UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K10-K/A

(Amendment No. 1)

 

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

For the Fiscal Year Ended December 31, 20202019

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  

img 

 

(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)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading symbol

Name of each exchange on which registered

Common stock, par value $0.001 per share

HWCC

HWCC

The Nasdaq Stock Market

Securities registered pursuant to Section 12(b) of the Act: None

 

 Securities registered pursuant to Section 12(g) of the Act: None 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES   ☐            NO  

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES   ☐            NO  

 

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 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 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.    ☐

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

 

The aggregate market value of the voting stock (common stock) held by non-affiliates of the registrant as of June 30, 20192020 was $83,886,290.$31,938,992.

 

At March 1, 2020,April 5, 2021, there were 16,556,95016,882,557 shares of the registrant’s common stock, $.001 par value per share, outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Part III of this report incorporates by reference specific portions of the registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 5, 2020.None 

 

 

 

Explanatory Note

Houston Wire & Cable Company (the “Company” or “we”) filed its Annual Report on Form 10-K for the year ended December 31, 2020 (the “Original 10-K Filing”) with the Securities and Exchange Commission on March 25, 2021. Pursuant to General Instruction G(3) to Form 10-K, the Company incorporated by reference the information required by Part III of Form 10-K from the definitive proxy statement for the 2021 Annual Meeting of Shareholders (the “2021 Proxy Statement”) that the Company expected to file with the Commission not later than 120 days after the end of the fiscal year covered by the Original 10-K Filing. Because the 2021 Proxy Statement will not be filed with the Commission within such 120-day period, the Company is filing this Amendment No. 1 to the Original 10-K Filing (this “Form 10-K/A”) to provide the additional information required by Part III of Form 10-K.

Except for the addition of Part III information and the filing of new certifications by our principal executive officer and principal financial officer, this Form 10-K/A does not amend or otherwise update any information in the Original 10-K Filing, and the Original 10-K Filing, as amended by this Form 10-K/A, continues to speak as of the date of the Original 10-K Filing. Accordingly, this Form 10-K/A should be read in conjunction with the Original 10-K Filing and with our filings with the Commission subsequent to the Original 10-K Filing.

HOUSTON WIRE & CABLE COMPANY

Form 10-K


For the Fiscal Year Ended December 31, 2019
2020

 

INDEX

 

PART I.

Item 1.

Business

Item 1A.

Risk Factors

Item 1B.

Unresolved Staff Comments

Item 2.

Properties

Item 3.

Legal Proceedings

Item 4.

Mine Safety Disclosures

Supplemental Item. Executive Officers of the Registrant

PART II.

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Item 6.

Selected Financial Data

10 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

12 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

21 

Item 8.

Consolidated Financial Statements and Supplementary Data

22 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

23 

Item 9A.

Controls and Procedures

23 

Item 9B.

Other Information

26 

PART III.

26 

1

Item 10.

Directors, Executive Officers and Corporate Governance

26 

1

Item 11.

Executive Compensation

26 

5

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

26 

12

Item 13.

Certain Relationships and Related Transactions, and Director Independence

26 

14

Item 14.

Principal AccountingAccountant Fees and Services

26 

15

PART IV.

27 

17

Item 15.

Exhibits and Financial Statement Schedules

27 

17

Item 16.

Form 10-K Summary

27 


PART I

ITEM 1.  BUSINESS

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 sell electrical products through wholesale electrical distributors, steel wire rope and synthetic products through rigging wholesalers, fastener products through industrial distributors, and fabricated steel wire rope and synthetic lifting and hardware products to distributors and end users. 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.

Our wide product selection and specialized services support our position in the supply chain between manufacturers and the customer. The breadth and depth of wire and cable, fasteners, lifting products and related hardware that we offer requires significant warehousing resources and a large number of SKUs (stock-keeping units). While manufacturers may have the space and capabilities to maintain a large supply of inventory, we do not believe that any single manufacturer has the breadth and depth of product that we offer. More importantly, manufacturers historically have not offered the services that our customers need, such as complimentary custom cutting, cable coiling, custom manufactured slings and harnesses, paralleling, bundling, striping, cable management for large capital projects, and same day shipment, and do not have multiple distribution centers across the nation.

Our Cable Management Program addresses our customers’ requirement for sophisticated and efficient just-in-time product management for large capital projects. This program entails purchasing and storing dedicated inventory so our customers have immediate product availability for the duration of their projects. Advantages of this program include extra pre-allocated safety stock, firm pricing, zero cable surplus and just-in-time delivery. Used on large construction and capital expansion projects, our Cable Management Program combines the expertise of our cable specialists with dedicated project inventory and superior logistics to allow complex projects to be completed on time, within budget and with minimal residual waste.

History

We were founded in 1975 and have a long history of exceptional customer service, broad product selection and high levels of product expertise. In 1987, we completed our first initial public offering and were subsequently purchased in 1989 by ALLTEL Corporation and in 1997 by investment funds affiliated with Code, Hennessy & Simmons LLC. In 2006, we completed our second initial public offering. In 2010, we purchased Southwest Wire Rope LP (“Southwest”), its general partner Southwest Wire Rope GP LLC and its wholly owned subsidiary, Southern Wire (“Southern”), and subsequently merged the acquired businesses into our operating subsidiary. In 2016 we completed the acquisition of Vertex Corporate Holdings, Inc., and its subsidiaries (“Vertex”) from DXP Enterprises. Vertex is a master distributor of industrial fasteners, and this acquisition expanded our product offerings to the industrial marketplace that purchases our wire and cable products.

Products

We offer products in most categories of wire and cable, including: continuous and interlocked armor cable; control and power cable; electronic wire and cable; flexible and portable cord; instrumentation and thermocouple cable; lead and high temperature cable; medium voltage cable; premise and category wire and cable, primary and secondary aluminum distribution cable, steel wire rope and wire rope slings, as well as synthetic fiber rope slings, chain, shackles, related hardware and corrosion resistant products including inch and metric bolts, screws, nuts, washers, rivets and hose clamps. We also offer private branded products, including our proprietary brand LifeGuard, a low-smoke, zero-halogen cable. Our products are used in repair and replacement work, also referred to as Maintenance, Repair and Operations (“MRO”), and related projects, larger-scale projects in the utility, industrial and infrastructure markets and a diverse range of industrial applications including  communications, energy, engineering and construction, general manufacturing, marine construction and marine transportation, mining, infrastructure, oilfield services, petrochemical, transportation, utility, wastewater treatment and food and beverage.

Targeted Markets

Our business is driven, in part, by the strength, growth prospects and activity in the end-markets in which our products are used, which are primarily in the continental United States, where we target the utility, industrial and infrastructure markets.

Industrial Market. The industrial market is one of the largest segments of the U.S. economy and is comprised of a diverse base of manufacturing and production companies. The largest driver of our success in this market results from the level of U.S. investment in upstream, midstream and downstream oil and gas exploration, transportation and production. We provide a wide variety of products specifically designed for use in manufacturing, metal/mineral, and oil and gas markets.


Utility Market.  The utility market includes large investor-owned utilities, rural cooperatives and municipal power authorities. We are not a significant distributor of power lines used for the transmission of electricity but have products in our portfolio that are used in this sector. We sell our core products for the construction of power plants and the related pollution control equipment used to comply with environmental standards as well as plant modernizations implemented to extend the life of power generation facilities. Our customers utilize our cable management services to supply the wire and cable required in the construction of new power plants and upgrading of existing power plants.

Infrastructure Market. Investments in the development, construction and maintenance of infrastructure markets (including commercial buildings, education and health care; air, ground and rail transportation; telecommunications, and wastewater) are opportunities for our product and service offerings.

Distribution Logistics

Our national distribution presence and value-added services make us an essential partner in the supply chain for our suppliers, customers and end users. We have successfully expanded our business from the original location in Houston, Texas to 22 locations nationwide, which includes four third-party logistics providers. Our standard practice is to process customers’ orders the same day they are received. Our strategically located distribution centers generally allow for ground delivery nationwide within 24 hours of shipment. Orders are delivered through a variety of distribution methods, including less-than-truck-load, truck-load, air or parcel service providers, direct from supplier, cross-dock shipments and customer pick-up. Freight costs are typically borne by our customers. Due to our shipment volume, we have preferred pricing relationships with our contract carriers.

Customers

During 2019, we served over 10,000 customers, shipping approximately 44,000 SKUs to approximately 14,500 customer locations nationwide. No customer represented 10% or more of our 2019 sales.

Suppliers

We obtain products from leading suppliers and believe we have strong relationships with our top suppliers. We source a portion of our products from offshore. While alternative sources are available for the majority of our products, we have strategically concentrated our purchases with our top suppliers in order to maximize product quality, delivery dependability, purchasing efficiencies, and vendor rebates. As a result, in 2019, approximately 51% of our purchases came from five suppliers. We do not believe we are dependent on any one supplier for any of the industrial products that we sell.

Our top five suppliers in 2019 were AmerCable Incorporated, Belden Inc., General Cable Corporation, Nexans Energy USA, Inc. and Southwire Company.

Sales

We market our products and related services through an inside sales force situated in our regional offices, a field sales force focused on key geographic markets, and regional sales agencies. By operating under a decentralized structure, region managers are able to adapt quickly to market-specific occurrences, allowing us to compete effectively with local competitors. We believe the knowledge, experience and tenure of our sales force are critical to serving our fragmented and diverse customer and end-user base.

Competition

The industrial products market remains very competitive and fragmented, with several hundred electrical wire and cable, steel wire rope, and fastener competitors serving this market. The product offerings and levels of service from the other providers of product with which we compete vary widely at the national, regional or local levels. In addition to the direct competition with other product providers, we also face, on a varying basis, competitors that sell products directly or through multiple distribution channels to end-users or other resellers.

In the markets that we sell our industrial products, competition is primarily based on product line breadth, quality, product availability, service capabilities and price.

Employees

At December 31, 2019, we had 432 employees. Our sales and marketing staff accounted for 201 employees, including 30 field sales personnel and 127 inside sales and technical support personnel. We believe that our employee relations are good.


Website Access

We maintain an internet website at www.houwire.com. We make available, under the “Investor Relations” tab on our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and, if applicable, amendments to those reports, as well as proxy and information statements, as soon as reasonably practicable after such documents are electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”). Information contained on our website is not part of, and should not be construed as being incorporated by reference into, this Annual Report on Form 10-K.

Government Regulation

We are subject to regulation by various federal, state and local agencies. We believe we are in compliance in all material respects with existing applicable statutes and regulations affecting environmental issues and our employment, workplace health and workplace safety practices.


ITEM 1A.  RISK FACTORS

In addition to other information in this Annual Report on Form 10-K, the following risk factors should be carefully considered in evaluating our business, because such factors may have a significant impact on our business, operating results, cash flows and financial condition. As a result of the risks set forth below and elsewhere in this Annual Report, actual results could differ materially from those projected in any forward-looking statements.

Downturns in capital spending and cyclicality in the markets we serve have had and could continue to have a material adverse effect on our financial condition and results of operations.

The majority of our products are used in the construction, maintenance, repair and operation of facilities, plants and projects in the communications, energy, engineering and construction, general manufacturing, infrastructure, oil and gas, marine construction, marine transportation, mining, oilfield services, transportation, utility, wastewater treatment and food and beverage industries. The demand for our products and services depends to a large degree on the capital spending levels of end-users in these markets. Many of these end-users defer capital expenditures or cancel projects during economic downturns or periods of uncertainty. In addition, certain of the markets we serve are cyclical, which affects capital spending by end-users in these industries.

We have risks associated with our customers’ access to credit.

Poor credit market conditions may adversely impact the availability of construction and other project financing, upon which many of our customers depend, resulting in project cancellations or delays. Our utility and industrial customers may also face limitations when trying to access the credit markets to fund ongoing operations or capital projects. Credit constraints experienced by our customers may result in lost revenues, reduced gross margins for us and, in some cases, higher than expected bad debt losses.

We have risks associated with inventory.

Our business requires us to maintain substantial levels of inventory. We must identify the right mix and quantity of products to keep in our inventory to fulfill customer orders. Failure to do so could adversely affect our sales and earnings. However, if our inventory levels are too high, we are at risk that unexpected changes in circumstances, such as a shift in market demand, drop in prices or loss of a customer, could have a material adverse impact on the net realizable value of our inventory.

Our operating results are affected by fluctuations in commodity prices.

Copper, steel, aluminum, nickel and petrochemical products are components of the products we sell. Fluctuations in the costs of these and other commodities have historically affected our operating results. If commodity prices decline, the net realizable value of our existing inventory could be reduced, and our gross profit could be adversely affected. To the extent higher commodity prices result in increases in the costs we pay for our products, we attempt to reflect the increase in the prices we charge our customers. While we historically have been able to pass most of these cost increases on to our customers, to the extent we are unable to do so in the future, it could have a material adverse effect on our operating results. In addition, if commodity costs increase, our customers may delay or decrease their purchases of our products.

Our sales are impacted by the level of oil and gas drilling activity.

We estimate that approximately one-third of our sales directly depend upon the level of capital and operating expenditures in the oil and gas industry, including capital and other expenditures in connection with exploration, drilling, production, gathering, transportation, refining and processing operations. Demand for the products we distribute is sensitive to the level of exploration, development and production activity of, and the corresponding capital and other expenditures by, oil and gas companies. A material decline in oil or gas prices, inability to access capital, and consolidation within the industry could all depress levels of exploration, development and production activity and, therefore, could lead to a decrease in our sales due to curtailed capital and MRO expenditures.  

If we are unable to maintain our relationships with our customers, it could have a material adverse effect on our financial results.

We rely on customers to purchase our industrial products. The number, size, business strategy and operations of these customers vary widely from market to market. Our success depends heavily on our ability to identify and respond to our customers’ needs.

In 2019, our ten largest customers accounted for approximately 37% of our sales. If we were to lose one or more of our large customers, or if one or more of our large customers were to significantly reduce their purchases from us, and we were unable to replace the lost sales on similar terms, we could experience a significant loss of revenue and profits. In addition, if one or more of our key customers failed or were unable to pay, we could experience a write-off or write-down of the related receivables, which could adversely affect our earnings. We participate with national marketing groups and engage in joint promotional sales activities with the members of those groups. Any exclusion of us from, or refusal to allow us to participate in, such national marketing groups could have a material adverse effect on our sales and our results of operations.


An inability to obtain the products that we distribute could result in lost revenues and reduced profits and damage our relationships with customers.

In 2019, we sourced products from approximately 376 suppliers. However, we have adopted a strategy to concentrate our purchases with a small number of suppliers in order to maximize product quality, delivery dependability, purchasing efficiencies and vendor rebates. As a result, in 2019 approximately 51% of our purchases came from five suppliers. If any of these suppliers changes its sales strategy or decides to terminate its business relationship with us, our sales and earnings could be adversely affected unless and until we were able to establish relationships with suppliers of comparable products. In addition, if we are not able to obtain the products we distribute from either our current suppliers or other competitive sources, we could experience a loss of revenue, reduction in profits and damage to our relationships with our customers. Supply shortages may occur as a result of unanticipated demand or production cutbacks, shortages of raw materials, labor disputes or weather conditions affecting products or shipments, transportation disruptions or other reasons beyond our control. When shortages occur, suppliers often allocate products among their customers, and our allocations might not be adequate to meet our customers’ needs.

Loss of key personnel or our inability to attract and retain new qualified personnel could hurt our ability to operate and grow successfully.

Our success is highly dependent upon the services of James L. Pokluda III, our President and Chief Executive Officer, and Christopher M. Micklas, our Chief Financial Officer. Our success will continue to depend to a significant extent on our executive officers, key management and sales personnel. We do not have key man life insurance covering any of our executive officers. We may not be able to retain our executive officers, key personnel or attract additional qualified management and sales personnel. The loss of any of our executive officers or our other key management and sales personnel or our inability to recruit and retain qualified personnel could hurt our ability to operate and make it difficult to maintain our market share and to execute our growth strategies.

A change in vendor rebate programs could adversely affect our gross margins and results of operations.

The terms on which we purchase products from many of our suppliers entitle us to receive a rebate based on the volume of our purchases. These rebates effectively reduce our costs for products. If suppliers adversely change the terms of some or all of these programs, the changes may lower our gross margins on products we sell and may have an adverse effect on our operating results.

If we encounter difficulties with our management information systems, including cyber-attacks, we would experience problems managing our business.

We believe our management information systems are a competitive advantage in maintaining a leadership position in the industrial supply industry. We rely upon our management information systems to manage and replenish inventory, determine pricing, fill and ship orders on a timely basis and coordinate our sales and marketing activities. If we experience problems with our management information systems, we could experience product shortages, diminished inventory control or an increase in accounts receivable. Any failure by us to maintain our management information systems could adversely impact our ability to attract and serve customers and would cause us to incur higher operating costs and experience reduced profitability.

An increase in competition could decrease sales or earnings.

We operate in a highly competitive industry. We compete directly with national, regional and local providers of industrial products. Competition is primarily focused in the local service area and is generally based on product line breadth, quality, product availability, service capabilities and price. Some of our existing competitors have, and new market entrants may have, greater financial and marketing resources than we do. To the extent existing or future competitors seek to gain or retain market share by reducing prices, we may be required to lower our prices, thereby adversely affecting our financial results. Existing or future competitors also may seek to compete with us for acquisitions, which could have the effect of increasing the price and reducing the number of suitable acquisitions. Other companies, including our current customers, could seek to compete directly with our private branded products, which could adversely affect our sales of those products and ultimately our financial results. Our existing customers, as well as suppliers, could seek to compete with us by offering services similar to ours, as well as the increasing trend of our suppliers to sell direct to our customer and industry consolidation, which could adversely affect our market share and our financial results. In addition, competitive pressures resulting from economic conditions and the industry trend toward consolidation could adversely affect our growth and profit margins.

We may not be able to successfully identify acquisition candidates, effectively integrate newly acquired businesses into our operations or achieve expected profitability from our acquisitions.

To supplement our growth, we intend to selectively pursue acquisition opportunities. If we are not successful in finding attractive acquisition candidates that we can acquire on satisfactory terms, or if we cannot complete those acquisitions that we identify, we will not be able to realize the benefit of this growth strategy.


Acquisitions involve numerous possible risks, including unforeseen difficulties in integrating operations, technologies, services, accounting and personnel; the diversion of financial and management resources from existing operations; unforeseen difficulties related to entering geographic regions or target markets where we do not have prior experience; the potential loss of key employees; and the inability to generate sufficient profits to offset acquisition or investment-related expenses. If we finance acquisitions by issuing equity securities or securities convertible into equity securities, our existing stockholders could be diluted, which, in turn, could adversely affect the market price of our stock. If we finance an acquisition with debt, it could result in higher leverage and interest costs. As a result, if we fail to evaluate and execute acquisitions properly, we might not achieve the anticipated benefits of these acquisitions, and we may incur costs in excess of what we anticipate, and goodwill impairments may result.

We are anticipating growth in the businesses we acquired in 2010 and in 2016. However, the Southwest reporting unit had an impairment of intangibles in 2019 and 2018 and goodwill in 2015, and the Southern reporting unit had an impairment of intangibles in 2013 and 2016. Future goodwill and tradename impairments may result, should the acquired businesses not achieve their currently forecasted growth or profitability targets, which would adversely affect our results of operations.  

We may be subject to product liability claims that could be costly and time consuming.

We sell industrial products. As a result, from time to time we have been named as a defendant in lawsuits alleging that these products caused physical injury or injury to property. We rely on product warranties and indemnities from the product manufacturers, as well as insurance that we maintain, to protect us from these claims. However, if manufacturers’ warranties and indemnities and our insurance coverage are not available or inadequate to cover every claim, it could have an adverse effect on our operating results.

Changes to the U.S. tax, tariff and import/export regulations may have a negative effect on our results of operations.

We import a relatively small but growing percentage of our wire and cable products, as well as a significant portion of our hardware products, from foreign manufacturers. Changes resulting from the 2017 Tax Cuts and Jobs Act could disrupt supply chains on imported goods which could result in limited availability of supply, or cost competitiveness of supply. In addition, recent tariff proposals have created uncertainty about future trade policies and any changes in import tariffs or other trade regulations, could have a negative impact on our cash flow, and require us to change our sourcing and supply chain strategies, and adversely affect our profitability.

We may be adversely affected by the potential discontinuation of LIBOR.

In July 2017, the Financial Conduct Authority in the United Kingdom, which regulates LIBOR, publicly announced that it will no longer compel or persuade banks to make LIBOR submissions after 2021. This announcement is expected to effectively end LIBOR rates beginning in 2022, and, while other alternatives have been proposed, it is unclear which, if any, alternative to LIBOR will be available and widely accepted in major financial markets.

Our loan agreement permits both base rate borrowings and LIBOR borrowings. If an alternative to LIBOR is not available and widely accepted after 2021, our ability to borrow at an alternative to the base rate under our loan agreement may be adversely impacted, and the costs associated with any potential future borrowings may increase.

Epidemics and other events outside our control, and our inability to successfully mitigate the effects of such events, may harm our business.

All of our facilities are subject to natural or man-made disasters such as floods, fires, acts of terrorism, failures of utilities and epidemics or pandemics such as the coronavirus COVID-19. If such an event were to occur, our business could be harmed due to the event or our inability to successfully mitigate the effects of the particular event. Potential harms include the loss of business continuity, the loss of business data and damage to infrastructure.

Our production and supply chains could be severely affected if our employees or the regions in which our facilities or suppliers are located are affected by a significant outbreak of any disease, epidemic or pandemic. For example, a facility could be closed by government authorities for a sustained period of time, some or all of our workforce could be unavailable due to quarantine, fear of catching the disease or other factors, and local, national or international transportation or other infrastructure could be affected, leading to delays or loss of production. In addition, our suppliers and customers are subject to similar risks, which could lead to a shortage of inventory or components, or a reduction in our customers’ demand for our products.


ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

ITEM 2.  PROPERTIES

Facilities

We operate out of twenty-two distribution centers strategically located throughout the United States with approximately 922,000 square feet of distribution space. We own three facilities in Houston, Texas, including our corporate headquarters, and two facilities in Louisiana. All of the other facilities are leased, except for our four locations operated by third-party logistics providers, which are provided under service agreements. Nineteen of the facilities, in addition to containing inventory for re-sale, house knowledgeable sales staff. We believe that our properties are in good operating condition and adequately serve our current business operations.  

ITEM 3.  LEGAL PROCEEDINGS

From time to time, we are involved in lawsuits that are brought against us in the normal course of business. We are not currently a party to any legal proceedings that we expect, either individually or in the aggregate, to have a material adverse effect on our business or financial condition.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

SUPPLEMENTAL ITEM.  EXECUTIVE OFFICERS OF THE REGISTRANT

Name/Office

Age

Business Experience

During Last 5 Years

James L. Pokluda III

President and Chief Executive Officer

55

Chief Executive Officer since January 2012 and President since May 2011. Prior thereto, Vice President Sales & Marketing of the Company from April 2007 until May 2011.

Christopher M. Micklas

Chief Financial Officer, Treasurer and Secretary

52

Chief Financial Officer, Treasurer and Secretary since April 2018. Prior thereto, Chief Financial Officer and Chief Accounting Officer at Par Pacific Holdings, Inc. from December 2013 until April 2017.


PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed on The NASDAQ Global Market under the symbol “HWCC”.  As of January 31, 2020, there were 1,498 holders of record, including participants in security position listings. This figure does not include those beneficial holders whose shares may be held by brokerage firms and clearing agencies. 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The board authorized a stock repurchase program of $25 million in March 2014. The program has no expiration date. Purchases under the stock repurchase program were suspended in November 2016 and reactivated in August 2019. At December 31, 2019, there was $8.1 million available under the program to repurchase stock. 

Dividend Policy

Holders of our common stock are entitled to receive dividends when, as and if declared by our Board of Directors. We paid a quarterly cash dividend from August 2007 until August 2016. The Board of Directors determined to suspend the regular dividend in November 2016, to redeploy funds for other purposes, including the Vertex acquisition.

As a holding company, our only source of funds to pay dividends is distributions from our operating subsidiaries. Our loan agreement does not limit the amount of dividends we may pay or stock we may repurchase, as long as we are not in default under the loan agreement and we maintain defined levels of fixed charge coverage and/or availability.

Securities Authorized for Issuance under Equity Compensation Plans

The information called for by this Item regarding securities available for issuance is provided in response to Item 12.


ITEM 6.  SELECTED FINANCIAL DATA

You should read the following selected financial information together with our consolidated financial statements and the related notes and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Form 10-K. We have derived the consolidated statement of operations data for each of the years ended December 31, 2019, 2018 and 2017, and the consolidated balance sheet data at December 31, 2019 and 2018, from our audited financial statements, which are included in this Form 10-K. We have derived the consolidated statement of operations data for each of the years ended December 31, 2016 and 2015, and the consolidated balance sheet data at December 31, 2017, 2016 and 2015 from our audited financial statements, which are not included in this Form 10-K.

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

 

(Dollars in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CONSOLIDATED STATEMENT OF OPERATIONS DATA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

338,286

 

 

$

356,858

 

 

$

317,697

 

 

$

261,644

 

 

$

308,133

 

Cost of sales

 

 

258,364

 

 

 

271,650

 

 

 

245,035

 

 

 

208,694

 

 

 

242,223

 

Gross profit

 

 

79,922

 

 

 

85,208

 

 

 

72,662

 

 

 

52,950

 

 

 

65,910

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and commissions

 

 

37,180

 

 

 

38,110

 

 

 

36,570

 

 

 

29,369

 

 

 

28,537

 

Other operating expenses

 

 

33,238

 

 

 

30,962

 

 

 

28,716

 

 

 

24,714

 

 

 

25,023

 

Depreciation and amortization

 

 

2,502

 

 

 

2,178

 

 

 

2,772

 

 

 

3,018

 

 

 

2,915

 

Impairment charge

 

 

120

 

 

 

60

 

 

 

 

 

 

2,384

 

 

 

3,417

 

Total operating expenses

 

 

73,040

 

 

 

71,310

 

 

 

68,058

 

 

 

59,485

 

 

 

59,892

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

6,882

 

 

 

13,898

 

 

 

4,604

 

 

 

(6,535

)

 

 

6,018

 

Interest expense

 

 

3,057

 

 

 

2,907

 

 

 

2,073

 

 

 

845

 

 

 

901

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

3,825

 

 

 

10,991

 

 

 

2,531

 

 

 

(7,380

)

 

 

5,117

 

Income tax expense (benefit)

 

 

1,275

 

 

 

2,355

 

 

 

2,753

 

 

 

(1,374

)

 

 

3,073

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

2,550

 

 

$

8,636

 

 

$

(222

)

 

$

(6,006

)

 

$

2,044

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.16

 

 

$

0.53

 

 

$

(0.01

)

 

$

(0.37

)

 

$

0.12

 

Diluted

 

$

0.15

 

 

$

0.52

 

 

$

(0.01

)

 

$

(0.37

)

 

$

0.12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

16,433,644

 

 

 

16,389,876

 

 

 

16,269,611

 

 

 

16,345,679

 

 

 

17,012,560

 

Diluted

 

 

16,552,866

 

 

 

16,523,599

 

 

 

16,269,611

 

 

 

16,345,679

 

 

 

17,067,593

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10

 

 

As of December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

 

(Dollars in thousands)

 

CONSOLIDATED BALANCE SHEET DATA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,096

 

 

$

1,393

 

 

$

 

 

$

 

 

$

 

Accounts receivable, net

 

$

56,965

 

 

$

59,793

 

 

$

57,396

 

 

$

44,677

 

 

$

46,250

 

Inventories, net

 

$

114,069

 

 

$

94,325

 

 

$

88,115

 

 

$

79,783

 

 

$

75,777

 

Total assets

 

$

240,148

 

 

$

203,057

 

 

$

194,039

 

 

$

175,870

 

 

$

159,113

 

Book overdraft (1)

 

$

 

 

$

 

 

$

3,028

 

 

$

3,181

 

 

$

3,701

 

Total debt

 

$

83,500

 

 

$

71,316

 

 

$

73,555

 

 

$

60,388

 

 

$

39,188

 

Stockholders’ equity

 

$

103,628

 

 

$

100,678

 

 

$

90,744

 

 

$

90,131

 

 

$

100,001

 

(1)

Our book overdraft is funded by our revolving credit facility as soon as the related checks clear our disbursement accounts.


ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Form 10-K. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our expectations. Factors that could cause such differences include those described in “Risk Factors” and elsewhere in this Form 10-K. Certain tabular information may not foot due to rounding.

Overview

Since our founding 44 years ago, we have grown to be a large provider of industrial products to the U.S. market. Today, we serve over 10,000 customers. Our products are used in MRO activities and related projects, as well as for larger-scale projects in the utility, industrial and infrastructure markets and a diverse range of industrial applications including communications, energy, engineering and construction, general manufacturing, mining, marine construction and marine transportation, infrastructure, oilfield services, petrochemical, transportation, utility, wastewater treatment and food and beverage. In the past few years, activity in the MRO market has fluctuated, while the level of competition has increased.

Our revenue is driven in part by the level of capital spending within the end-markets we serve. Because many of these end-markets defer capital expenditures during periods of economic downturns, our business has experienced cyclicality. Our revenue has been and will continue to be impacted by fluctuations in capital spending and by our ability to drive demand through our sales and marketing initiatives and the continued development and marketing of our private branded products, such as LifeGuardTM. The recent increased levels of economic activity and commodity prices have impacted sales and the level of demand.

Our direct costs will continue to be influenced significantly by the prices we pay our suppliers to procure the products we distribute to our customers. Changes in these costs may result, for example, from increases or decreases in raw material costs, changes in our relationships with suppliers or changes in vendor rebates. Our operating expenses will continue to be affected by our investment in sales, marketing and customer support personnel and commissions paid to our sales force for revenue and profit generated. Some of our operating expenses are related to our fixed infrastructure, including rent, utilities, administrative salaries, maintenance, insurance and supplies. To meet our customers’ needs for an extensive product offering and short delivery times, we will need to continue to maintain adequate inventory levels. Our ability to obtain this inventory will depend, in part, on our relationships with suppliers.

Critical Accounting Policies and Estimates

Critical accounting policies are those that both are important to the accurate portrayal of a company’s financial condition and results of operations, and require subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

In order to prepare financial statements that conform to accounting principles generally accepted in the United States, commonly referred to as GAAP, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Certain estimates are particularly sensitive due to their significance to the financial statements and the possibility that future events may be significantly different from our expectations.

We have identified the following accounting policies as those that require us to make the most subjective or complex judgments in order to fairly present our consolidated financial position and results of operations. Actual results in these areas could differ materially from management’s estimates under different assumptions and conditions.

Inventory Reserves

Inventories are valued at the lower of cost, using the average cost method, or net realizable value. We continually monitor our inventory levels at each of our distribution centers. Our reserve for inventory is based on the age of the inventory, movements of our inventory over the prior twelve months and the experience of our purchasing and sales departments in estimating demand for the product in the succeeding year. Our inventories are generally not susceptible to technological obsolescence. At December 31, 2019 and 2018, inventory reserves totaled $3.6 million and $3.7 million, respectively. A 20% change in our inventory reserve estimate at December 31, 2019 would have resulted in a change in income before income taxes of $0.7 million.


Goodwill

Goodwill represents the excess of the amount we paid to acquire businesses over the estimated fair value of tangible assets and identifiable intangible assets acquired, less liabilities assumed. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash flows, discount rates and asset lives among other items. At December 31, 2019, our goodwill balance was $22.4 million, representing 9.3% of our total assets.

We conduct impairment testing for goodwill annually in the fourth quarter of our fiscal year and more frequently, on an interim basis, when an event occurs or circumstances change that indicate that the fair value of a reporting unit may have declined below its carrying value. Events or circumstances which could indicate a probable impairment include, but are not limited to, financial performance, industry and market conditions, macroeconomic conditions, reporting unit-specific events, historical results of goodwill impairment testing and the timing of the last performance of a quantitative assessment.

We test goodwill at the reporting unit level, which is defined as an operating segment or one level below an operating segment that constitutes a business for which financial information is available and is regularly reviewed by management. We have determined that we have four reporting units for this purpose. Before testing goodwill, we consider whether or not to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount and whether an impairment test is required.

The goodwill impairment test consists of assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, including goodwill. We may bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the quantitative goodwill impairment test. The quantitative goodwill impairment test, used to identify both the existence of impairment and the amount of impairment loss, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.

When performing goodwill impairment testing, the fair values of reporting units are determined based on valuation techniques using the best available information. Inherent in such fair value determinations are certain judgments and estimates relating to future cash flows, including our interpretation of current economic indicators and market valuations, and assumptions about our strategic plans. In developing fair values for our reporting units, we may employ a market multiple or a discounted cash flow methodology, or a combination thereof. The market multiple methodology compares us to similar companies on the basis of risk characteristics to determine our risk profile relative to the comparable companies as a group. This analysis generally focuses on quantitative considerations, which include financial performance and other quantifiable data, and qualitative considerations, which include any factors which are expected to impact future financial performance. The most significant assumptions affecting the market multiple methodology are the market multiples and control premium. A control premium represents the value an investor would pay above non-controlling interest transaction prices in order to obtain a controlling interest in the respective unit.


The discounted cash flow methodology establishes fair value by estimating the present value of the projected future cash flows to be generated from the reporting unit. The discount rate applied to the projected future cash flows to arrive at the present value is intended to reflect all risks of ownership and the associated risks of realizing the stream of projected future cash flows. The discounted cash flow methodology uses our projections of financial performance. The most significant assumptions used in the discounted cash flow methodology are the discount rate and expected future revenue and operating margins, which vary among reporting units. If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be exposed to future impairment losses that could be material to our results of operations.

Intangible Assets

Our intangible assets, excluding goodwill, represent tradenames and customer relationships acquired in purchase transactions. At December 31, 2019, our intangible asset balance was $10.3 million, representing 4.3% of our total assets. Tradenames are not being amortized and are treated as indefinite-lived assets. Tradenames are tested for recoverability in the fourth quarter of our fiscal year, and more frequently, on an interim basis, when an event occurs or circumstances change that indicate that the fair value may have declined below its carrying value. We consider whether or not to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of an intangible asset is less than its carrying amount. If as a result of our qualitative assessment, we determine that an impairment test is required, or alternatively, if we elect to forego the qualitative assessment, we perform a quantitative test and, if required, record an impairment for the difference in the discounted cash flows and the carrying value. The results of the annual qualitative test for 2019 indicated that certain of the tradenames at Southwest were impaired. Accordingly, we performed a quantitative test on Southwest which resulted in an impairment charge of $0.1 million in 2019.

We assign useful lives to our intangible assets based on the periods over which we expect the assets to contribute directly or indirectly to our future cash flows. Customer relationships are amortized over 6 to 9 year useful lives. If events or circumstances were to indicate that any of our definite-lived intangible assets might be impaired, we would assess recoverability based on the estimated undiscounted future cash flows to be generated from the applicable intangible asset.

When performing quantitative assessments for impairment, we use various assumptions in determining the current fair value of these indefinite-lived intangible assets, including future expected cash flows and discount rates under the relief from royalty method, as well as other fair value measures. If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be exposed to future impairment charges that could be material to our results of operations.

Income Taxes

We determine deferred tax assets and liabilities based on differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and measure them using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. On December 22, 2017, the Tax Cuts and Jobs Act was signed into law, making significant changes to the US Internal Revenue Code. In 2018, we completed our analysis of our accounting for the income tax effects of tax reform and as a result, no additional adjustments were recorded.

Estimates, judgments and assumptions are required in determining whether deferred tax assets will be fully or partially realized.  We establish a valuation allowance to reduce the deferred tax assets when it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. In evaluating the ability to realize deferred tax assets, we consider all available positive and negative evidence, in determining whether, based on the weight of that evidence, a valuation allowance is needed for part or all of the deferred tax assets. In determining the need for a valuation allowance on our deferred tax assets, we place greater weight on recent and objectively verifiable current information, as compared to more forward-looking information that is used in valuing other assets on the balance sheet. We have considered taxable income in prior carryback years, future reversals of existing taxable temporary differences, future taxable income, and tax planning strategies in assessing the need for the valuation allowance.

We establish liabilities for estimated tax issues, and the provisions and benefits resulting from changes to those liabilities are included in our annual tax provision along with related interest.  We recognize interest on any tax issue as a component of interest expense and any related penalties in other operating expenses.

Sales

Our primary source of revenue is the sale of industrial products based upon purchase orders or contracts with customers, as well as billing for freight charges. Revenue is recognized at a point in time once we have determined that the customer has obtained control over the product. Control is typically deemed to have been transferred to the customer when the product is shipped, or delivered (either by customer pickup or through common carrier. Sales incentives earned by customers are accrued in the same month as the shipment is invoiced and are accounted for as a reduction in sales.

Cost of Sales

Cost of sales consists primarily of the average cost of the industrial products that we sell. We also incur shipping and handling costs in the normal course of business. Cost of sales also reflects cash discounts for prompt payment to vendors and vendor rebates generally related to annual purchase targets, as well as inventory obsolescence charges.

Operating Expenses

Operating expenses include all expenses, excluding freight, incurred to receive, sell and ship product and administer the operations of the Company.

Salaries and Commissions.   Salary expense includes the base compensation, and any overtime earned by hourly personnel, for all sales, administrative and warehouse employees and stock compensation expense for options and restricted stock granted to employees. Commission expense is earned by inside sales personnel based on gross profit dollars generated, by field sales personnel from generating sales and meeting various objectives, by sales, national and marketing managers for driving the sales process, by region managers based on the profitability of their branches and by corporate managers based primarily on our profitability and also on other operating metrics.

Other Operating Expenses.   Other operating expenses include all payroll taxes, health insurance, travel expenses, public company expenses, advertising, management information system expenses, facility rent and all distribution expenses such as packaging, reels, and repair and maintenance of equipment and facilities.


Depreciation and Amortization.   We incur depreciation expense on costs related to capitalized property and equipment on a straight-line basis over the estimated useful lives of the assets, which range from three to thirty years. We incur amortization expense on leasehold improvements and finance leases over the shorter of the lease term or the life of the related asset and on intangible assets over the estimated life of the asset.

Interest Expense

Interest expense consists primarily of interest we incur on our debt.


Results of Operations

The following discussion compares our results of operations for the years ended December 31, 2019, 2018 and 2017.

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

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

Sales

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

Cost of sales

 

 

76.4

%

 

 

76.1

%

 

 

77.1

%

Gross profit

 

 

23.6

%

 

 

23.9

%

 

 

22.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and commissions

 

 

11.0

%

 

 

10.7

%

 

 

11.5

%

Other operating expenses

 

 

9.8

%

 

 

8.7

%

 

 

9.0

%

Depreciation and amortization

 

 

0.7

%

 

 

0.6

%

 

 

0.9

%

Impairment charge

 

 

n/m

 

 

 

n/m

 

 

 

0.0

%

Total operating expenses

 

 

21.6

%

 

 

20.0

%

 

 

21.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

2.0

%

 

 

3.9

%

 

 

1.4

%

Interest expense

 

 

0.9

%

 

 

0.8

%

 

 

0.7

%

Income before income taxes

 

 

1.1

%

 

 

3.1

%

 

 

0.8

%

Income tax expense

 

 

0.4

%

 

 

0.7

%

 

 

0.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

0.8

%

 

 

2.4

%

 

 

(0.1

)%

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

Comparison of Years Ended December 31, 2019 and 2018

Sales

 

 

Year Ended

 

 

 

December 31,

 

(Dollars in millions)

 

2019

 

 

2018

 

 

Change

 

Sales

 

$

338.3

 

 

$

356.9

 

 

$

(18.6

)

 

 

(5.2

)%

Our sales in 2019 decreased $18.6 million or 5.2% from 2018. The decrease in sales was primarily due to reduced industrial market demand in oil and gas geographies, reduced demand for fasteners and reduced availability of inventory due to supply chain disruptions resulting from the on-going trade discussions between the United States and China. We estimate 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) sales decreased 6%, as compared to 2018. When adjusted for fluctuations in commodity prices of approximately 2%, we estimate that MRO and project business sales decreased by 4% and 3%, respectively.

Gross Profit

 

 

Year Ended

 

 

 

December 31,

 

(Dollars in millions)

 

2019

 

 

2018

 

 

Change

 

Gross profit

 

$

79.9

 

 

$

85.2

 

 

$

(5.3

)

 

 

(6.2

)%

Gross profit as a percent of sales

 

 

23.6

%

 

 

23.9

%

 

 

 

 

 

 

 

 

Gross profit decreased $5.3 million or 6.2% from 2018. The decrease in gross profit was primarily due to decreased sales. Gross margin (gross profit as a percentage of sales) was near flat at 23.6% in 2019 compared to 23.9% in 2018.


Operating Expenses

 

 

Year Ended

 

 

 

December 31,

 

(Dollars in millions)

 

2019

 

 

2018

 

 

Change

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and commissions

 

$

37.2

 

 

$

38.1

 

 

$

(0.9

)

 

(2.4

)%

Other operating expenses

 

 

33.2

 

 

 

31.0

 

 

 

2.3

 

 

7.4

%

Depreciation and amortization

 

 

2.5

 

 

 

2.2

 

 

 

0.3

 

 

14.9

%

Impairment charge

 

 

0.1

 

 

 

0.1

 

 

 

0.1

 

 

0.0

%

Total operating expenses

 

$

73.0

 

 

$

71.3

 

 

$

1.7

 

 

2.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses as a percent of sales

 

 

21.6

%

 

 

20.0

%

 

 

 

 

 

 

 

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

Salaries and Commissions. Salaries and commissions decreased $0.9 million or 2.4% primarily due to lower commissions resulting from the reduction in sales and gross profit.

Other Operating Expenses. Other operating expenses increased $2.3 million or 7.4% primarily due to the $2.2 million early termination liability related to Vertex’s Massachusetts facility lease and additional warehouse distribution expenses resulting from the closure of this facility and two additional warehouse moves in the fourth quarter.

Depreciation and Amortization. Depreciation and amortization increased slightly to $2.5 million in 2019 from $2.2 million in 2018 primarily due to depreciation on right-of-use assets from the adoption of Accounting Standards Update (“ASU”) 842.

Impairment Charge. The Company recorded non-cash impairment charges in 2019 and 2018 with respect to tradenames at its Southwest reporting unit. (See Note 4 to our Consolidated Financial Statements)  

Operating expenses as a percentage of sales increased to 21.6% in 2019 from 20.0% in 2018, as operating expenses increased combined with a reduction in sales.

Interest Expense

Interest expense increased 5.2% to $3.1 million in 2019 from $2.9 million in 2018 due to higher average debt to fund increased working capital and the payment of the early termination liability discussed above. Average debt was $76.6 million in 2019 compared to $76.8 million in 2018. The average effective interest rate increased slightly to 3.8% in 2019 from 3.7% in 2018.

Income Tax

Income tax expense decreased 45.9% to $1.3 million in 2019 from $2.4 million in 2018. The effective income tax rate was 33.3% in 2019 compared to 21.4% in 2018. The effective tax rate is affected by recurring items, such as nondeductible expenses, share-based compensation and state taxes. In addition, the effective tax rate for 2018 included a benefit of (9.5%) for the release of the valuation allowance on our net deferred tax assets.


Comparison of Years Ended December 31, 2018 and 2017

Sales

 

 

Year Ended

 

 

 

December 31,

 

(Dollars in millions)

 

2018

 

 

2017

 

 

Change

 

Sales

 

$

356.9

 

 

$

317.7

 

 

$

39.2

 

 

 

12.3

%

Our sales in 2018 increased $39.2 million or 12.3% from 2017. The increase in sales was primarily due to improved industrial activity and disciplined pricing. We estimate sales for our project business, which targets end markets, encompassing Environmental Compliance, Engineering & Construction, Industrials, Utility Power Generation, and Mechanical Wire Rope, increased 17%, while MRO sales increased 11%, as compared to 2017.

Gross Profit

 

 

Year Ended

 

 

 

December 31,

 

(Dollars in millions)

 

2018

 

 

2017

 

 

Change

 

Gross profit

 

$

85.2

 

 

$

72.7

 

 

$

12.5

 

 

 

17.3

%

Gross profit as a percent of sales

 

 

23.9

%

 

 

22.9

%

 

 

 

 

 

 

 

 

Gross profit increased $12.5 million or 17.3% from 2017. The increase in gross profit was primarily due to increased sales. Gross margin increased to 23.9% in 2018 from 22.9% in 2017 primarily due to ongoing pricing discipline and product mix.

Operating Expenses

 

 

Year Ended

 

 

 

December 31,

 

(Dollars in millions)

 

2018

 

 

2017

 

 

Change

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and commissions

 

$

38.1

 

 

$

36.6

 

 

$

1.5

 

 

4.2

%

Other operating expenses

 

 

31.0

 

 

 

28.7

 

 

 

2.2

 

 

7.8

%

Depreciation and amortization

 

 

2.2

 

 

 

2.8

 

 

 

(0.6

)

 

(21.4

)%

Impairment charge

 

 

0.1

 

 

 

 

 

 

0.1

 

 

100.0

%

Total operating expenses

 

$

71.3

 

 

$

68.1

 

 

$

3.3

 

 

4.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses as a percent of sales

 

 

20.0

%

 

 

21.4

%

 

 

 

 

 

 

 

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

Salaries and Commissions. Salaries and commissions increased $1.5 million or 4.2% primarily due to additional sales and warehouse personnel, as well as an increase in commissions due to higher sales and gross profit.

Other Operating Expenses. Other operating expenses increased $2.2 million or 7.8% primarily due to additional warehouse distribution expenses as sales increased and increased administrative expenses due to increased personnel.

Depreciation and Amortization. Depreciation and amortization decreased slightly to $2.2 million in 2018 from $2.8 million in 2017 primarily due to the full amortization of the Southern Wire reporting unit tradenames in 2017.

Impairment Charge. The Company recorded a non-cash impairment charge in 2018 with respect to tradenames at its Southwest Wire Rope reporting unit. (See Note 4 to our Consolidated Financial Statements)  


Operating expenses as a percentage of sales decreased to 20.0% in 2018 from 21.4% in 2017. This decrease primarily relates to the leverage obtained from increased sales, which rose at a higher rate than the increase in operating expenses.

Interest Expense

Interest expense increased 40.2% to $2.9 million in 2018 from $2.1 million in 2017 due to higher average debt to fund increased working capital and an increase in the average effective interest rate. Average debt was $76.8 million in 2018 compared to $71.8 million in 2017. The average effective interest rate increased to 3.7% in 2018 from 2.8% in 2017.

Income Tax

Income tax expense decreased 14.5% to $2.4 million in 2018 from $2.8 million in 2017. The effective income tax rate was 21.4% in 2018 compared to 108.8% in 2017. The 2018 tax rate included a benefit of (9.5%) for the release of the valuation allowance on our net deferred tax assets and 1.2% for share-based compensation. This compares to the 2017 tax rate which included a 41.0% charge for the establishment of a valuation allowance on our net deferred tax assets, 15.2% for share-based compensation expense and a 12.9% charge for deferred tax assets in respect of the tax reform rate change.

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 can be adversely affected because of either reduced selling prices or lower of cost or net realizable value adjustments in the carrying value of our inventory. We turn our inventory approximately three times a year, therefore, 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

17

 

Comparison of Years Ended December 31, 2019 and 2018

 

Our net cash used in operating activities was $5.6 million in 2019 compared to cash provided by operating activities of $5.3 million in 2018. We had net income of $2.6 million in 2019 compared to $8.6 million in 2018.

Changes in our operating assets and liabilities resulted in cash used in operating activities of $19.3 million in 2019. The majority of the change was due to increased inventories of $20.3 million and lease payments of $6.2 million. Partially offsetting these uses of cash was the increase of accounts payable of $2.6 million, increase in accrued liabilities of $2.4 million and decrease in accounts receivable of $2.6 million.

Net cash used in investing activities was $2.4 million in 2019 compared to $1.5 million in 2018. The increase was primarily due to expenditures for the computer system upgrade and conversion.


Net cash provided by financing activities was $10.7 million in 2019 compared to cash used in financing activities of $2.5 million in 2018. Net borrowings under our revolver of $12.2 million and the purchase of treasury stock of $1.2 million were the main components of financing activities in 2019.

Comparison of Years Ended December 31, 2018 and 2017

Our net cash provided by operating activities was $5.3 million in 2018 compared to net cash used in operating activities of $11.3 million in 2017. We had net income of $8.6 million in 2018 compared to a net loss of $0.2 million in 2017.

Changes in our operating assets and liabilities resulted in cash used in operating activities of $6.2 million in 2018. Inventories increased $6.8 million in alignment with the increase in sales volume. Accounts receivable increased $2.5 million, primarily due to increased sales in 2018. Partially offsetting these uses of cash was the decrease in book overdraft of $3.0 million, an increase in accounts payable of $2.8 million, an increase in accrued and other current liabilities of $2.5 million primarily due to increased inventory and customer volume discounts and a decrease in prepaid expenses of $1.2 million.

Net cash used in investing activities was $1.5 million in 2018 compared to $1.6 million in 2017. 

Net cash used in financing activities was $2.5 million in 2018 compared to net cash provided by financing activities of $12.9 million in 2017. Net payments under our revolver of $2.2 million and the purchase of treasury stock of $0.2 million were the main components of financing activities in 2018.

Indebtedness

Our principal source of liquidity at December 31, 2019 was working capital of $138.5 million compared to $126.2 million at December 31, 2018. We also had available borrowing capacity of approximately $22.8 million at December 31, 2019 and $28.7 million at December 31, 2018 under our loan agreement.

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, we may decide to issue additional shares of common or preferred stock to raise funds.

Loan and Security Agreement

HWC Wire & Cable Company, Vertex, and Bank of America, N.A., as agent and lender, are parties to the Fourth Amended and Restated Loan and Security Agreement (the “Loan Agreement”), as amended on December 10, 2019. The Loan Agreement provides a $115 million revolving credit facility and expires on March 12, 2024. Under certain circumstances we may request an increase in the commitment by an additional $50 million. Borrowings under the Loan Agreement bear interest at the British Bankers Association LIBOR Rate plus 100 to 150 basis points based on availability, if a LIBOR loan, or at a fluctuating rate equal to the greatest of the agent’s prime rate, the federal funds rate plus 50 basis points, or LIBOR for a 30-day interest period plus 150 basis points, if a base rate loan. The unused commitment fee is 25 basis points. Availability under the 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 Loan Agreement is secured by substantially all of our property, other than real estate.

Covenants in the Loan Agreement require us to maintain a specified minimum fixed charge coverage ratio, unless certain availability levels exist. Repaid amounts can be re-borrowed subject to the borrowing base. As of December 31, 2019, we met the availability-based covenant.

Capital Expenditures

We made capital expenditures of $2.4 million, $1.5 million and $1.8 million in the years ended December 31, 2019, 2018 and 2017, respectively.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements. 

Financial Derivatives

We have no financial derivatives.


Climate Risk

Our operations are subject to inclement weather conditions, which could potentially be related to global warming, including hurricanes, earthquakes and abnormal weather events. Our previous experience from these events has had a minimal effect on our operations.

Factors Affecting Future Results

This Annual Report on Form 10-K contains statements that may be considered forward-looking.  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. You should read statements that contain these words carefully, because they discuss our future expectations, contain projections of our future results of operations or of our financial position or state other “forward-looking” information.  Actual results could differ materially from the results indicated by these statements, because the realization of those results is subject to many risks and uncertainties.  Some of these risks and uncertainties are discussed in greater detail under Item 1A, “Risk Factors.”

All forward-looking statements are based on current management expectations and speak only as of the date of this filing. Except as required under federal securities laws and the rules and regulations of the SEC, we do not have any intention, and do not undertake, to update any forward-looking statements to reflect events or circumstances arising after the date of this Form 10-K.

ITEM 7A. – Not applicable and has been omitted.

21

 

 

ITEM 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Houston Wire & Cable Company

Index to consolidated financial statements

Page

Report of Independent Registered Public Accounting Firm

F-1

Consolidated Balance Sheets as of December 31, 2019 and 2018

F-2

Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017

F-3

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019, 2018 and 2017

F-4

Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017

F-5

Notes to Consolidated Financial Statements

F-6

22

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of Houston Wire & Cable Company

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Houston Wire & Cable Company (the Company) as of December 31, 2019 and 2018, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles. 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 13, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.  Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company’s auditor since 1997.

/s/ Ernst & Young LLP

Houston, Texas

March 13, 2020

F-1 

Houston Wire & Cable Company

Consolidated Balance Sheets

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(In thousands, except
share data)

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

4,096

 

 

$

1,393

 

Accounts receivable, net

 

 

 

 

 

 

 

 

Trade

 

 

50,325

 

 

 

52,946

 

Other

 

 

6,640

 

 

 

6,847

 

Inventories, net

 

 

114,069

 

 

 

94,325

 

Income tax receivable

 

 

1,353

 

 

 

435

 

Prepaids and other current assets

 

 

1,833

 

 

 

737

 

Total current assets

 

 

178,316

 

 

 

156,683

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

14,589

 

 

 

11,456

 

Intangible assets, net

 

 

10,282

 

 

 

11,179

 

Goodwill

 

 

22,353

 

 

 

22,353

 

Deferred income taxes

 

 

600

 

 

 

930

 

Operating lease right-of-use assets, net

 

 

13,481

 

 

 

 

Other assets

 

 

527

 

 

 

456

 

Total assets

 

$

240,148

 

 

$

203,057

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Trade accounts payable

 

$

13,858

 

 

$

11,253

 

Accrued and other current liabilities

 

 

23,261

 

 

 

19,232

 

Operating lease liabilities

 

 

2,742

 

 

 

 

Total current liabilities

 

 

39,861

 

 

 

30,485

 

 

 

 

 

 

 

 

 

 

Debt

 

 

83,500

 

 

 

71,316

 

Operating lease long term liabilities

 

 

11,182

 

 

 

 

Other long-term obligations

 

 

1,977

 

 

 

578

 

Total liabilities

 

 

136,520

 

 

 

102,379

 

 

 

 

 

 

 

 

 

 

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: 16,556,950 and 16,611,651 shares outstanding at December 31, 2019 and 2018, respectively

 

 

21

 

 

 

21

 

Additional paid-in capital

 

 

52,304

 

 

 

53,514

 

Retained earnings

 

 

108,626

 

 

 

105,975

 

Treasury stock

 

 

(57,323

)

 

 

(58,832

)

Total stockholders’ equity

 

 

103,628

 

 

 

100,678

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

240,148

 

 

$

203,057

 

The accompanying notes are an integral part of these consolidated financial statements.

F-2 

Houston Wire & Cable Company

Consolidated Statements of Operations

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

   

Sales

 

$

338,286

 

 

$

356,858

 

 

$

317,697

 

Cost of sales

 

 

258,364

 

 

 

271,650

 

 

 

245,035

 

Gross profit

 

 

79,922

 

 

 

85,208

 

 

 

72,662

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and commissions

 

 

37,180

 

 

 

38,110

 

 

 

36,570

 

Other operating expenses

 

 

33,238

 

 

 

30,962

 

 

 

28,716

 

Depreciation and amortization

 

 

2,502

 

 

 

2,178

 

 

 

2,772

 

Impairment charge

 

 

120

 

 

 

60

 

 

 

 

Total operating expenses

 

 

73,040

 

 

 

71,310

 

 

 

68,058

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

6,882

 

 

 

13,898

 

 

 

4,604

 

Interest expense

 

 

3,057

 

 

 

2,907

 

 

 

2,073

 

Income before income taxes

 

 

3,825

 

 

 

10,991

 

 

 

2,531

 

Income tax expense

 

 

1,275

 

 

 

2,355

 

 

 

2,753

 

Net income (loss)

 

$

2,550

 

 

$

8,636

 

 

$

(222

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.16

 

 

$

0.53

 

 

$

(0.01

)

Diluted

 

$

0.15

 

 

$

0.52

 

 

$

(0.01

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

16,433,644

 

 

 

16,389,876

 

 

 

16,269,611

 

Diluted

 

 

16,552,866

 

 

 

16,523,599

 

 

 

16,269,611

 

The accompanying notes are an integral part of these consolidated financial statements.

F-3 

Houston Wire & Cable Company

Consolidated Statements of Stockholders’ Equity

 

 

 

 

 

Additional

 

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Retained

 

 

Treasury Stock

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Shares

 

 

Amount

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands, except share data)

 

Balance at January 1, 2017

 

 

20,988,952

 

 

 

21

 

 

 

53,824

 

 

 

97,550

 

 

 

(4,531,427

)

 

 

(61,264

)

 

 

90,131

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(222

)

 

 

 

 

 

 

 

 

(222

Repurchase of treasury shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(27,156

)

 

 

(177

)

 

 

(177

)

Amortization of unearned stock compensation

 

 

 

 

 

 

 

 

1,004

 

 

 

 

 

 

 

 

 

 

 

 

1,004

 

Impact of forfeited awards

 

 

 

 

 

 

 

 

361

 

 

 

 

 

 

(26,707

)

 

 

(361

)

 

 

 

Impact of released vested restricted stock units

 

 

 

 

 

 

 

 

(372

)

 

 

 

 

 

27,519

 

 

 

372

 

 

 

 

Issuance of restricted stock awards

 

 

 

 

 

 

 

 

(811

)

 

 

 

 

 

60,000

 

 

 

811

 

 

 

 

Dividends accrual reversal

 

 

 

 

 

 

 

 

 

 

 

8

 

 

 

 

 

 

 

 

 

8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

 

20,988,952

 

 

 

21

 

 

 

54,006

 

 

 

97,336

 

 

 

(4,497,771

)

 

 

(60,619

)

 

 

90,744

 

Net income

 

 

 

 

 

 

 

 

 

 

 

8,636

 

 

 

 

 

 

 

 

 

8,636

 

Repurchase of treasury shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(25,368

)

 

 

(175

)

 

 

(175

)

Amortization of unearned stock compensation

 

 

 

 

 

 

 

 

1,059

 

 

 

 

 

 

 

 

 

 

 

 

1,059

 

Amortization of reclassed liability awards

 

 

 

 

 

 

 

 

411

 

 

 

 

 

 

 

 

 

 

 

 

411

 

Impact of forfeited awards

 

 

 

 

 

 

 

 

179

 

 

 

 

 

 

(13,332

)

 

 

(179

)

 

 

 

Impact of released vested restricted stock units

 

 

 

 

 

 

 

 

(353

)

 

 

 

 

 

26,185

 

 

 

353

 

 

 

 

Issuance of restricted stock awards

 

 

 

 

 

 

 

 

(1,788

)

 

 

 

 

 

132,985

 

 

 

1,788

 

 

 

 

Dividend accrual reversal

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

 

20,988,952

 

 

 

21

 

 

 

53,514

 

 

 

105,975

 

 

 

(4,377,301

)

 

 

(58,832

)

 

 

100,678

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

2,550

 

 

 

 

 

 

 

 

 

2,550

 

Repurchase of treasury shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(262,231

)

 

 

(1,188

)

 

 

(1,188

)

Amortization of unearned stock compensation

 

 

 

 

 

 

 

 

1,471

 

 

 

 

 

 

 

 

 

 

 

 

1,471

 

Impact of forfeited awards

 

 

 

 

 

 

 

 

117

 

 

 

 

 

 

(9,142

)

 

 

(117

)

 

 

 

Impact of released vested restricted stock units

 

 

 

 

 

 

 

 

(1,019

)

 

 

 

 

 

77,046

 

 

 

1,019

 

 

 

 

Settlement of director’s deferred compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,251

 

 

 

16

 

 

 

16

 

Issuance of restricted stock awards

 

 

 

 

 

 

 

 

(1,779

)

 

 

 

 

 

137,375

 

 

 

1,779

 

 

 

 

Cumulative effect of accounting change (Note 10)

 

 

 

 

 

 

 

 

 

 

 

101

 

 

 

 

 

 

 

 

 

101

 

Balance at December 31, 2019

 

 

20,988,952

 

 

 

21

 

 

$

52,304

 

 

$

108,626

 

 

 

(4,432,002

)

 

$

(57,323

)

 

$

103,628

 

The accompanying notes are an integral part of these consolidated financial statements.

F-4 

Houston Wire & Cable Company

Consolidated Statements of Cash Flows

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Operating activities

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

2,550

 

 

$

8,636

 

 

$

(222

)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Impairment charge

 

 

120

 

 

 

60

 

 

 

 

Depreciation and amortization

 

 

2,502

 

 

 

2,178

 

 

 

2,772

 

Amortization of unearned stock compensation

 

 

1,471

 

 

 

1,298

 

 

 

1,176

 

Non-cash lease expense

 

 

5,887

 

 

 

 

 

 

 

Provision for doubtful accounts

 

 

119

 

 

 

73

 

 

 

68

 

Provision for refund liability

 

 

84

 

 

 

37

 

 

 

180

 

Provision for inventory obsolescence

 

 

515

 

 

 

615

 

 

 

34

 

Deferred income taxes

 

 

431

 

 

 

(1,344

)

 

 

1,314

 

Other non-cash items

 

 

54

 

 

 

25

 

 

 

42

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

2,625

 

 

 

(2,507

)

 

 

(12,719

)

Inventories

 

 

(20,259

)

 

 

(6,825

)

 

 

(7,942

)

Income taxes

 

 

(918

)

 

 

14

 

 

 

1,499

 

Prepaid expenses

 

 

(265

)

 

 

1,201

 

 

 

(1,368

)

Lease payments

 

 

(6,194

)

 

 

 

 

 

 

Book overdraft

 

 

 

 

 

(3,028

)

 

 

(153

)

Trade accounts payable

 

 

2,605

 

 

 

2,804

 

 

 

38

 

Accrued and other current liabilities

 

 

2,394

 

 

 

2,460

 

 

 

3,571

 

Other operating activities

 

 

673

 

 

 

(359

)

 

 

368

 

Net cash (used in) provided by operating activities

 

 

(5,606

)

 

 

5,338

 

 

 

(11,342

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(2,379

)

 

 

(1,503

)

 

 

(1,769

)

Proceeds from disposals of property and equipment

 

 

5

 

 

 

20

 

 

 

8

 

Cash refunded (paid) for acquisition

 

 

 

 

 

 

 

 

193

 

Net cash used in investing activities

 

 

(2,374

)

 

 

(1,483

)

 

 

(1,568

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings on revolver

 

 

364,671

 

 

 

367,513

 

 

 

333,301

 

Payments on revolver

 

 

(352,487

)

 

 

(369,752

)

 

 

(320,133

)

Payment of dividends

 

 

(36

)

 

 

(48

)

 

 

(81

)

Purchase of treasury stock/stock surrendered on vested awards

 

 

(1,172

)

 

 

(175

)

 

 

(177

)

Lease payments

 

 

(293

)

 

 

 

 

 

 

Net cash (used in) provided by financing activities

 

 

10,683

 

 

 

(2,462

)

 

 

12,910

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in cash

 

 

2,703

 

 

 

1,393

 

 

 

 

Cash at beginning of year

 

 

1,393

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash at end of year

 

$

4,096

 

 

$

1,393

 

 

$

 

Supplemental disclosures

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid during the year for interest

 

$

3,011

 

 

$

2,811

 

 

$

1,961

 

Cash paid during the year for income taxes

 

$

1,762

 

 

$

3,696

 

 

$

64

 

The accompanying notes are an integral part of these consolidated financial statements.

F-5 

Houston Wire & Cable Company 

Notes to Consolidated Financial Statements

1.

Organization and Summary of Significant Accounting Policies

Description of Business

Houston Wire & Cable Company (the “Company”), through its wholly owned subsidiaries, provides industrial products to the U.S. market through twenty-two locations in fourteen states throughout the United States. The Company has no other business activity.

Basis of Presentation and Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries and have been prepared following accounting principles generally accepted in the United States (“GAAP”) and the requirements of the Securities and Exchange Commission (“SEC”). The financial statements include all normal and recurring adjustments that are necessary for a fair presentation of the Company’s financial position and operating results. All significant inter-company balances and transactions have been eliminated.

Use of Estimates

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 allowance for doubtful accounts, the refund liability, the inventory obsolescence reserve, vendor rebates, the realization of deferred tax assets and the valuation of goodwill and indefinite-lived assets. Actual results could differ materially from the estimates and assumptions used for the preparation of the financial statements.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

Accounts Receivable

Accounts receivable consists primarily of receivables from customers, less an allowance for doubtful accounts of $0.2 million at December 31, 2019 and 2018. The Company has no contractual repurchase arrangements with its customers. Credit losses have been within management’s expectations.


Inventories

Inventories are carried at the lower of cost, using the average cost method, and net realizable value and consist primarily of goods purchased for resale, less a reserve for obsolescence and unusable items and unamortized vendor rebates. The reserve for inventory is based upon a number of factors, including the experience of the purchasing and sales departments, age of the inventory, new product offerings, and other factors. The reserve for inventory may periodically require adjustment as the factors identified above change.

Vendor Rebates

Under many of the Company’s arrangements with its vendors, the Company receives a rebate of a specified amount of consideration, payable when the Company achieves any of a number of measures, generally related to the volume level of purchases from the vendors. The Company accounts for such rebates as a reduction of the prices of the vendors’ products and therefore as a reduction of inventory until it sells the products, at which time such rebates reduce cost of sales in the accompanying consolidated statements of operations. Throughout the year, the Company estimates the amount of the rebates earned based on purchases to date relative to the total purchase levels expected to be achieved during the rebate period. At year end, the Company recalculates the rebates earned based on actual purchases made.

Property and Equipment

The Company provides for depreciation on a straight-line method over the following estimated useful lives:

Buildings

25 to 30 years

Machinery and equipment

3 to 10 years

Leasehold improvements are depreciated over their estimated life or the term of the lease, whichever is shorter.

Total depreciation expense was approximately $1.7 million for the year ended December 31, 2019, and $1.4 million for each of the years ended December 31, 2018 and 2017.

Goodwill

Goodwill represents the excess of the amount paid to acquire businesses over the estimated fair value of tangible assets and identifiable intangible assets acquired, less liabilities assumed.  Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash flows, discount rates and asset lives among other items. At December 31, 2019, the goodwill balance was $22.4 million, representing 9.3% of the Company’s total assets.


The Company conducts impairment testing for goodwill annually in the fourth quarter of its fiscal year and more frequently, on an interim basis, when an event occurs or circumstances change that indicate that the fair value of a reporting unit may have declined below its carrying value. Events or circumstances which could indicate a probable impairment include, but are not limited to, financial performance, industry and market conditions, macroeconomic conditions, reporting unit-specific events, historical results of goodwill impairment testing and the timing of the last performance of a quantitative assessment.

The Company tests goodwill at the reporting unit level, which is defined as an operating segment or one level below an operating segment that constitutes a business for which financial information is available and is regularly reviewed by management. The Company determined that it has four reporting units for this purpose. Before testing goodwill, the Company considers whether or not to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount and whether an impairment test is required. If as a result of the qualitative assessment, the Company determines that an impairment test is required, or alternatively, if the Company elects to forego the qualitative assessment, the Company performs a quantitative assessment and records an impairment to goodwill to the extent the carrying amount of the reporting unit, including goodwill, exceeds the fair value of the reporting unit. See Note 4 for more details.

Intangibles

Intangible assets, from the acquisition of Southwest and Southern in 2010 and the acquisition of Vertex in 2016, consist of customer relationships and tradenames. The customer relationships are amortized over 6 to 9 year useful lives. If events or circumstances were to indicate that any of the Company’s definite-lived intangible assets might be impaired, the Company would assess recoverability based on the estimated undiscounted future cash flows to be generated from the applicable intangible asset. If the undiscounted cash flows were less than the carrying value, then the intangible assets would be written down to their fair value. Tradenames have an indefinite life and are not being amortized and are tested for impairment on an annual basis. See Note 4 for more details.

Leases

At the inception of a contract, the Company assesses whether the contract is, or contains, a lease. The assessment is based on (1) whether the contract involves the use of a distinct identified asset, (2) whether the Company obtains the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether the Company has the right to direct the use of the asset. All significant lease arrangements are recognized at lease commencement. Leases with a lease term of 12 months or less at inception are not recorded on the Consolidated Balance Sheets and are expensed on a straight-line basis over the lease term in the Consolidated Statements of Operations. The Company determines the lease term by assuming the exercise of renewal options that are reasonably certain. As most of the leases do not provide an implicit interest rate, the Company uses the incremental borrowing rate which approximates to a collateralized rate at the commencement date to determine the present value of future payments that are reasonably certain. See Note 11 for more details. 

Self Insurance

The Company retains certain self-insurance risks for health benefits. The Company limits its exposure to these self-insurance risks by maintaining excess and aggregate liability coverage. Self-insurance reserves are established based on claims filed and estimates of claims incurred but not reported. The estimates are based on information provided to the Company by its claims administrators.

Segment Reporting

The Company operates in a single operating and reportable segment, sales of industrial products, including electrical and mechanical wire and cable, industrial fasteners, hardware and related services to the U.S. market. The Company’s chief operating decision maker (“CODM”) is its Chief Executive Officer. The CODM makes operational and resource decisions based on company-wide sales and margin performance compared to the established strategic goals of the Company.

Revenue Recognition, Returns & Allowances

The Company’s primary source of revenue is the sale of industrial products based upon purchase orders or contracts with customers. Revenue is recognized at a point in time once the Company has determined that the customer has obtained control over the product. Control is typically deemed to have been transferred to the customer when the product is shipped, or delivered (either by customer pickup or through common carrier). It is not normal Company practice to grant extended payment terms. Revenue is recognized net of any sales taxes collected, which are subsequently remitted to the appropriate taxing authorities. The Company treats its transportation costs (shipping and handling) as fulfillment costs and not as a separate performance obligation. These transportation costs are recorded in cost of sales.

The amount of revenue recognized reflects the consideration the Company expects to be entitled to receive in exchange for products sold. Revenue is recorded at the transaction price net of estimates of variable consideration, which may include product returns, trade discounts and allowances. The Company accrues for variable consideration using the expected value method. Estimates of variable consideration are included in revenue to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur.

Customers are permitted to return product only on a case-by-case basis. Product exchanges are handled as a credit, with any replacement item being re-invoiced to the customer. Customer returns are recorded as a refund liability, included in accrued and other liabilities, with a corresponding reduction to sales. The Company has no installation obligations.


The Company may offer sales incentives, which are accrued monthly as an adjustment to sales.

Shipping and Handling

The Company incurs shipping and handling costs in the normal course of business. Freight amounts invoiced to customers are included as sales, and freight charges are included as a component of cost of sales.

Credit Risk

No single customer accounted for 10% or more of the Company’s sales in 2019, 2018 or 2017. The Company performs periodic credit evaluations of its customers and generally does not require collateral.

Financial Instruments

The carrying values of accounts receivable, trade accounts payable and accrued and other current liabilities approximate fair value, due to the short maturity of these instruments.

Stock-Based Compensation

Restricted stock awards, units and cash awards are valued at the closing price of the Company’s stock on the grant date and are granted under the Company’s 2017 Stock Plan. Stock options issued under the Company’s now-expired 2006 Stock Plan have an exercise price equal to the fair value of the Company’s stock on the grant date. The Company recognizes compensation expense ratably over the vesting period. The Company’s stock-based compensation expense is included in salaries and commissions expense for employees and in other operating expenses for non-employee directors in the accompanying consolidated statements of operations.

The Company receives a tax deduction for certain stock option exercises in the period in which the options are exercised, generally for the excess of the market price on the date of exercise over the exercise price of the options. The Company reports excess tax benefits from the award of equity instruments as operating cash flows. Excess tax benefits result when a deduction reported for tax return purposes for an award of equity instruments exceeds the cumulative compensation cost for the instruments recognized for financial reporting purposes.

Income Taxes

Deferred tax assets and liabilities are determined based on differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. 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 to determine whether a valuation allowance is required.

Recently Adopted Accounting Standards

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 were recently adopted by the Company.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Under the new guidance as amended, a lessee is required to recognize a right-of use asset and a lease liability for leases greater than 1 year, both finance and operating leases. This update was effective for public companies for fiscal years beginning after December 15, 2018. Under the transition rules, an entity initially applies the new leases standard at the adoption date, and recognizes a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption and the comparative periods presented in the financial statements continue to be in accordance with previously-existing GAAP. The Company adopted this ASU effective January 1, 2019. See Note 11 for detailed information.


In June 2018, the FASB issued ASU No. 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,” which simplifies the accounting for share-based payment arrangements with nonemployees for goods and services. Under the ASU, the guidance on such payments to nonemployees is aligned with the accounting for share-based payments granted to employees, including the measurement of equity-classified awards, which is fixed at the grant date under the new guidance. The ASU superseded Subtopic 505-50, “Equity - Equity-Based Payments to Non-Employees,” and was effective for public entities for interim and annual reporting periods beginning after December 15, 2018. The Company adopted this ASU in the first quarter of 2019, and the adoption did not have a material impact on the Company’s consolidated financial statements.

Recent Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments in this update eliminate, add and modify certain disclosure requirements for fair value measurements as part of the FASB’s disclosure framework project. The guidance is effective for public companies beginning in the first quarter of 2020. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40); Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The amendments in this update require implementation costs incurred by customers in cloud computing arrangements (i.e., hosting arrangements) to be capitalized under the same premises of authoritative guidance for internal-use software, and deferred over the non-cancellable term of the cloud computing arrangement plus any option renewal periods that are reasonably certain to be exercised by the customer or for which the exercise is controlled by the service provider. The guidance is effective for public companies beginning in the first quarter of 2020. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses.  This ASU, among other narrow-scope improvements, clarifies guidance around how to report expected recoveries.  This ASU permits organizations to record expected recoveries on assets purchased with credit deterioration.  In addition to other narrow technical improvements, the ASU also reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities.  The effective date and transition methodology are the same as in ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  The FASB deferred the effective dates of this ASU for smaller reporting companies (“SRC”) to fiscal years beginning after December 15, 2022. As of December 31, 2019, the Company qualifies as a SRC and will adopt this ASU in the first quarter of 2023.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.  This ASU removes specific exceptions to the general principles in Topic 740 in GAAP.  It eliminates the need for an organization to analyze whether certain exceptions apply in a given period.  This ASU also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for: a) Franchise taxes that are partially based on income; b) Transactions with a government that result in a step up in the tax basis of goodwill; c) Separate financial statements of legal entities that are not subject to tax; and d) Enacted changes in tax laws in interim periods.  For public business entities, ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.  The Company is currently assessing the impact of this ASU on its 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:

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares for basic earnings per share

 

 

16,433,644

 

 

 

16,389,876

 

 

 

16,269,611

 

Effect of dilutive securities

 

 

119,222

 

 

 

133,723

 

 

 

 

Denominator for diluted earnings per share

 

 

16,552,866

 

 

 

16,523,599

 

 

 

16,269,611

 

Stock awards to purchase 369,325, 298,406 and 808,391 shares of common stock were not included in the diluted net income (loss) per share calculation for 2019, 2018 and 2017, respectively, as their inclusion would have been anti-dilutive. In 2017 and for the first quarter of 2018, the Company calculated earnings per share using the “two-class” method, whereby unvested share-based payment awards that contained non-forfeitable rights to dividends or dividend equivalents were considered “participating securities”, as discussed in Note 9, and therefore, these participating securities were treated as a separate class in computing earnings per share.

3.

Detail of Selected Balance Sheet Accounts

Accounts Receivable

The following table summarizes the changes in the allowance for doubtful accounts for the past three years:

 

 

2019

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Balance at beginning of year

 

$

182

 

 

$

172

 

 

$

151

 

Bad debt expense

 

 

119

 

 

 

73

 

 

 

68

 

Write-offs, net of recoveries

 

 

(90

)

 

 

(63

)

 

 

(47

)

Balance at end of year

 

$

211

 

 

$

182

 

 

$

172

 

Inventories

The following table summarizes the changes in the inventory reserves for the past three years:

 

 

2019

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Balance at beginning of year

 

$

3,709

 

 

$

3,925

 

 

$

4,366

 

Provision for inventory write-downs

 

 

515

 

 

 

615

 

 

 

34

 

Deduction for inventory write-offs

 

 

(640

)

 

 

(831

)

 

 

(475

)

Balance at end of year

 

$

3,584

 

 

$

3,709

 

 

$

3,925

 


Property and Equipment, net

Property and equipment are stated at cost and consist of:

 

 

At December 31,

 

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

Land

 

$

2,476

 

 

$

2,476

 

Buildings

 

 

8,712

 

 

 

8,501

 

Machinery and equipment (1)

 

 

19,199

 

 

 

14,867

 

 

 

 

30,387 

 

 

 

25,844

 

Less accumulated depreciation

 

 

(15,798

)

 

 

(14,388

)

Total

 

$

14,589

 

 

$

11,456

 

(1)This includes finance leases. See Note 11 for more details.

Intangible assets

Intangible assets consist of:  

 

At December 31,

 

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

Tradenames

 

$

5,816

 

 

$

5,936

 

Customer relationships

 

 

18,620

 

 

 

18,620

 

 

 

 

24,436

 

 

 

24,556

 

Less accumulated amortization:

 

 

 

 

 

 

 

 

Tradenames

 

 

 

 

 

 

Customer relationships

 

 

(14,154

)

 

 

(13,377

)

 

 

 

(14,154

 

 

(13,377

)

 

 

 

 

 

 

 

 

 

Total

 

$

10,282

 

 

$

11,179

 

As of December 31, 2019, accumulated amortization on the acquired intangible assets was $14.2 million, and amortization expense was $0.8 million in the years ended December 31, 2019 and 2018 and $1.4 million in the year ended December 31, 2017. Future amortization expense to be recognized on the acquired intangible assets is expected to be as follows:

 

 

Annual
Amortization
Expense

 

 

 

(In thousands)

 

2020

 

$

777

 

2021

 

 

777

 

2022

 

 

777

 

2023

 

 

777

 

2024

 

 

777

 

2025

 

 

583

 

Goodwill

 

 

At December 31,

 

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

Balance at beginning of year

 

$

22,353

 

 

$

22,353

 

Less purchase price adjustment

 

 

 

 

 

 

Balance at end of year (1)

 

$

22,353

 

 

$

22,353

 

(1) The balance is net of $12.6 million of accumulated impairment losses, of which none were recorded in 2019 or 2018.


Accrued and Other Current Liabilities

Accrued and other current liabilities consist of:

 

At December 31,

 

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

Customer rebates

 

$

4,979

 

 

$

6,163

 

Payroll, commissions, and bonuses

 

 

1,930

 

 

 

3,047

 

Accrued inventory purchases

 

 

11,122

 

 

 

5,140

 

Property taxes

 

 

977

 

 

 

1,041

 

Freight

 

 

464

 

 

 

689

 

Refund liability

 

 

1,182

 

 

 

435

 

Professional fees

 

 

399

 

 

 

415

 

Accrued interest

 

 

248

 

 

 

259

 

Lease obligations

 

 

593

 

 

 

71

 

Other

 

 

1,367

 

 

 

1,972

 

Total

 

$

23,261

 

 

$

19,232

 

4.

Impairment of Goodwill and Intangible Assets

The annual goodwill and indefinite-lived intangibles impairment test was performed using the qualitative assessment option as of October 1, 2019 for the Southern, Southwest and Vertex reporting units, resulting in a conclusion that it was more-likely-than-not that the fair value of the reporting units exceeded their respective carrying values except for certain tradenames of the Southwest reporting unit for which a quantitative test was necessary and an impairment charge of $0.1 million was recorded in 2019.

In 2018, a quantitative assessment was performed in which the fair values of the reporting units were estimated using a discounted cash flow model (income approach) and a guideline public company method (market approach), giving 50% weight to each. The material assumptions used included cash flows based on future expected performance for the reporting units, weighted average costs of capital ranging from 11.5% to 15.0%, a long-term growth rate of 3% for the income approach and a control premium of 25.0% for the guideline public company method. The results of the test indicated that certain of the tradenames at Southwest were impaired. Accordingly, a charge of less than $0.1 million was recorded for 2018.

The Company is still anticipating significant growth in the businesses acquired in 2010 and in 2016. If this projected growth is not achieved and or there are future reductions in our market capitalization or market multiples, further goodwill and intangible assets impairments may result.

5.

Debt

On March 12, 2019 and December 10, 2019, the Company, as guarantor, HWC Wire & Cable Company and Vertex, as borrowers, and Bank of America, N.A., as agent and lender, entered into the Second and Third Amendments, respectively, to the Fourth Amended and Restated Loan and Security Agreement (such agreement, as so amended, the “Loan Agreement”). The Second Amendment extends the expiration date until March 12, 2024 and the Third Amendment increases the revolving credit facility to $115 million. 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 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 Loan Agreement is secured by substantially all of the property of the Company, other than real estate.

The 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 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 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 March 12, 2024. At December 31, 2019, the Company was in compliance with the availability-based covenant and fixed coverage ratio 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.”

The Company’s borrowings at December 31, 2019 and 2018 were $83.5 million and $71.3 million, respectively. The weighted average interest rates on outstanding borrowings were 3.4% and 4.1% at December 31, 2019 and 2018, respectively.

At December 31, 2019, the Company had available borrowing capacity of $22.8 million under the terms of the Loan Agreement. The Company paid $0.1 million for each of the years ended December 31, 2019, 2018, and 2017, for the unused facility.

Principal repayment obligations for succeeding fiscal years are as follows:

 

 

(In thousands)

 

2020

 

$

 

2021

 

 

 

2022

 

 

 

2023

 

 

 

2024

 

 

83,500

 

Total

 

$

83,500

 

6.

Income Taxes

The provision (benefit) for income taxes consists of:

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$

719

 

 

$

3,041

 

 

$

1,280

 

State

 

 

125

 

 

 

658

 

 

 

159

 

Total current

 

 

844

 

 

 

3,699

 

 

 

1,439

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred:

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

 

400

 

 

 

(1,246

)

 

 

1,259

 

State

 

 

31

 

 

 

(98

)

 

 

55

 

Total deferred

 

 

431

 

 

 

(1,344

)

 

 

1,314

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,275

 

 

$

2,355

 

 

$

2,753

 


A reconciliation of the U.S. Federal statutory tax rate to the effective tax rate on income before taxes is as follows:

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

   

Federal statutory rate

 

 

21.0

%

 

 

21.0

%

 

 

35.0

%

State taxes, net of federal benefit

 

 

3.4

 

 

 

4.3

 

 

 

4.2

 

Impairment, non-deductible portion

 

 

 

 

 

0.1

 

 

 

 

Share-based compensation

 

 

3.7

 

 

 

1.2

 

 

 

15.2

 

Non-deductible items

 

 

5.4

 

 

 

2.1

 

 

 

4.6

 

Valuation allowance

 

 

 

 

 

(9.5

)

 

 

41.0

 

Tax reform rate change

 

 

 

 

 

 

 

 

12.9

 

Other

 

 

(0.2

)

 

 

2.2

 

 

 

(4.1

)

Total effective tax rate

 

 

33.3

%

 

 

21.4

%

 

 

108.8

%

Significant components of the Company’s deferred taxes were as follows:

  Year Ended
December 31,
 
  2019  2018 
  (In thousands) 
Deferred tax assets:        
Operating lease right-of-use assets $3,425  $—   
Inventory reserve  1,072   1,179 
Uniform capitalization adjustment  1,633   1,469 
Stock compensation expense  666   681 
Accrued commission  124   348 
Other  199   276 
Total deferred tax assets  7,119   3,953 
         
Deferred tax liabilities        
    Operating lease right-of-use assets  (3,316)  —   
Goodwill  (838)  (649)
Intangible assets  (2,230)  (2,315)
Other  (135)  (59)
Total deferred tax liabilities  (6,519)  (3,023)
         
Net deferred tax assets $600  $930 

On December 22, 2017, the United States enacted significant changes to the U.S. tax law following the passage and signing of H.R.1, “An Act to Provide the Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (previously known as “The Tax Cuts and Jobs Act”). In March 2018, the FASB issued ASU 2018-05, “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (SEC Update).” This ASU added the SEC guidance released on December 22, 2017 regarding the income tax accounting implication of the Tax Cuts and Jobs Act to ASC Topic 740. During 2017, the Company recorded income tax expense of $0.3 million to reflect the reduction in the U.S. corporate income tax rate from 35% to 21%. As of December 31, 2018, the Company completed its analysis of its accounting for the income tax effects of tax reform and as a result no additional adjustments were recorded.

The Company does not have any unrecognized tax benefits recorded at December 2019, 2018 and 2017. The Company recognizes interest on any tax issue as a component of interest expense and any related penalties in other operating expenses. As of December 31, 2019, 2018 and 2017, the Company recorded no provision for interest or penalties related to uncertain tax positions. The tax years 2015 through 2019 remain open to examination by the major taxing jurisdictions to which the Company is subject.

7.

Stockholders’ Equity

On March 7, 2014, the Board of Directors adopted a stock repurchase program under which the Company is authorized to purchase up to $25 million of its outstanding shares of common stock from time to time, depending on market conditions, trading activity, business conditions and other factors. Shares of stock purchased under the program are held as treasury shares and may be used to satisfy the exercise of options, issuance of restricted stock, to fund acquisitions or for other uses as authorized by the Board of Directors. In November 2016, the Board of Directors suspended purchases under the stock repurchase program. In August 2019, the plan was reactivated. During 2019, the Company made repurchases under the stock repurchase program of 235,500 shares for a total cost of $1.1 million.


Under the terms of the 2017 Stock Plan, the Company acquired 26,731 shares and 25,368 shares that were surrendered by the holders to pay withholding taxes in 2019 and 2018, respectively.

The Company paid a quarterly cash dividend from August 2007 until August 2016. The Company has not paid a cash dividend since 2016.

The Company is authorized to issue 5,000,000 shares of preferred stock, par value $.001 per share. The Board of Directors is authorized to fix the particular preferences, rights, qualifications and restrictions of each series of preferred stock. In connection with the adoption of a now terminated stockholder rights plan, the Board of Directors designated 100,000 shares as Series A Junior Participating Preferred Stock. No shares of preferred stock have been issued.

8.

Retirement-related Benefits

Defined Contribution Plan

The Company maintains a combination profit-sharing plan and salary deferral plan for the benefit of its employees who are not covered by a collective bargaining agreement. Employees who are eligible to participate in the plan can contribute a percentage of their base compensation, up to the maximum percentage allowable not to exceed the limits of Internal Revenue Code Sections 401(k), 404, and 415, subject to the IRS-imposed dollar limit. Employee contributions are invested in certain equity and fixed-income securities, based on employee elections. The Company matches 100% of the first 1% of the employee’s contribution. The Company’s match for the years ended December 31, 2019, 2018 and 2017 was $0.2 million for each year.

Defined Benefit Plan

The Company has a non-contributory defined benefit pension plan for those current and former employees of Vertex who are subject to a collective bargaining agreement. Effective November 30, 2019, there are no active employees in the plan as the plan was frozen with the closure of Vertex’s Massachusetts facility. The benefit provisions to participants of the defined benefit plan were calculated based on the number of years of service and an annual negotiated plan benefit per year of service. Annual compensation (or future compensation increases) is not used in calculating the benefit or future plan contributions. It is the Company’s policy to fund amounts for pensions sufficient to meet the minimum funding requirements set forth in applicable employee benefit laws, which currently approximate the benefit payments made each year. A total contribution of less than $0.1 million was made during each of the years ended December 31, 2019, 2018 and 2017.

The current projected benefit obligation was $1.3 million and $1.1 million as of December 31, 2019 and 2018, respectively. The discount rate used to determine the projected benefit obligation was 3.2% and 4.2% in 2019 and 2018, respectively.

The fair value of the assets of the defined benefit plan was $1.3 million and $1.0 million in 2019 and 2018, respectively. The plan assets are all classified as Level 1 and as such have readily observable prices and therefore a reliable fair market value.

As of November 30, 2019, the defined benefit plan is inactive, with no additional incremental benefits being accrued and no contributions being made.


9.

Incentive Plans

On August 4, 2017, the Board of Directors approved the Houston Wire & Cable Company 2017 Stock Plan (the “2017 Plan”). The 2017 Plan was approved by the stockholders at the 2018 Annual Meeting on May 8, 2018. The 2017 Plan provides for discretionary grants of stock options, stock awards, stock units and stock appreciation rights (SARs) to employees and directors up to a total of 1,000,000 shares. Shares issuable under the 2017 Plan may be authorized but unissued shares or treasury shares. If any award granted under the 2017 Plan expires, terminates or is forfeited or cancelled for any reason, the shares subject to the award will again be available for issuance. Any shares subject to an award that are delivered to the Company or withheld by the Company on behalf of a participant as payment for the award (including the exercise price of a stock option or SAR) or as payment for any withholding taxes due in connection with the award, or that are purchased by the Company with proceeds received from a stock option exercise, will not again be available for issuance. The 2017 Plan’s purpose is to attract and retain outstanding individuals as employees and directors of the Company and its subsidiaries and to provide them with additional incentive to expand and improve the Company’s profits by giving them the opportunity to acquire or increase their proprietary interest in the Company.

The 2017 Plan succeeded the Company’s 2006 Stock Plan (the “2006 Plan”), which expired on May 1, 2017. The types of equity awards previously authorized under the 2006 Plan did not significantly differ from those permitted under the 2017 Plan.

Stock Option Awards

The Company may grant options to purchase its common stock to employees and directors of the Company under the 2006 Plan and 2017 Plan at no less than the fair market value of the underlying stock on the date of grant. These options are granted for a term not exceeding ten years and may be forfeited in the event the employee or director terminates his or her employment or relationship with the Company. Options granted to employees generally vest over three to five years, and options granted to directors generally vest one year after the date of grant. Shares issued to satisfy the exercise of options may be newly issued shares or treasury shares. Each plan contains anti-dilutive provisions that permit an adjustment of the number of shares of the Company’s common stock represented by each option for any change in capitalization. Compensation cost for options granted is charged to expense on a straight line basis over the term of the option.

The fair value of each option awarded is estimated on the date of grant using a Black-Scholes option-pricing model. Expected volatilities are based on historical volatility of the Company’s stock and other factors. The expected life of options granted represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. There were no options granted in 2019, 2018 or 2017. 

All granted stock options have vested, with the last grant having an expiration date of December 20, 2021. The following summarizes stock option activity and related information: 

   Options
(in 000’s)
  Weighted
Average
Exercise Price
  Aggregate
Intrinsic
Value
  Weighted
Average
Remaining
Contractual Life
(in years)
 
   2019  2018  2019  2018  2019  2018  2019  2018 
Outstanding-Beginning of year   154   223   13.40   13.10  $  $   2.52   2.84 
Granted                             
Exercised                             
Forfeited   (22)  (30)  13.04   11.17                 
Expired   (10)  (39)  10.32   13.42                 
Outstanding-End of year   122   154   13.72   13.40  $  $   1.75   2.52 
Exercisable-End of year   122   154   13.72   13.40  $  $   1.75   2.52 

There was no excess tax benefit for the years ended December 31, 2019, 2018 and 2017.

There were no options exercised in the years ended December 31, 2019, 2018 and 2017. There is no intrinsic value of options outstanding and exercisable as of December 31, 2019 as the closing stock price at the end of 2019 creates a negative intrinsic value.

The total grant-date fair value of options vested during 2019 was $0, as all the options vested as of December 31, 2018. The total grant-date fair value of options vested during the year ended December 31, 2017 was $0.2 million.

Restricted Stock Awards, Restricted Stock Units and Cash Awards

As a result of the approval of the 2017 Plan by the stockholders at the 2018 Annual Meeting, all cash/liability awards granted prior to stockholder approval of the 2017 Plan were reclassified to restricted stock units (equity) effective May 8, 2018. The total liability reclassified to additional paid-in-capital was $0.4 million. This modification resulted in an increase in total fair value of $0.1 million, recognized over the terms of the grants, which range from 1 to 5 years.


On December 3, 2019, the Board of Directors granted to the Company’s President and CEO 78,125 voting shares of restricted stock and to the CFO, 19,531 voting shares of restricted stock under the 2017 Plan. The shares vest in one-third increments on the first, second and third anniversaries of the date of grant, in each case as long as the recipient is then employed by the Company. Any dividends declared will be accrued and paid if and when the related shares or units vest.

Also, on December 3, 2019, the Board of Directors granted 250,000 shares of restricted stock to the Company’s President and CEO and 125,000 shares of restricted stock to the CFO. Each grant vests if there is a Change in Control of the Company (as defined in the 2017 Plan) on or before December 2, 2024, as long as the recipient remained in continuous employment with the Company or a Subsidiary until the Change in Control or if the recipient was terminated by the Company without cause within one year before the Change in Control. Any dividends declared will be accrued and paid to the grantee if and when the related shares vest.

The Board of Directors also granted 39,719 voting shares of restricted stock under the 2017 Plan to members of management in December 2019. The shares vest in one-third increments on the third, fourth and fifth anniversaries of the date of grant, in each case as long as the recipient is then employed by the Company. Any dividends declared will be accrued and paid if and when the related shares or units vest.

Following the Annual Meeting of Stockholders on May 7, 2019, the Company granted restricted stock units with a grant date value of $60,000 to each nonemployee director who was elected, for an aggregate of 58,920 restricted stock units. Each award of restricted stock units vests at the date of the 2020 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.

On March 12, 2019, the Board of Directors granted 52,910 performance stock units to the Company’s President and CEO and 13,228 performance stock units to the CFO. Each grant of performance stock units vests on December 31, 2021, 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 the grantee 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 the grantee if and when the related shares vest.

On December 4, 2018, the Board of Directors granted to the Company’s President and CEO 48,387 voting shares of restricted stock and to the CFO, 12,097 voting shares of restricted stock under the 2017 Plan. The shares vest in one-third increments on the first, second and third anniversaries of the date of grant, in each case as long as the recipient is then employed by the Company. Any dividends declared will be accrued and paid if and when the related shares or units vest.

The Board of Directors also granted 44,357 voting shares of restricted stock under the 2017 Plan to members of management on December 4, 2018. The shares vest in one-third increments on the third, fourth and fifth anniversaries of the date of grant, in each case as long as the recipient is then employed by the Company. Any dividends declared will be accrued and paid if and when the related shares or units vest.

On November 6, 2018 and June 1, 2018, the Company awarded restricted stock units with a grant date value of $30,000 and $55,000 for a total of 4,950 and 6,667 restricted stock units, respectively, to its newly appointed non-employee directors. These awards of restricted stock units vest at the date of the 2019 Annual Meeting of Stockholders. Each grant entitles the non-employee director 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.

On May 8, 2018, the Company approved the award of restricted stock units with a grant date value of $60,000 to each non-employee director who was re-elected, for an aggregate of 31,372 restricted stock units. Each award of restricted stock units vests at the date of the 2019 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.

Also on May 8, 2018, the Company granted 28,144 voting shares of restricted stock to new members of the management team. Of the 28,144 shares granted, 26,144 shares vest in one third increments on the first, second and third anniversaries of the date of grant and the remaining 2,000 shares vest in one third increments on the third, fourth and fifth anniversaries of the date of grant, in each case as long as the recipient is then employed by the Company. Any dividends declared will be accrued and paid if and when the related shares vest.

Restricted common shares and restricted stock units are measured at fair value on the date of grant based on the quoted price of the common stock. Such value is recognized as compensation expense over the corresponding vesting period which ranges from one to five years, based on the number of awards that vest.

The following summarizes restricted stock activity for the years ended December 31, 2019 and 2018:

  Shares 
  2019  2018 
  Shares
(in 000’s)
  Weighted
Average
Market
Value at
Grant Date
  Shares
(in 000’s)
  Weighted
Average
Market
Value at
Grant Date
 
Non-vested -Beginning of year  259  $6.78   238  $7.33 
Granted  511   3.84   133   6.51 
Vested  (107)  7.24   (99)  7.61 
Cancelled/Forfeited  (9)  6.34   (13)  7.63 
Expired            
Cash awards converted to equity            
Non-vested -End of year  654  $5.18   259   6.78 

  Units 
  2019  2018 
  Shares
(in 000’s)
  Weighted
Average
Market
Value at
Grant Date
  Shares
(in 000’s)
  Weighted
Average
Market
Value at
Grant Date
 
Non-vested -Beginning of year  215  $7.59   40  $7.50 
Granted  125   5.88   43   7.47 
Vested  (60)  7.59   (60)  7.65 
Cancelled/Forfeited  (3)  7.65   (5)  7.65 
Expired            
Cash awards converted to equity        197   7.65 
Non-vested -End of year  277   6.83   215   7.59 

Total stock-based compensation cost was $1.5 million for the year ended December 31, 2019, $1.3 million for the year ended December 31, 2018, and $1.2 million for the year ended December 31, 2017, of which $1.0 million was for equity awards and $0.2 million was for liability awards. Total income tax benefit recognized for equity awards stock-based compensation arrangements was $0.2 million for each of the years ended December 31, 2019, 2018 and 2017.

As of December 31, 2019, there was $1.8 million of total unrecognized compensation cost related to non-vested, stock-based compensation arrangements. The cost is expected to be recognized over a weighted average period of approximately 26 months. There are 5,148 shares available for future grants under the 2017 Plan at December 31, 2019.

10.

Commitments and Contingencies

The Company had aggregate purchase commitments for fixed inventory quantities of approximately $59.0 million at December 31, 2019.

The Company had outstanding under the Loan Agreement letters of credit totaling $1.8 million to certain vendors as of December 31, 2019.

From time to time, we are involved in lawsuits that are brought against us in the normal course of business. We are not currently a party to any legal proceedings that we expect, either individually or in the aggregate, to have a material adverse effect on the Company’s consolidated financial position, cash flows, or results from operations.


11.Leases

Effective January 1, 2019, the Company adopted ASU No. 2016-02, “Leases (Topic 842)” and the series of related ASUs that followed (collectively referred to as “Topic 842”). The most significant changes under the new guidance include clarification of the definition of a lease, and the requirements for lessees to recognize a right-of-use (ROU) asset and a lease liability for all qualifying leases with terms longer than twelve months in the consolidated balance sheet. In addition, under Topic 842, additional disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.

The Company elected the practical expedient available under ASU 2018-11 “Leases: Targeted Improvements,” which allows the Company to apply the transition provision for Topic 842 at the Company’s adoption date instead of at the earliest comparative period presented in the Company’s financial statements. Therefore, the Company recognized and measured leases existing at January 1, 2019 but without retrospective application. The Company also elected all other available practical expedients except the hindsight practical expedient. In electing the practical expedients, the Company utilized the transition practical expedient package whereby the Company did not reassess (i) whether any of the Company’s expired or existing contracts contain a lease, (ii) the classification for any expired or existing leases and (iii) initial direct costs for any existing leases.

The impact of Topic 842 on the Company’s consolidated balance sheet as of January 1, 2019 was the recognition of ROU assets and lease liabilities for operating leases, while the Company’s accounting for finance leases remained substantially unchanged. The Company’s finance leases were immaterial prior to the adoption of Topic 842, and no change was made to the classification of these leases. As a result of the adoption of Topic 842, beginning retained earnings was impacted by $0.1 million and there was no impact to the income statement.

The Company leases property including warehouse space, offices, vehicles and equipment. The Company determines if an arrangement is a lease at inception. As part of the transition to the new standard, the Company reviewed agreements with suppliers, vendors, customers, and other outside parties to determine if any agreements met the definition of an embedded lease. This is based on the nature of the contracts reviewed, and various factors, including identified assets included in the agreement to which the Company has exclusive rights of control as described by Topic 842. The Company concluded that these are not material agreements with parties that would constitute an embedded lease. For purposes of calculating operating lease liabilities, lease terms may be deemed to include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

Beginning January 1, 2019, operating ROU assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Operating leases in effect prior to January 1, 2019 were recognized at the present value of the remaining lease payments over the remaining lease term as of January 1, 2019. The Company is required to determine a discount rate in order to calculate the present value of lease payments. If the rate is not included in the lease or cannot be readily determined, the Company uses its incremental secured borrowing rate based on lease term information available at the commencement date of the lease in determining the present value of lease payments. The Company recognizes lease components and non-lease components together and not as separate parts of a lease for all leases. The Company will exercise this practical expedient in the future by asset class.

The expenses generated by the lease activity of the Company as lessee for the twelve months ended December 31, 2019 were as follows:

Lease Type

 

Income Statement Classification

 

 

Amount

 

(Dollars in thousands)

 

 

 

 

 

 

Consolidated operating lease expense

 

Operating expenses

 

 

$

5,887

 

 

 

 

 

 

 

 

 

Consolidated financing lease amortization

 

Depreciation and amortization

 

 

 

305

 

Consolidated financing lease interest

 

Interest expense

 

 

 

61

 

Consolidating financing lease expense

 

 

 

 

 

366

 

 

 

 

 

 

 

 

 

Net lease cost

 

 

 

 

$

6,253

 

Rent expense was approximately $3.7 million and $3.5 million in 2018 and 2017, respectively.


The value of the net assets and liabilities generated by the leasing activity of the Company as lessee as of December 31, 2019 were as follows:

Lease Type

 

Balance Sheet Classification

 

 

Amount

 

(Dollars in thousands)

 

 

 

 

 

 

Total ROU operating lease assets (1)

 

Operating lease right-of-use assets, net

 

 

$

13,481

 

Total ROU financing lease assets (2)

 

Property and equipment, net

 

 

 

2,430

 

Total lease assets

 

 

 

 

$

15,911

 

  

 

 

 

 

 

 

 

Total current operating lease obligation

 

Operating lease liabilities

 

 

$

2,742

 

Total current financing lease obligation

 

Accrued and other current liabilities

 

 

 

593

 

Total current lease obligation

 

 

 

 

$

3,335

 

 

 

 

 

 

 

 

 

Total long term operating lease obligation

 

Operating lease long term liabilities

 

 

$

11,182

 

Total long term financing lease obligation

 

Other long term liabilities

 

 

 

1,860

 

Total long term lease obligation

 

 

 

 

$

13,042

 

(1) Operating lease assets are recorded net of accumulated amortization of $2.3 million as of December 31, 2019

(2) Financing lease assets are recorded net of accumulated amortization of $0.4 million as of December 31, 2019

The future minimum lease payments for finance and operating lease liabilities of the Company as lessee as of December 31, 2019 were as follows:

Maturity Date of Lease Liabilities

 

Operating Leases

 

 

Financing Leases

 

 

Total

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

Year one

 

$

3,391

 

 

 

708

 

 

 

4,099

 

Year two

 

 

3,298

 

 

 

661

 

 

 

3,959

 

Year three

 

 

3,169

 

 

 

599

 

 

 

3,768

 

Year four

 

 

2,509

 

 

 

517

 

 

 

3,026

 

Year five

 

 

2,181

 

 

 

256

 

 

 

2,437

 

Subsequent years

 

 

1,266

 

 

 

 

 

 

1,266

 

Total lease payments

 

 

15,814

 

 

 

2,741

 

 

 

18,555

 

Less: Interest

 

 

1,900

 

 

 

289

 

 

 

2,189

 

Present value of lease liabilities

 

$

13,914

 

 

 

2,452

 

 

 

16,366

 

The weighted average remaining lease terms and discount rates of the leases held by the Company as of December 31, 2019 were as follows:

 

Lease Type

 

 

Weighted Average

Term in Years

 

Weighted Average
Interest Rate

 

Operating leases

 

 

4.9

 

5.3

 

Financing leases

 

 

4.2

 

5.3

 

The cash outflows of the leasing activity of the Company as lessee for the twelve months ended December 31, 2019 were as follows:

Cash Flow Source

 

Classification

 

 

Amount

 

(Dollars in thousands)

 

 

 

 

 

 

Operating cash outflows from operating leases

 

Operating activities

 

 

$

6,140

 

Operating cash outflows from financing leases

 

Operating activities

 

 

 

54

 

Financing cash outflows from financing leases

 

Financing activities

 

 

 

293

 

During the year ended December 31, 2019, the Company recorded non-cash ROU financing lease assets and corresponding financing lease obligations totaling $2.5 million primarily related to warehouse machinery and IT infrastructure lease agreements.

During the year ended December 31, 2019, the Company modified certain terms of the lease agreement with the landlord of Vertex’s Massachusetts facility, including early termination of the lease on November 30, 2019 and Vertex subleasing a portion of the space until the end of November. In connection with the modification, the Company recognized expense related to the early termination of approximately $2.2 million.

The Company has entered into two operating leases during 2020, with significant rights and obligations that total $0.8 million. All other leases are not material.


12.

Select Quarterly Financial Data (unaudited)

The following table presents the Company’s unaudited quarterly results of operations for each of the last eight quarters in the period ended December 31, 2019. The unaudited information has been prepared on the same basis as the audited consolidated financial statements.

 

 

Year Ended December 31, 2019

 

 

 

Fourth
Quarter

 

 

Third
Quarter

 

 

Second
Quarter

 

 

First
Quarter

 

 

 

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

82,287

 

 

$

85,403

 

 

$

85,326

 

 

$

85,270

 

Gross profit

 

$

18,695

 

 

$

19,431

 

 

$

20,537

 

 

$

21,259

 

Operating (loss) income

 

$

76

 

 

$

(87

)

 

$

3,030

 

 

$

3,863

 

Net (loss) income

 

$

(656

)

 

$

(721

)

 

$

1,643

 

 

$

2,284

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.04

)

 

$

(0.04

)

 

$

0.10

 

 

$

0.14

 

Diluted

 

$

(0.04

)

 

$

(0.04

)

 

$

0.10

 

 

$

0.14

 

 

 

Year Ended December 31, 2018

 

 

 

Fourth
Quarter

 

 

Third
Quarter

 

 

Second
Quarter

 

 

First
Quarter

 

 

 

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

87,906

 

 

$

90,074

 

 

$

93,852

 

 

$

85,026

 

Gross profit

 

$

20,979

 

 

$

21,393

 

 

$

22,347

 

 

$

20,489

 

Operating income

 

$

3,190

 

 

$

3,046

 

 

$

4,392

 

 

$

3,270

 

Net income

 

$

1,628

 

 

$

2,455

 

 

$

2,606

 

 

$

1,947

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.10

 

 

$

0.15

 

 

$

0.16

 

 

$

0.12

(1) 

Diluted

 

$

0.10

 

 

$

0.15

 

 

$

0.16

 

 

$

0.12

(1)

(1)

The “two-class” method was used to calculate earnings per share which resulted in the same value.


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

In accordance with Exchange Act Rules 13a-15 and 15a-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2019.

Design and Evaluation of Internal Control over Financial Reporting

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we included a report of management’s assessment of the design and effectiveness of our internal controls as part of this Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Ernst & Young, LLP, our independent registered public accounting firm, also attested to our internal control over financial reporting. Management’s report and the independent registered accounting firm’s attestation report are included on pages 24 and 25 under the captions entitled “Management’s Report on Internal Control Over Financial Reporting” and “Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting.”

There has been no change in our internal controls over financial reporting that occurred during the quarter ended December 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

23

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Company has assessed the effectiveness of its internal control over financial reporting as of December 31, 2019 based on criteria established by Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission  (2013 framework) (“COSO Framework”). The Company’s management is responsible for establishing and maintaining adequate internal controls over financial reporting. The Company’s independent registered public accountants that audited the Company’s financial statements as of December 31, 2019 have issued an attestation report on management’s assessment of the effectiveness of the Company’s internal control over financial reporting, which appears on page 25.

Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

The Company’s assessment of the effectiveness of its internal control over financial reporting included testing and evaluating the design and operating effectiveness of its internal controls. In management’s opinion, the Company has maintained effective internal control over financial reporting as of December 31, 2019, based on criteria established in the COSO Framework.

/s/ James L. Pokluda III

/s/ Christopher M. Micklas

James L. Pokluda III

Christopher M. Micklas

President and Chief Executive Officer

Chief Financial Officer, Treasurer

and Secretary (Chief Accounting Officer)

24

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of Houston Wire & Cable Company

Opinion on Internal Control over Financial Reporting

We have audited Houston Wire & Cable Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Houston Wire & Cable Company (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and our report dated March 13, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

Houston, Texas

March 13, 2020

25

ITEM 9B.  OTHER INFORMATION

None.

PART III

 

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Directors

Roy W. Haley, age 74. Director since 2017
Independent Director

Mr. Haley served as the Chairman of the Board of WESCO International, Inc. (“WESCO”) from 1998 until his retirement in 2011 and as Chief Executive Officer of WESCO from 1994 to 2009. WESCO is a leading North American-based distributor of products and provider of advanced supply chain management and logistics services used primarily in industrial, construction, utility, and commercial, institutional and government markets. From 1988 to 1993, Mr. Haley served as Chief Operating Officer, President and a director of American General Corporation, a diversified financial services company. In 2018, Mr. Haley retired as a director of Essendant Inc. (formerly United Stationers, Inc.), after 18 years of service. He was previously a director of BlueLinx Holdings Inc., from 2013 to 2016 and Non-Executive Chairman of the Board from 2014 to 2016. As a former CEO of a major distributor of industrial products, Mr. Haley brings extensive knowledge of the industrial and electrical distribution industries, the customer perspective and experience with distribution operations.

Margaret S. Laird, age 44. Director since 2019
Independent Director

Ms. Laird has served as Chief Pricing Officer of Hitachi Vantara, a subsidiary of Hitachi, Ltd. that provides data-managing solutions to business enterprises, since January 2019. From 2005 until 2018, Ms. Laird was with Deloitte Consulting LLP in its Monitor Deloitte Strategy Practice, most recently as a Managing Director. Ms. Laird’s deep experience with digital strategies and technologies, and her expertise in sales and pricing, help the board address a changed competitive landscape, and she brings age and gender diversity to the board.

David Nierenberg, age 67. Director since March 2020.
Independent Director

Since January 1996, Mr. Nierenberg has served as the President of Nierenberg Investment Management Company, Inc. (“NIMCO”), which manages the D3 Family Funds. Several of the D3 Family Funds are stockholders of the Company. Before founding NIMCO in 1996, Mr. Nierenberg was a General Partner at Trinity Ventures, a venture capital fund. Mr. Nierenberg began his career at Bain & Company Inc., where he was a Partner, managing strategy, acquisition, and cost reduction projects. He serves as Chair for the Advisory Board of the Ira M. Millstein Center for Global Markets and Corporate Ownership at Columbia Law School. Mr. Nierenberg chairs the Research Advisory Council of Glass, Lewis & Co. He is also a member of the board of the Washington State Investment Board, Flotek Industries, Inc. (NYSE: FTK), The information calledNational WWII Museum, STAND for by Item 10 relatingChildren, and International Refugee Assistance Program. Mr. Nierenberg previously served as a director for Electro Scientific Industries, Inc. (NASDAQ: ESIO), Radisys Corporation (NASDAQ: RSYS), Riverview Bancorp (NASDAQ: RVSB) and Rosetta Stone (NYSE: RST). Our Board of Directors believes that Mr. Nierenberg is particularly qualified to directorsserve as a director based on his significant expertise in strategic planning and nominees for electioncorporate governance, along with his broad-based business knowledge. In addition, Mr. Nierenberg’s service on other public company boards and with the Ira M. Millstein Center and Glass, Lewis provides valuable insight into the Company’s corporate governance.

James L. Pokluda III, age 56. Director since 2012
President and Chief Executive Officer of the Company

Mr. Pokluda was appointed President in May 2011 and Chief Executive Officer in January 2012. From 2007 until 2011, he served as Vice President – Sales and Marketing. During his 33 years with the Company, Mr. Pokluda has a demonstrated history of substantial contributions to the Company including the construction and leadership of our long-term growth plan, implementation of the National Service Center, the commercialization of our private branded products, co-leadership of the initial public offering in 2006, follow-on offering in 2007 and subsequent strategic acquisitions and dispositions. Mr. Pokluda served on the Board of Directors of Houston Electrical League (HEL) for several years, is incorporated herein by reference to the “Proposal No. 1 – Election of Directors” sectionan affiliate member of the registrant’s definitive Proxy Statement relatingNational Association of Electrical Distributors (NAED), and a graduate of the College of Engineering at Texas A&M University. In 2012, Mr. Pokluda completed the University of Chicago’s Booth School of Business Executive Education Advanced Management Program. As the only management representative on our board, and someone with experience in all aspects of our business, Mr. Pokluda provides an insider’s perspective in board discussions about our industry and the business and strategic direction of the Company.


Sandford W. Rothe, age 65. Director since 2018
Independent Director

Mr. Rothe is a retired Partner of Deloitte LLP (“Deloitte”). Mr. Rothe joined Deloitte in 1977, became a partner in 1990 and was the Managing Partner of Deloitte’s Denver office from 2002 until his retirement in June 2018. At Deloitte he held various leadership positions and served clients across many industries, advising clients in the areas of strategy, new market development, mergers & acquisitions, operational efficiency, capital allocation and structure and enterprise IT Projects. He served as a National Facilitator for Deloitte’s executive transition labs, focused on the successful onboarding and integration of incoming C-Suite executives. He is a Certified Public Accountant in Colorado and Oklahoma. Mr. Rothe’s significant experience with financial and SEC reporting, internal controls and risk management strengthen the board’s capabilities in those areas.

William H. Sheffield, age 72, Director since 2006
Independent Director

Mr. Sheffield is a corporate director and serves on the boards of directors of Hydro One, Velan Inc., Burnbrae Farms Limited, Longview Aviation Capital and 4iiii Innovations. He previously served on the boards of Canada Post Corporation until 2018 and Ontario Power Generation Inc. until 2014. Mr. Sheffield served as Chief Executive Officer of Sappi Fine Paper from 2001 until 2003. He holds an MBA and a BSc, and is recognized as both a Governance Fellow and a Certified Professional Director by the National Association of Corporate Directors in the United States and the Institute of Corporate Directors in Canada. With his knowledge of complex issues surrounding global companies and his understanding of what makes businesses work effectively and efficiently, Mr. Sheffield provides valuable insight to our board and offers particular expertise in labor relations, critical end user markets and board governance issues.

G. Gary Yetman, age 66. Director since 2014
Independent Director

Mr. Yetman served as the Annual MeetingChief Executive Officer and President of StockholdersColeman Cable, Inc. from 1999 until his retirement following the sale of Coleman Cable in 2014. Prior to bethat, Mr. Yetman held on May 5, 2020.  various senior management positions with Coleman Cable’s predecessor and within the electrical industry. Mr. Yetman’s extensive experience and proven track record within the electrical wire and cable industry make him a valuable member of our Board of Directors.

Executive Officers

The information called for by Item 10 relating to executive officers and certain significant employees is set forth in Part I of this Annual Report on Form 10-K.

 

The information called for by Item 10 relating to disclosure of delinquent Form 3, 4 or 5 filers is incorporated herein by reference to the “General – Delinquent Section 16(a) Reports” sectionReports

Section 16(a) of the registrant’s definitive Proxy Statement relatingSecurities Exchange Act of 1934 requires our officers, directors and persons who own more than ten percent of a registered class of our equity securities to file reports of ownership and changes in ownership on Forms 3, 4 and 5, as applicable, with the Annual MeetingSEC. Officers, directors and stockholders owning more than ten percent of Stockholdersour common stock are required by the SEC regulations to be heldfurnish us with copies of all Forms 3, 4 and 5 they file.


Based solely upon a review of Forms 3 and 4 and any amendments furnished to us, we believe that our directors, officers and greater than 10% beneficial owners complied with all applicable Section 16 filing requirements during 2020 and that such filings were timely, except (i) a Form 4 representing the acquisition of 12,500 shares of common stock upon the vesting of performance stock units, and the forfeiture of 23,077 performance share units, by Mr. Pokluda on May 5,December 31, 2020 was filed on April 6, 2021, (ii) a Form 4 reporting the acquisition on December 11, 2018 of 15,385 shares of common stock, December 11, 2019 of 15,385 shares of common stock, and December 11, 2020 of 15,384 shares of common stock by Mr. Pokluda upon the vesting of restricted stock units was filed on February 2, 2021, (iii) the Form 4 reporting the acquisition on December 11, 2020 of 1,026 shares of common stock by Mr. Davis upon the vesting of restricted stock units was filed on February 2, 2021, (iv) the Form 4 reporting the acquisition of 27,510 shares of common stock upon the vesting of performance share units, and the forfeiture of 20,000 performance share units, by Mr. Pokluda on March 10, 2020 was filed on April 8, 2020, and (v) the Forms 3 reporting that Mr. Zurovchak and Mr. Davis had become officers subject to Section 16 on June 12, 2020, were filed on June 24, 2020.

 

Code of Ethics

The information called forboard has adopted a Code of Conduct, most recently updated in May 2019 and reviewed annually, a copy of which may be found by Item 10 relatingaccessing the “Investors” page on our website at http://ir.houwire.com and clicking on the “Corporate Governance” link. Under the Code of Conduct, we insist on honest and ethical conduct by all of our directors, officers, employees and other representatives, including but not limited to the codefollowing:

Our directors, officers and employees are required to avoid situations in which their personal, family or financial interests conflict with those of the Company;

Our directors, officers and employees must refrain from engaging in any activities that compete with the Company, or which may compromise its interests;

Our directors, officers and employees must refrain from taking any business or investment opportunity discovered in the course of employment with or service to the Company that the director, officer or employee knows, or should have known or has reason to know, would benefit the Company; and

Our directors, officers and employees must comply with all applicable governmental laws, rules and regulations.

We are also committed to ensuring that all disclosures in reports and documents that the Company files with the SEC, as well as other public communications made by the Company, are full, fair, accurate, timely and understandable. Further, we will comply with all laws, rules and regulations that are applicable to our activities and expect all of ethics is incorporated herein by referenceour directors, officers and employees to obey the “Corporate Governance -law. Any violation of applicable law or any deviation from the standards embodied in the Code of Business Conduct” sectionConduct will result in appropriate corrective and disciplinary action, up to and including termination of the registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 5, 2020.employment.

 

The information calledStockholder Recommendations for by Item 10 relatingDirector Nominations

There have been no material changes to the procedures by which security holders may recommend nominees to the BoardCompany’s board of Directorsdirectors since the Company’s definitive proxy statement for its 2020 Annual Meeting of Stockholders, which was filed on March 26, 2020.

Audit Committee; Audit Committee Financial Expert

The Audit Committee consists of Messrs. Haley, Rothe and Sheffield, each of whom is incorporated hereinindependent for purposes of Rules 5605(a)(2) and (c)(2) of the Nasdaq Listing Rules and Rule 10A-3(b)(1) under the Securities Exchange Act of 1934. Mr. Rothe serves as the Chairperson. Each of the Audit Committee members is financially literate as determined by reference toour board in its business judgment. The board has also determined that Mr. Rothe is an “audit committee financial expert,” as such term is defined under the “Corporate Governance –applicable SEC rules.


The Audit Committee Establishedoperates under a charter approved by the Board of Directors, which can be found by accessing the “Investors” page of our website at http://ir.houwire.com and clicking on the “Corporate Governance” link. Copies of the charter will be sent to stockholders upon request.

The principal duties and responsibilities of the Audit Committee are to assist the board in its oversight of:

the accounting and financial reporting processes of the Company and the audits of the financial statements of the Company;

the independent auditors’ qualifications and independence; and

the performance of the independent auditors.

Our Audit Committee is also responsible for:

maintaining free and open communication among the committee, the independent auditors and management of the Company;

reviewing and approving related person transactions; and

preparing the report required to be prepared pursuant to the rules of the SEC for inclusion in the Company’s annual proxy statement.

The Audit Committee has the resources and authority appropriate to discharge its duties and responsibilities, including the authority to select, retain, terminate and approve the fees and other retention terms of counsel, accountants or other experts and advisors, as it deems necessary or appropriate.


ITEM 11.  EXECUTIVE COMPENSATION

Executive Compensation

Summary Compensation Table

The following table and related notes set forth information concerning the compensation paid to our President and Chief Executive Officer and our Chief Financial Officer for fiscal years 2020 and 2019. Because our President and Chief Executive Officer, Chief Financial Officer, and our Senior Vice President and Chief Operating Officer are our only executive officers, the following compensation disclosures have been limited to those individuals. We collectively refer to these executive officers throughout this section as our “named executive officers.”

Name and Principal 

Position 

 Year 

Salary 

($) (1) 

  

Bonus

($)

  

Stock Awards

($) (2)

  Non-Equity
Incentive Plan
Compensation
($) (3)
  

All Other

Compensation

($) (4)

  

Total

($)

 
                           

James L. Pokluda III,

President & Chief Executive Officer 

 2020  512,129   --   --   134,245   20,627   667,001 
 2019  549,192   --   300,000   82,500   9,960   941,652 
                           

Eric W. Davis,

Vice President & Chief Financial Officer (effective July 11, 2020) 

 2020  249,629   --   157,300   45,136   12,509   464,574 
                          
                           

Jerry M. Zurovchak, 

Senior Vice President & Chief Operating Officer (effective June 12, 2020) 

 2020  228,846   --   --   42,581   2,438   237,865 
                          
                           

Christopher M. Micklas, 

Chief Financial Officer (through July 10, 2020) 

 2020  184,230   --   --   --   7,754   191,984 
 2019  314,654   --   75,000   19,875   13,578   423,107 

(1)The annual salary rates for 2020 were $566,500 for Mr. Pokluda, $265,000 for Mr. Davis (effective July 11, 2020), $250,000 for Mr. Zurovchak and $346,500 for Mr. Micklas. However, as part of the cost saving measures adopted by the Company in response to the COVID-19 pandemic, all salaries were reduced effective May 1, 2020. The salaries for Messrs. Davis, Zurovchak and Micklas were reduced by 10% and for Mr. Pokluda, by 15%.

(2)This column shows the aggregate grant date fair value of the shares of restricted stock under the 2017 Plan computed in accordance with FASB ASC Topic 718. No annual awards were granted in 2020. Mr. Davis received 55,000 shares on November 3, 2020 in connection with his promotion to Chief Financial Officer. All awards were subject to time-based vesting. See note 10 of Notes to Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2020 for a discussion of the assumptions made in the valuation of these awards.

(3)For Mr. Pokluda, reflects the performance based annual bonus earned pursuant to his employment agreement, and for Mr. Davis and Mr. Zurovchak, reflects the performance based annual bonus earned pursuant to the Company’s Senior Management Bonus Program. See “2020 Annual Incentive Programs” below for a discussion of Mr. Pokluda’s 2020 annual bonus arrangement and the Senior Management Bonus Program.

(4)All Other Compensation reported for Mr. Pokluda for 2020 represents a matching contribution by the Company to our 401(k) Plan of $2,781; group term life and long-term disability insurance premiums of $2,618; and personal use of an automobile of $15,228. All Other Compensation reported for Mr. Davis for 2020 represents a matching contribution by the Company to our 401(k) Plan of $892; group term life and long-term disability insurance premiums of $2,618; and automobile allowance of $9,000. All Other Compensation reported for Mr. Zurovchak for 2020 represents a matching contribution by the Company to our 401(k) Plan of $813; and group term life and long-term disability insurance premiums of $1,625. All Other Compensation reported for Mr. Micklas for 2020 represents a matching contribution by the Company to our 401(k) Plan of $1,390; group term life and long-term disability insurance premiums of $1,345; and automobile allowance of $5,019.


Employment Agreements

James L. Pokluda III

On March 24, 2017, the Company and Mr. Pokluda entered into a second amended and restated employment agreement that (i) extended the term through December 31, 2018 (with automatic one-year extensions thereafter), (ii) increased his base salary to $500,000 (subject to future increases but not decreases) and annual incentive opportunity to a target of 80% of salary and (iii) provided for immediate vesting of any unvested restricted stock awards and performance stock unit awards granted as of January 31, 2017 in the event of a termination by the Company without cause, termination by Mr. Pokluda for good reason, or termination due to death or disability. The other material terms of Mr. Pokluda’s employment agreement remained unchanged.

In setting Mr. Pokluda’s annual incentive opportunity for 2020 in March 2020, the Compensation Committee modified the percentage of Mr. Pokluda’s base salary that would be payable upon achievement of the threshold and maximum benchmarks for the performance measures. On March 11, 2020, the Company and Mr. Pokluda entered into a first amendment to the second amended and restated employment agreement that conformed the language of the employment agreement to the incentive compensation program agreed to by the Compensation Committee and Mr. Pokluda for 2020.

Mr. Pokluda will be entitled to receive as severance the payments described under “Potential Payments upon Termination of Employment or Change in Control of the Company” below. The agreement limits Mr. Pokluda’s ability to compete with the Company for a period of one year following the termination of his employment for any reason or two years if he is receiving severance benefits due to a qualifying termination prior to a change in control.

Eric W. Davis

Mr. Davis was promoted to interim Chief Financial Officer effective July 11, 2020 and appointed as the permanent Chief Financial Officer on November 3, 2020. Pursuant to his Promotion and Severance Agreement dated as of November 5, 2020, Mr. Davis is entitled to receive an annual base salary of $265,000 and a maximum annual cash bonus opportunity of 50% of base salary, subject to the attainment of certain performance goals, and to participate in the Company’s Stock Plan and vacation and benefit plans on the same terms as other members of senior management.

Mr. Davis will be entitled to receive as severance the payments described under “Potential Payments upon Termination of Employment or Change in Control of the Company” below.

Christopher M. Micklas

Mr. Micklas joined the Company as Chief Financial Officer on April 16, 2018. Pursuant to his offer letter from the Company, Mr. Micklas was entitled to receive an annual base salary of $300,000 and a maximum annual cash bonus opportunity for 2019 of 60% of base salary, subject to the attainment of certain performance goals, and to participate in the Company’s Stock Plan and vacation and benefit plans on the same terms as other members of senior management. The Compensation Committee increased Mr. Micklas’ base salary to $315,000 for 2019 and $346,500 for 2020 and increased his maximum cash bonus opportunity to 70% of base salary. Mr. Micklas resigned from the Company effective July 10, 2020.

2020 Annual Incentive Programs

Under Mr. Pokluda’s employment agreement, Mr. Pokluda has a target bonus of 80% of his base salary and can earn an annual bonus of up to 140% of his base salary based on achievement of one or more performance targets for the fiscal year that are agreed to by the Board of Directors (or Compensation Committee) and Mr. Pokluda and consistent with the Company’s annual business plan. For 2020, the Compensation Committee selected two performance measures: net income and debt reduction, each weighted 50%. There was a single target for each measure; if the target was achieved, the full bonus was earned, and if the target was not, no bonus was earned.

For 2020, Mr. Davis and Mr. Zurovchak each had a target bonus of 50% of his base salary based on achievement of benchmarks with respect to the same two performance measures of net income and debt reduction established for purposes of Mr. Pokluda’s annual incentive compensation.


All bonuses are paid the year following the year for which performance is being measured, after receipt of (and subject to) the audit of the financial statements for the relevant year.

The annual cash bonus opportunities for 2020 for Mr. Pokluda, Mr. Davis, and Mr. Zurovchak were as follows:

Named Executive OfficerTarget
% of Base Salary
James L. Pokluda III80
Eric W. Davis50
Jerry M. Zurovchak50

Our actual performance in 2020 compared to the target and maximum levels was:

Performance Goal ($ in millions)TargetActualWeighted
Net income>$0$(12.6)50%
Revolver debt<$40.0$22.650%

Based on the above performance the target amounts and actual bonus amounts earned for Mr. Pokluda, Mr. Davis and Mr. Zurovchak are shown in the table below:

Named Executive OfficerTarget BonusActual Bonus
James L. Pokluda III$453,200$134,245
Eric W. Davis$132,500$45,136
Jerry M. Zurovchak$125,000$42,581

Mr. Micklas received no bonus for 2020, since he resigned from the Company before year end.

401(k) Plan

The Company sponsors the Houston Wire & Cable Company Employee Savings Plan, which is a tax-qualified retirement plan that covers most employees, including the named executive officers. A participant can elect to defer a percentage of his or her compensation, up to a maximum in 2020 of $19,500, or $26,000 if age 50 or over, and the Company will make a matching contribution equal to 100% of the first 1% of the participant’s deferral contributions. Participants vest in the matching contribution accounts at a rate equal to 20% for each year of service, subject to full vesting upon age 65, death or disability.


2020 Outstanding Equity Awards at Fiscal Year-End

The following table sets forth information for Mr. Pokluda, Mr. Davis, and Mr. Zurovchak with respect to unexercised options to purchase common stock that remained outstanding and shares of restricted stock, restricted stock units and performance stock units that remained unvested at December 31, 2020. The Company’s executive officers currently do not have any other outstanding stock awards.

  Option awards Stock awards 
Name Number of
securities
underlying
unexercised
options
exercisable
(#)
  Number of
securities
underlying
unexercised
options
unexercisable
(#)
  Option
exercise
price
($)
  Option
expiration
date
 Number of
shares or
units of
stock that
have not
vested
(#)
  Market value
of shares or
units of stock
that have not
vested
($)(1)
  Equity incentive
plan awards:
number of
unearned shares,
units or other rights
that have not vested
(#)
  Equity incentive plan
awards: market or
payout value of
unearned shares, units
or other rights that
have not vested
($)(1)
 
                      
James L. Pokluda III  72,910   0   14.11   12/20/2021  68,212(2)  190,311   302,910(3)   845,119 
       0                       
                               
Eric W. Davis  5,000   0   14.11  12/20/2021  63,193(4)  176,308   0   0 
                               
Jerry M. Zurovchak  0   0   --  --  2,604(5)  7,265   0   0 

(1)The market value of the stock awards was determined using the closing price of the Company’s common stock on December 31, 2020 ($2.79 per share).

(2)These shares vest in installments of 16,129 shares on December 4, 2021, 26,042 shares on December 3, 2021 and 26,041 shares on December 3, 2022.

(3)Of these awards, 52,910 units vest on December 31, 2021, as adjusted based on the level of attainment of the performance goals, and 250,000 shares vest upon a Change in Control of the Company.

(4)Of these awards, (i) 1,026 units vest on December 11, 2021 and 1,025 units vest on December 11, 2022, (ii) 18,334 shares vest on November 3, 2021, 18,333 shares vest on November 3, 2022 and 18,333 shares vest on November 3, 2023, (iii) 1,076 shares vest on December 4, 2021, 1,075 shares vest on December 4, 2022 and 1,075 shares vest on December 4, 2023, (iv) 833 shares vest on December 12, 2021, and (v) 695 shares vest on December 3, 2022, 694 shares vest on December 3, 2023 and 694 shares vest on December 3, 2024.

(5)These shares vest in installments of 868 shares on each of December 3, 2022, December 3, 2023 and December 3, 2024.

Potential Payments upon Termination of Employment or Change in Control of the Company

The Company provides certain benefits upon his termination of employment from the Company. These benefits are in addition to the benefits to which the executive officers would be entitled upon a termination of employment generally (i.e., vested retirement benefits accrued as of the date of termination, stock-based awards that are vested as of the date of termination and the right to elect continued health coverage pursuant to COBRA). The incremental benefits for Mr. Pokluda and Mr. Davis are described below. Mr. Zurovchak is not entitled to receive any additional severance benefits.

Employment Agreement with Mr. Pokluda

The Company’s employment agreement with Mr. Pokluda provides the following severance benefits:

Termination Prior to a Change in Control. If prior to a Change in Control (as defined in Mr. Pokluda’s employment agreement) Mr. Pokluda’s employment is terminated by the Company without Cause, Mr. Pokluda terminates his employment for Good Reason, or his employment terminates due to Disability, he is entitled to (i) continued payment of then current base salary for 24 months, (ii) two payments, each equal to the amount of his incentive bonus for the most recently completed fiscal year, paid when incentive bonuses are paid to other executives for the year in which the termination occurs and the following year, and (iii) continued participation in the Company’s health plan for 36 months (provided that COBRA is elected) with the premiums for the first 18 months at active employee rates. Outstanding equity awards will vest pursuant to the terms of the 2017 Stock Plan.


Termination Following a Change in Control. If within two years following a Change in Control (as defined in the 2017 Stock Plan) Mr. Pokluda’s employment is terminated by the Company without Cause (other than for Disability) or Mr. Pokluda terminates his employment for Good Reason, he is entitled to the same benefits as in the case of termination prior to a Change in Control, except that the 24 months of base salary and two years of incentive bonuses are payable in a lump sum within ten days after termination. If any excise tax under Section 280G of the Code would be triggered by the benefits paid to Mr. Pokluda, and the net after-tax value of the benefits is less than the net after-tax value of the benefits reduced so that no excise tax is payable, then the benefits will be reduced accordingly.

Termination Due to Death. If Mr. Pokluda’s employment is terminated due to his death, his estate will be entitled to a pro rata portion of the bonus payable for the year of termination had he remained employed through the end of the year, and his surviving spouse and dependents can elect continued participation in the Company’s health plan for 36 months (provided that COBRA is elected) with the premiums for the first 18 months at active employee rates.

In each case, benefits are conditioned on the execution of a release of claims, and Mr. Pokluda is subject to a two-year non-compete restriction.

The terms “Cause,” “Disability” and “for Good Reason” are defined as follows:

“Cause” means (i) a material neglect by Mr. Pokluda of his assigned duties, which includes any failure to follow the written direction of the board or to comply with the Company’s code of ethics or written policies, or repeated refusal by Mr. Pokluda to perform his assigned duties, in each case other than by reason of disability, which continues for 30 days following receipt of written notice from the board; (ii) the commission by Mr. Pokluda of any act of fraud or embezzlement against Company or any of its affiliates or the commission of any felony or act involving dishonesty; (iii) the commission by Mr. Pokluda of any act of moral turpitude which actually causes financial harm to the Company or any of its affiliates; (iv) a material breach by Mr. Pokluda of the confidentiality provisions of the employment agreement or any other confidentiality or non-disclosure agreement of Mr. Pokluda with the Company; or (v) Mr. Pokluda’s commencement of employment with another company while he is an employee of the Company without the prior consent of the board.

“Disability” means, in the sole judgment of the board, Mr. Pokluda’s inability to engage in any substantial gainful activity by reason of any medically-determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.

“Good Reason” means voluntary termination of the employment agreement by Mr. Pokluda if, without the prior consent of Mr. Pokluda: (a) the Company shall relocate its principal executive offices to a location outside the Houston, Texas metropolitan area; (b) there is a material reduction by the Company in Mr. Pokluda’s responsibilities, duties, authority, title or reporting relationship; or (c) the Company materially reduces Mr. Pokluda’s base salary or takes action that adversely affects Mr. Pokluda’s participation in, or materially reduces Mr. Pokluda’s benefit under, any benefit plan of the Company in which Mr. Pokluda is participating; provided, however, that termination for Good Reason by Mr. Pokluda shall not be permitted unless (x) Mr. Pokluda has given the Company at least 30 days’ prior written notice that he has a basis for a termination for Good Reason, which notice shall specify the facts and circumstances constituting Good Reason, and (y) the Company has not remedied such facts and circumstances constituting Good Reason within such 30-day period.


Promotion and Severance Agreement with Mr. Davis

The Company’s Promotion and Severance Agreement with Mr. Davis provides the following severance benefits:

Termination Following a Change in Control. If within two years following a Change in Control (as defined in the 2017 Stock Plan) Mr. Davis’ employment is terminated by the Company for other than cause or Mr. Davis terminates his employment for good reason, he is entitled to one year of his base salary then in effect and one times the amount of the annual bonus paid to Mr. Davis for the most recently completed fiscal year.

Stock Plans

The 2006 Stock Plan, as amended, provides that with respect to grants made after February 2014, the Compensation Committee has the discretion to determine how awards are to be treated upon a Change in Control, provided that if the awards are assumed by the acquiring entity, the vesting provisions continue and the Compensation Committee has the discretion to accelerate vesting only if there is a subsequent termination of employment. Mr. Pokluda’s January 30, 2017 performance stock units and restricted stock award agreements provide that if the awards are not assumed by the acquiring entity they will fully vest on a Change in Control. The 2017 Stock Plan contains the same Change in Control language as the amended 2006 Stock Plan. The award agreements issued under the 2017 Stock Plan prior to December 2019 provide that if the awards are not assumed by the acquiring entity they will fully vest on a Change in Control, and award agreements issued in December 2019 provide that awards will fully vest upon a Change in Control. All award agreements issued under the 2017 Stock Plan also provide that upon termination of employment due to death or disability, a pro rata portion of restricted stock units, and the target number of performance stock units, will vest.

The table set forth below quantifies the additional benefits described above that would be paid to Mr. Pokluda and Mr. Davis pursuant to the arrangements described above, assuming a qualifying termination of employment and/or Change in Control occurred on December 31, 2020.

Name Salary
($)
  Bonus
($)
  Accelerated
Vesting of
Options (1)
($)
 Accelerated
Vesting of
Restricted
Stock/Units (2)
($)
  Continued
Health
Coverage
($)
 
James L. Pokluda III                   
Prior to change in control  1,133,000   268,490   --  1,035,430 (3)  18,248 
On or after change in control  1,133,000   268,490   --  1,035,430 (4)  18,248 
Eric W. Davis                   
Prior to a change in control  --   --   --  176,308 (3)  -- 
On or after a change in control  265,000   45,136   --  176,308 (4)  -- 

(1)As of December 31, 2020, no named executive officer has any unvested stock options.

(2)Based on the closing price of the Company’s stock at December 31, 2020.

(3)Reflects accelerated vesting of all outstanding performance stock units and a prorata portion of the restricted stock awards, if termination is due to death or Disability.
(4)Reflects accelerated vesting of all outstanding performance stock unit and restricted stock unit awards. Assumes awards issued prior to December 2019 would not be assumed by the acquiring entity.
(5)Assumes awards issued prior to December 2020 would not be assumed by the acquiring entity.


Director Compensation

Each non-employee member of the Board of Directors currently receives an annual cash retainer of $120,000, paid quarterly. The Chairman of the Board receives an additional fee of $50,000 per year, and the Chairpersons of the Audit, Compensation, Nominating and Corporate Governance, and Digital & Technology Committees receive additional annual fees of $12,000, $9,000, $6,000 and $9,000, respectively, also paid quarterly. In light of the business challenges resulting from the COVID-19 pandemic, the board agreed that all cash retainers paid with respect to the period from May 2020 through March 2021 would be reduced by 20%. There are no additional fees for meeting attendance. Mr. Pokluda does not receive any additional compensation for his service as a director. When Mr. Sheffield served as both Chairman of the Board and Chairperson of the Nominating and Corporate Governance Committee, – Stockholder Recommendationshe waived the chairperson’s fee for Director Nominations” sectionthat committee. In connection with his appointment as Executive Chairman of the registrant’s definitive Proxy Statement relatingBoard, Mr. Yetman received a one-time grant of 10,000 restricted stock units under the 2017 Stock Plan.

The Company has adopted the Nonemployee Directors’ Deferred Compensation Plan. This plan permits a nonemployee director of the Company to make an advance election to defer receipt of all or a portion of the board fees (including annual retainers for board service and additional retainers for service as Chairman of the Board or as a chair of a board committee) that are otherwise payable to the Annual Meetingdirector for services performed during a calendar year. The deferred board fees are converted into stock units, based on the price of Stockholdersthe Company’s common stock on the date the fees would otherwise be paid to the director, and credited to a stock unit account, which is credited with dividend equivalents to the extent applicable. The stock unit account is distributed in shares of common stock on the date previously elected by the director (or, if no date is elected, on the January 31 following the date the director’s board service ends), or upon a change in control of the Company, if earlier.

Prior to the 2020 annual meeting, the annual cash retainer for service as a director was $60,000 and, following election or reelection to the board, each non-employee director received in addition a grant of restricted stock units having a fair market value of $60,000, based on the price of the Company’s common stock on the date of grant. The restricted stock units vest on the date of the Company’s annual meeting of stockholders the following year and are settled in shares of common stock when the director’s service on the board terminates for any reason. Any dividends declared on the common stock during the term of the restricted stock units will be heldaccrued and paid to the director when the restricted stock units are settled. In order to limit the dilutive impact of stock awards, effective as of the 2020 annual meeting, the board determined to pay all board compensation in cash.

We reimburse members of our Board of Directors for any out-of-pocket expenses they incur in connection with services provided as directors. The Nominating and Corporate Governance Committee has adopted a policy encouraging each director to devote at least one day each year to director education, and we pay for the cost of attending continuing education programs, up to $5,000 per director per year. Perquisites paid or provided to individual directors in 2020 were significantly less than the SEC’s minimum threshold for disclosure ($10,000).

The following table sets forth all compensation paid to each of our non-employee directors in 2020.

Name   

Fees Earned

or Paid in Cash

($) (1)

  

Stock Awards

($)

  

Total

($)

 
Roy W. Haley  89,250   0   89,250 
Margaret S. Laird  92,400   0   92,400 
David Nierenberg(2)  77,400   0   77,400 
Robert L. Reymond(3)  15,000   0   15,000 
Sandford W. Rothe  97,200   0   97,200 
William H. Sheffield(4)  109,400   0   109,400 
G. Gary Yetman(5)  115,450   0   115,450 


(1)       Includes amounts deferred under the Nonemployee Directors’ Deferred Compensation Plan.

(2)       Mr. Nierenberg became a director on March 16, 2020.

(3)       Mr. Reymond retired from the board on May 5, 2020.

 

The information called for by Item 10 relating to the audit committee and the audit committee financial expert is incorporated herein by reference to the “Corporate Governance - Committees Established by(4)       Mr. Sheffield served as Chairman of the Board of Directors - Audit Committee” section of the registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 5,until June 8, 2020.

 

ITEM 11.  EXECUTIVE COMPENSATION

(5)Mr. Yetman has served as Executive Chairman of the Board since June 8, 2020. In connection with his appointment as Executive Chairman, Mr. Yetman received a one-time grant of 10,000 restricted stock units.

 

The following table sets forth the aggregate number of restricted stock units granted under the Company’s stock plans for each of our non-employee directors outstanding as of December 31, 2020. No non-employee director holds any stock options. For information called for by Item 11 is incorporated herein by reference toregarding Mr. Pokluda’s outstanding equity awards, see the “Executive Compensation” and “Director Compensation” sections of the registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders to be held2020 Outstanding Equity Awards at Fiscal Year End table on May 5, 2020.page 8.

 

NameRestricted Stock Units
Roy W. Haley25,316
Margaret S. Laird9,820
David Nierenberg--
Sandford W. Rothe14,770
William H. Sheffield54,557
G. Gary Yetman51,428

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The information called for by Item 12 is incorporated herein by reference to the “StockStock Ownership of Certain Beneficial Owners and Management”Management

The following table sets forth the beneficial ownership of shares of our common stock for each stockholder who is known by us to own beneficially more than 5% of the outstanding shares of our common stock.

Name and Address of Beneficial Owner

Amount and Nature

of Beneficial Ownership

 

Percent of Class 

 
          
Nierenberg Investment Management Company, Inc. (1)         
19605 NE 8th St.         
Camas, WA 98607  2,043,358    12.10% 
          
FMR LLC (2)         
245 Summer Street         
Boston, MA 02210  1,598,621   9.47% 
          
Royce & Associates, LP (3)         
745 Fifth Avenue         
New York, NY 10151  1,208,781   7.16% 
          
Dimensional Fund Advisors LP (4)         

Building One

6300 Bee Cave Road 

         
Austin, TX 78746  926,291   5.49% 

(1)As reported in an amendment to Statement on Schedule 13D filed with the SEC on behalf of The D3 Family Fund, L.P., The D3 Family Bulldog Fund, L.P., Haredale Ltd., Nierenberg Investment Management Company, Inc. and David Nierenberg, on March 26, 2021. Each of Nierenberg Investment Management Company, Inc. and its president, David Nierenberg, is deemed to be the beneficial owner of these shares on behalf of various investment companies registered under the Investment Company Act of 1940. One of those investment companies, The D3 Family Bulldog Fund, L.P., beneficially owned 1,314,254 shares, or 7.78% of our common stock. Each of Nierenberg Investment Management Company, Inc. and Mr. Nierenberg had shared voting and shared dispositive power with respect to all 2,043,358 shares reported as beneficially owned.


(2)As reported in an amendment to Statement on Schedule 13G filed with the SEC on behalf of FMR LLC and Abigail P. Johnson, its chairman, on February 8, 2021. Fidelity Management & Research Company, a wholly-owned subsidiary of FMR LLC, is deemed to be the beneficial owner of these shares as a result of acting as investment adviser to various investment companies registered under the Investment Company Act of 1940. One of those investment companies, Fidelity Series Intrinsic Opportunities Fund, beneficially owned 1,348,500 shares, or 7.99%, of our common stock. Fidelity Management & Research Company had sole voting power with respect to 30,449 shares, shared voting power with respect to no shares and sole dispositive power with respect to all 1,598,621 shares reported as beneficially owned.

(3)As reported in an amendment to Statement on Schedule 13G filed with the SEC on behalf of Royce & Associates, LP on January 27, 2021. Royce & Associates, LP is deemed to be the beneficial owner of these shares as a result of its acting as investment adviser to various accounts. One of those investment companies, Royce Value Trust, Inc., beneficially owned 877,363 shares, or 5.20% of our common stock. Royce & Associates, LP had sole voting and sole dispositive power for all 1,208,781 shares reported as beneficially owned.

(4)As reported in an amendment to Statement on Schedule 13G filed with the SEC on behalf of Dimensional Fund Advisors LP on February 12, 2021. Dimensional Fund Advisors LP is deemed to be the beneficial owner of these shares as a result of its acting as investment adviser to various investment companies registered under the Investment Company Act of 1940. Dimensional Fund Advisors LP has sole voting power with respect to 880,661 shares, shared voting power with respect to no shares and sole dispositive power with respect to all 926,291 shares reported as beneficially owned.

The following table sets forth the beneficial ownership of shares of our common stock for (i) each of our directors and “Equitynominees, (ii) each of our executive officers named in the Summary Compensation Table on page 5 and (iii) all of our directors and executive officers as a group. Except as noted below, the nature of beneficial ownership for shares shown in this table is sole voting and sole dispositive power. The information below is as of April 16, 2021, unless otherwise indicated.

  Amount and Nature of Beneficial Ownership  
Name of Beneficial Owner Shares OwnedShares Under
Options/Restricted Stock Units
Exercisable/Vesting
Within 60 Days (1)

Total Number

of Shares

Percent of
Class
 
Eric W. Davis  77,652(2) 5,000  82,652  *  
Roy W. Haley  349,930 (3) 25,316  375,246  2.56% 
Margaret S. Laird  500 (4) 9,820  10,320  *  
David Nierenberg  2,043,358 (5) 0  2,043,358  12.10% 
James L. Pokluda III  674,047 (6) 72,910  746,957  4.41% 
Sandford W. Rothe  24,000 (7) 14,770  38,770  *  
William H. Sheffield  30,000 (8) 54,557  84,557  *  
G. Gary Yetman  29,718  51,428  81,146  *  
Jerry M. Zurovchak  2,604(9) 0  2,604  *  
All directors and executive officers as a group (9 persons)  3,231,809  233,801  3,465,610  20.25% 

*Less than 1%


(1)Excludes share units under the Nonemployee Directors’ Deferred Compensation Plan as follows:
Mr. Haley – 57,048 shares; and Mr. Sheffield – 11,507 shares.

(2)Includes 61,142 unvested restricted shares.

(3)Owned by Mr. Haley’s individual retirement accounts.

(4)Ms. Laird has shared voting power and shared dispositive power with her spouse.

(5)Mr. Nierenberg has shared voting power and shared dispositive power with Nierenberg Investment Management Company, Inc. See table on page 12.

(6)Includes 318,212 unvested restricted shares.

(7)Owned by Mr. Rothe’s individual retirement account.

(8)Mr. Sheffield has shared voting power and shared dispositive power with respect to 7,000 of these shares.

(9)Includes 2,604 unvested restricted shares.

Equity Compensation Plan Information” sections of the registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 5, 2020.Information

 

The following table provides information as of December 31, 2020 with respect to our compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance:

  (a)  (b)  (c) 
Plan Category  

Number of

Securities to be

Issued upon

Exercise of

Outstanding

Options, Warrants

and Rights

   

Weighted-Average

Exercise Price of

Outstanding

Options,

Warrants

and Rights (3)

   

Number of Securities

Remaining Available

for Issuance under

Equity Compensation

Plans (Excluding

Securities Reflected in

Column (a))

 
Equity compensation plans approved by security holders (1)  264,456  $14.11   1,631,123 
Equity compensation plans not approved by security holders(2)  68,555   3.31   -- 
Total
  333,011  $17.42   1,631,123 

(1)Amounts shown in this row relate solely to stock options, restricted stock units and performance stock units granted under the 2006 Stock Plan and the 2017 Stock Plan. This row excludes shares of restricted stock granted under the 2006 Stock Plan and the 2017 Stock Plan, which were granted at no cost to the recipients.

(2)Amounts in this row relate solely to stock units issued under the Nonemployee Directors’ Deferred Compensation Plan.

(3)Weighted-average exercise price of outstanding stock options. The performance stock units and restricted stock units have no exercise price.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Director Independence

 

The information calledBoard of Directors has determined that each person who served as a director in 2020, and each director nominee for 2021, except Mr. Pokluda, is “independent” under Nasdaq Listing Rule 5605(a)(2). Under Rule 5605(a)(2), a director is considered independent as long as he or she does not have a relationship with the Company or management which would interfere with the exercise of independent judgment in carrying out the director’s responsibilities. The Nasdaq Listing Rules also enumerate certain relationships which preclude a finding of independence and generally provide that an individual cannot be considered independent if, among other things, he or she is a current officer or other employee of the issuer or directly or indirectly receives certain significant payments from the issuer other than in his or her capacity as a director or board committee member.


Related Person Transaction Policy

The purpose of the Related Person Transaction Policy, as adopted by Item 13the Board of Directors, is incorporated hereinto provide for the identification, review and consideration of transactions between the Company and any related person. “Related person” means anyone who is, or within the past year was, a director, nominee for director or executive officer of the Company or greater than five percent beneficial owner of the Company's voting securities or any member of their immediate families.

Under the policy, any related person transaction must be reviewed, considered, and approved or ratified by referencethe Audit Committee of the Board of Directors directly or through the Chairman of the Audit Committee. The Policy applies to all related person transactions, even if the amount involved does not exceed the $120,000 threshold required for disclosure under the SEC rules. Review of a proposed related person transaction takes into consideration the purpose of, and the potential benefits to the “Corporate GovernanceCompany from, the related person transaction, and Board Committees - Director Independence” and “Related Person Transaction Policy” sectionsthe impact of the registrant’s definitive Proxy Statement relatingrelated person transaction on a director's independence in the event that the related person is a director or an immediate family member of a director. No member of the Audit Committee may participate in any review, consideration, or approval of any related person transaction with respect to which such member or any of his or her immediate family members is the related person.

The policy provides that the Company may undertake certain pre-approved related person transactions (e.g., transactions in which the related person's interest derives solely from his or her service as a director of another corporation or entity that is a party to the Annual Meeting of Stockholders to be held on May 5,transaction) without further specific review, consideration and approval. The Company engaged in no related person transactions in 2020.

 

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The information calledAudit Committee is responsible for by Item 14 is incorporated herein by referencethe appointment, compensation, retention and oversight of the work of BKD LLP, our independent registered public accounting firm. The independent registered public accounting firm reports directly to the “Principal Independent Accountant FeesAudit Committee. As part of its responsibility, the committee established a policy requiring the pre-approval of all audit and Services” sectionpermissible non-audit services performed by the registered public accounting firm. In pre-approving services, the Audit Committee considers whether such services are consistent with the SEC’s rules on auditor independence.

Prior to the engagement of the registrant’s definitive Proxy Statement relatingregistered public accounting firm for an upcoming audit/non-audit service period, defined as a twelve-month timeframe, BKD LLP submits a detailed list of services expected to be rendered during that period as well as an estimate of the associated fees for each of the following four categories of services to the Annual Meeting of Stockholders to be held on May 5, 2020.Audit Committee for approval:

 

26

Audit Services consist of services rendered by an external auditor for the audit of our annual consolidated financial statements (including tax services performed to fulfill the auditor’s responsibility under generally accepted auditing standards) and internal controls and reviews of financial statements included in Forms 10-Q, and includes services that generally only an external auditor can reasonably provide, such as comfort letters, statutory audits, attest services, consents and assistance with and review of documents filed with the SEC.

 

Audit-Related Services consist of assurance and related services by an external auditor that are reasonably related to audit or review of financial statements, including employee benefit plan audits, due diligence related to mergers and acquisitions, and accounting consultations.

Tax Services consist of services not included in Audit Services above, rendered by an external auditor for tax compliance.

Other Non-Audit Services are any other permissible work that is not an Audit, Audit-Related or Tax Service.


Circumstances may arise during the twelve-month period when it may become necessary to engage the independent registered public accounting firm for additional services not contemplated in the original pre-approval. In those instances, the Audit Committee requires specific pre-approval before engaging the independent auditor.

The table below summarizes the fees billed by our independent registered public accounting firms, BKD, LLP, with respect to the fiscal year ended December 31, 2020, and Ernst & Young LLP, with respect to the fiscal year ended December 31, 2019, for the audit of our annual financial statements for such fiscal years and fees billed for other services rendered by each such firm during those periods.

Year  Audit Fees (1)  Audit-Related Fees  Tax Fees (2)  All Other Fees  Total 
2020  $415,034  $80,000  $62,400  $  $557,434 
2019  $535,000  $50,000  $71,575  $  $656,575 

(1)Audit fees include fees for professional services rendered for the audit of our annual consolidated financial statements (including, for the year ended December 31, 2019, services related to the audit of internal control over financial reporting under the Sarbanes-Oxley Act of 2002) and the reviews of the interim financial statements included in our Forms 10-Q.

(2)Tax fees represent professional services related to tax compliance.

For the fiscal year ended December 31, 2020, none of the Audit-Related Fees, Tax Fees or Other Fees were approved in accordance with the exceptions to the pre-approval requirements set forth in 16 CFR 210.2-01(c)(7)(i)(C).


PART IV

 

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a)The following financial statements of our Company and Report of the Independent Registered Public Accounting Firm are included in Part II:

(c)           Exhibits

Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements

(b)Financial Statement Schedules:

Financial statement schedules have been omitted because they are either not applicable or the required information has been disclosed in the financial statements or notes thereto.

(c)Exhibits

 

Exhibits are set forth on the attached exhibit index

 

ITEM 16.  FORM 10-K SUMMARY

 

Not applicable

27


INDEX TO EXHIBITS

 

EXHIBIT

NUMBER

EXHIBIT

3.1

Amended and Restated Certificate of Incorporation of Houston Wire & Cable Company (incorporated herein by reference to Exhibit 3.1 to Houston Wire & Cable Company’s Registration Statement on Form S-1 (Registration No. 333-132703))

3.2

Amended and Restated By-Laws of Houston Wire & Cable Company (incorporated herein by reference to Exhibit 3.2 to Houston Wire & Cable Company’s Registration Current Report on Form 8-K filed May 11, 2012)

4.1 Description of the Registrant’s Securities**Securities (incorporated herein by reference to Exhibit 4.1 to Houston Wire & Cable Company’s Annual Report on Form 10-K for the year ended December 31, 2019)
   

10.1*

Houston Wire & Cable Company 2006 Stock Plan, as amended and restated effective March 1, 2015, as amended (incorporated herein by reference to Exhibit 10.1 to Houston Wire & Cable Company’s Current Report on Form 8-K filed March 13, 2015 and Exhibit 10.12 to Houston Wire & Cable Company’s Annual Report on Form 10-K for the year ended December 31, 2016)

10.2*

Amended and Restated Executive Employment Agreement dated as of January 1, 2017, as amended as of March 11, 2020, between James L. Pokluda, III and Houston Wire & Cable Company (incorporated by reference to Exhibit 10.1 to Houston Wire & Cable Company’s Current Report on Form 8-K filed March 29, 2017)2017 and Exhibit 10.1 to Houston Wire & Cable Company’s Current Report on Form 8-K filed March 12, 2020)

10.3*

Form of Employee Non-Qualified Stock Option Agreement under Houston Wire & Cable Company’s 2006 Stock Plan (incorporated herein by reference to Exhibit 10.4 to Houston Wire & Cable Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015)

10.4*

Form of Director Non-Qualified Stock Option Agreement under Houston Wire & Cable Company’s 2006 Stock Plan (incorporated herein by reference to Exhibit 10.2 to Houston Wire & Cable Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015)

10.5*

Form of Stock Award Agreement for Key Employees under Houston Wire & Cable Company’s 2006 Stock Plan (incorporated herein by reference to Exhibit 10.3 to Houston Wire & Cable Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015)

10.6*

Form of Restricted Stock Unit Award Agreement for Non-Employee Directors under Houston Wire & Cable Company’s 2006 Stock Plan (incorporated herein by reference to Exhibit 10.1 to Houston Wire & Cable Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015)

10.7*

Form of Performance Stock Unit Award Agreement under Houston Wire & Cable Company’s 2006 Stock Plan (incorporated herein by reference to Exhibit 10.7 to Houston Wire & Cable Company’s Annual Report on Form 10-K for the year ended December 31, 2016)

10.8*

Description of Senior Management Bonus Program (incorporated herein by reference to Exhibit 10.7 to Houston Wire & Cable Company’s Annual Report on Form 10-K for the year ended December 31, 2015)


10.9*

Form of Director/Officer Indemnification Agreement by and between Houston Wire & Cable Company and a director, member of a committee of the Board of Directors or officer of Houston Wire & Cable Company (incorporated herein by reference to Exhibit 10.24 to Houston Wire & Cable Company’s Annual Report on Form 10-K for the year ended December 31, 2006) 

10.10

Fourth Amended and Restated Loan and Security Agreement, dated as of October 1, 2015, as amended on March 12, 2019 and December 10, 2019, among HWC Wire & Cable Company, as borrower, Houston Wire & Cable Company, as Guarantor, certain financial institutions, as lenders, and Bank of America, N.A., as agent (incorporated herein by reference to Exhibit 10.1 to Houston Wire & Cable Company’s Current Report on Form 8-K filed October 2, 2015, Exhibit 10.1 to Houston Wire & Cable Company’s Current Report on Form 8-K filed October 5, 2016, Exhibit 10.1 to Houston Wire & Cable Company’s Current Report on Form 8-K filed March 14, 2019 and Exhibit 10.1 to Houston Wire & Cable Company’s Current Report on Form 8-K filed on December 12, 2019)

28

10.11

Third Amended and Restated Guaranty dated as of October 1, 2015, by Houston Wire & Cable Company, as guarantor, in favor of Bank of America, N.A., as agent (incorporated herein by reference to Exhibit 10.2 to Houston Wire & Cable Company’s Current Report on Form 8-K filed October 2, 2015)

10.12* 

10.12*

Houston Wire & Cable Company 2017 Stock Plan, as amended (incorporated herein by reference to Exhibit 10.1A to Houston Wire & Cable Company’s Current Report on Form 8-K filed August 8, 2017)definitive proxy statement for the annual meeting of stockholders held May 5, 2020)

10.13*

Form of Restricted Stock Unit Award Agreement for Non-Employee Directors (incorporated herein by reference to Exhibit 10.2 to Houston Wire & Cable Company’s Current Report on Form 8-K filed August 8, 2017)

10.14*

Form of Restricted Stock Unit Award Agreement for Key Employees (incorporated herein by reference to Exhibit 10.3 to Houston Wire & Cable Company’s Current Report on Form 8-K filed August 8, 2017)

10.15*

Form of Stock Appreciation Agreement (incorporated herein by reference to Exhibit 10.4 to Houston Wire & Cable Company’s Current Report on Form 8-K filed August 8, 2017)

 

10.16*

Form of Stock Award Agreement for Key Employees (incorporated by reference to Exhibit 10.1 to Houston Wire & Cable Company’s Current Report on Form 8-K filed May 14, 2018)

10.18*

Letter Agreement dated April 5, 2018 between Houston Wire & Cable Company and Christopher M. Micklas (incorporated by reference to Exhibit 10.1 to Houston Wire & Cable Company’s Current Report on Form 8-K filed April 13, 2018)

10.19*

Houston Wire & Cable Company Nonemployee Directors’ Deferred Compensation Plan (incorporated by reference to Exhibit 10.1 to Houston Wire & Cable Company’s Current Report on Form 8-K filed December 14, 2017)

10.20Letter Agreement dated as of November 5, 2020 between Houston Wire & Cable Company and Eric W. Davis (incorporated by reference to Exhibit 10.1 to Houston Wire & Cable Company’s Current Report on Form 8-K filed November 6, 2020)
21.1

Subsidiaries of Houston Wire & Cable Company **(incorporated herein by reference to Exhibit 21.1 to Houston Wire & Cable Company’s Annual Report on Form 10-K for the year ended December 31, 2019)

23.1

Consent of BKD LLP**

23.2Consent of Ernst & Young, LLP **LLP**


31.1

Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 **

31.2

Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 **

31.3

Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ***
31.4Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ***
32.1

Certifications of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 **

 

*            Management contract or compensatory plan or arrangement

**          Previously filed with the Original 10-K Filing 

***       Filed herewith

29


SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

HOUSTON WIRE & CABLE COMPANY

(Registrant)

Date: March 13, 2020

April 28, 2021

By:

/s/ CHRISTOPHER M. MICKLAS

ERIC W. DAVIS

Christopher M. Micklas

Eric W. Davis Chief Financial Officer,
Treasurer and Secretary

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

SIGNATURE

TITLE

DATE

/s/ JAMES L. POKLUDA III

President, Chief Executive Officer and Director

March 13, 2020

James L. Pokluda III

/s/ CHRISTOPHER M. MICKLAS

Chief Financial Officer, Treasurer and

Secretary (Principal Accounting Officer)

March 13, 2020

Christopher M. Micklas

/s/ WILLIAM H. SHEFFIELD

Chairman of the Board

March 13, 2020

William H. Sheffield

/s/ ROY W. HALEY

Director

March 13, 2020

Roy W. Haley

/s/ MARGARET S. LAIRD

Director

March 13, 2020

Margaret S. Laird

/s/ ROBERT L. REYMOND

Director

March 13, 2020

Robert Reymond

/s/ SANDFORD W. ROTHE

Director

March 13, 2020

Sandford W. Rothe

/s/ G. GARY YETMAN

Director

March 13, 2020

G. Gary Yetman

30