WIRE Encore Wire Corp - 10-K

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 carefully considered in evaluating us and our common stock. Any of these risks, many of which are beyond our control, could materially and adversely affect our financial condition, results of operations or cash flows, or cause our actual results to differ materially from those projected in any forward-looking statements contained in this Annual Report on Form 10-K. Before purchasing the Company’s stock, an investor should know that making such an investment involves 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. We may also face other risks and uncertainties that are not presently known, are not currently believed to be material, or are not identified below because they are common to all businesses. Past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.

Risks Related to Our Business and Industry

Supply and Availability of Raw Materials, Supply Chain Constraints and Profitability Margins

The success of our business depends on our ability to meet customer demand of a commodity product in a highly competitive market, and sourcing an adequate supply of raw materials, including copper, is vital to our business and operations. While the Company generally believes our supply of raw materials is adequate, the Company could experience instances of limited supply of certain raw materials, resulting in extended lead times and higher prices.

Shortages or interruptions (including due to labor or political disputes) in the supply of our raw materials could disrupt our operations, and our business and financial condition could be materially adversely affected by such disruptions. Limitations inherent within our supply chain of certain raw materials, including competitive, governmental, and legal limitations, natural disasters, and other events, could impact costs, and future increases in the costs of these items, including, for example, the adoption of new tariffs by the United States and other countries, and a resurgence of the COVID-19 pandemic could adversely affect our profitability and availability of raw materials. There can be no assurance that future price increases will be successfully passed through to customers or that we will be able to find alternative suppliers.

Product Pricing and Volatility of Copper Market

Price competition for copper electrical wire and cable is significant, and the Company sells its products in accordance with prevailing market prices. Wire and cable 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. The price of copper fluctuates depending on general economic conditions and in relation to supply and demand and other factors, including changes in regulatory, geopolitical, political, social, economic, tax or monetary policies, 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. While the Company has experienced increased profitability in recent quarters, the Company cannot predict future copper prices or the effect of fluctuations in the costs of copper on the Company’s future operating results and, as a result, cannot predict how long the Company's increased profitability will continue and whether such positive financial trends will be sustained. Consequently, fluctuations in copper prices caused by market forces can significantly affect the Company’s financial results.

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. Data on remodeling is not readily available. However, remodeling activity historically trends up when new construction slows down. Construction activity is affected by the ability of our end users to finance projects, which may be severely reduced due to a widespread outbreak of contagious disease, including an epidemic or pandemic such as the COVID-19 pandemic. Residential, commercial and industrial construction could decline if companies and consumers are unable to finance construction projects or if the economy precipitously declines or stalls, which could result in delays or cancellations of capital projects.

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.

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 does. 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 manufacturers 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.

Risks Related to Our Operations

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, including recent periods of increased profitability, have been and will be impacted by the volume of such orders and shipments, and the Company cannot predict if periods of increased profitability will continue in the future. 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 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), various types of insurance coverage, and interruptions in plant operations resulting from the interruption of raw material supplies and other factors. Additionally, our results of operations could be impacted by macro-economic and geopolitical conditions as well as other outside factors, including changes in regulatory, geopolitical, political, social, economic, tax or monetary policies, 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. Bret J. Eckert, the Company’s Executive Vice President and Chief Financial Officer (neither of whom is 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.

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.

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, 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 systems, 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.

Climate Change

Future deterioration of the environment due to climate change or increased severe weather related events associated with climate change could affect both our operations and the operations of our suppliers and customers. Climate change may be associated with extreme weather conditions such as more intense hurricanes, thunderstorms, tornadoes and snow or ice storms, as well as rising sea levels. Additionally, the Company could experience disruptions or limitations to access of water. Our suppliers may face similar challenges, which could impact our supply chain. Demand for our products may be

impacted regionally as local climates adapt to global environmental changes. However, at this time, we are unable to determine the extent to which climate change may lead to increased storm or weather hazards affecting our operations.

Risks Related to Ownership of Our Stock

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 36% 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 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.

Risks Related to Laws and Regulations

Environmental Liabilities

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, including the Comprehensive Environmental Response, Compensation and Liability Act, as amended; the Resource Conservation and Recovery Act, as amended; and comparable state statutes and regulations promulgated thereunder, 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. We believe that we are in substantial compliance with applicable requirements related to waste handling, and that we hold all necessary and up-to-date permits, registrations and other authorizations to the extent that our operations require them under such laws and regulations. However, 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.

Our Targets Related to Sustainability and Emissions Reduction Initiatives, Including our Public Statements and Disclosures Regarding Them, May Expose Us to Numerous Risks

We have developed, and will continue to develop, targets related to our environmental, social, and governance ("ESG") initiatives. Statements in this and other reports we file with the SEC and other public statements related to these initiatives

reflect our current plans and expectations and are not a guarantee the targets will be achieved or achieved on the currently anticipated timeline. Our ability to achieve our ESG targets, including emissions reductions, is subject to numerous factors and conditions, some of which are outside of our control, and failure to achieve our announced targets or comply with ethical, environmental or other standards, including reporting standards, may expose us to government enforcement actions or private litigation and adversely impact our business. Further, our continuing efforts to research, establish, accomplish and accurately report on these targets may create additional operational risks and expenses and expose us to reputational, legal and other risks.

Investor and regulator focus on ESG matters continues to increase. If our ESG initiatives do not meet our investors' or other stakeholders' evolving expectations and standards, investment in our stock may be viewed as less attractive and our reputation, contractual, employment and other business relationships may be adversely impacted.

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.

Risks Related to Taxes

Changes in Tax Laws Could Increase Our Tax Rate and Adversely Affect Our Results of Operations

A change in tax laws is one of many factors that impact the Company’s effective tax rate, and any such change could adversely impact our effective tax rate, financial condition and results of operations.

The Inflation Reduction Act (“IRA”) was enacted on August 16, 2022. The IRA includes provisions imposing a 1% excise tax on share repurchases that occur after December 31, 2022, and introduces a 15% corporate alternative minimum tax on “adjusted financial statement income” of certain large corporations (generally, corporations reporting at least $1 billion of average adjusted pre-tax net income on their consolidated financial statements). Based on application of currently available guidance, the Company does not expect the IRA to have a material adverse impact to its financial statements.

It cannot be predicted whether or when tax laws, rules, regulations or ordinances may be enacted, issued, or amended that could materially and adversely impact our financial position, results of operations, or cash flows.

General Risk Factors

Outbreak of Contagious Disease

Our business and the businesses of our suppliers, distributors and customers could be adversely affected by the effects of a widespread outbreak of contagious diseases, including COVID-19, or any ongoing variants. Any outbreak of contagious diseases, and other adverse public health developments, could cause a disruption in our supply chain, distribution and demand for our products. The duration of any such disruption and the related financial impact from COVID-19, or any ongoing variants, and other epidemics and pandemics cannot be reasonably estimated at this time. Although the effects of the COVID-19 pandemic during 2023 were not as significant as prior years, new variants continued to cause waves of COVID-19 cases around the world. The occurrence or continuation of any of these events could lead to decreased revenues and limit our ability to execute on our business plan, which could adversely affect our business, financial condition and results of operations.

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;

• single-site, vertically integrated business model;

• deep supplier relationships for key raw materials;

• 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 a skilled work force; 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.

Investment in residential, commercial, and industrial infrastructure drives demand for the Company’s wire and cable products. In 2023, pounds shipped increased 6.7% in copper wire versus 2022. In 2022, pounds shipped increased 7.9% in copper wire versus 2021. In 2021, pounds shipped increased 10.8% in copper wire versus 2020.

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 significant and the Company sells its products in accordance with prevailing market prices. Copper, a commodity product, is the principal raw material used by the Company in manufacturing its products. The price of copper fluctuates, depending on general economic conditions, 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. The tables below highlight the range of closing prices of copper on the COMEX exchange for the periods shown.

COMEX COPPER CLOSING PRICE 2023

October

November

December

Quarter Ended

Dec. 31, 2023

Year-to-Date

Dec. 31, 2023

High

Low

Average

COMEX COPPER CLOSING PRICE 2022

October

November

December

Quarter Ended

Dec. 31, 2022

Year-to-Date

Dec. 31, 2022

High

Low

Average

COMEX COPPER CLOSING PRICE 2021

October

November

December

Quarter Ended

Dec. 31, 2021

Year-to-Date

Dec. 31, 2021

High

Low

Average

COMEX COPPER CLOSING PRICE 2023 by Quarter

Quarter Ended

March 31, 2023

Quarter Ended

June 30, 2023

Quarter Ended

Sept. 30, 2023

Quarter Ended

Dec. 31, 2023

Year-to-Date

Dec. 31, 2023

High

Low

Average

COMEX COPPER CLOSING PRICE 2022 by Quarter

Quarter Ended

March 31, 2022

Quarter Ended

June 30, 2022

Quarter Ended

Sept. 30, 2022

Quarter Ended

Dec. 31, 2022

Year-to-Date

Dec. 31, 2022

High

Low

Average

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,

Net sales

Cost of goods sold:

Copper

Other raw materials

Depreciation

Labor and overhead

LIFO adjustment

Total cost of goods sold

Gross profit

Selling, general and administrative expenses

Operating income

Net interest and other income

Income before income taxes

Provision for income taxes

Net income

The following discussions and analyses relate to factors that have affected the operating results of the Company for the years ended December 31, 2023, 2022 and 2021. 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. Additional information about results for year end 2021 and certain year-on-year comparisons between 2022 and 2021 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Net sales for the twelve months ended December 31, 2023 were $2.568 billion compared to $3.018 billion during the same period in 2022 and $2.593 billion during the same period in 2021. Copper unit volume, measured in pounds of copper contained in the wire sold, increased 6.7% in the year ended December 31, 2023 versus the year ended December 31, 2022. The 14.9% decrease in net sales dollars in 2023 versus 2022 was primarily the result of a 12.3% decrease in copper wire sales, driven by a 17.8% decrease in the average selling price of copper wire, partially offset by a 6.7% increase in copper wire pounds shipped. Additionally, aluminum net sales represented 12.9% of net sales for the year ended December 31, 2023 compared to 15.4% for the year ended December 31, 2022. The 16.4% increase in net sales dollars in 2022 versus 2021 was primarily the result of a 7.4% increase in copper wire sales, driven by a 7.9% increase in copper wire pounds shipped, partially offset by a 0.5% decrease in the average selling price of copper wire due to moderate decreases in copper commodity prices in the trailing six months of 2022.

Cost of goods sold was $1.912 billion, or 74.5% of net sales, in 2023 versus $1.905 billion, or 63.1% of net sales, in 2022 and $1.725 billion, or 66.5% of net sales in 2021. Gross profit decreased to $655.9 million, or 25.5% of net sales in 2023, compared to $1.112 billion, or 36.9% of net sales, in 2022 and $867.7 million, or 33.5% of net sales, in 2021.

Gross profit percentage for the twelve months ended December 31, 2023 was 25.5% compared to 36.9% during the same period in 2022 and 33.5% during the same period in 2021. The average selling price of wire per copper pound sold decreased 17.8% in the twelve months ended December 31, 2023 versus the twelve months ended December 31, 2022, while the average cost of copper per pound purchased decreased 3.7%. The overall increase in total volumes shipped, offset by an anticipated decrease in the average sales price during 2023, resulted in the decreased gross profit margin for the full year of 2023 when compared to 2022. The average selling price of wire per copper pound sold decreased 0.5% in the twelve months ended December 31, 2022 versus the twelve months ended December 31, 2021, while the average cost of copper per pound purchased decreased 2.7%.

Net income for the twelve months ended December 31, 2023 was $372.4 million versus $717.8 million in the same period in 2022 and $541.4 million in the same period in 2021. Fully diluted net earnings per common share were $21.62 in the twelve months ended December 31, 2023 versus $36.91 in the same period in 2022 and $26.22 in the same period in 2021.

Inventories consist of the following at December 31 (in thousands):

Raw materials

Work-in-process

Finished goods

Total

Adjust to LIFO cost

Inventory

The quantity of total copper inventory on hand in 2023 was consistent with our quantity of total copper inventory on hand in 2022. The other materials category, which includes a large number of raw materials, had quantity and price changes that included increases and decreases in various other materials. This resulted in a last-in, first-out (LIFO) method adjustment decreasing cost of sales by $1.8 million in 2023. We utilize the LIFO method because it results in a better matching of costs and revenues.

The quantity of total copper inventory on hand increased in 2022, compared to 2021. The other materials category, which includes a large number of raw materials, had quantity changes that included increases and decreases in various other materials. This resulted in a LIFO method adjustment decreasing cost of sales by $19.1 million in 2022.

Based on copper and other raw material prices, there were no lower of cost or market (LCM) adjustments necessary in the periods presented above.

Gross profit was $655.9 million, or 25.5% of net sales, in 2023 compared to $1.112 billion, or 36.9% of net sales, in 2022 and $867.7 million, or 33.5% of net sales, in 2021. The changes in gross profit were due to the factors discussed above.

Selling expenses, which are made up of freight and sales commissions, were $115.2 million in 2023, $133.7 million in 2022 and $109.5 million in 2021. Freight costs decreased in 2023 as a result of a decrease in overall freight rates compared to 2022. In 2022, freight costs increased as a result of increased sales volumes and an increase in overall freight rates, as compared to 2021. Commission costs decreased commensurate with the sales dollar decrease. As a percentage of net sales, selling expenses were 4.5% in 2023, 4.4% in 2022, and 4.2% in 2021. General and administrative expenses were $90.6 million in 2023, $63.7 million in 2022 and $57.6 million in 2021. As a percentage of net sales, general and administrative expenses were 3.5% in 2023 versus 2.1% in 2022 and 2.2% in 2021. Accounts receivable write-offs were $45 thousand in 2023 and zero in 2022 and 2021. The Company decreased the reserve for credit losses in 2023 by $1.3 million, did not record a reserve for credit losses in 2022, and increased the reserve by $1.5 million in 2021.

Net interest and other income was $33.3 million in 2023, $9.8 million in 2022 and $0.2 million in 2021. Both the increase in 2023 and 2022 reflect the economic impact of the pandemic and its effect on interest rates during the years and the resulting interest earned.

Our effective tax rate was 23.2% in 2023, 22.4% in 2022 and 22.6% in 2021. The differences between the provisions for income taxes and the income taxes computed using the federal income tax statutory rate are primarily due to state taxes and non-deductible expenses.

As a result of the foregoing factors, the Company’s net income was $372.4 million in 2023, $717.8 million in 2022 and $541.4 million in 2021.

Liquidity and Capital Resources

The following table summarizes the Company’s cash flow activities (in thousands):

Year Ended December 31,

Net cash provided by operating activities

Net cash used in investing activities

Net cash used in financing activities

Net increase in cash and cash equivalents

Annual dividends paid

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 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 and borrowings under its various debt arrangements. We believe that the Company has sufficient liquidity, and will continue to have sufficient liquidity beyond the short-term outlook.

At December 31, 2023 and 2022, the Company had no debt outstanding.

On February 9, 2021, the Company terminated its previous credit agreement and entered into a new Credit Agreement (the “2021 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 2021 Credit Agreement extends through February 9, 2026 and provides for maximum borrowings of $200.0 million. At our request and subject to certain conditions, the commitments under the 2021 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.

The 2021 Credit Agreement contains provisions to replace LIBOR with a replacement rate as described in the 2021 Credit Agreement. On October 20, 2022, the Company entered into the First Amendment to the 2021 Credit Agreement (the “Amended 2021 Credit Agreement”) which replaced LIBOR with BSBY as permitted under the 2021 Credit Agreement. Borrowings under the line of credit bear interest, at the Company’s option, at either (1) BSBY plus a margin that varies from 1.000% to 1.875% depending upon the Leverage Ratio (as defined in the 2021 Credit Agreement), or (2) the base rate (which is the highest of the federal funds rate plus 0.5%, the prime rate, or BSBY plus 1.0%) plus 0% to 0.375% (depending upon the Leverage Ratio). A commitment fee ranging from 0.20% to 0.325% (depending upon the Leverage Ratio) is payable on the unused line of credit. At December 31, 2023, there were no borrowings outstanding under the Amended 2021 Credit Agreement, and letters of credit outstanding in the amount of $0.3 million left $199.7 million of credit available under the Amended 2021 Credit Agreement. Obligations under the Amended 2021 Credit Agreement are the only contractual borrowing obligations or commercial borrowing commitments of the Company.

Obligations under the Amended 2021 Credit Agreement are unsecured and contain customary covenants and events of default. The Company was in compliance with the covenants as of December 31, 2023.

The Company paid interest totaling $0.4 million in 2023, 2022 and 2021, 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 from time to time in the open market or private transactions at the Company's discretion. This authorization originally expired on December 31, 2007, and the Company’s Board of Directors has authorized several increases and annual extensions of this stock repurchase program, most recently in June 2023, authorizing the repurchase of up to 2,000,000 shares of our common stock. A s of December 31, 2023,

813,617 shares remained authorized for repurchase through March 31, 2024. Under this program, the Company repurchased 2,661,792 shares of its stock in 2023, 2,055,470 shares in 2022, and 475,557 shares in 2021.

Subsequently, in February 2024, the Board of Directors extended the repurchase authorization for up to 2,000,000 shares of our common stock through March 31, 2025.

Net cash provided by operations decreased $233.7 million to $455.2 million in 2023 compared to $688.9 million in 2022 and $418.4 million in 2021. The decrease in cash provided by operations of $233.7 million in 2023 versus 2022 was due to several factors. Net income decreased to $372.4 million in 2023 from $717.8 million in 2022. Accounts receivable decreased $22.1 million in 2023 compared to increasing $7.6 million in 2022, resulting in a positive impact to cash flow of $29.7 million. Inventory, net increased $10.5 million in 2023 compared to increasing $52.4 million in 2022, producing a positive impact to cash flow of $41.9 million. Trade accounts payable and accrued liabilities positively impacted cash by $1.1 million in 2023 versus negatively impacting cash by $12.0 million in 2022, a positive swing of $13.1 million. These changes in cash flow were the primary drivers of the $233.7 million decrease in net cash flow provided by operations in 2023 versus 2022.

Net cash provided by operations increased $270.5 million to $688.9 million in 2022 compared to $418.4 million in 2021. The increase in cash provided by operations of $270.5 million in 2022 versus 2021 was due to several factors. Net income increased to $717.8 million in 2022 from $541.4 million in 2021. Accounts receivable increased $7.6 million in 2022 compared to increasing $216.8 million in 2021, resulting in a positive impact to cash flow of $209.2 million. Inventory, net increased $52.4 million in 2022 compared to increasing $8.5 million in 2021, producing a negative impact to cash flow of $43.9 million. Trade accounts payable and accrued liabilities negatively impacted cash by $12.0 million in 2022 versus favorably impacting cash by $66.9 million in 2021, a negative swing of $78.9 million. These changes in cash flow were the primary drivers of the $270.5 million increase in net cash flow provided by operations in 2022 versus 2021.

Net cash used in investing activities was $164.5 million in 2023 versus $148.4 million in 2022 and $118.2 million in 2021. In 2023, capital expenditures were used primarily for the purchase and installation of machinery and equipment throughout the Company. The construction of our new, state of the art, cross-link polyethylene (XLPE) compounding facility, which deepens our vertical integration related to wire and cable insulation, was completed in 2023. In 2022 and 2021, capital expenditures were used primarily for repurposing of our vacated distribution center, the construction of our new service center, and the purchase and installation of machinery and equipment throughout the Company.

The net cash used by financing activities of $460.6 million in 2023 consisted primarily of $460.2 million used to purchase Company stock and dividend payments of $1.4 million, partially offset by $0.9 million proceeds from issuance of Company stock related to employees exercising stock options. The net cash used by financing activities of $249.0 million in 2022 consisted primarily of $247.6 million used to purchase Company stock and dividend payments of $1.5 million, partially offset by $0.2 million proceeds from issuance of Company stock related to employees exercising stock options. The net cash used by financing activities of $44.4 million in 2021 consisted primarily of $43.3 million used to purchase Company stock and dividend payments of $1.6 million, partially offset by $1.1 million proceeds from issuance of Company stock related to employees exercising stock options.

In 2022 we began construction on a new, state of the art, cross-link polyethylene (XLPE) compounding facility to deepen vertical integration related to wire and cable insulation. XLPE insulation is used in many applications including Data Centers, Oil and Gas, Transit, Waste-Water Treatment facilities, Utilities and Wind and Solar applications. The new facility is substantially completed, with start-up and optimization now in progress. Capital spending in 2024 through 2026 will further expand vertical integration in our manufacturing processes to reduce costs as well as modernize select wire manufacturing facilities to increase capacity and efficiency and improve our position as a sustainable and environmentally responsible company. Total capital expenditures were $148.4 million in 2022 and $164.5 million in 2023. Total capital expenditures are expected to range from $130 - $150 million in 2024, $130 - $150 million in 2025, and $100 - $120 million in 2026. These investments are expected to be funded with existing cash reserves and operating cash flows.

As of December 31, 2023, the Company had contractual obligations of $226.0 million, consisting of open purchase orders for major raw material purchases and $65.4 million of purchase orders for capital expenditures.

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 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 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 and other raw materials and finished wire prices as of the end of each reporting period. The Company performs an LCM calculation quarterly. As of December 31, 2023, 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 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 credit 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 (“FASB”) Accounting Standards Codification (“ASC”) is the sole source of authoritative U.S. GAAP, along with the Securities and Exchange Commission ("SEC") and Public Company Accounting Oversight Board (“PCAOB”) 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. No new standards were adopted in 2023.

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;

• the impact of a global pandemic;

• 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, aluminum 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;

• 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.”