Attached files

file filename
EX-31.2 - EXHIBIT 31.2 - Houston Wire & Cable COs103799_ex31-2.htm
EX-32.1 - EXHIBIT 32.1 - Houston Wire & Cable COs103799_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - Houston Wire & Cable COs103799_ex31-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2016

 

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: 000-52046

 

 

 (Exact name of registrant as specified in its charter)

 

Delaware   36-4151663
(State or other jurisdiction of  incorporation or organization)   (I.R.S. Employer Identification No.)
     
10201 North Loop East    
Houston, Texas   77029
(Address of principal executive offices)   (Zip Code)

 

(713) 609-2100

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days   YES  x        NO ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  YES x       NO ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act

 

Large Accelerated Filer    ¨ Accelerated Filer    x Non-Accelerated Filer    ¨ Smaller Reporting Company     ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    YES ¨      NO x

 

At August 1, 2016 there were 16,470,249 outstanding shares of the registrant’s common stock, $0.001 par value per share.

 

 

   

 

HOUSTON WIRE & CABLE COMPANY

Form 10-Q

For the Quarter Ended June 30, 2016

 

INDEX

 

PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements (Unaudited)  
  Consolidated Balance Sheets 2
  Consolidated Statements of Operations 3
  Consolidated Statements of Cash Flows 4
  Notes to Consolidated Financial Statements 5
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 9
  Overview 9
  Cautionary Statement for Purposes of the “Safe Harbor” 9
  Results of Operations 10
  Impact of Inflation and Commodity Prices 13
  Liquidity and Capital Resources 13
  Contractual Obligations 14
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
     
Item 4. Controls and Procedures 14
     
PART II. OTHER INFORMATION 14
     
Item 1. Legal Proceedings 14
Item 1A. Risk Factors 14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Mine Safety Disclosures 15
Item 5. Other Information 15
Item 6. Exhibits 16
 
Signature Page 17

 

 1 
   

 

HOUSTON WIRE & CABLE COMPANY

Consolidated Balance Sheets

(In thousands, except share data)

 

   June 30,   December 31, 
   2016   2015 
   (unaudited)     
Assets          
Current assets:          
Accounts receivable, net  $41,505   $46,250 
Inventories, net   64,580    75,777 
Deferred income taxes   3,591    3,074 
Income taxes   1,139    932 
Prepaids   1,384    648 
Total current assets   112,199    126,681 
           
Property and equipment, net   10,814    10,899 
Intangible assets, net   5,138    5,984 
Goodwill   12,504    14,866 
Deferred income taxes   442    264 
Other assets   424    419 
Total assets  $141,521   $159,113 
           
Liabilities and stockholders' equity          
Current liabilities:          
Book overdraft  $491   $3,701 
Trade accounts payable   8,352    6,380 
Accrued and other current liabilities   7,800    9,568 
Total current liabilities   16,643    19,649 
           
Debt   30,092    39,188 
Other long term obligations   511    275 
Total liabilities   47,246    59,112 
           
Stockholders' equity:          
Preferred stock, $0.001 par value; 5,000,000 shares authorized, none issued and outstanding        
Common stock, $0.001 par value; 100,000,000 shares authorized: 20,988,952 shares issued: 16,490,559 and 16,712,626 outstanding at June 30, 2016 and December 31, 2015, respectively   21    21 
Additional paid-in-capital   54,847    54,621 
Retained earnings   101,308    106,048 
Treasury stock   (61,901)   (60,689)
Total stockholders' equity   94,275    100,001 
Total liabilities and stockholders' equity  $141,521   $159,113 

 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

 

 2 
   

 

HOUSTON WIRE & CABLE COMPANY

Consolidated Statements of Operations

(Unaudited)

(In thousands, except share and per share data)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2016   2015   2016   2015 
                 
Sales  $62,454   $77,959   $127,165   $159,559 
Cost of sales   50,024    61,024    101,336    124,900 
Gross profit   12,430    16,935    25,829    34,659 
                     
Operating expenses:                    
Salaries and commissions   6,838    7,168    13,747    14,406 
Other operating expenses   5,496    6,281    11,333    12,329 
Depreciation and amortization   774    726    1,466    1,438 
Impairment charge   2,384    2,994    2,384    2,994 
Total operating expenses   15,492    17,169    28,930    31,167 
                     
Operating income (loss)   (3,062)   (234)   (3,101)   3,492 
Interest expense   149    217    324    482 
Income (loss) before income taxes   (3,211)   (451)   (3,425)   3,010 
Income tax expense (benefit)   (654)   168    (684)   1,443 
Net income (loss)  $(2,557)  $(619)  $(2,741)  $1,567 
                     
Earnings (loss) per share:                    
Basic  $(0.16)  $(0.04)  $(0.17)  $0.09 
Diluted  $(0.16)  $(0.04)  $(0.17)  $0.09 
Weighted average common shares outstanding:                    
Basic   16,383,630    17,101,952    16,432,376    17,198,927 
Diluted   16,383,630    17,101,952    16,432,376    17,251,178 
                     
Dividend declared per share  $0.06   $0.12   $0.12   $0.24 

 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

 

 3 
   

 

HOUSTON WIRE & CABLE COMPANY

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

   Six Months
Ended June 30,
 
   2016   2015 
         
Operating activities          
Net income (loss)  $(2,741)  $1,567 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:          
Impairment charge   2,384    2,994 
Depreciation and amortization   1,466    1,438 
Amortization of unearned stock compensation   422    463 
Provision for inventory obsolescence   357    330 
Deferred income taxes   (695)   (670)
Other non-cash items   27    83 
Changes in operating assets and liabilities:          
Accounts receivable   4,738    8,564 
Inventories   10,840    12,359 
Book overdraft   (3,210)   (1,883)
Trade accounts payable   1,972    2,783 
Accrued and other current liabilities   (1,757)   (4,009)
Income taxes   (207)   (1,069)
Other operating activities   (525)   (520)
Net cash provided by operating activities   13,071    22,430 
           
Investing activities          
Expenditures for property and equipment   (557)   (1,545)
Net cash used in investing activities   (557)   (1,545)
           
Financing activities          
Borrowings on revolver   124,312    151,366 
Payments on revolver   (133,408)   (164,874)
Payment of dividends   (1,990)   (4,110)
Purchase of treasury stock   (1,428)   (3,267)
Net cash used in financing activities   (12,514)   (20,885)
           
Net change in cash        
Cash at beginning of period        
           
Cash at end of period  $   $ 

 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

 

 4 
   

 

HOUSTON WIRE & CABLE COMPANY
Notes to Consolidated Financial Statements

(Unaudited)

 

1.Basis of Presentation and Principles of Consolidation

 

Houston Wire & Cable Company (the “Company”), through its wholly owned subsidiaries, provides wire and cable, hardware and related services to the U.S. market through eighteen locations in thirteen states throughout the United States. The Company has no other business activity.

 

The consolidated financial statements as of June 30, 2016 and for the six months ended June 30, 2016 and 2015 have been prepared following accounting principles generally accepted in the United States (“GAAP”) for interim financial information and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation of the results of these interim periods have been included. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year. All significant inter-company balances and transactions have been eliminated. The Company has evaluated subsequent events through the time these financial statements in this Form 10-Q were filed with the Securities and Exchange Commission (the “SEC”).

 

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The most significant estimates are those relating to the inventory obsolescence reserve, the reserve for returns and allowances, vendor rebates and asset impairments. Actual results could differ materially from the estimates and assumptions used for the preparation of the financial statements.

 

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the SEC.

 

Recent Accounting Pronouncements

 

The Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) is the sole source of authoritative GAAP other than 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 recently issued ASUs are relevant to the Company.

 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The new guidance addresses several aspects of the accounting for share-based payment award transactions, including: (a) the recognition of the income tax effects of awards in the income statement when the awards vest, forfeit, or are settled, thus eliminating additional paid-in-capital pools, (b) classification of awards as either equity or liabilities, and (c) classification on the statement of cash flows. This update is effective for public companies for fiscal years beginning after December 15, 2016 with early adoption permitted. The Company is currently evaluating the elections the Company may make as well as the effects the adoption of this guidance may have on the Company's consolidated financial statements and determining the timing of adoption.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Under the new guidance, a lessee will be required to recognize assets and liabilities for leases greater than 1 year, regardless of whether they were previously accounted for as capital or operating leases. This update is effective for public companies for fiscal years beginning after December 15, 2018 with early adoption permitted. The Company is currently evaluating the impacts of adopting as well as the timing of when it will adopt this ASU.

 

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740) — Balance Sheet Classification of Deferred Taxes.” ASU No. 2015-17 eliminates the requirement to classify deferred tax assets and liabilities as current or long-term based on how the related assets or liabilities are classified. All deferred taxes are now required to be classified as long-term including any associated valuation allowances. This guidance is effective for public companies for fiscal years beginning after December 15, 2016 with early adoption permitted on either a prospective or retrospective basis. The Company is currently evaluating the timing and method of adoption of this ASU, which impacts only the balance sheet presentation.

 

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory (Topic 330),” which changes guidance for subsequent measurement of inventory within the scope of the update from the lower of cost or market to the lower of cost and net realizable value. This update is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. The Company does not believe there will be any material impact upon the adoption of this guidance on the Company's consolidated financial statements and is still determining the timing of adoption.

 

 5 
   

  

In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs (Subtopic 835-30).” The amendments in this ASU require debt issuance costs to be presented on the balance sheet as a direct reduction from the carrying amount of the related debt liability. However, the guidance in this ASU did not address the presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. As a result, in August 2015 the FASB issued ASU No. 2015-15 “Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Agreements,” to clarify that, with respect to a line-of-credit agreement, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement. The Company adopted this guidance in the first quarter and will continue to treat debt issuance costs as a deferred asset and amortize the deferred asset over the term of the credit agreement. Therefore, the adoption did not have any impact on the Company’s financial position or results of operations.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition,” and most industry-specific guidance. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The amendments in the ASU must be applied using one of two retrospective methods and are effective for annual and interim periods beginning after December 15, 2017. Early adoption for annual and interim periods beginning after December 31, 2016 is permitted. The Company is still evaluating the impact of this ASU on its financial position and results of operations, timing of adoption, and which implementation method the Company will use.

 

2.Earnings (loss) per Share

 

Basic earnings (loss) per share are calculated by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings (loss) per share include the dilutive effects of stock options and unvested restricted stock awards and units.

 

The following reconciles the denominator used in the calculation of diluted earnings (loss) per share:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2016   2015   2016   2015 
Denominator:                    
Weighted average common shares for basic earnings (loss) per share   16,383,630    17,101,952    16,432,376    17,198,927 
Effect of dilutive securities               52,251 
Weighted average common shares for diluted earnings (loss) per share   16,383,630    17,101,952    16,432,376    17,251,178 

 

The weighted average common shares for diluted earnings (loss) per share exclude stock options and unvested restricted stock awards and units to purchase 728,535 and 600,364 shares for the three months ended June 30, 2016 and 2015, respectively, and 697,688 and 591,436 shares for the six months ended June 30, 2016 and 2015. These securities have been excluded from the calculation, as including them would have an anti-dilutive effect on earnings (loss) per share for the respective periods.

 

3.Impairment of Goodwill and Intangibles

 

During the second quarter of 2016 and prior to the annual impairment test of goodwill in October, the Company concluded that impairment indicators existed at the Houston Wire & Cable (HWC) reporting unit, due to a decline in the overall financial performance, decrease in the market capitalization and overall market demand. The Company also concluded that there were impairment indicators for certain of the Company’s tradenames related to the Southwest and Southern Wire reporting units.

 

The Company performed step one of the impairment test and concluded that the fair value of the HWC reporting unit was less than its carrying value. Therefore, the Company performed step two of the impairment analysis. The step one test also indicated that one of the tradenames at Southern Wire was impaired, and the Company has recorded a non-cash charge of less than $0.1 million against the tradenames during the period ended June 30, 2016.

 

Step two of the impairment analysis measures the impairment charge by allocating the HWC reporting unit’s fair value to all of the assets and liabilities of the reporting unit in a hypothetical analysis that calculates implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination and recording the deferred tax impact. Any excess of the carrying value of the reporting unit’s goodwill over the implied fair value of the reporting unit’s goodwill is recorded as an impairment loss.

 

The fair value of the HWC reporting unit was estimated using a discounted cash flow model and a guideline public company method, 50% weight of each. The material assumptions used included a weighted average cost of capital of 11.0% and a long-term growth rate of 3-7% for the income approach and adjusted invested capital multiple of 0.2 times revenue and a control premium of 10.0% for the guideline public company method. The carrying value of the HWC reporting unit’s goodwill was $2.4 million and its implied fair value resulting from step two of the impairment test was zero. As a result, the Company has recorded a non-cash goodwill impairment charge of $2.4 million during the period ended June 30, 2016.

 

The fair value for goodwill and tradenames (indefinite-lived intangible assets) were both determined using a Level 3 measurement approach. The Level 3 value of all of the Company’s tradenames at June 30, 2016 was $4.5 million.

 

During the second quarter of 2015 and prior to the annual impairment test of goodwill in October, the Company concluded that impairment indicators existed at the Southwest Wire Rope (Southwest) reporting unit, due to a decline in the overall financial performance and overall market demand. Impairment indicators also existed for certain of the Company’s tradenames related to the Southwest and Southern Wire reporting units.

 

 6 
   

 

 After performing the necessary analysis the Company recorded, during the period ended June 30, 2015, a non-cash charge of $0.4 million against the tradenames and a non-cash goodwill impairment charge of $2.6 million.

  

4.Debt

 

On October 1, 2015, HWC Wire & Cable Company, as borrower, entered into the Fourth Amended and Restated Loan and Security Agreement (the “2015 Loan Agreement”), with Bank of America, N.A., as agent and lender, and the Company, as guarantor, executed a Third Amended and Restated Guaranty of the borrower’s obligations thereunder. The 2015 Loan Agreement provides a $100 million revolving credit facility, bears interest at the agent’s base rate, with a London Interbank Offered Rate (“LIBOR”) rate option, and expires on September 30, 2020. Under certain circumstances, the Company may request an increase in the commitment by an additional $50 million. The 2015 Loan Agreement is secured by substantially all of the property of the Company, other than real estate. Availability under the 2015 Loan Agreement is limited to a borrowing base equal to 85% of the value of eligible accounts receivable, plus the lesser of 70% of the value of eligible inventory or 90% of the net orderly liquidation value percentage of the value of eligible inventory, in each case less certain reserves.

 

Portions of the loan may be converted to LIBOR loans in minimum amounts of $1.0 million and integral multiples of $0.1 million. LIBOR loans bear interest at the British Bankers Association LIBOR Rate plus 100 to 150 basis points based on availability, and loans not converted to LIBOR loans bear interest at a fluctuating rate equal to the greatest of the agent’s prime rate, the federal funds rate plus 50 basis points, or 30-day LIBOR plus 150 basis points. The unused commitment fee is 25 basis points.

 

The 2015 Loan Agreement includes, among other things, covenants that require the Company to maintain a specified minimum fixed charge coverage ratio, unless certain availability levels exist. Additionally, the 2015 Loan Agreement allows for the unlimited payment of dividends and repurchases of stock, subject to the absence of events of default and maintenance of a fixed charge coverage ratio and minimum level of availability. The 2015 Loan Agreement contains certain provisions that may cause the debt to be classified as a current liability, in accordance with GAAP, if availability falls below certain thresholds, even though the ultimate maturity date under the loan agreement remains as September 30, 2020. At June 30, 2016, the Company was in compliance with the availability-based covenants governing its indebtedness.

 

The carrying amount of long term debt approximates fair value as it bears interest at variable rates. The fair value is a Level 2 measurement as defined in ASC Topic 820, “Fair Value Measurement.”

 

5.Stockholders’ Equity

 

During each of the first and second quarters of 2016, the Board of Directors approved a quarterly dividend of $0.06 per share payable to stockholders. Dividends paid were $2.0 million and $4.1 million during the six months ended June 30, 2016 and 2015, respectively.

 

6.Stock Based Compensation

 

Stock Option Awards

 

There were no stock option awards granted during the first six months of 2016 or 2015.

 

Restricted Stock Awards and Restricted Stock Units

 

Following the Annual Meeting of Stockholders on May 3, 2016, the Company awarded restricted stock units with a value of $50,000 to each non-employee director who was elected or re-elected, for an aggregate of 35,515 restricted stock units. Each award of restricted stock units vests at the date of the 2017 Annual Meeting of Stockholders. Each non-employee director is entitled to receive a number of shares of the Company's common stock equal to the number of vested restricted stock units, together with dividend equivalents from the date of grant, at such time as the director’s service on the board terminates for any reason.

 

Total stock-based compensation cost was $0.2 million for each of the three months ended June 30, 2016 and 2015 and $0.4 million and $0.5 million for the six months ended June 30, 2016 and 2015, respectively, and is included in salaries and commissions.

 

7.Commitments and Contingencies

 

As part of the acquisition of Southwest Wire Rope and Southern Wire made in 2010, the Company assumed the liability for the post-remediation monitoring of the water quality at one of the acquired facilities in Louisiana. The expected liability of $0.1 million at June 30, 2016 relates to the cost of the monitoring, which the Company estimates will be incurred over approximately the next two years, and also the cost to plug the wells. Remediation work was completed prior to the acquisition in accordance with the requirements of the Louisiana Department of Environmental Quality.

 

 7 
   

 

The Company has issued letters of credit totaling $2.6 million to certain vendors, of which $2.5 million will expire in October 2016.

 

The Company, along with many other defendants, has been named in a number of lawsuits in the state courts of Minnesota, North Dakota, and South Dakota alleging that certain wire and cable which may have contained asbestos caused injury to the plaintiffs who were exposed to this wire and cable. These lawsuits are individual personal injury suits that seek unspecified amounts of money damages as the sole remedy. It is not clear whether the alleged injuries occurred as a result of the wire and cable in question or whether the Company, in fact, distributed the wire and cable alleged to have caused any injuries.  The Company maintains general liability insurance that, to date, has covered the defense of and all costs associated with these claims. In addition, the Company did not manufacture any of the wire and cable at issue, and the Company would rely on any warranties from the manufacturers of such cable if it were determined that any of the wire or cable that the Company distributed contained asbestos which caused injury to any of these plaintiffs. In connection with ALLTEL’s sale of the Company in 1997, ALLTEL provided indemnities with respect to costs and damages associated with these claims that the Company believes it could enforce if its insurance coverage proves inadequate.

 

There are no legal proceedings pending against or involving the Company that, in management’s opinion, based on the current known facts and circumstances, are expected to have a material adverse effect on the Company’s consolidated financial position, cash flows, or results from operations.

 

8.Subsequent Events

 

On August 5, 2016, the Board of Directors approved a dividend on the shares of common stock of the Company in the amount of $0.03 per share, payable on August 30, 2016, to stockholders of record at the close of business on August 19, 2016.

 

 8 
   

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the Company’s financial position and results of operations. MD&A is provided as a supplement to the Company’s Consolidated Financial Statements (unaudited) and the accompanying Notes to Consolidated Financial Statements (unaudited) and should be read in conjunction with the MD&A included in the Company’s Form 10-K for the year ended December 31, 2015.

 

Overview

 

We are one of the largest distributors of wire and cable and related services to the U.S. market. We provide our customers with a single-source solution for wire and cable, hardware and related services by offering a large selection of in-stock items, exceptional customer service and high levels of product expertise.

 

Critical Accounting Policies

 

The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses. On an on-going basis, we make and evaluate estimates and judgments, including those related to the inventory obsolescence reserve, the reserve for returns and allowances, vendor rebates and asset impairments. We base our estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances; the results of which form the basis for making judgments about amounts and timing of revenue and expenses, the carrying values of assets and the recorded amounts of liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. We have discussed the development and selection of critical accounting policies and estimates with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed our related disclosures. The critical accounting policies related to the estimates and judgments are discussed in our Annual Report on Form 10-K for the year ended December 31, 2015 under Management’s Discussion and Analysis of Financial Condition and Results of Operations. There have been no changes to our critical accounting policies and estimates during the six months ended June 30, 2016.

 

Cautionary Statement for Purposes of the “Safe Harbor”

 

Forward-looking statements in this report are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may relate to, but are not limited to, information or assumptions about our sales and marketing strategy, sales (including pricing), income, operating income or gross margin improvements, working capital, cash flow, interest rates, impact of changes in accounting standards, future economic performance, management’s plans, goals and objectives for future operations, performance and growth or the assumptions relating to any of the forward-looking statements. These statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as “aim”, “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “project”, “should”, “will be”, “will continue”, “will likely result”, “would” and other words and terms of similar meaning in conjunction with a discussion of future operating or financial performance. The Company cautions that forward-looking statements are not guarantees because there are inherent difficulties in predicting future results. Actual results could differ materially from those expressed or implied in the forward-looking statements. The factors listed under “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, as well as any cautionary language in this report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements.

 

 9 
   

 

Results of Operations

 

The following table shows, for the periods indicated, information derived from our consolidated statements of operations, expressed as a percentage of net sales for the periods presented.

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2016   2015   2016   2015 
                 
Sales   100.0%   100.0%   100.0%   100.0%
Cost of sales   80.1%   78.3%   79.7%   78.3%
Gross profit   19.9%   21.7%   20.3%   21.7%
                     
Operating expenses:                    
Salaries and commissions   10.9%   9.2%   10.8%   9.0%
Other operating expenses   8.8%   8.1%   8.9%   7.7%
Depreciation and amortization   1.2%   0.9%   1.2%   0.9%
Impairment charge   3.8%   3.8%   1.9%   1.9%
Total operating expenses   24.8%   22.0%   22.7%   19.5%
                     
Operating income (loss)   (4.9)%   (0.3)%   (2.4)%   2.2%
Interest expense   0.2%   0.3%   0.3%   0.3%
                     
Income (loss) before income taxes   (5.1)%   (0.6)%   (2.7)%   1.9%
Income tax expense (benefit)   (1.0)%   0.2%   (0.5)%   0.9%
                     
Net income (loss)   (4.1)%   (0.8)%   (2.2)%   1.0%

 

Note:   Due to rounding, percentages may not add up to total operating expenses, operating income (loss), income (loss) before income taxes or net income (loss).

 

Comparison of the Three Months Ended June 30, 2016 and 2015

 

Sales

 

   Three Months Ended 
   June 30, 
(Dollars in millions)  2016   2015   Change 
Sales  $62.5   $78.0   $(15.5)   (19.9)%

 

Our sales for the second quarter decreased 19.9% to $62.5 million in 2016 from $78.0 million in 2015. We estimate that, when adjusted for the fluctuation in metal prices, sales for 2016 were down approximately 11% compared to the second quarter of 2015. Our project business, which includes our key growth initiatives encompassing Environmental Compliance, Engineering & Construction, Industrials, Utility Power Generation, and Mechanical Wire Rope, is estimated to have decreased 35%, or approximately 26% on a metals adjusted basis, from 2015. Maintenance, Repair, and Operations (MRO) fell 14%, or approximately 5% when adjusted for metals, from 2015.

 

Gross Profit

 

   Three Months Ended 
   June 30, 
(Dollars in millions)  2016   2015   Change 
Gross profit  $12.4   $16.9   $(4.5)   (26.6)%
Gross margin   19.9%   21.7%   (1.8)%     

 

 10 
   

 

Gross profit decreased 26.6% to $12.4 million in 2016 from $16.9 million in 2015. The decrease in gross profit was primarily attributed to the lower sales in 2016. Gross margin (gross profit as a percentage of sales) fell to 19.9% in 2016 from 21.7% in 2015, primarily due to continuing competitive market conditions.

 

Operating Expenses

 

   Three Months Ended 
   June 30, 
(Dollars in millions)  2016   2015   Change 
Operating expenses:                    
Salaries and commissions  $6.8   $7.2   $(0.3)   (4.6)%
Other operating expenses   5.5    6.3    (0.8)   (12.5)%
Depreciation and amortization   0.8    0.7        6.6%
Impairment charge   2.4    3.0    (0.6)   (20.4)%
Total operating expenses  $15.5   $17.2   $(1.7)   (9.8)%
                     
Operating expenses as a percent of sales   24.8%   22.0%   2.8%     

 

Note:  Due to rounding, numbers may not add up to total operating expenses.

 

Salaries and commissions decreased $0.3 million between the periods as sales and gross margin declined reducing commissions and due to a lower headcount.

 

Other operating expenses decreased $0.8 million primarily due to reduced warehouse occupancy costs, the absence of moving costs incurred for the 2015 consolidation of the Southwest Houston facilities, lower employee related expenses, and a decrease in public company expenses.

 

Depreciation and amortization remained consistent between the periods.

 

Impairment charge in 2016 relates to the write-off of goodwill on the HWC reporting unit and the write-down of tradenames at the Southern Wire reporting unit. In 2015, the impairment charge consisted of the write-off of goodwill at the Southwest reporting unit and the write-down of tradenames at the Southwest and Southern Wire reporting units. (See Note 3)

 

Operating expenses as a percentage of sales increased to 24.8% in 2016 from 22.0% in 2015, as sales levels fell at a greater rate than the reduction in operating expenses.

 

Interest Expense

 

Interest expense decreased 31.3% from $0.2 million in 2015 to $0.1 million in 2016 due to lower average debt levels and lower interest rates. Average debt was $32.0 million in 2016 compared to $45.1 million in 2015. The average effective interest rate was 1.7% in 2016 compared to 2.0 % in 2015.

 

Income Taxes

 

The income tax benefit of $0.7 million, due to the pre-tax loss, decreased, compared to the $0.2 million income tax expense in the prior year period. The effective income tax rate decreased to 20.4% in 2016 from 37.3% in 2015. The 2016 income tax benefit was net of a $0.1 million charge resulting from the write-off of deferred tax assets related to share-based awards that vested or were forfeited during the quarter and the non-deductible portion of the goodwill impairment of $0.5 million included in the effective tax rate in the current year. If the Company's stock price remains below the grant-date values of share-based compensation, future forfeitures, vesting and exercises will result in charges to income tax expense, which will negatively impact the effective tax rate.

 

 Net Income (Loss)

 

We incurred a net loss of $2.6 million in 2016 compared to net loss of $0.6 million in 2015, primarily due to the decline in sales and the resulting decrease in gross profit.

  

 11 
   

 

Comparison of the Six Months Ended June 30, 2016 and 2015

 

Sales

 

   Six Months Ended 
   June 30, 
(Dollars in millions)  2016   2015   Change 
Sales  $127.2   $159.6   $(32.4)   (20.3)%

 

Our sales for the six month period decreased 20.3% to $127.2 million in 2016 from $159.6 million in 2015. We estimate that, when adjusted for the fluctuation in metal prices, sales for 2015 were down approximately 12% compared to the first six months of 2015. Our project business, which includes our key growth initiatives encompassing Environmental Compliance, Engineering & Construction, Industrials, Utility Power Generation, and Mechanical Wire Rope, is estimated to have decreased 31%, or approximately 22% on a metals adjusted basis, from 2015. MRO fell 16%, or approximately 7% when adjusted for metals, from 2015.

 

 Gross Profit

 

   Six Months Ended 
   June 30, 
(Dollars in millions)  2016   2015   Change 
Gross profit  $25.8   $34.7   $(8.8)   (25.5)%
Gross margin   20.3%   21.7%   (1.4)%     

 

Gross profit decreased 25.5% to $25.8 million in 2016 from $34.7 million in 2015. The decrease in gross profit was primarily attributed to the lower sales in 2016. Gross margin decreased to 20.3% in 2016 from 21.7% in 2015, primarily due to competitive market conditions.

 

Operating Expenses

 

   Six Months Ended 
   June 30, 
(Dollars in millions)  2016   2015   Change 
Operating expenses:                    
Salaries and commissions  $13.7   $14.4   $(0.7)   (4.6)%
Other operating expenses   11.3    12.3    (1.0)   (8.1)%
Depreciation and amortization   1.5    1.4    -    1.9%
Impairment charge   2.4    3.0    (0.6)   (20.4)%
Total operating expenses  $28.9   $31.2   $(2.2)   (7.2)%
                     
Operating expenses as a percent of sales   22.7%   19.5%   3.2%     

 

Note:  Due to rounding, numbers may not add up to total operating expenses.

 

Salaries and commissions decreased $0.7 million between the periods as sales and gross margin declined reducing commissions and due to a lower headcount.

 

Other operating expenses decreased $1.0 million primarily due to a decrease in warehouse occupancy costs, the absence of moving costs incurred with the 2015 consolidation of the Southwest Houston facilities and employee related expenses from a headcount reduction.

 

Depreciation and amortization remained consistent between the periods.

 

Impairment charge in 2016 relates to the write-off of goodwill at the HWC reporting unit and the write-down of trade names at the Southern Wire reporting unit. In 2015 the impairment consisted of the write-off of goodwill at the Southwest reporting unit and the write-down of tradenames at the Southwest and Southern Wire reporting units. (See Note 3)

 

Operating expenses as a percentage of sales increased to 22.7% in 2016 from 19.5% in 2015, as sales levels fell at a greater rate than the reduction in operating expenses.

 

 12 
   

 

Interest Expense

 

Interest expense decreased 32.8% to $0.3 million in 2016 from $0.5 million in 2015 due to lower average debt levels and lower interest rates. Average debt was $34.4 million in 2016 compared to $47.1 million in 2015. The average effective interest rate fell to 1.7% in 2016 from 2.0% in the prior year period.

 

Income Taxes

 

The income tax benefit of $0.7 million decreased from the $1.4 million expense in 2015, primarily due to the pre-tax loss incurred in the 2016 period. The effective income tax rate decreased to 20.0% in 2016 from 47.9% in 2015, primarily due to the $0.1 million charge resulting from the write-off of deferred tax assets related to share-based awards that vested or were forfeited in 2016 and the non-deductible portion of the goodwill impairment of $0.5 million. The 2015 rate of 47.9% was due to the non-deductible portion of the impairment charge.

 

Net Income (Loss)

 

We incurred a net loss of $2.7 million in 2016 compared to net income of $1.6 million in 2015, which was due to the sales shortfall and the resulting decrease in gross profit.

  

Impact of Inflation and Commodity Prices

 

Our results of operations are affected by changes in the inflation rate and commodity prices. Moreover, because copper, steel, aluminum and petrochemical products are components of the wire and cable and related hardware we sell, fluctuations in the costs of these and other commodities have historically affected our operating results. To the extent commodity prices decline, the net realizable value of our existing inventory could also decline, and our gross profit could be adversely affected because of either reduced selling prices or lower of cost or market adjustments in the carrying value of our inventory. If we turn our inventory approximately three times a year, the impact of changes in commodity prices in any particular quarter would primarily affect the results of the succeeding two calendar quarters. If we are unable to pass on to our customers future cost increases due to inflation or rising commodity prices, our operating results could be adversely affected.

 

Liquidity and Capital Resources

 

Our primary capital needs are for working capital obligations, capital expenditures, dividend payments, our stock repurchase program and other general corporate purposes, including acquisitions. Our primary sources of working capital are cash from operations supplemented by bank borrowings.

 

Liquidity is defined as the ability to generate adequate amounts of cash to meet the current need for cash. We assess our liquidity in terms of our ability to generate cash to fund our operating activities. Significant factors which could affect liquidity include the following:

 

  ·   the adequacy of available bank lines of credit;
  ·   cash flows generated from operating activities;
  ·   capital expenditures;
  ·   additional stock repurchases;
  ·   payment of dividends;
  ·   acquisitions; and
  ·   the ability to attract long-term capital with satisfactory terms

 

Comparison of the Six Months Ended June 30, 2016 and 2015

 

Our net cash provided by operating activities was $13.1 million for the six months ended June 30, 2016 compared to $22.4 million in 2015. We had a net loss of $2.7 million in 2016 compared to net income of $1.6 million in 2015.

 

Changes in our operating assets and liabilities resulted in cash provided by operating activities of $11.9 million in 2016. A reduction in our inventory investment of $10.8 million to align inventory levels with current activity levels, a decrease in accounts receivable of $4.7 million due to the decrease in sales and an increase in accounts payable of $2.0 million were the main sources of cash. Partially offsetting these sources of cash was the decrease in book overdraft of $3.2 million and the reduction of accrued and other current liabilities of $1.8 million as customer incentives were paid and prepayments on cable management orders that were shipped in early 2016.

 

 13 
   

 

Net cash used in investing activities was $0.6 million in 2016 compared to $1.5 million in 2015. The decrease was primarily attributable to the renovation costs of the Southwest Wire Rope facility consolidation in 2015.

 

Net cash used in financing activities was $12.5 million in 2016 compared to $20.9 million in 2015. Net payments on the revolver of $9.1 million, the payment of dividends of $2.0 million and the purchase of treasury stock of $1.4 million were the components of financing activities in 2016.

  

Indebtedness

 

Our principal source of liquidity at June 30, 2016 was working capital of $95.6 million compared to $107.0 million at December 31, 2015. We also had additional available borrowing capacity of approximately $41.6 million at June 30, 2016 and $41.5 million at December 31, 2015 under our loan agreement. The availability at June 30, 2016 is net of outstanding letters of credit of $2.6 million.

 

We believe that we will have adequate availability of capital to fund our present operations, meet our commitments on our existing debt, fund our dividend payments and stock repurchase program, and fund anticipated growth over the next twelve months, including expansion in existing and targeted market areas. We continually seek potential acquisitions and from time to time hold discussions with acquisition candidates. If suitable acquisition opportunities or working capital needs arise that would require additional financing, we believe that our financial position and earnings history provide a solid base for obtaining additional financing resources at competitive rates and terms. Additionally, based on market conditions, we may decide to issue additional shares of common or preferred stock to raise funds.

 

Contractual Obligations

 

The following table summarizes our loan commitment at June 30, 2016:

 

In millions  Total   Less than
1 year
   1-3 years   3-5 years   More
than
5 years
 
                          
Total debt  $30.1   $   $   $30.1   $ 

 

There were no material changes in operating lease obligations or non-cancellable purchase obligations since December 31, 2015.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

There were no material changes to our market risk as set forth in Items 7A and 7 of our Annual Report on Form 10-K for the year ended December 31, 2015.

 

Item 4. Controls and Procedures

 

As of June 30, 2016, an evaluation was performed by the Company’s management, under the supervision and with the participation of the Company’s chief executive officer and chief financial officer, of the effectiveness of the Company’s disclosure controls and procedures.  Based on that evaluation, the chief executive officer and the chief financial officer concluded that the Company’s disclosure controls and procedures were effective. There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Part II. Other Information

 

Item 1 – Not applicable and has been omitted.

 

Item 1A.  Risk Factors

 

There were no material changes in the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

 14 
   

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table provides information about our purchases of common stock for the three months ended June 30, 2016.

 

Period  Total number
of shares
purchased
   Average price
paid per
share
  

Total number

of shares

purchased as

part of publicly

announced

plans or

programs  (1)

  

Maximum

dollar value

that may yet

be used for

purchases

under the

plan (1)

 
April 1 – 30, 2016   31,892   $7.16    31,892   $10,383,991 
May 1 – 31, 2016   43,700    5.83    43,700    10,129,034 
June 1 – 30, 2016   28,500    5.48    28,500    9,972,893 
Total   104,092   $6.14    104,092      

 

(1) The board authorized a stock repurchase program of $25 million in March 2014. The program has no expiration date.

 

Item 3 – Not applicable and has been omitted.

 

Item 4 – Not applicable and has been omitted.

 

Item 5 – Not applicable and has been omitted.

 

 15 
   

 

Item 6.  Exhibits

 

(a)Exhibits required by Item 601 of Regulation S-K.

 

Exhibit
Number
  Document Description
     
31.1  

Certification by James L. Pokluda III pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

     
31.2   Certification by Nicol G. Graham pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1  

Certification by James L. Pokluda III and Nicol G. Graham pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

     
101.INS   XBRL Instance Document (1)
     
101.SCH   XBRL Taxonomy Extension Schema
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase
     
101.LAB   XBRL Taxonomy Extension Label Linkbase
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase

 

(1)Attached as exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets at June 30, 2016 and December 31, 2015; (ii) the Consolidated Statements of Operations for the three month and six month periods ended June 30, 2016 and 2015; (iii) the Consolidated Statements of Cash Flows for the six month periods ended June 30, 2016 and 2015; and (vi) Notes to the Consolidated Financial Statements.

 

 16 
   

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

  

Date:  August 9, 2016 HOUSTON WIRE & CABLE COMPANY
   
  BY:   /s/ Nicol G. Graham
  Nicol G. Graham, Chief Financial Officer

 

 17 
   

 

EXHIBIT INDEX

 

Exhibit 
Number
  Document Description
     
31.1  

Certification by James L. Pokluda III pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

     
31.2   Certification by Nicol G. Graham pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1  

Certification by James L. Pokluda III and Nicol G. Graham pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

     
101.INS   XBRL Instance Document (1)
     
101.SCH   XBRL Taxonomy Extension Schema
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase
     
101.LAB   XBRL Taxonomy Extension Label Linkbase
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase

  

 

 

(1)

Attached as exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets at June 30, 2016 and December 31, 2015; (ii) the Consolidated Statements of Operations for the three month and six month periods ended June 30, 2016 and 2015; (iii) the Consolidated Statements of Cash Flows for the six month periods ended June 30, 2016 and 2015; and (vi) Notes to the Consolidated Financial Statements.

 

 18