UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2017

 

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 ☒  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 ☒  NO ☐

 

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

 

Large Accelerated Filer   ☐	Accelerated Filer   ☒	Non-Accelerated Filer   ☐	Smaller Reporting Company    ☐
Emerging Growth Company    ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

At November 1, 2017 there were 16,506,235 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 September 30, 2017

 

INDEX

 

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Cash Flows	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
	Overview	12
	Cautionary Statement for Purposes of the “Safe Harbor”	12
	Results of Operations	13
	Impact of Inflation and Commodity Prices	17
	Liquidity and Capital Resources	17
	Contractual Obligations	18
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	18
Item 4.	Controls and Procedures	18
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	18
Item 1A.	Risk Factors	18
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	18
Item 3.	Defaults Upon Senior Securities	18
Item 4.	Mine Safety Disclosures	18
Item 5.	Other Information	18
Item 6.	Exhibits	19
Signature Page		20

 

 

 

HOUSTON WIRE & CABLE COMPANY

Consolidated Balance Sheets

(In thousands, except share data)

 

		September 30,				December 31,
		2017				2016
			(unaudited)
Assets
Current assets:
Accounts receivable, net		$	57,381			$	44,677
Inventories, net			82,211				79,783
Income taxes receivable			2,690				1,948
Prepaids			1,209				570
Total current assets			143,491				126,978
Property and equipment, net			11,243				11,261
Intangible assets, net			12,209				13,378
Goodwill			22,354				22,770
Deferred income taxes			—				892
Other assets			455				591
Total assets		$	189,752			$	175,870
Liabilities and stockholders’ equity
Current liabilities:
Book overdraft		$	1,888			$	3,181
Trade accounts payable			6,621				8,406
Accrued and other current liabilities			17,132				13,248
Total current liabilities			25,641				24,835
Debt			72,530				60,388
Deferred income taxes			2,263				—
Other long term obligations			702				516
Total liabilities			101,136				85,739
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: 16,506,235 and 16,457,525 outstanding at September 30, 2017 and December 31, 2016, respectively			21				21
Additional paid-in-capital			53,772				53,824
Retained earnings			95,340				97,550
Treasury stock			(60,517	)			(61,264	)
Total stockholders’ equity			88,616				90,131
Total liabilities and stockholders’ equity		$	189,752			$	175,870

 

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

 

 

HOUSTON WIRE & CABLE COMPANY

Consolidated Statements of Operations

(Unaudited)

(In thousands, except share and per share data)

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2017				2016				2017				2016
Sales		$	81,196			$	65,222			$	235,551			$	192,387
Cost of sales			62,626				53,177				183,732				154,513
Gross profit			18,570				12,045				51,819				37,874
Operating expenses:
Salaries and commissions			8,975				7,148				26,647				20,895
Other operating expenses			6,999				5,969				21,303				17,302
Depreciation and amortization			549				732				2,234				2,198
Impairment charge			—				—				—				2,384
Total operating expenses			16,523				13,849				50,184				42,779
Operating income (loss)			2,047				(1,804	)			1,635				(4,905	)
Interest expense			543				129				1,492				453
Income (loss) before income taxes			1,504				(1,933	)			143				(5,358	)
Income tax expense (benefit)			3,215				(494	)			2,361				(1,178	)
Net (loss)		$	(1,711	)		$	(1,439	)		$	(2,218	)		$	(4,180	)
Earnings (loss) per share:
Basic		$	(0.11	)		$	(0.09	)		$	(0.14	)		$	(0.26	)
Diluted		$	(0.11	)		$	(0.09	)		$	(0.14	)		$	(0.26	)
Weighted average common shares outstanding:
Basic			16,274,663				16,302,870				16,260,862				16,388,892
Diluted			16,274,663				16,302,870				16,260,862				16,388,892
Dividend declared per share		$	—			$	0.03			$	—			$	0.15

 

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

 

 

HOUSTON WIRE & CABLE COMPANY

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

		Nine Months Ended September 30,
		2017				2016
Operating activities
Net (loss)		$	(2,218	)		$	(4,180	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Impairment charge			—				2,384
Depreciation and amortization			2,234				2,198
Amortization of unearned stock compensation			770				626
Provision for inventory obsolescence			78				355
Deferred income taxes			3,163				(752	)
Other non-cash items			195				(11	)
Changes in operating assets and liabilities:
Accounts receivable			(12,619	)			3,360
Inventories			(2,082	)			11,859
Prepaids			(639	)			(447	)
Income taxes receivable			(742	)			(645	)
Book overdraft			(1,293	)			(2,599	)
Trade accounts payable			(1,790	)			2,108
Accrued and other current liabilities			4,031				1,486
Other operating activities			18				217
Net cash (used in) provided by operating activities			(10,894	)			15,959
Investing activities
Expenditures for property and equipment			(1,307	)			(955	)
Cash received upon finalization of purchase price for acquisition			193				—
Net cash used in investing activities			(1,114	)			(955	)
Financing activities
Borrowings on revolver			243,651				195,914
Payments on revolver			(231,509	)			(206,483	)
Payment of dividends			(60	)			(2,477	)
Purchase of treasury stock			(74	)			(1,958	)
Net cash provided by (used in) financing activities			12,008				(15,004	)
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.

 

 

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, industrial fasteners, hardware and related services to the U.S. market through twenty-two locations in fourteen states throughout the United States. The Company has no other business activity.

 

The consolidated financial statements as of September 30, 2017 and for the nine months ended September 30, 2017 and 2016 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 intercompany 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, 2016 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 are those recent ASUs that are relevant to the Company.

 

In March 2017, the FASB issued ASU No. 017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The new guidance requires that an employer disaggregate the service cost component from the other components of net benefit cost. This update is effective for public companies for annual periods beginning after December 15, 2017. The Company is currently evaluating the impact of adopting this ASU.

 

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The amendment in this ASU provides final guidance that simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in today’s two-step impairment test under ASC 350. ASU No. 2017-04 is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company is currently evaluating the impact of adopting as well as the timing of when it will adopt this ASU.

 

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The amendments in this ASU address eight cash flow issues with the intention of reducing current diversity in practice among business entities. The Company will evaluate the eight issues in the amendment and determine if any changes are necessary for compliance. ASU No. 2016-15 is effective for annual and interim periods beginning after December 15, 2017; early adoption is permitted and should be applied retrospectively where practical. The Company will determine the date of adoption, once the Company has evaluated the impact of this ASU.

 

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 was effective for public companies for fiscal years beginning after December 15, 2016 with early adoption permitted. The Company adopted this guidance in the first quarter of 2017 and there was no material impact on the consolidated financial statements.

 

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Under the new guidance, a lessee will be required to recognize a right to use asset and a lease liability for leases greater than 1 year, both capital and 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 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 was effective for annual and interim periods beginning after December 15, 2016 and early adoption was permitted. The Company adopted this guidance in the first quarter of 2017 and the adoption did not have a material impact on the Company’s consolidated financial statements.

 

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. The Company will adopt this ASU effective January 1, 2018 and plans to adopt the modified retrospective method. The Company has almost completed its evaluation and does not expect material changes to the timing of our revenue recognition relative to current accounting standards, however, the Company is still evaluating the disclosures to be included in the Company’s consolidated financial statements.

 

2.

Earnings (loss) per Share

 

Basic earnings (loss) per share is 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 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								Nine Months Ended
		September 30,								September 30,
		2017				2016				2017				2016
Denominator:
Weighted average common shares for basic earnings (loss) per share			16,274,663				16,302,870				16,260,862				16,388,892
Effect of dilutive securities			—				—				—				—
Weighted average common shares for diluted earnings (loss) per share			16,274,663				16,302,870				16,260,862				16,388,892

 

The Company calculates earnings per share using the “two-class” method, whereby unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are “participating securities”, as discussed in Note 7, and therefore, these participating securities are treated as a separate class in computing earnings per share. Stock awards to purchase 667,239 and 736,968 shares of common stock were not included in the diluted net income (loss) per share calculation for the three months ended September 30, 2017 and 2016, respectively, and 683,847 and 772,012 shares for the nine months ended September 30, 2017 and 2016, respectively, as their inclusion would have been anti-dilutive.

 

3.

Business Combination

 

On October 3, 2016, the Company completed the acquisition of Vertex from DXP Enterprises. The acquisition has been accounted for in accordance with ASC Topic 805, “Business Combinations.” Accordingly, the total purchase price has been allocated to the assets acquired and liabilities assumed based on their fair values as of the acquisition date. Vertex is a master distributor of industrial fasteners, specializing in corrosion resistant and specialty alloy inch and metric threaded fasteners, rivets, and hose clamps, to the industrial market. Under the terms of the acquisition agreement, the purchase price was $32.3 million, subject to an adjustment based on the net working capital of Vertex as of the date of closing. On May 2, 2017, the Company and DXP Enterprises finalized the working capital adjustment resulting in a final purchase price of $32.2 million. The Company treated the acquisition as a stock purchase for tax purposes. The amount of goodwill deductible for tax purposes is $1.0 million. The acquisition was funded by borrowing under the Company’s loan agreement. This acquisition expands the Company’s product offerings to the industrial marketplace that purchases its wire and cable products.

 

 

During the quarter, the Company finalized its analysis of assets acquired and liabilities assumed, including accounts receivable, inventories and leases. The following table summarizes the final fair value of the acquired assets and assumed liabilities recorded as of the date of acquisition:

 

		At October 3, 2016
			(In thousands)
Cash		$	3
Accounts receivable			2,874
Inventories			15,006
Prepaids			46
Property and equipment			59
Intangibles assets			9,161
Goodwill			9,849
Other assets			116
Total assets acquired			37,114
Trade accounts payable			1,134
Accrued and other current liabilities			1,051
Long-term obligation			320
Deferred income taxes			2,432
Total liabilities assumed			4,937
Net assets purchased		$	32,177

 

The fair values of the assets acquired and liabilities assumed were determined using the market, income and cost approaches. The market approach used by the Company included prices at which comparable assets were purchased under similar circumstances. The income approach indicated value for the subject net assets based on the present value of cash flows projected to be generated by the net assets over their useful life. Projected cash flows were discounted at a market rate of return that reflected the relative risk associated with the asset and the time value of money. The cost approach estimated value by determining the current cost of replacing the asset with another of equivalent economic utility. The cost to replace a given asset reflected the estimated reproduction or replacement cost for the asset, less an allowance for loss in value due to depreciation.

 

Intangible assets acquired consist of customer relationships - $7.0 million and trade names - $2.1 million. Trade names are not being amortized, while customer relationships are being amortized over a 9 year useful life. Amortization expense to be recognized on the acquired intangible assets is expected to be $0.8 million per year in 2017 through 2024 and $0.6 million in 2025. Amortization expense was $0.2 million during the three months ended September 30, 2017, and accumulated amortization on the acquired intangible assets was $0.8 million as of September 30, 2017.

 

The long-term obligation represents the unfavorable lease terms relative to market, and is being amortized over the remaining 81 months of the lease.

 

The results of operations of Vertex are included in the consolidated statements of operations prospectively from October 3, 2016. The unaudited pro forma combined historical results of the Company, giving effect to the acquisition assuming the transaction was consummated on January 1, 2016, are as follows:

 

		Nine Months ended,
		September 30, 2016
			(In thousands, except earnings per share)
Sales		$	215,055
Net loss			(3,059	)
Basic loss per share			(0.19	)
Diluted loss per share			(0.19	)

 

 

The unaudited pro forma combined historical results do not reflect any cost savings or other synergies that might result from the transaction. They are provided for informational purposes only and are not necessarily indicative of the results of operations for future periods or the results that actually would have been realized had the acquisition occurred as of January 1, 2016.

 

4.

Debt

 

On October 3, 2016, in connection with the acquisition of Vertex, HWC Wire & Cable Company, the Company, Vertex, and Bank of America, N.A., as agent and lender, entered into a First Amendment (“the Loan Agreement Amendment”) amending the Fourth Amended and Restated Loan and Security Agreement (“the 2015 Loan Agreement”). The Loan Agreement Amendment adds Vertex as a borrower (and lien grantor) and provides the terms for inclusion of Vertex’s eligible accounts receivable and eligible inventory in the borrowing base for the 2015 Loan Agreement. The 2015 Loan Agreement was expanded to include incremental availability on eligible accounts receivable and inventory up to $5 million, which is being amortized quarterly, starting April 1, 2017, over two and a half years. The 2015 Loan Agreement provides a $100 million revolving credit facility and expires on September 30, 2020. Under certain circumstances the Company may request an increase in the commitment by an additional $50 million.

 

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.

 

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. The 2015 Loan Agreement is secured by substantially all of the property of the Company, other than real estate.

 

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 September 30, 2017, 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.

Income Taxes

 

The Company calculates its provision for income taxes during interim reporting periods by applying the estimated annual effective tax rate for the full fiscal year to pre-tax income or loss, excluding discrete items, for the reporting period. The Company’s effective tax rate increased in the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, primarily due to changes in the estimated annual earnings for 2017 and a valuation allowance on deferred tax assets not expected to be realized. In the nine months ended September 30, 2017, the effect of discrete period tax items was $2.1 million which were primarily related to the valuation allowance on deferred tax assets not expected to be realized.

 

A valuation allowance for deferred tax assets is recognized when it is more likely than not, that some or all of the benefit from the deferred tax assets will not be realized. To assess that likelihood, the Company uses its current financial position, results of operations, both actual and forecasted, the reversal of deferred tax liabilities, and tax planning strategies, as well as the current and forecasted business economics to determine whether a valuation allowance is required.

 

The Company has assessed both positive and negative evidence to estimate whether sufficient future taxable income will be generated and concluded that it is more likely than not that the deferred tax assets will not be realized and, as such, has recorded a valuation allowance of $2.4 million as of September 30, 2017. Going forward, management will continue to assess the available evidence to determine whether it is more likely than not that sufficient future taxable income will be generated to realize the deferred tax assets.

 

6.

Stockholders’ Equity

 

No dividend was declared during the first, second or third quarter of 2017. Dividends paid were $2.5 million during the nine months ended September 30, 2016.

 

 

7.

Stock Based Compensation

 

Stock Option Awards

 

There were no stock option awards granted during the first nine months of 2017 or 2016.

 

Restricted Stock Awards and Restricted Stock Units

 

Following the Annual Meeting of Stockholders on May 5, 2017, the Company approved the award of restricted stock units with a value of $60,000 to each non-employee director who was elected or re-elected, for an aggregate of 37,500 restricted stock units. Issuance of the restricted stock unit awards was subject to adoption of a new stock plan, as the Company’s 2006 Stock Plan expired on May 1, 2017. On August 4, 2017, the Company adopted the 2017 Stock Plan. Each award of restricted stock units will vest at the date of the 2018 Annual Meeting of Stockholders. In addition, on August 4, 2017, the Company approved the award of 7,653 restricted stock units with a value of $45,000 to a newly elected director. Until the new stock plan has been approved by the Company’s stockholders, each restricted stock unit will entitle the non-employee director to receive, at such time as the director’s service on the board terminates for any reason, a cash payment equal to the market value of one share of the Company’s common stock, together with dividend equivalents from the date of grant, at the time of payment. Following stockholder approval of the new stock plan, instead of such cash payment each non-employee director will be 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. The Company intends to submit the 2017 Stock Plan for approval by stockholders at the 2018 Annual Meeting. Assuming such approval, at the time the awards vest, they will represent the right to receive shares of common stock.

 

In addition, on August 4, 2017, the Company approved an award of $50,000 of restricted stock units to a new member of senior management, based on the closing price on the date of grant. These units vest in one third increments, on the third, fourth and fifth anniversaries of the date of grant, as long as the recipient is still employed by the Company. Assuming the stockholders approve the 2017 Stock Plan at the 2018 Annual Meeting, upon vesting each restricted stock unit will entitle the recipient to receive one share of the Company’s common stock, together with dividend equivalents from the date of grant.

 

The three awards discussed above are liability awards and are required to be fair valued every quarter and any difference accounted for in the statement of operation. The Company believes that the impact of any fair value adjustment to be immaterial.

 

On January 30, 2017, the Company granted to the Company’s President and CEO 60,000 shares of restricted stock and performance stock units with respect to an additional 40,000 shares of common stock under the 2006 Stock Plan. The equity award of 60,000 shares of restricted stock vest in one-third increments on January 30, 2018, December 19, 2018 and December 19, 2019, in each case as long as Mr. Pokluda is then employed by the Company. The performance stock units vest on December 31, 2019 based on and subject to the Company’s achievement of cumulative EBITDA and stock price performance goals over a three-year period, as long as Mr. Pokluda is then employed by the Company, and upon vesting will be settled in shares of our common stock. Any dividends declared will be accrued and paid to Mr. Pokluda if and when the related shares vest.

 

Total stock-based compensation cost was $0.3 million and $0.2 million for the three months ended September 30, 2017 and 2016, respectively, and $0.8 million and $0.6 million for the nine months ended September 30, 2017 and 2016, respectively, and is included in salaries and commissions.

 

8.

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 September 30, 2017 relates to the cost of the monitoring, which the Company estimates will be incurred in the next year, 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.

 

The Company had outstanding under the 2015 Loan Agreement, letters of credit totaling $1.1 million to certain vendors as of September 30, 2017.

 

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 of operations.

 

 

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, 2016.

 

Overview

 

We are a provider of industrial products including electrical and mechanical wire and cable, industrial fasteners, hardware and related services to the U.S. market. We provide our customers with a single-source solution 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, 2016 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 nine months ended September 30, 2017. 

 

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, 2016, 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.

 

 

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								Nine Months Ended
		September 30,								September 30,
		2017				2016				2017				2016
Sales			100.0	%			100.0	%			100.0	%			100.0	%
Cost of sales			77.1	%			81.5	%			78.0	%			80.3	%
Gross profit			22.9	%			18.5	%			22.0	%			19.7	%
Operating expenses:
Salaries and commissions			11.1	%			11.0	%			11.3	%			10.9	%
Other operating expenses			8.6	%			9.2	%			9.0	%			9.0	%
Depreciation and amortization			0.7	%			1.1	%			0.9	%			1.1	%
Impairment charge			—				—				—				1.2	%
Total operating expenses			20.3	%			21.2	%			21.3	%			22.2	%
Operating income (loss)			2.5	%			(2.8	)%			0.7	%			(2.5	)%
Interest expense			0.7	%			0.2	%			0.6	%			0.2	%
Income (loss) before income taxes			1.9	%			(3.0	)%			0.1	%			(2.8	)%
Income tax expense (benefit)			4.0	%			(0.8	)%			1.0	%			(0.6	)%
Net loss			(2.1	)%			(2.2	)%			(0.9	)%			(2.2	)%

 

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

 

Comparison of the Three Months Ended September 30, 2017 and 2016

 

Sales

 

		Three Months Ended
		September 30,
(Dollars in millions)		2017				2016				Change
Sales		$	81.2			$	65.2			$	16.0				24.5	%

 

Our sales for the third quarter increased 24.5% to $81.2 million in 2017 from $65.2 million in 2016. The primary reasons for the increase were $7.8 million in sales from Vertex and a 12.6% or $8.2 million increase in sales of wire and cable products.  We estimate that higher metals prices in 2017 represented approximately 5% of the increase in wire and cable sales. We estimate wire and cable sales for our project business, which targets end markets for Environmental Compliance, Engineering & Construction, Industrials, Utility Power Generation, and Mechanical Wire Rope, decreased 5%, while Maintenance, Repair, and Operations (MRO) wire and cable sales increased 20%, as compared to 2016, including the impact of higher metals prices.

 

Gross Profit

 

		Three Months Ended
		September 30,
(Dollars in millions)		2017				2016				Change
Gross profit		$	18.6			$	12.0			$	6.5				54.2	%
Gross margin			22.9		%		18.5		%		4.4	%

 

 

Gross profit increased 54.2% to $18.6 million in 2017 from $12.0 million in 2016. The increase in gross profit was primarily attributable to the increased sales in the third quarter of 2017, including the acquisition of Vertex, and to higher gross margins. Gross margin (gross profit as a percentage of sales) increased to 22.9% in 2017 from 18.5% in 2016 primarily due to increased product margins and the higher margins earned by Vertex.

 

Operating Expenses

 

		Three Months Ended
		September 30,
(Dollars in millions)		2017				2016				Change
Operating expenses:
Salaries and commissions		$	9.0			$	7.1			$	1.8				25.6	%
Other operating expenses			7.0				6.0				1.1				17.3	%
Depreciation and amortization			0.5				0.7				(0.2	)			(24.9	)%
Total operating expenses		$	16.5			$	13.8			$	2.7				19.3	%
Operating expenses as a percent of sales			20.3	%			21.2	%			(0.9	)%

 

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

 

Salaries and commissions increased $1.8 million between the periods primarily due to the additional personnel at Vertex and increased commissions due to higher sales and gross profit.

 

Other operating expenses increased $1.1 million primarily due to $1.0 million of additional other operating expenses at Vertex.

 

Depreciation and amortization decreased $0.2 primarily due to a decrease in the amortization of intangibles.

 

Operating expenses as a percentage of sales decreased to 20.3% in 2017 from 21.2% in 2016, as sales growth exceeded the increase in operating expenses.

 

Interest Expense

 

Interest expense increased to $0.5 million in 2017 from $0.1 million in 2016 due to higher debt as a result of the Vertex acquisition and to an increase in the average effective interest rate. Average debt was $71.2 million in 2017 compared to $28.5 million in 2016. The average effective interest rate was 3.0% in 2017 compared to 1.7% in 2016.

 

Income Taxes

 

The income tax expense of $3.2 million fluctuated from a $0.5 million income tax benefit in the prior year period. The effective income tax rate for the quarter increased to 213.8% in 2017 from 25.6% in 2016, primarily due to a change in the estimated annual earnings for 2017, the cumulative effect of which, is reflected in the current quarter and a valuation allowance on the deferred tax assets not expected to be realized. The 2016 income tax benefit was net of the non-deductible portion of the goodwill impairment charge of $0.5 million.

 

Net Loss

 

We incurred a net loss of $1.7 million in 2017 compared to a net loss of $1.4 million in 2016.

 

  

Comparison of the Nine Months Ended September 30, 2017 and 2016

 

		Nine Months Ended
		September 30,
(Dollars in millions)		2017				2016				Change
Sales		$	235.6			$	192.4			$	43.2				22.4	%

 

Our sales for the nine month period increased 22.4% to $235.6 million in 2017 from $192.4 million in 2016. The primary reasons for the increase were $23.6 million in sales from Vertex and a 10.2% or $19.5 million increase in sales of wire and cable products. We estimate that higher metals prices in 2017 represented approximately 3% of the increase in wire and cable sales. We estimate wire and cable sales for our project business, which targets end markets for Environmental Compliance, Engineering & Construction, Industrials, Utility Power Generation, and Mechanical Wire Rope, decreased 6%, while Maintenance, Repair, and Operations (MRO) wire and cable sales increased 17%, as compared to 2016, including the impact of higher metals prices.

 

Gross Profit

 

		Nine Months Ended
		September 30,
(Dollars in millions)		2017				2016				Change
Gross profit		$	51.8			$	37.9			$	13.9				36.8	%
Gross margin			22.0	%			19.7	%			2.3	%

 

Gross profit increased 36.8% to $51.8 million in 2017 from $37.9 million in 2016. The increase in gross profit was primarily attributable to increased sales, including the acquisition of Vertex and to higher product gross margin. Gross margin increased to 22.0% in 2017 from 19.7% in 2016, primarily due to increased product margins and the higher gross margins generated by Vertex.

 

Operating Expenses

 

		Nine Months Ended
		September 30,
(Dollars in millions)		2017				2016				Change
Operating expenses:
Salaries and commissions		$	26.7			$	20.9			$	5.8				27.5	%
Other operating expenses			21.3				17.3				4.0				23.3	%
Depreciation and amortization			2.2				2.2				—				1.7	%
Impairment charge			—				2.4				(2.4	)			(100.0	)%
Total operating expenses		$	50.2			$	42.8			$	7.4				17.3	%
Operating expenses as a percent of sales			21.3	%			22.2	%			(0.9	)%

 

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

 

 

Salaries and commissions increased $5.8 million between the periods due to the additional personnel from the Vertex acquisition, as well as increased commissions, and higher distribution salaries, both resulting from increased sales and gross profit.

 

Other operating expenses increased $4.0 million primarily due to the additional other operating expenses at Vertex, as well as increased distribution expenses due to increased sales.

 

Depreciation and amortization remained consistent with the prior year period.

 

The 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.

 

Operating expenses as a percentage of sales decreased to 21.3% in 2017 from 22.2% in 2016, as sales growth exceeded the increase in operating expenses.

 

 Interest Expense

 

Interest expense increased to $1.5 million in 2017 from $0.5 million in 2016 due to higher average debt levels from the Vertex acquisition and higher interest rates. Average debt was $70.6 million in 2017 compared to $32.4 million in 2016. The average effective interest rate was 2.8% in 2017 up from 1.7% in the prior year period.

 

Income Taxes

 

The income tax expense of $2.4 million fluctuated from the $1.2 million income tax benefit in 2016. The effective income tax rate increased to 1,651.0% in 2017 from 22.0% in 2016, primarily due to a change in the estimated annual earnings for 2017 and a valuation allowance on deferred tax assets not expected to be realized. The effective income tax rate in 2017 is also greater than the statutory rate primarily because of the valuation allowance on deferred tax assets not expected to be realized. The 2016 income tax benefit was net of the non-deductible portion of the goodwill impairment charge of $0.5 million.

 

Net Loss

 

The net loss of $2.2 million in 2017 was lower than the loss of $4.2 million in 2016. The 2016 loss included an impairment charge of $2.4 million.

 

 

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, nickel and petrochemical products are components of the industrial products 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 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;
	●	acquisitions; and
	●	the ability to attract long-term capital with satisfactory terms

 

Comparison of the Nine Months Ended September 30, 2017 and 2016

 

Our net cash used in operating activities was $10.9 million for the nine months ended September 30, 2017 compared to net cash provided by operating activities of $16.0 million in 2016. We had a net loss of $2.2 million in 2017 compared to net loss of $4.2 million in 2016.

 

Changes in our operating assets and liabilities resulted in cash used in operating activities of $15.1 million in 2017. An increase in accounts receivable of $12.6 million due to the increase in sales, an increase of $2.1 million in inventories, a decrease in book overdraft of $1.3 million, a decrease in accounts payable of $1.8 million, an increase in income taxes receivable of $0.7 million, offset by an increase in accrued and other liabilities of $4.0 million were the main uses of cash.

 

Net cash used in investing activities was $1.1 million in 2017 compared to $1.0 million in 2016.

 

Net cash provided by financing activities was $12.0 million in 2017 compared to net cash used of $15.0 million in 2016. Net borrowings on the revolver of $12.1 million were the primary source for financing activities in 2017.

 

 

Indebtedness

 

Our principal source of liquidity at September 30, 2017 was working capital of $116.7 million compared to $102.1 million at December 31, 2016. We also had additional available borrowing capacity of $24.0 million at September 30, 2017 and $25.6 million at December 31, 2016 under our loan agreement. The availability at September 30, 2017 is net of outstanding letters of credit of $1.1 million.

 

We believe that we will have adequate availability of capital to fund our present operations, meet our commitments on our existing debt, 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 and approval of our 2017 Stock Plan, 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 September 30, 2017.

 

In thousands		Total				Less than 1 year				1-3 years				3-5 years				More than 5 years
Total debt		$	72,530			$	—			$	—			$	72,530			$	—

 

There were no material changes in operating lease obligations or non-cancellable purchase obligations since December 31, 2016.

 

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, 2016.

 

Item 4. Controls and Procedures

 

As of September 30, 2017, 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.  In that evaluation, our Chief Executive Officer and Chief Financial Officer noted that we had failed to file an amendment to our October 5, 2016 Form 8-K to provide audited financial statements for Vertex for 2015 and related pro forma information, and as a result our disclosure controls and procedures were not effective as of September 30, 2017. The deficiency identified in our disclosure controls and procedures was related to our inability to obtain in a timely manner audited financial statements of Vertex for a period pre-dating our acquisition and did not impact our current financial reporting or the Company’s current or historical financial statements. The Form 8-K amendment was filed on October 20, 2017 and, as a result, the deficiency has been addressed. There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2017 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, 2016.

 

Item 2 – Not applicable and has been omitted.

 

Item 3 – Not applicable and has been omitted.

 

Item 4 – Not applicable and has been omitted.

 

Item 5 – Not applicable and has been omitted.  

 

 

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 September 30, 2017 and December 31, 2016; (ii) the Consolidated Statements of Operations for the nine  month periods ended September 30, 2017 and 2016; (iii) the Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2017 and 2016; and (vi) Notes to the Consolidated Financial Statements.

 

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:   November 9, 2017	HOUSTON WIRE & CABLE COMPANY
	BY:	/s/ Nicol G. Graham
	Nicol G. Graham, Chief Financial Officer

 

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 September 30, 2017 and December 31, 2016; (ii) the Consolidated Statements of Operations for the nine month periods ended September 30, 2017 and 2016; (iii) the Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2017 and 2016; and (vi) Notes to the Consolidated Financial Statements.