$
3.29

Low
2.66

 
2.68

 
2.63

 
2.63

 
2.56

Average
2.76

 
2.75

 
2.72

 
2.75

 
2.92

COMEX COPPER CLOSING PRICE 2017
 
October
2017

 
November
2017

 
December
2017

 
Quarter Ended
Dec. 31, 2017

 
Year Ended
Dec. 31, 2017

High
$
3.22

 
$
3.17

 
$
3.29

 
$
3.29

 
$
3.29

Low
2.94

 
3.04

 
2.92

 
2.92

 
2.48

Average
3.10

 
3.09

 
3.10

 
3.10

 
2.81

COMEX COPPER CLOSING PRICE 2016
 
October
2016

 
November
2016

 
December
2016

 
Quarter Ended
Dec. 31, 2016

 
Year Ended
Dec. 31, 2016

High
$
2.20

 
$
2.67

 
$
2.69

 
$
2.69

 
$
2.69

Low
2.08

 
2.22

 
2.47

 
2.08

 
1.94

Average
2.14

 
2.47

 
2.57

 
2.39

 
2.20

COMEX COPPER CLOSING PRICE 2018 by Quarter
 
Quarter Ended Mar. 31, 2018

 
Quarter Ended June 30, 2018

 
Quarter Ended Sept. 30, 2018

 
Quarter Ended
Dec. 31, 2018

 
Year Ended
Dec. 31, 2018

High
$
3.26

 
$
3.29

 
$
2.93

 
$
2.82

 
$
3.29

Low
2.96

 
2.95

 
2.56

 
2.63

 
2.56

Average
3.14

 
3.09

 
2.73

 
2.75

 
2.92



13



Results of Operations
The following table presents certain items of income and expense as a percentage of net sales for the periods indicated.
 
Year Ended December 31,
 
2018

 
2017

 
2016

Net sales
100.0
 %
 
100.0
%
 
100.0
%
Cost of goods sold:
 
 
 
 
 
Copper
62.3
 %
 
60.3
%
 
56.9
%
Other raw materials
12.8
 %
 
12.9
%
 
15.0
%
Depreciation
1.1
 %
 
1.2
%
 
1.5
%
Labor and overhead
9.6
 %
 
10.5
%
 
12.6
%
LIFO adjustment
(0.5
)%
 
1.7
%
 
1.2
%
 
85.3
 %
 
86.6
%
 
87.2
%
 
 
 
 
 
 
Gross profit
14.7
 %
 
13.4
%
 
12.8
%
Selling, general and administrative expenses
7.0
 %
 
6.6
%
 
7.4
%
Operating income
7.7
 %
 
6.8
%
 
5.4
%
Net interest and other income
0.2
 %
 
0.1
%
 
%
 
 
 
 
 
 
Income before income taxes
7.9
 %
 
6.9
%
 
5.4
%
Provision for income taxes
1.8
 %
 
1.1
%
 
1.8
%
 
 
 
 
 
 
Net income
6.1
 %
 
5.8
%
 
3.6
%
The following discussion and analysis relate to factors that have affected the operating results of the Company for the years ended December 31, 2018, 2017 and 2016. Reference should also be made to the Financial Statements and the related notes included under “Item 8. Financial Statements and Supplementary Data” of this Annual Report.
Net sales were $1.289 billion in 2018 compared to $1.164 billion in 2017 and $940.8 million in 2016. The 10.7% increase in net sales dollars in 2018 versus 2017 is primarily the result of a 11.8% increase in copper wire sales. Sales dollars were driven higher primarily by a 7.0% increase in average selling price of copper wire, coupled with a 4.5% increase in copper wire pounds shipped. Average selling prices for wire sold were primarily driven higher by rising copper commodity prices.
In the fourth quarter of 2018, net sales dollars increased 6.1% versus the fourth quarter of 2017. The increase in net sales was due to a 6.4% increase in copper net sales, driven by an increase in unit sales volume of copper of 10.5%, offset somewhat by an average selling price decrease of 3.7% in copper wire in the fourth quarter of 2018 versus the fourth quarter of 2017. Pre-tax income rose 42.8% in fourth quarter of 2018 versus the fourth quarter of 2017, fueled by a 7.4% increase in copper wire spreads.
On a sequential quarter comparison, net sales dollars in the fourth quarter of 2018 decreased 6.2% versus the third quarter of 2018, due primarily to a 6.5% decrease in copper wire unit volumes, offset slightly by a 0.9% increase the average selling price of copper wire. Unit sales generally decline in the fourth quarter.
Comparing the full year of 2018 to 2017, the increase in gross profit margin percentage was primarily the result of an increase in the spread between the average price paid for a pound of raw copper and the average sales price for a pound of copper in 2018 versus 2017, due primarily to improved industry pricing. Fluctuations in sales prices are primarily a result of changing copper raw material prices and product price competition. The increased margins were due primarily to the competitive pricing environment in the building wire industry. We believe that a strong construction environment in the United States during the year helped the building wire industry increase margin through price increases during 2018. As the number two player in the industry, the Company tried to lead or quickly follow prices up. However, a financially stressed competitor who had been acting erratically in the aluminum wire market, was purchased by a large foreign based company. This competitor had previously appeared to readily follow pricing downward from some imported aluminum wire. For aluminum products, which represented 7.3% of net sales in 2018, the Company has encountered significant price-based import competition from aluminum wire imports from China, which are sold through U.S. based distributors. In September 2018, the Company joined with another U.S. producer in filing petitions with the U.S. Commerce Department and International Trade Commission (ITC), requesting that they investigate whether aluminum wire and cable imports into the United States are being illegally dumped and subsidized. The Commerce Department initiated these investigations in

14



October 2018, and the ITC issued preliminary affirmative determinations in November 2018. These investigations are still pending and final results are not expected before the fourth quarter of 2019. The copper spread increased 9.8% in 2018 versus 2017. The spread increased as a result of the 7.0% increase in the average sales price per copper pound sold in building wire while the per pound cost of raw copper increased 5.7%. Fluctuations in sales prices are primarily a result of changing copper and other raw material prices and product price competition.
Comparing the full year of 2017 to 2016, the increase in gross profit margin percentage was primarily the result of an increase in the spread between the average price paid for a pound of raw copper and the average sales price for a pound of copper in 2017 versus 2016, due primarily to improved industry pricing. Fluctuations in sales prices are primarily a result of changing copper raw material prices and product price competition. The increased margins were due primarily to the competitive pricing environment in the industry. We believe that a strong construction environment in the United States coupled with a fairly steady rise in copper prices during the year helped the building wire industry increase margin through price increases during 2017. As the number two player in the building wire industry, the Company tried to lead or quickly follow prices up. However, we believe a different, financially stressed competitor was acting erratically in the aluminum wire market, impacting aluminum spreads negatively in 2017, although aluminum is an insignificant piece of the Company's sales. This competitor appeared to readily follow pricing downward from some imported aluminum wire. The copper spread increased 9.9% in 2017 versus 2016. The spread increased as a result of the 19.8% increase in the average sales price per copper pound sold while the per pound cost of raw copper increased 25.4%. In nominal dollars, the sales price increased more than the cost of copper. Fluctuations in sales prices are primarily a result of changing copper and other raw material prices and product price competition.
Cost of goods sold was $1.099 billion in 2018, compared to $1.008 billion in 2017 and $820.7 million in 2016. The copper costs included in cost of goods sold were $802.7 million in 2018 compared to $702.6 million in 2017 and $535.4 million in 2016. Copper costs as a percentage of net sales were 62.3% in 2018 compared to 60.3% in 2017 and 56.9% in 2016. The increase from 2017 to 2018 of copper costs as a percentage of net sales was due to copper costs increasing 5.7%. As noted above, copper costs are the largest component of costs and therefore the most significant driver of sales prices of copper wire. Accordingly, the increase in copper prices in 2018 caused most of the other costs to decrease slightly in terms of their percentage of net sales dollars. The cost of other raw materials as a percentage of net sales dropped from 15.0% in 2016 and 12.9% in 2017 to 12.8% in 2018. Material cost percentages in 2018 were decreased by a 0.5% LIFO credit (income), and increased in 2017 by a 1.7% LIFO debit (expense), and also increased in 2016 by a 1.2% LIFO debit (expense). Adding the LIFO adjustment to the cost of copper and other materials, the total materials cost in 2018 was 74.6% of net sales versus 74.9% in 2017 and 73.1% in 2016.

Depreciation, labor and overhead costs as a percentage of net sales were 10.7% in 2018 compared to 11.7% in 2017 and 14.1% in 2016. The percentage decrease of depreciation, labor and overhead costs in 2018 versus 2017 and in 2017 versus 2016 was due primarily to the increase in copper driven sales dollars providing a larger denominator by which these costs are divided. These trends in percentages are also somewhat due to the fact that depreciation, labor and overhead costs have fixed and semi-fixed components that do not vary directly with sales dollars or unit volumes.
Inventories consist of the following at December 31 (in thousands):
 
2018
 
2017
 
2016
Raw materials
$
28,455

 
$
32,928

 
$
23,144

Work-in-process
30,529

 
22,753

 
20,889

Finished goods
88,708

 
88,497

 
81,764

Total
147,692

 
144,178

 
125,797

Adjust to LIFO cost
(45,325
)
 
(51,813
)
 
(32,523
)
Inventory
$
102,367

 
$
92,365

 
$
93,274

In 2018, copper steadily declined during the year, while exhibiting some volatility as shown in the COMEX copper closing price tables above. The quantity of total copper inventory on hand increased somewhat in 2018, compared to 2017. The other materials category, which includes a large number of raw materials, had quantity changes that included increases and decreases in various other materials. These factors resulted in the 2018 year-end inventory value of all inventories using the LIFO method being $45.3 million less than the FIFO value, and the 2018 year-end LIFO reserve balance being $6.5 million lower than at the end of 2017. This resulted in a LIFO adjustment decreasing cost of sales by $6.5 million in 2018.
In 2017, copper steadily rose during the year, while exhibiting some volatility as shown in the COMEX copper closing price tables above. Following the global collapse of many commodities that began in 2015, copper prices rebounded in 2017, finishing significantly higher than at the end of 2016. The quantity of total copper inventory on hand decreased nominally in 2017, compared to 2016. The other materials category, which includes a large number of raw materials, had quantity changes that included increases and decreases in various other materials. These factors resulted in the 2017 year-end inventory value of all inventories using the

15



LIFO method being $51.8 million less than the FIFO value, and the 2017 year-end LIFO reserve balance being $19.3 million higher than at the end of 2016. This resulted in a LIFO adjustment increasing cost of sales by $19.3 million in 2017.
Based on the current copper and other raw material prices, there is no LCM adjustment necessary in the periods presented above. Future reductions in the price of copper and other raw materials could require the Company to record an LCM adjustment against the related inventory balance, which would result in a negative impact on net income.
Gross profit was $189.7 million, or 14.7% of net sales, in 2018 compared to $156.2 million, or 13.4% of net sales, in 2017 and $120.1 million, or 12.8% of net sales, in 2016. The changes in gross profit were due to the factors discussed above.
Selling expenses, which are made up of freight and sales commissions, were $67.0 million in 2018, $55.0 million in 2017 and $47.7 million in 2016. As a percentage of net sales, selling expenses were 5.2% in 2018 versus 4.7% in 2017 and 5.1% in 2016. The increase in 2018 is due to increases in freight rates, which have been widely publicized due to new federal government regulations and a shortage of truck drivers. General and administrative expenses, as a percentage of net sales, were 1.8% in 2018 versus 1.9% in 2017 and 2.3% in 2016. Percentages to sales of these costs decreased slightly as the metal driven sales dollars increased. Accounts receivable write-offs were zero in 2018, $11,000 in 2017 and $29,000 in 2016. The Company did not increase the bad debt reserve in 2018, 2017 and 2016.
Net interest and other income was $2.2 million in 2018, $0.4 million in 2017 and $0.1 million in 2016. The increase in 2018 reflects higher cash balances, higher US interest rates, our purchase of certificates of deposit during the year and the resulting interest earned.
The Tax Cuts and Jobs Act of 2017 (“the 2017 Tax Act”) was signed into law on December 22, 2017. The 2017 Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%, eliminating certain deductions and introducing new tax regimes. The 2017 Tax Act also enhanced and extended through 2026 the option to claim accelerated depreciation deductions on qualified property. The Company has completed its determination of the accounting implications of the 2017 Tax Act on its tax accruals and has not recorded any material changes to the $13.5 million originally recorded. This amount is primarily comprised of the remeasurement of federal net deferred tax liabilities resulting from the permanent reduction in the U.S. statutory corporate tax rate to 21% from 35%.

Our effective tax rate was 23.1% in 2018, 16.1% in 2017 and 33.4% in 2016. The differences between the provisions for income taxes and the income taxes computed using the federal income tax statutory rate are primarily due to changes in tax laws and the effects of permanent differences between transactions reported for financial reporting and tax purposes, primarily the domestic production activity deduction. The provisional favorable impact of the 2017 Tax Act reduced the 2017 effective tax rate by 16.9%. The domestic production activity deduction reduced the effective tax rate by approximately 3.1% in 2017 and 3.4% in 2016. The 2017 Tax Act eliminated the qualified domestic production activities deduction beginning in 2018.
As a result of the foregoing factors, the Company’s net income was $78.2 million in 2018, $67.0 million in 2017 and $33.8 million in 2016.
Off-Balance Sheet Arrangements
The Company does not currently have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Liquidity and Capital Resources
The following table summarizes the Company’s cash flow activities (in thousands):
 
Year Ended December 31,
 
2018
 
2017
 
2016
Net cash provided by operating activities
$
81,590

 
$
48,013

 
$
58,560

Net cash used in investing activities
(26,065
)
 
(20,690
)
 
(41,582
)
Net cash provided by (used in) financing activities
(482
)
 
286

 
(377
)
Net increase in cash and cash equivalents
$
55,043

 
$
27,609

 
$
16,601

Annual dividends paid
$
1,668

 
$
1,661

 
$
1,656

The Company maintains a substantial inventory of finished products to satisfy customers’ 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

16



its suppliers. 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 the invoice. Therefore, the Company’s liquidity needs have generally consisted of working capital necessary to finance receivables and inventory. 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, borrowings under its various debt arrangements and sales of its common stock.
At December 31, 2018 and 2017, the Company had no debt outstanding.
The Company is party to a Credit Agreement (as amended, the “Credit Agreement”) with two banks, Bank of America, N.A., as administrative agent and letter of credit issuer, and Wells Fargo Bank, National Association as syndication agent. The Credit Agreement extends through October 1, 2021, and provides for maximum borrowings of $150.0 million. In the third quarter of 2016, the Company signed a Third Amendment to the Credit Agreement, which, along with other minor changes, eliminated the restriction of maximum borrowings based on the amount of eligible accounts receivable plus the amount of eligible finished goods and raw materials, less any reserves established by the banks. Additionally, at our request and subject to certain conditions, the commitments under the Credit Agreement may be increased by a maximum of up to $100.0 million as long as existing or new lenders agree to provide such additional commitments. Borrowings under the line of credit bear interest, at the Company’s option, at either (1) LIBOR plus a margin that varies from 0.875% to 1.75% depending upon the Leverage Ratio (as defined in the Credit Agreement), or (2) the base rate (which is the highest of the federal funds rate plus 0.5%, the prime rate, or LIBOR plus 1.0%) plus 0% to 0.25% (depending upon the Leverage Ratio). A commitment fee ranging from 0.15% to 0.30% (depending upon the Leverage Ratio) is payable on the unused line of credit. At December 31, 2018, there were no borrowings outstanding under the Credit Agreement, and letters of credit outstanding in the amount of $1.3 million left $148.7 million of credit available under the Credit Agreement. Obligations under the Credit Agreement are the only contractual borrowing obligations or commercial borrowing commitments of the Company. Obligations under the Credit Agreement are unsecured and contain customary covenants and events of default. The Company was in compliance with the covenants as of December 31, 2018.
The Company paid interest totaling $0.3 million, $0.2 million and $0.2 million in 2018, 2017 and 2016, respectively, none of which was capitalized.
On November 10, 2006, the Board of Directors approved a stock repurchase program authorizing the Company to repurchase up to an authorized number of shares of its common stock on the open market or through privately negotiated transactions at prices determined by the President of the Company during the term of the program. The Company’s Board of Directors has authorized several increases and annual extensions of this stock repurchase program, and, as of December 31, 2018, 1,132,946 shares remained authorized for repurchase through March 31, 2019. The Company did not repurchase any shares of its stock in 2018, 2017 or 2016. The Company also has a broker agreement to repurchase stock in the open market at certain trigger points pursuant to a Rule 10b5-1 plan announced on November 28, 2007.
Net cash provided by operations was $81.6 million in 2018 compared to $48.0 million in 2017 and $58.6 million in 2016. The increase in cash provided by operations of $33.6 million in 2018 versus 2017 was due to several factors. The Company had increased net income of $78.2 million in 2018 versus $67.0 million of net income in 2017. Accounts receivable increased in 2018, resulting in cash used of $6.5 million versus cash used of $44.0 million in 2017, an increase in operating cash flow of $37.5 million. 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. Additionally, accounts receivable can fluctuate based upon the payment timing patterns of certain large customers, although increases in accounts receivable at the end of quarterly reporting periods for this reason have not historically raised collectability issues. Changes in current and deferred taxes resulted in $1.3 million of cash provided in 2018 versus cash used of $17.0 million in 2017, a positive swing of $18.3 million in 2018 versus 2017. Changes in inventory resulted in cash used of $10.0 million in 2018 versus cash provided of $0.9 million in 2017, a $10.9 million decrease in cash provided. Changes in trade accounts payable and accrued liabilities resulted in cash provided of $0.2 million in 2018 versus cash provided of $25.0 million in 2017, a negative swing of $24.8 million. These changes in cash flow were the primary drivers of the $33.6 million increase in net cash flow provided by operations in 2018 versus 2017.
Net cash provided by operations was $48.0 million in 2017 compared to $58.6 million in 2016. The decrease in cash provided by operations of $10.6 million in 2017 versus 2016 was due to several factors. The Company had increased net income of $67.0 million in 2017 versus $33.8 million of net income in 2016. Accounts receivable increased in 2017, resulting in cash used of $44.0 million versus cash provided of $1.2 million in 2016, a reduction in operating cash flow of $45.2 million. 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. Additionally, accounts receivable can fluctuate based upon the payment timing patterns of certain large customers, although increases in accounts receivable at the end of quarterly reporting periods for this reason have not historically raised collectability issues. Changes in current and deferred taxes resulted in $17.0 million of cash used in 2017 versus cash provided of $10.5 million in 2016, a negative swing of $27.5 million in 2017 versus 2016. This negative impact of current and deferred

17



taxes in 2017 is a result of the 2017 federal tax rate reduction and offsets the tax benefit included in the $67.0 million of net income. Changes in inventory resulted in cash provided of $0.9 million in 2017 versus cash provided of $2.0 million in 2016, a $1.1 million decrease in cash provided. Changes in trade accounts payable and accrued liabilities resulted in cash provided of $25.0 million in 2017 versus cash used of $7.8 million in 2016, a positive swing of $32.8 million. These changes in cash flow were the primary drivers of the $10.6 million decrease in net cash flow provided by operations in 2017 versus 2016.
Net cash used in investing activities was $26.1 million in 2018 versus $20.7 million in 2017 and $41.6 million in 2016. In 2018, capital expenditures were used primarily for the purchase and installation of machinery and equipment throughout the Company. In 2017 and 2016, capital expenditures were used primarily for the expansion of an existing wire plant and the purchase and installation of machinery and equipment throughout the Company.
The net cash used by financing activities of $0.5 million in 2018 consisted primarily of dividend payments of $1.7 million, partially offset by $1.2 million proceeds from issuance of Company stock related to employees exercising stock options. The net cash provided by financing activities of $0.3 million in 2017 consisted primarily of $1.7 million in dividend payments offset by $1.9 million proceeds from issuance of Company stock related to employees exercising stock options. The net cash used by financing activities of $0.4 million in 2016 consisted primarily of $1.7 million in dividend payments partially offset by $1.4 million proceeds from issuance of Company stock related to employees exercising stock options.
During 2019, the Company expects its capital expenditures will consist primarily of machinery and equipment for its manufacturing operations. The Company also expects its future working capital requirements may fluctuate as a result of changes in unit sales volumes and the price of copper and other raw materials. The Company believes that its cash balance, cash flow from operations and the financing available from its revolving credit facility will satisfy working capital and capital expenditure requirements for the next twelve months.
Contractual Obligations
As shown below, the Company had the following contractual obligations as of December 31, 2018.
 
Payments Due by Period ($ in Thousands)
Contractual Obligations
Total
 
Less Than
1 Year
 
1-3 Years
 
3-5 Years
 
More Than
5 Years
Purchase Obligations
$
82,988

 
$
82,988

 

 

 

Note:
Amounts listed as purchase obligations consist of open purchase orders for major raw material purchases and $14.5 million of capital equipment and construction purchase orders open as of December 31, 2018.
Critical Accounting Policies and Estimates
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 preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. See Note 1 to the Financial Statements included under “Item 8. Financial Statements and Supplementary Data” of this annual report. Management believes the following critical accounting policies affect its more significant estimates and assumptions used in the preparation of its financial statements.
Inventories are stated at the lower of cost, using the last-in, first out (LIFO) method, or market. The Company maintains two inventory pools for LIFO purposes. 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 monthly 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, aluminum and finished wire prices as of the end of each reporting period. The Company performs a lower of cost or market calculation quarterly. As of December 31, 2018, no LCM adjustment was required. However, decreases in copper and other material prices could necessitate establishing an LCM reserve in future periods. Additionally, future reductions in the quantity of inventory on hand could cause copper or other raw materials that are carried in inventory at costs different from the cost of copper and other raw materials in the period in which the reduction occurs to be included in costs of goods sold for that period at the different price.
Revenue from the sale of the Company’s products is recognized when goods are shipped to the customer, title and risk of loss are transferred, pricing is fixed or determinable and collection is reasonably assured. A provision for payment discounts and customer

18



rebates is estimated based upon historical experience and other relevant factors and is recorded within the same period that the revenue is recognized.
The Company has provided an allowance for losses on customer receivables based upon estimates of those customers’ inability to make required payments. Such allowance is established and adjusted based upon the makeup of the current receivable portfolio, past bad debt experience and current market conditions. If the financial condition of our customers was to deteriorate and impair their ability to make payments to the Company, additional allowances for losses might be required in future periods.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) is the sole source of authoritative U.S. GAAP other than Securities and Exchange Commission ("SEC") issued rules and regulations that apply only to SEC registrants. The FASB issues an Accounting Standard Update (“ASU”) to communicate changes to the codification. The Company considers the applicability and impact of all ASUs. The following are those ASUs that are relevant to the Company.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (ASC 606),” which replaces numerous requirements in U.S. GAAP, including industry-specific requirements, and provides companies with a single revenue recognition model for recognizing revenue from contracts with customers. On January 1, 2018, we adopted the requirements of ASC 606 and all the related amendments to all of our contracts using the modified retrospective method. Upon completing our implementation assessment of ASC 606, we concluded that no adjustment was required to the opening balance of retained earnings at the date of initial application. The comparative information has also not been restated and continues to be reported under the accounting standards in effect for those periods. Additional disclosures required by ASC 606 are presented under Revenue Recognition above.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Under the new guidance, a lessee will be required to recognize a right to use asset and a lease liability for all leases with terms of twelve months or longer. Lessor accounting remains largely consistent with existing U.S. generally accepted accounting principles. The new standard will be effective for us beginning January 1, 2019. Early adoption is permitted. In July 2018, the FASB issued ASU 2018-11 which provided a transition option that allows companies to continue applying the guidance under the current lease standard in the comparative periods presented in the financial statements. Companies that elect this option would record a cumulative-effect adjustment to the opening balance of retained earnings on the date of adoption. The Company has completed its assessment of Topic 842 and the related impact to the financial statements and disclosures and will adopt Topic 842 effective January 1, 2019 using the transition method provided by ASU 2018-11. The Company estimates the adoption will result in the recognition of a right-of-use asset and corresponding lease liability for operating leases of less than $1.0 million on the Balance Sheet. In preparation for the adoption, we have designed internal controls and information system functionality to enable the preparation of the necessary financial information and have reached conclusions on key accounting assessments.
Information Regarding Forward-Looking Statements
This report contains various forward-looking statements 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 and stock price are:
fluctuations in the global and national economy
fluctuations in the level of activity in the construction industry, including remodeling
demand for the Company’s products
the impact of price competition on the Company’s margins
fluctuations in the price of copper and other key raw materials
the loss of key manufacturers’ representatives who sell the Company’s product line
fluctuations in utility costs, especially electricity and natural gas, and freight costs
fluctuations in insurance costs and the availability of coverage of various types
weather related disasters at the Company’s and/or key vendor’s operating facilities

19



stock price fluctuations due to “stock market expectations” and other external variables
unforeseen future legal issues and/or government regulatory changes
changes in tax laws
patent and intellectual property disputes, and
fluctuations in the Company’s financial position or national banking issues that impede the Company’s ability to obtain reasonable and adequate financing.
This list highlights some of the major factors that could affect the Company’s operations or stock price, but cannot enumerate all the potential issues that management faces on a daily basis, many of which are totally out of management’s control. For further discussion of the factors described herein and their potential effects on the Company, see “Item 1. Business,” “Item 1A. Risk Factors,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.”
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The Company does not engage in metal futures trading or hedging activities and does not enter into derivative financial instrument transactions for trading or other speculative purposes. However, the Company is generally exposed to commodity price and interest rate risks.
The Company purchases copper cathode primarily from miners and commodity brokers at prices determined each month based on the average daily COMEX closing prices for copper for that month, plus a negotiated premium. As a result, fluctuations in copper prices caused by market forces can significantly affect the Company’s financial results. Interest rate risk is attributable to the Company’s long-term debt. As of December 31, 2018, the Company was a party to the Credit Agreement. Amounts outstanding under the Credit Agreement, as amended, are payable on October 1, 2021, with interest payments due quarterly. At December 31, 2018, the balance outstanding under the Credit Agreement was zero.
There is inherent rollover risk for borrowings under the Credit Agreement as such borrowings mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and the Company’s future financing requirements. Assuming that the Company had $100.0 million of outstanding debt, an average 1% interest rate increase in 2018 would increase the Company’s interest expense by $1.0 million.
For further information regarding market risk, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Item 1A. Risk Factors.”

20



Item 8. Financial Statements and Supplementary Data.
The financial statements of the Company and the notes thereto appear on the following pages.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Encore Wire Corporation
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Encore Wire Corporation (the Company) as of December 31, 2018 and 2017, and the related statements of income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018 and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 22, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the PCAOB and required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1990.
Dallas, Texas
February 22, 2019



21



Encore Wire Corporation
Balance Sheets
As of December 31, 2018 and 2017
(In thousands, except share data)
 
2018
 
2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
178,405

 
$
123,362

Accounts receivable, net of allowance of $2,030 and $2,028
235,353

 
228,885

Inventories
102,367

 
92,365

Income taxes receivable
1,389

 

Prepaid expenses and other
1,723

 
2,372

Total current assets
519,237

 
446,984

 
 
 
 
Property, plant and equipment – at cost:
 
 
 
Land and land improvements
51,169

 
51,024

Construction-in-progress
24,623

 
13,782

Buildings and improvements
151,758

 
150,603

Machinery and equipment
314,175

 
300,250

Furniture and fixtures
9,687

 
9,602

Total property, plant and equipment
551,412

 
525,261

 
 
 
 
Accumulated depreciation
(252,754
)
 
(238,463
)
Property, plant and equipment – net
298,658

 
286,798

 
 
 
 
Other assets
165

 
193

Total assets
$
818,060

 
$
733,975

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Trade accounts payable
$
36,706

 
$
36,330

Accrued liabilities
36,866

 
35,005

Income taxes payable

 
296

Total current liabilities
73,572

 
71,631

 
 
 
 
Deferred income taxes
24,032

 
20,999

 
 
 
 
Commitments and contingencies

 

 
 
 
 
Stockholders’ equity:
 
 
 
Preferred stock, $.01 par value:
 
 
 
Authorized shares – 2,000,000; none issued

 

Common stock, $.01 par value:
 
 
 
Authorized shares – 40,000,000;
 
 
 
Issued shares – 26,906,603 and 26,859,203
269

 
269

Additional paid-in capital
60,822

 
58,192

Treasury stock, at cost – 6,027,455 and 6,027,455 shares
(91,056
)
 
(91,056
)
Retained earnings
750,421

 
673,940

Total stockholders’ equity
720,456

 
641,345

Total liabilities and stockholders’ equity
$
818,060

 
$
733,975

See accompanying notes.

22



Encore Wire Corporation
Statements of Income
For the Years Ended December 31, 2018, 2017 and 2016
(In thousands, except per share data)
 
2018
 
2017
 
2016
Net sales
$
1,288,683

 
$
1,164,248

 
$
940,790

Cost of goods sold
1,098,961

 
1,008,073

 
820,673

Gross profit
189,722

 
156,175

 
120,117

 
 
 
 
 
 
Selling, general and administrative expenses
90,212

 
76,726

 
69,351

Operating income
99,510

 
79,449

 
50,766

 
 
 
 
 
 
Net interest and other income
2,174

 
427

 
48

Income before income taxes
101,684

 
79,876

 
50,814

 
 
 
 
 
 
Provision for income taxes
23,534

 
12,859

 
16,975

Net income
$
78,150

 
$
67,017

 
$
33,839

Earnings per common and common equivalent share – basic
$
3.75

 
$
3.23

 
$
1.63

Earnings per common and common equivalent share – diluted
$
3.74

 
$
3.21

 
$
1.63

Weighted average common and common equivalent shares outstanding – basic
20,845

 
20,767

 
20,704

Weighted average common and common equivalent shares outstanding – diluted
20,910

 
20,847

 
20,773

Cash dividends declared per share
$
0.08

 
$
0.08

 
$
0.08

See accompanying notes.

23



Encore Wire Corporation
Statements of Stockholders' Equity
(In thousands, except per share data)
 
Common Stock
 
Additional
Paid-In
Capital
 
Treasury
Stock
 
Retained
Earnings
 
 
 
Shares
 
Amount
 
Total
Balance at January 1, 2016
26,715

 
$
267

 
$
53,024

 
$
(91,056
)
 
$
576,404

 
$
538,639

Net income

 

 

 

 
33,839

 
33,839

Exercise of stock options
48

 
1

 
1,436

 

 

 
1,437

Tax benefit on exercise of stock options

 

 
60

 

 

 
60

Stock-based compensation

 

 
791

 

 

 
791

Dividend declared—$0.08 per share

 

 

 

 
(1,657
)
 
(1,657
)
Balance at December 31, 2016
26,763

 
268

 
55,311

 
(91,056
)
 
608,586

 
573,109

Net income

 

 

 

 
67,017

 
67,017

Exercise of stock options
91

 
1

 
1,926

 

 

 
1,927

Stock-based compensation
5

 

 
955

 

 

 
955

Dividend declared—$0.08 per share

 

 

 

 
(1,663
)
 
(1,663
)
Balance at December 31, 2017
26,859

 
269

 
58,192

 
(91,056
)
 
673,940

 
641,345

Net income

 

 

 

 
78,150

 
78,150

Exercise of stock options
42

 

 
1,186

 

 

 
1,186

Stock-based compensation
5

 

 
1,444

 

 

 
1,444

Dividend declared—$0.08 per share

 

 

 

 
(1,669
)
 
(1,669
)
Balance at December 31, 2018
26,906

 
$
269

 
$
60,822

 
$
(91,056
)
 
$
750,421

 
$
720,456

See accompanying notes.

24



Encore Wire Corporation
Statements of Cash Flows
For the Years Ended December 31, 2018, 2017 and 2016
(In thousands)
 
2018
 
2017
 
2016
Operating Activities
 
 
 
 
 
Net income
$
78,150

 
$
67,017

 
$
33,839

Adjustments to reconcile net income to net cash
provided by operating activities:
 
 
 
 
 
Depreciation and amortization
16,513

 
15,684

 
16,811

Deferred income taxes
3,033

 
(12,974
)
 
(1,262
)
Excess tax benefits of options exercised

 

 
(60
)
Stock-based compensation attributable to equity awards
1,444

 
955

 
791

Other
(187
)
 
(587
)
 
1,294

Changes in operating assets and liabilities:
 
 
 
 
 
Accounts receivable
(6,468
)
 
(44,030
)
 
1,210

Inventories
(10,002
)
 
909

 
1,980

Other assets
627

 
58

 
12

Trade accounts payable and accrued liabilities
165

 
25,004

 
(7,778
)
Current income taxes receivable / payable
(1,685
)
 
(4,023
)
 
11,723

Net cash provided by operating activities
81,590

 
48,013

 
58,560

 
 
 
 
 
 
Investing Activities
 
 
 
 
 
Purchases of property, plant and equipment
(26,181
)
 
(21,754
)
 
(45,374
)
Proceeds from sale of assets
116

 
1,064

 
3,792

Net cash used in investing activities
(26,065
)
 
(20,690
)
 
(41,582
)
 
 
 
 
 
 
Financing Activities
 
 
 
 
 
Deferred financing fees

 
(1
)
 
(197
)
Borrowings from revolver
67,300

 

 

Repayments to revolver
(67,300
)
 

 

Proceeds from issuance of common stock, net
1,186

 
1,948

 
1,416

Dividends paid
(1,668
)
 
(1,661
)
 
(1,656
)
Excess tax benefits of options exercised

 

 
60

Net cash provided by (used in) financing activities
(482
)
 
286

 
(377
)
 
 
 
 
 
 
Net increase in cash and cash equivalents
55,043

 
27,609

 
16,601

Cash and cash equivalents at beginning of period
123,362

 
95,753

 
79,152

Cash and cash equivalents at end of period
$
178,405

 
$
123,362

 
$
95,753

See accompanying notes.

25



Encore Wire Corporation
Notes to Financial Statements
December 31, 2018
1. Significant Accounting Policies
Business
The Company conducts its business in one segment – the manufacture of electric building wire, principally NM-B cable, for use primarily as interior wiring in homes, apartments, and manufactured housing, and THHN/THWN-2 cable and metal-clad and armored cable for use primarily as wiring in commercial and industrial buildings. The Company sells its products primarily through manufacturers’ representatives located throughout the United States and, to a lesser extent, through its own direct marketing efforts. The principal customers for Encore’s building wire are wholesale electrical distributors.
Copper, a commodity product, is the principal raw material used in the Company’s manufacturing operations. Copper accounted for 73.0%, 69.7% and 65.2% of the cost of goods sold during 2018, 2017 and 2016, respectively. The price of copper fluctuates, depending on general economic conditions and in relation to supply and demand and other factors, and has caused monthly variations in the cost of copper purchased by the Company. The Company cannot predict future copper prices or the effect of fluctuations in the cost of copper on the Company’s future operating results.
Basis of Presentation
The Company's financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The financial statements include the accounts of the Company and its former wholly-owned subsidiary, which was dissolved in December 2018. For periods prior to the subsidiary's dissolution, all intercompany accounts and transactions were eliminated upon consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
The majority of our revenue is derived by fulfilling customer orders for the purchase of our products, which include electrical building wire and cable. We recognize revenue at the point in time that control of the ordered products is transferred to the customer, which is typically upon shipment to the customer from our manufacturing facilities and based on agreed upon shipping terms on the related purchase order. Amounts billed and due from our customers are classified as accounts receivables on the balance sheet and require payment on a short-term basis through standard payment terms.
Revenue is measured as the amount of consideration we expect to receive in exchange for fulfilling product orders. The amount of consideration we expect to receive and revenue we recognize includes estimates for trade payment discounts and customer rebates which are estimated using historical experience and other relevant factors and is recorded within the same period that the revenue is recognized. We review and update these estimates regularly and the impact of any adjustments are recognized in the period the adjustments are identified. The adjustments resulting from updated estimates of trade payment discounts and customer rebates were not material.
Freight Expenses
The Company classifies shipping and handling costs as a component of selling, general and administrative expenses. Shipping and handling costs were approximately $35.1 million, $26.2 million and $24.1 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Fair Value of Financial Instruments
Certain items are required to be measured at fair value on a recurring basis, primarily cash equivalents held in banks. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A three-level hierarchy is followed for disclosure to show the extent and level of judgment used to estimate fair value measurements:
Level 1 – Inputs used to measure fair value are unadjusted quoted prices that are available in active markets for the identical assets or liabilities as of the reporting date.

26



Level 2 – Inputs used to measure fair value, other than quoted prices included in Level 1, are either directly or indirectly observable as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.
Level 3 – Inputs used to measure fair value are unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.
At December 31, 2018 and 2017, the carrying value of cash and cash equivalents, excluding certificates of deposit, approximated fair value, a Level 1 measurement. At December 31, 2018 and 2017, the carrying value of the Company’s certificates of deposit totaling $100.7 million and $30.2 million, respectively, approximated fair value, a Level 2 measurement.
Concentrations of Credit Risk and Accounts Receivable
Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company places its cash and cash equivalents with high credit quality financial institutions.
Accounts receivable represent amounts due from customers, primarily wholesale electrical distributors, related to the sale of the Company’s products. Such receivables are uncollateralized and are generally due from a diverse group of customers located throughout the United States. Encore has three customers, each of whom slightly exceeds 10% of the Company's total sales. The Company establishes an allowance for losses based upon the makeup of the current portfolio, past bad debt experience and current market conditions.
Allowance for Losses Progression (In Thousands)
2018
 
2017
 
2016
Beginning balance January 1
$
2,028

 
$
2,036

 
$
2,065

Write-offs of bad debts

 
(11
)
 
(29
)
Collection of previous write-offs
2

 
3

 

Ending balance at December 31
$
2,030

 
$
2,028

 
$
2,036

Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. At December 31, 2018 and 2017, the Company’s cash equivalents consisted of investments in money market accounts and certificates of deposit with the Company’s banks.
Inventories
Inventories are stated at the lower of cost, using the last-in, first-out (LIFO) method, or market. The Company evaluates the market value of its raw materials, work-in-process and finished goods inventory primarily based upon current raw material and finished goods prices at the end of each period.
Property, Plant, and Equipment
Depreciation of property, plant and equipment for financial reporting is provided on the straight-line method over the estimated useful lives of the respective assets as follows: buildings and improvements, 15 to 39 years; machinery and equipment, 3 to 20 years; and furniture and fixtures, 3 to 15 years. Accelerated cost recovery methods are used for tax purposes. Repairs and maintenance costs are expensed as incurred.
Stock-Based Compensation
Compensation cost for all equity-based compensation expected to vest is measured at fair value on the date of grant and recognized over the related service period. The fair value of stock awards is determined based on the number of shares granted and the quoted price of Encore’s common stock, and the fair value of stock options and stock appreciation rights is estimated on the date of grant using the Black-Scholes model. Such value is recognized as expense over the service period, net of estimated forfeitures, on a straight-line basis. To the extent actual forfeitures or updated estimates of forfeitures differ from management’s current estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised.

27



Earnings Per Share
Earnings 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. The dilutive effects of stock options, which are common stock equivalents, are calculated using the treasury stock method.
Income Taxes
Income taxes are provided for based on the liability method, resulting in deferred income tax assets and liabilities arising due to temporary differences. Temporary differences are differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period the change in rate is enacted.
Comprehensive Income
Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. There were no differences between comprehensive income and reported income in the periods presented.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) is the sole source of authoritative U.S. GAAP other than Securities and Exchange Commission ("SEC") issued rules and regulations that apply only to SEC registrants. The FASB issues an Accounting Standard Update (“ASU”) to communicate changes to the codification. The Company considers the applicability and impact of all ASUs. The following are those ASUs that are relevant to the Company.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (ASC 606),” which replaces numerous requirements in U.S. GAAP, including industry-specific requirements, and provides companies with a single revenue recognition model for recognizing revenue from contracts with customers. On January 1, 2018, we adopted the requirements of ASC 606 and all the related amendments to all of our contracts using the modified retrospective method. No adjustment was required to the opening balance of retained earnings at the date of initial application. The comparative information has also not been restated and continues to be reported under the accounting standards in effect for those periods. Additional disclosures required by ASC 606 are presented under Revenue Recognition above.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Under the new guidance, a lessee will be required to recognize a right to use asset and a lease liability for all leases with terms of twelve months or longer. Lessor accounting remains largely consistent with existing U.S. generally accepted accounting principles. The new standard will be effective for us beginning January 1, 2019. Early adoption is permitted. In July 2018, the FASB issued ASU 2018-11 which provided a transition option that allows companies to continue applying the guidance under the current lease standard in the comparative periods presented in the financial statements. Companies that elect this option would record a cumulative-effect adjustment to the opening balance of retained earnings on the date of adoption. The Company has completed its assessment of Topic 842 and the related impact to the financial statements and disclosures and will adopt Topic 842 effective January 1, 2019 using the transition method provided by ASU 2018-11. The Company estimates the adoption will result in the recognition of a right-of-use asset and corresponding lease liability for operating leases of less than $1.0 million on the Balance Sheet. In preparation for the adoption, we have designed internal controls and information system functionality to enable the preparation of the necessary financial information and have reached conclusions on key accounting assessments.

28



2. Inventories
Inventories consist of the following as of December 31:
In Thousands
2018
 
2017
Raw materials
$
28,455

 
$
32,928

Work-in-process
30,529

 
22,753

Finished goods
88,708

 
88,497

Total
147,692

 
144,178

Adjust to LIFO cost
(45,325
)
 
(51,813
)
Inventory
$
102,367

 
$
92,365

There were no liquidations of inventories that had a material impact on the Company’s results of operations for any period presented.
3. Accrued Liabilities
Accrued liabilities consist of the following as of December 31:
In Thousands
2018
 
2017
Sales rebates payable
$
18,565

 
$
17,386

Property taxes payable
3,962

 
3,802

Accrued salaries
8,790

 
8,318

Other accrued liabilities
5,549

 
5,499

Total accrued liabilities
$
36,866

 
$
35,005

4. Debt
At December 31, 2018 and 2017, the Company had no debt outstanding.
The Company is party to a Credit Agreement (as amended, the “Credit Agreement”) with two banks, Bank of America, N.A., as administrative agent and letter of credit issuer, and Wells Fargo Bank, National Association as syndication agent. The Credit Agreement extends through October 1, 2021, and provides for maximum borrowings of $150.0 million. In the third quarter of 2016, the Company signed a Third Amendment to the Credit Agreement, which, along with other minor changes, eliminated the restriction of maximum borrowings based on the amount of eligible accounts receivable plus the amount of eligible finished goods and raw materials, less any reserves established by the banks. Additionally, at the Company's request and subject to certain conditions, the commitments under the Credit Agreement may be increased by a maximum of up to $100.0 million as long as existing or new lenders agree to provide such additional commitments. Borrowings under the line of credit bear interest, at the Company’s option, at either (1) LIBOR plus a margin that varies from 0.875% to 1.75% depending upon the Leverage Ratio (as defined in the Credit Agreement), or (2) the base rate (which is the highest of the federal funds rate plus 0.5%, the prime rate, or LIBOR plus 1.0%) plus 0% to 0.25% (depending upon the Leverage Ratio). A commitment fee ranging from 0.15% to 0.30% (depending upon the Leverage Ratio) is payable on the unused line of credit. At December 31, 2018, there were no borrowings outstanding under the Credit Agreement, and letters of credit outstanding in the amount of $1.3 million left $148.7 million of credit available under the Credit Agreement. Obligations under the Credit Agreement are the only contractual borrowing obligations or commercial borrowing commitments of the Company. Obligations under the Credit Agreement are unsecured and contain customary covenants and events of default. The Company was in compliance with the covenants as of December 31, 2018.
The Company paid interest totaling $0.3 million, $0.2 million and $0.2 million in 2018, 2017 and 2016, respectively, none of which was capitalized.
5. Income Taxes
The Tax Cuts and Jobs Act of 2017 (“the 2017 Tax Act”) was signed into law on December 22, 2017. The 2017 Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%, eliminating certain deductions and introducing new tax regimes. The 2017 Tax Act also enhanced and extended through 2026 the option to claim accelerated depreciation deductions on qualified property. The Company has completed its determination of the accounting implications of the 2017 Tax Act on its tax accruals and has not recorded any material changes to the $13.5 million originally

29



recorded. This amount is primarily comprised of the remeasurement of federal net deferred tax liabilities resulting from the permanent reduction in the U.S. statutory corporate tax rate to 21% from 35%.
The provisions for income tax expense are summarized as follows for the years ended December 31:
In Thousands
2018
 
2017
 
2016
Current:
 
 
 
 
 
Federal
$
18,523

 
$
24,421

 
$
17,139

State
1,978

 
1,411

 
1,098

Deferred:
 
 
 
 
 
Federal
2,603

 
(13,289
)
 
(905
)
State
430

 
316

 
(357
)
Total income tax expense
$
23,534

 
$
12,859

 
$
16,975

The differences between the provision for income taxes and income taxes computed using the federal income tax rate are as follows for the years ended December 31:
In Thousands
2018
 
2017
 
2016
Amount computed using the statutory rate
$
21,354

 
$
27,956

 
$
17,769

State income taxes, net of federal tax benefit
1,903

 
1,166

 
482

Qualified domestic production activity deduction

 
(2,464
)
 
(1,712
)
Effect of 2018 deferred rate change

 
(13,463
)
 

Other
277

 
(336
)
 
436

Total income tax expense
$
23,534

 
$
12,859

 
$
16,975

The domestic production activity deduction reduced the Company’s effective tax rate 3.1% and 3.4% in 2017 and 2016, respectively. The 2017 Tax Act eliminated the qualified domestic production activities deduction beginning in 2018.
The tax effect of each type of temporary difference giving rise to the net deferred tax liability at December 31 is as follows:
In Thousands
2018
 
2017
Depreciation
$
(23,559
)
 
$
(22,121
)
Inventory
(2,650
)
 
(486
)
Allowance for doubtful accounts
457

 
457

Uniform capitalization rules
470

 
610

Other
1,250

 
541

Deferred income tax liability
$
(24,032
)
 
$
(20,999
)
The Company made income tax payments of $22.3 million in 2018, $30.0 million in 2017 and $6.7 million in 2016.
The Company was audited by the IRS for the year 2015. The audit concluded with no adjustments. The Company’s federal income tax returns for the years subsequent to December 31, 2015 remain subject to examination. The Company’s income tax returns in major state income tax jurisdictions remain subject to examination for various periods subsequent to December 31, 2012. The Company has no reserves for uncertain tax positions as of December 31, 2018 and 2017. Interest and penalties resulting from audits by tax authorities have been immaterial and are included in the provision for income taxes in the statements of income.

30



6. Stock-Based Compensation
Total stock-based compensation expense by type of award was as follows for the years ended December 31:
In Thousands
2018
 
2017
 
2016
Stock options
$
1,209

 
$
738

 
$
791

Stock appreciation rights (“SARs”)
894

 
1,543

 
805

Stock grants
235

 
217

 

Total stock-based compensation expense
$
2,338

 
$
2,498

 
$
1,596

 
 
 
 
 
 
Tax benefit on exercise of stock options
$

 
$

 
$
60

Stock Options:
In 2010, the Board of Directors adopted a new stock option plan called the Encore Wire 2010 Stock Option Plan (As Amended and Restated Effective February 20, 2017) (the “2010 Stock Option Plan”) which was approved by the Company’s stockholders at the 2017 Annual Meeting of Stockholders. Similar to the 1999 Stock Option Plan, which expired on June 28, 2009, the 2010 Stock Option Plan permits the grant of stock options to directors, officers and employees of the Company. The Company granted stock option awards in 2018, 2017 and 2016 with exercise prices equal to the fair market value of its stock on the date of grant of the options. These options vest ratably over a period of five years from the time the options were granted. The maximum term of any option granted under the 1999 or 2010 Stock Option Plan is ten years. New shares are issued upon the exercise of options. As of December 31, 2018, 474,800 options were available to be granted in the future under the 2010 Stock Option Plan.
The following presents a summary of stock option activity for the year ended December 31, 2018:
 
Number
of
Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic Value
(In Thousands)
Outstanding at January 1, 2018
339,900

 
$
36.55

 
 
 
 
Granted
117,500

 
51.05

 
 
 
 
Exercised
(42,400
)
 
28.00

 
 
 
 
Outstanding at December 31, 2018
415,000

 
$
41.53

 
6.9 years
 
$
3,762

Vested and exercisable at December 31, 2018
156,100

 
$
36.88

 
5.1 years
 
$
2,133

The fair value of stock options granted during the years ended December 31, 2018, 2017 and 2016, was estimated on the date of grant using a Black-Scholes option pricing model and the following weighted average assumptions:
 
Year Ended December 31,
 
2018
 
2017
 
2016
Risk-free interest rate
2.36
%
 
1.84
%
 
1.46
%
Expected dividend yield
0.16
%
 
0.19
%
 
0.23
%
Expected volatility
31.40
%
 
30.80
%
 
32.92
%
Expected lives
5.0 years

 
5.0 years

 
5.0 years

The Company bases expected volatilities on historical volatilities of Encore's common stock. The expected life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting periods and management’s consideration of historical exercise patterns. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding to the expected life of the option. The expected dividend yield is based on the annualized dividend payment paid on common shares.
During the years ended December 31, 2018, 2017 and 2016, the weighted average grant date fair value of options granted was $15.95, $12.46 and $10.64, respectively, and the total intrinsic value of options exercised was $0.9 million, $2.2 million and $0.5

31



million, respectively. As of December 31, 2018, total unrecognized compensation cost related to non-vested stock options of $1.9 million was expected to be recognized over a weighted average period of 3.4 years.
Stock Appreciation Rights:
In 2014, the Board of Directors adopted a new stock appreciation rights plan called the Encore Wire 2014 Stock Appreciation Rights Plan (the “2014 SARs Plan”). The 2014 SARs Plan permits the grant of SARs that may only be settled in cash to non-executive officers and employees of the Company. SARs granted to employees vest ratably over a period of five years from the time the SARs were granted. The maximum term of any SARs granted under the 2014 SARs Plan is ten years. These awards are classified as liability awards. The liability balance was $2.3 million and $2.5 million at December 31, 2018 and 2017, respectively, and are included in accrued liabilities. Compensation cost for these awards is determined using a fair value method and remeasured at each reporting date until the date of settlement. As of December 31, 2018, a total of 471,100 SARs were outstanding under the 2014 SARs Plan.
The following presents a summary of SARs activity for the year ended December 31, 2018:
 
Cash-settled SARs
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic Value
(In Thousands)
Outstanding at January 1, 2018
366,900

 
$
39.73

 
 
 
 
Granted
221,000

 
50.99

 
 
 
 
Exercised
(77,800
)
 
39.58

 
 
 
 
Forfeited/Canceled
(39,000
)
 
45.43

 
 
 
 
Outstanding at December 31, 2018
471,100

 
$
44.56

 
8.0 years
 
$
2,816

Vested and exercisable at December 31, 2018
63,900

 
$
39.95

 
6.4 years
 
$
653

The fair value of SARs granted during the years ended December 31, 2018, 2017 and 2016, was estimated on the date of grant using a Black-Scholes option pricing model and the following weighted average assumptions:
 
Year Ended December 31,
 
2018
 
2017
 
2016
Risk-free interest rate
2.53
%
 
2.01
%
 
1.53
%
Expected dividend yield
0.16
%
 
0.16
%
 
0.18
%
Expected volatility
30.83
%
 
31.90
%
 
33.25
%
Expected lives
3.0 years

 
3.2 years

 
3.4 years

The Company bases expected volatilities on historical volatilities of Encore's common stock. The expected life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting periods and management’s consideration of historical exercise patterns. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding to the expected life of the option. The expected dividend yield is based on the annualized dividend payment paid on common shares.
During the years ended December 31, 2018, 2017 and 2016, the weighted average grant date fair value of SARs granted was $14.94, $16.09 and $13.36, respectively, and the total intrinsic value of SARs exercised was $1.1 million in 2018, $0.3 million in 2017, and negligible in 2016. As of December 31, 2018, total unrecognized compensation cost related to non-vested SARs of $4.2 million was expected to be recognized over a weighted average period of 3.4 years.
Stock Grants:
In May 2018, the Company granted 1,000 shares of stock to each of the 5 non-employee directors, with a grant date fair value of $46.95 per share. In May 2017, the Company granted 1,000 shares of stock to each of the 5 non-employee directors, with a grant date fair value of $43.40 per share

32



7. Earnings Per Share
The following table sets forth certain components of the computation of basic and diluted earnings per share for the years ended December 31:
In Thousands
2018
 
2017
 
2016
Numerator:
 
 
 
 
 
Net income
$
78,150

 
$
67,017

 
$
33,839

 
 
 
 
 
 
Denominator:
 
 
 
 
 
Denominator for basic earnings per share – weighted average shares
20,845

 
20,767

 
20,704

 
 
 
 
 
 
Effect of dilutive securities:
 
 
 
 
 
Employee stock options
65

 
80

 
69

 
 
 
 
 
 
Denominator for diluted earnings per share – weighted average shares
20,910

 
20,847

 
20,773

Stock options to purchase common stock at exercise prices in excess of the average actual stock price for the period that were anti-dilutive and that were excluded from the determination of diluted earnings per share are as follows:
In Thousands, Except Per Share Data
2018
 
2017
 
2016
Weighted average anti-dilutive stock options
181

 
125

 
143

 
 
 
 
 
 
Weighted average exercise price per share
$
50.20

 
$
45.74

 
$
40.39

8. Stockholders’ Equity
On November 10, 2006, the Board of Directors approved a stock repurchase program authorizing the Company to repurchase up to an authorized number of shares of its common stock on the open market or through privately negotiated transactions at prices determined by the President of the Company during the term of the program. The Company’s Board of Directors has authorized several increases and annual extensions of this stock repurchase program, and, as of December 31, 2018, 1,132,946 shares remained authorized for repurchase through March 31, 2019. The Company did not repurchase any shares of its stock in 2018, 2017 or 2016. The Company also has a broker agreement to repurchase stock in the open market at certain trigger points pursuant to a Rule 10b5-1 plan announced on November 28, 2007.
9. Contingencies
There are no material pending proceedings to which the Company is a party or to which any of its property is subject. However, the Company is from time to time involved in litigation, certain other claims and arbitration matters arising in the ordinary course of its business. The Company accrues for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in both the determination of the probability of a loss and the determination as to whether a loss is reasonably estimable. Any such accruals are reviewed at least quarterly and adjusted to reflect the effects of negotiations, settlements, rulings, advice of legal counsel and technical experts and other information and events pertaining to a particular matter. To the extent there is a reasonable possibility (within the meaning of ASC 450 (Contingencies)) that probable losses could exceed amounts already accrued, if any, and the additional loss or range of loss is able to be estimated, management discloses the additional loss or range of loss.
For matters where the Company has evaluated that a loss is not probable, but is reasonably possible, the Company will disclose an estimate of the possible loss or range of loss or make a statement that such an estimate cannot be made. In some instances, for reasonably possible losses, the Company cannot estimate the possible loss or range of loss. The nature and progression of litigation can make it difficult to predict the impact a particular lawsuit will have on the Company. There are many reasons that the Company cannot make these assessments, including, among others, one or more of the following: the early stages of a proceeding; damages sought that are unspecified, unsupportable, unexplained or uncertain; discovery is incomplete; the complexity of the facts that are

33



in dispute; the difficulty of assessing novel claims; the parties not having engaged in any meaningful settlement discussions; the possibility that other parties may share in any ultimate liability; and/or the often slow pace of litigation.

10. Encore Wire Corporation 401(k) Profit Sharing Plan
The Company sponsors a 401(k) profit sharing plan (the “Plan”) that permits eligible employees to make self-directed contributions of their compensation, a portion of which is matched by the Company, subject to applicable limitations. At the discretion of its Board of Directors, the Company may, but is not required to, make profit-sharing contributions to the Plan on behalf of its employees. The Company’s matching contributions were $2.1 million, $1.9 million and $1.9 million in 2018, 2017 and 2016, respectively.
11. Related Party Transactions
Prior to 2017, the Company purchased certain finished goods inventory components from a company that was partially owned by a family member of an individual serving on the Board of Directors. The purchases totaled approximately $10.3 million in 2016. This supplier was sold during 2016 to an unrelated company. Therefore, this related party relationship ended in mid-2016.
The Company obtains quotes and purchases items from other vendors at prices that confirm that the Company obtains prices that are no less favorable than prices available from non-affiliated parties. Related party transactions are approved by the Audit Committee pursuant to Encore Wire Corporation’s Related Party Transactions Policy.
12. Quarterly Financial Information (Unaudited)
The following is a summary of the unaudited quarterly financial information for the two years ended December 31, 2018 and 2017 (in thousands, except per share data):
 
Three Months Ended
2018
March 31
 
June 30
 
September 30
 
December 31
Net sales
$
291,431

 
$
336,793

 
$
340,732

 
$
319,727

Gross profit
37,494

 
44,497

 
54,505

 
53,226

Net income
11,353

 
18,089

 
23,678

 
25,030

Earnings per common share – basic
0.54

 
0.87

 
1.14

 
1.20

Earnings per common share – diluted
0.54

 
0.86

 
1.13

 
1.20

 
Three Months Ended
2017
March 31
 
June 30
 
September 30
 
December 31
Net sales
$
279,392

 
$
291,534

 
$
292,030

 
$
301,292

Gross profit
39,205

 
35,872

 
39,087

 
42,011

Net income
13,632

 
10,933

 
13,964

 
28,488

Earnings per common share – basic
0.66

 
0.53

 
0.67

 
1.37

Earnings per common share – diluted
0.65

 
0.52

 
0.67

 
1.36


Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.

34



Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
The Company maintains controls and procedures designed to ensure that information required to be disclosed by it in the reports it files with or submits to the Securities and Exchange Commission (the “SEC”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Chief Executive and Chief Financial Officers, as appropriate to allow timely decisions regarding required disclosure. Based on an evaluation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report conducted by the Company’s management, with the participation of the Chief Executive and Chief Financial Officers, the Chief Executive and Chief Financial Officers concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports it files with or submits to the SEC is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Chief Executive and Chief Financial Officers, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) for the Company.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control —Integrated Framework (2013 Framework). Based on our assessment, we concluded that, as of December 31, 2018, the Company’s internal control over financial reporting is effective based on those criteria.
Ernst & Young LLP, the independent registered public accounting firm that audited the Company’s financial statements, has also audited the Company’s internal control over financial reporting as of December 31, 2018. Ernst & Young LLP’s attestation report on the Company’s internal control over financial reporting appears directly below.
There have been no changes in the Company’s internal control over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting during the Company’s last fiscal quarter.

35



Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Encore Wire Corporation
Opinion on Internal Control over Financial Reporting
We have audited Encore Wire Corporation’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Encore Wire Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the balance sheets of Encore Wire Corporation as of December 31, 2018 and 2017, the related statements of income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and our report dated February 22, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Dallas, Texas
February 22, 2019

36



PART III
Item 10. Directors, Executive Officers, and Corporate Governance.
The sections entitled “Election of Directors”, “Corporate Governance and Other Board Matters” and “Section 16(a) Beneficial Ownership Reporting Compliance” appearing in the Company’s proxy statement for the annual meeting of stockholders to be held on May 7, 2019 setting forth certain information with respect to the directors of the Company, Section 16(a) reporting obligations of directors and officers, the Company’s audit committee, the Company’s audit committee financial expert and the procedures by which security holders may recommend nominees to the Board of Directors are incorporated herein by reference. Certain information with respect to persons who are or may be deemed to be executive officers of the Company is set forth under the caption “Executive Officers of the Registrant” in Part I, Item 1 of this report.
In connection with Company’s long-standing commitment to conduct its business in compliance with applicable laws and regulations and in accordance with its ethical principles, the Board of Directors has adopted a Code of Business Conduct and Ethics applicable to all employees, officers, directors, and advisors of the Company. The Code of Business Conduct and Ethics of the Company is available under the “Investors” section of the Company’s website at http://www.encorewire.com, and is incorporated herein by reference. The Company intends to post amendments to or waivers of its Code of Business Conduct and Ethics (to the extent applicable to any officer or director of the Company) at such location on its website.
Item 11. Executive Compensation.
The section entitled “Executive Compensation” appearing in the Company’s proxy statement for the annual meeting of stockholders to be held on May 7, 2019, sets forth certain information with respect to the compensation of management of the Company and compensation committee interlocks and insider participation and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The section entitled “Security Ownership of Certain Beneficial Owners, Directors and Executive Officers” appearing in the Company’s proxy statement for the annual meeting of stockholders to be held on May 7, 2019 sets forth certain information with respect to the ownership of the Company’s common stock, and is incorporated herein by reference. Certain information with respect to the Company’s equity compensation plans that is required to be set forth in this Item 12 is set forth under the caption “Equity Compensation Plan Information” contained in “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of this Form 10-K and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The sections entitled “Executive Compensation — Certain Relationships and Related Transactions” and “Corporate Governance and Other Board Matters — Board Independence” appearing in the Company’s proxy statement for the annual meeting of stockholders to be held on May 7, 2019 set forth certain information with respect to certain relationships and related transactions, and director independence, and are incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The Section entitled “Proposal Three — Ratification of Appointment of Independent Registered Public Accounting Firm” appearing in the Company’s proxy statement for the annual meeting of stockholders to be held on May 7, 2019, sets forth certain information with respect to certain fees paid to accountants, and is incorporated herein by reference.

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PART IV
Item 15. Exhibits, Financial Statement Schedules.
The following documents are filed as a part of this report:
(1)
Financial Statements included in Item 8 of this Annual Report on Form 10-K; and
(2)
Financial statement schedules have been omitted because they are not applicable or the information required therein is included in the financial statements or notes thereto in Item 8 of this Annual Report on Form 10-K.
(3)
The exhibits required by Item 601 of Regulation S-K are set forth below:
Exhibit Number
  
Description
 
  
 
3.1
  
 
 
 
3.2
  
 
 
 
4.1
  
Form of certificate for Common Stock (filed as Exhibit 1 to the Company’s registration statement on Form 8-A, filed with the SEC on June 4, 1992 and incorporated herein by reference).
 
 
 
10.1*
  
 
 
 
10.2*
  
 
 
 
10.3*
  
 
 
 
10.4*
  
 
 
 
10.5*
  
 
 
 
10.6*
  
 
 
 
10.7*
 
 
 
 
10.8*
 
Form of Encore Wire Corporation Restricted Stock Award Agreement
 
 
 
10.9
  
 
 
 

38



10.10
  
 
 
 
10.11
  
 
 
 
10.12
 
 
 
 
10.13*
 
 
 
 
23.1
  
 
 
 
31.1
  
 
 
 
31.2
  
 
 
 
32.1
  
 
 
 
32.2
  
 
 
 
101.INS
  
XBRL Instance Document