UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended SeptemberJune 30, 20182019

or

For the transition period from                    to

Commission File Number: 000-52046

(Exact name of registrant as specified in its charter)

(713) 609-2100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☒  NO ☐

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

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

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

At NovemberAugust 1, 20182019 there were 16,523,43916,645,182 outstanding shares of the registrant’s common stock, $0.001 par value per share.

HOUSTON WIRE & CABLE COMPANY

Form 10-Q

For the Quarter Ended SeptemberJune 30, 20182019

INDEX

HOUSTON WIRE & CABLE COMPANY

Consolidated Balance Sheets

(In thousands, except share data)

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

HOUSTON WIRE & CABLE COMPANY

Consolidated Statements of Operations

(Unaudited)

(In thousands, except share and per share data)

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

HOUSTON WIRE & CABLE COMPANY

Consolidated Statements of Stockholders’ Equity

(Unaudited)

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

HOUSTON WIRE & CABLE COMPANY

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

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

HOUSTON WIRE & CABLE COMPANY

Notes to Consolidated Financial Statements

(Unaudited)

1.     Basis of Presentation and Principles of Consolidation

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

The consolidated financial statements as of SeptemberJune 30, 20182019 and for the three and ninesix months ended SeptemberJune 30, 2018,2019 and 20172018 have been prepared following accounting principles generally accepted in the United States (“GAAP”) for interim financial information and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation of the results of these interim periods have been included. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year. All significant intercompany balances and transactions have been eliminated. The Company has evaluated subsequent events through the time these financial statements in this Form 10-Q were filed with the Securities and Exchange Commission (the “SEC”).

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The most significant estimates are those relating to the allowance for doubtful accounts, the refund liability, the inventory obsolescence reserve, the reserve for returns and allowances, 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.

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 20172018 filed with the SEC.

Reclassifications

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

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 are relevant towere recently adopted by the Company.

In May 2014,February 2016, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”2016-02, “Leases (Topic 606), which supersedes842).” Under the revenue recognition requirements in ASC Topic 605, “Revenue Recognition,”new guidance as amended, a lessee is required to recognize a right-of-use asset and most industry-specific guidance.a lease liability for leases greater than 1 year, both finance and operating leases. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in the ASU wereupdate was effective for annual and interim periodspublic companies for fiscal years beginning after December 15, 2017.2018. 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, 2018, using the modified retrospective method, and adoption had no material impact on the Company’s consolidated financial statements.2019. See Note 7 for detailed information.

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 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.

In May 2017,June 2018, the FASB issued ASU No. 2017-09, “Compensation-Stock2018-07, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.Improvements to Nonemployee Share-Based Payment Accounting,” The amendments in this update provide guidance about which changes tosimplifies the terms and conditions of aaccounting for share-based payment award requirearrangements with nonemployees for goods and services. Under the applicationASU, the guidance on such payments to nonemployees is aligned with the accounting for share-based payments granted to employees, including the measurement of modification accounting. This updateequity-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 companiesentities for interim and annual reporting periods beginning after December 15, 2017.2018. The Company adopted this ASU in the first quarter of 20182019, and the adoption did not have a material impact on the Company’s consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The new guidance requires that an employer disaggregate the service cost component from the other components of net benefit cost. This update was effective for public companies for annual periods beginning after December 15, 2017. The Company adopted this ASU in the first quarter of 2018 and the adoption did not have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The amendment in this ASU amends prior guidance and simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the two-step impairment test under ASC 350. ASU No. 2017-04 is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company elected to early adopt this ASU in the first quarter of 2018 and the adoption did not have a material impact on the Company’s consolidated financial statements.

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. At September 30, 2018, the Company has not made a material adjustment to the tax provision recorded under this ASU at December 31, 2017. The Company has not completed its accounting for all of the tax effects of the Tax Cuts and Jobs Act; however, the Company has made reasonable estimates of these effects.

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 itsthe FASB’s disclosure framework project. The guidance is effective for public companies beginning in the first quarter of 2020 and early adoption is permitted.2020. The Company is currently assessing the impact of this ASU on its consolidated financial statements and evaluating the timing of adoption.statements.

In August 2018, the FASB issued ASU 2018-14, “Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans.” The amendments in this update eliminate, add and modify certain disclosure requirements for defined benefit pension plans. The guidance is effective for public companies beginning in the first quarter of 2020 and early adoption is permitted.2020. The Company is currently assessing the impact of this ASU on its consolidated financial statements and evaluating the timing of adoption.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 and early adoption is permitted.2020. The Company is currently assessing the impact of this ASU on its consolidated financial statements and evaluating the timing of adoption.statements.

In June 2018,2016, the FASB issued ASU No. 2018-07, “Compensation2016-13, “Financial Instruments – Stock CompensationCredit Losses (Topic 718)326): Improvements to Nonemployee Share-Based Payment Accounting” that simplifies the accounting for share-based payment arrangements with nonemployees for goods and services. Under the ASU,Measurement of Credit Losses on Financial Instruments.” The amendments in this update amend the guidance on such paymentsof the impairment of financial instruments and add an impairment model, known as the current expected credit loss (CECL) model. The CECL model is designed to nonemployees is aligned withcapture expected credit losses through the accounting for share-based payments grantedestablishment of an allowance account, which will be presented as an offset to employees, including the measurementamortized cost basis of equity-classified awards, which is fixed at the grant date under the new guidance.related financial asset. The ASU supersedes Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees andguidance is effective for public entities for interim and annual reporting periods beginning after December 15, 2018.2019. The Company is currently assessing the impact of this ASU 2018-07 and does not expect it to have a material impact on its accounting and disclosures.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Under the new guidance, a lessee will be required to recognize a right-to-use asset and a lease liability for leases greater than 1 year, both capital and operating leases. This update is effective for public companies for fiscal years beginning after December 15, 2018 with early adoption permitted. In August 2018, the FASB amended the ASU with an additional (and optional) transition method to adopt the new leases standard. Under the new transition method, 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 will continue to be in accordance with current GAAP. The Company will elect to use the package of practical expedients available under this amendment and will not elect the use of hindsight during transition. The Company has completed the evaluation of its lease contract population and is reviewing contract data as it continues to evaluate the impact that adopting this ASU will have on the Company’s consolidated financial statements. The Company is evaluating several system-based software options to facilitate in the identification, tracking and reporting of leases based upon the requirements of the new leases standard and will continue monitoring industry implementation activities.

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:

Stock awards to purchase 223,477275,494 and 667,239300,117 shares of common stock for the three months ended SeptemberJune 30, 20182019 and 2017,2018, respectively, and 295,387286,141 and 683,847286,121 shares for the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, respectively, were not included in the diluted net income (loss) per share calculation as their inclusion would have been anti-dilutive.

3.Debt

On March 12, 2019, the Company, as guarantor, HWC Wire & Cable Company the Company,and Vertex, as borrowers, and Bank of America, N.A., as agent and lender, are partiesentered into a Second Amendment to the Fourth Amended and Restated Loan and Security Agreement dated(such agreement, as of October 3, 2016 (theso amended, the “Loan Agreement”). The Loan Agreement provides aSecond Amendment extends the expiration date of the Company’s $100 million revolving credit facility and expires on September 30, 2020.until March 12, 2024. 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 agreementLoan Agreement remains as SeptemberMarch 12, 2024. At June 30, 2020. At September 30, 2018,2019, the Company was in compliance with the availability-based covenants governing its indebtedness.

The carrying amount of long termlong-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.”

4.     Income Taxes

On December 22, 2017 the Tax Cuts and Jobs Act was signed into law, making significant changes to the U.S. Internal Revenue Code. The major provisions include a corporate tax rate decrease from 35% to 21%, effective for years beginning after December 31, 2017, and changes in business-related exclusions and deductions.

The Company calculates its provision for income taxes during interim reporting periods by applying the estimated annual effective tax rate for the full fiscal year to pre-tax income or loss, excluding discrete items, for the reporting period.

A valuation allowance for deferred tax assets is recognized when it is more likely than not that some or all of the benefit from the deferred tax assets will not be realized. To assess that likelihood, the Company uses its current financial position, results of operations, both actual and forecasted, the reversal of deferred tax liabilities, and tax planning strategies, as well as the current and forecasted business economics, to determine whether a valuation allowance is required. The result of the Company’s assessment is that it is more likely than not that the Company will generate sufficient taxable income to utilize the deferred tax assets. Therefore, as of September 30, 2018, the valuation allowance of $1.0 million was released.

5.     Incentive Plans

Stock Option Awards

There were no stock option awards granted during the first ninesix months of 20182019 or 2017.2018.

Restricted Stock Awards and Restricted Stock Units

The 2017 Stock Plan (the “2017 Plan”) was approved by the stockholders at the 2018 Annual Meeting on May 8, 2018. As a result, all awards outstanding under the 2017 Plan (including those cash/liability awards granted prior to the approval of the 2017 Plan) will entitle the recipient to receive shares of the Company’s common stock.

All awards outstanding prior to the 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 June 1, 2018, the Company awarded restricted stock units with a grant date value of $55,000, for a total of 6,667 restricted stock units, to its newly-appointed non-employee director. This award of restricted stock units vests at the date of the 2019 Annual Meeting of Stockholders. The 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.

Following the Annual Meeting of Stockholders on May 8, 2018,7, 2019, the Company approved the award ofgranted restricted stock units with a grant date value of $60,000 to each non-employee director who was elected and re-elected, for an aggregate of 31,37258,920 restricted stock units. Each award of restricted stock units vests at the date of the 20192020 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.

AlsoOn 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 May 8, 2018,December 31, 2021, based on and subject to the Company granted 28,144 voting sharesCompany’s achievement of restrictedcumulative EBITDA and 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 caseprice performance goals over a three-year period, as long as the recipientgrantee is then employed by the Company.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.

Total stock-based compensation cost was $0.4 million and $0.3 million for each of the three months ended SeptemberJune 30, 2019 and 2018, and 2017, respectively, and $1.1 million and $0.8$0.7 million for each of the ninesix months ended SeptemberJune 30, 20182019 and 2017, respectively,2018, and is included in salaries and commissions for employees, and in other operating expenses for non-employee directors.

6.     Commitments and Contingencies

As a result of unfavorable lease terms relative to market for one of the leasesa facility in Massachusetts acquired as part of the Vertex acquisition in 2016, there is a remaining additional liability of $0.2 million that is being amortized over the remaining term of the lease, which was 5748 months at SeptemberJune 30, 2018.2019. See Note 8.

The Company along with many other defendants, has been named in a numberhad outstanding under the Loan Agreement letters of lawsuits in the state courtscredit totaling $1.7 million to certain vendors as of Minnesota, North Dakota, and South Dakota alleging that certain wire and cable which may have contained asbestos caused injury to the plaintiffs who were exposed to this wire and cable. These lawsuits are individual personal injury suits that seek unspecified amounts of money damages as the sole remedy. It is not clear whether the alleged injuries occurred as a result of the wire and cable in question or whether the Company, in fact, distributed the wire and cable alleged to have caused any injuries. The Company maintains general liability insurance that, to date, has covered the defense of and all costs associated with these claims. In addition, the Company did not manufacture any of the wire and cable at issue, and the Company would rely on any warranties from the manufacturers of such cable if it were determined that any of the wire or cable that the Company distributed contained asbestos which caused injury to any of these plaintiffs. In connection with ALLTEL’s sale of the Company in 1997, ALLTEL provided indemnities with respect to costs and damages associated with these claims that the Company believes it could enforce if its insurance coverage proves inadequate.June 30, 2019.

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

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 office 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 three months and six months ended June 30, 2019 were as follows:

The value of the net assets and liabilities generated by the leasing activity of the Company as lessee as of June 30, 2019 were as follows:

⁽¹⁾Operating lease assets are recorded net of accumulated amortization of $1.6 million as of June 30, 2019

⁽²⁾Financing lease assets are recorded net of accumulated amortization of $0.2 million as of June 30, 2019

The future minimum lease payments for finance and operating lease liabilities of the Company as lessee as of June 30, 2019 were as follows:

The weighted average remaining lease terms and discount rates of the leases held by the Company as of June 30, 2019 were as follows:

The cash outflows of the leasing activity of the Company as lessee for the six months ended June 30, 2019 were as follows:

During the six months ended June 30, 2019, the Company recorded non-cash ROU financing lease assets and corresponding financing lease obligations totaling $0.4 million related to new and modified lease agreements. Any operating leases, new or modified,as well as any sublease incomefor the six months ended June 30, 2019, are not material. 

On July 22, 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 will make a payment of approximately $2.5 million to the lessor. The Company will be relieved of $2.8 million of future rent payments, along with other future costs associated with the lease including property taxes, insurance, utilities and maintenance otherwise required in the original lease agreement.

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

The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the Company’s financial position and results of operations. MD&A is provided as a supplement to the Company’s Consolidated Financial Statements (unaudited) and the accompanying Notes to Consolidated Financial Statements (unaudited) and should be read in conjunction with the MD&A included in the Company’s Form 10-K for the year ended December 31, 2017.2018.

Overview

We are a provider of industrial products to the U.S. market. We provide our customers with a single-source solution by offering a large selection of in-stock items, exceptional customer service and high levels of product expertise.

Critical Accounting Policies

The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses. On an on-going basis, we make and evaluate estimates and judgments, including those related to the inventory obsolescence reserve, the reserve for returns and allowances, vendor rebates, the realization of deferred tax assets and liabilities and the valuation of goodwill and indefinite-lived assets. We base our estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances;circumstances, the results of which form the basis for making judgments about amounts and timing of revenue and expenses, the carrying values of assets and the recorded amounts of liabilities that are not readily apparent from other sources. Actual results may differ from these estimates, and such estimates may change if the underlying conditions or assumptions change. We have discussed the development and selection of critical accounting policies and estimates with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed our related disclosures. The critical accounting policies related to the estimates and judgments are discussed in our Annual Report on Form 10-K for the year ended December 31, 20172018 under Management’s Discussion and Analysis of Financial Condition and Results of Operations. There have been no changes to our critical accounting policies and estimates during the three and ninesix months ended SeptemberJune 30, 2018.2019.

Cautionary Statement for Purposes of the “Safe Harbor”

Forward-looking statements in this report are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may relate to, but are not limited to, information or assumptions about our sales and marketing strategy, sales (including pricing), income, operating income or gross margin improvements, working capital, cash flow, interest rates, impact of changes in accounting standards, future economic performance, management’s plans, goals and objectives for future operations, performance and growth or the assumptions relating to any of the forward-looking statements. These statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as “aim”, “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “project”, “should”, “will be”, “will continue”, “will likely result”, “would” and other words and terms of similar meaning in conjunction with a discussion of future operating or financial performance. The Company cautions that forward-looking statements are not guarantees because there are inherent difficulties in predicting future results. Actual results could differ materially from those expressed or implied in the forward-looking statements. The factors listed under “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017,2018, as well as any cautionary language in this report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements.

Results of Operations

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

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

Comparison of the Three Months Ended SeptemberJune 30, 20182019 and 20172018

Sales

Our sales for the thirdsecond quarter increased 10.9% to $90.1decreased from $93.9 million in 2018 from $81.2to $85.3 million in 2017.2019. The increasedecrease in sales iswas primarily due to improvedreduced industrial activity, increased commodity pricesmarket demand in oil and disciplined pricing.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 encompassingfor Environmental Compliance, Engineering & Construction, Industrials, Utility Power Generation, and Mechanical Wire Rope, increased 13%2%, while Maintenance, Repair, and Operations (MRO) sales increased 10%decreased 11%, as compared to the third quarter of 2017.2018.

Gross Profit

Gross profit increased 15.2%decreased 8.1% to $21.4$20.5 million in 20182019 from $18.6$22.3 million in 2017.2018. The increasedecrease in gross profit was primarily attributable to increased sales.reduced sales from oil and gas geographies and fasteners. Gross margin (gross profit as a percentage of sales) increased slightly to 24.1% in 2019 from 23.8% in 2018 from 22.9% in 2017 primarily due to ongoingproduct mix and pricing discipline and product mix.discipline.

Operating Expenses

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

Salaries and commissions increased $0.8decreased $0.7 million betweenfrom the periods primarilysecond quarter 2018 compared to 2019 due to additional administrative and warehouse personnel and increasedlower commissions resulting from higherthe reduction in sales and gross profit.profit, offset by an increase in headcount.

Other operating expenses increased $1.0 million primarilyslightly due to increased warehouse expenses as a result of higher volumeexpense, approximately $0.2 million, from the computer system upgrade and higher insurance expenses as a result of increased personnel.conversion.

Depreciation and amortization remained consistent between the periods.were flat year over year.

Operating expenses as a percentage of sales increased slightly to 20.4%20.5% in 2019 from 19.1% in 2018, from 20.3%as the reduction in 2017, assales changed at a greater rate than the decrease in operating expenses increased with the increase in sales.expenses.

Interest Expense

Interest expense increaseddecreased slightly from $0.8 million in 2018 to $0.7 million in 2018 from $0.5 million in 2017 due to higher2019 as a result of lower average debt, to fund increased working capital and tooffset by an increase in the average effective interest rate.rates. Average debt was $76.8$74.3 million in 20182019 compared to $71.2$82.5 million in 2017.2018. The average effective interest rate was 3.8%3.9% in 20182019 compared to 3.0%3.7% in 2017.2018.

Income Taxes

We recorded anThe income tax benefitexpense of $0.1$0.6 million in 2018 compared to the $3.2decreased from $1.0 million income tax expense in the prior year period.period due to lower pretax income. The effective income tax rate decreased to (6.4)for the quarter was near flat at 28.3 % in 2018 from 213.8%2019 compared to 28.0% in 2017, primarily due to the release of the $1.0 million valuation allowance at September 30, 2018 and higher estimated annual earnings for 2018. In 2017, the income tax expense was impacted by the establishment of a full valuation allowance on the net deferred tax assets. The 2018 tax rate is also lower due to the lower corporate tax rate as a result of the 2017 Tax Cuts and Jobs Act.

Net Income

We achieved net income of $2.5$1.6 million in 20182019 compared to a net loss of $1.7$2.6 million in 2017.2018.

Comparison of the NineSix Months Ended SeptemberJune 30, 20182019 and 20172018

Sales

Our sales for the ninesix month period increased 14.2% to $269.0decreased 4.6% from $178.9 million in 2018 from $235.6to $170.6 million in 2017.2019. The primary reasons for the increase are improveddecrease were reduced industrial activity, increased commodity pricesmarket demand in oil and disciplined pricing.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. Our project business, which includes our key growth initiatives encompassing Environmental Compliance, Engineering & Construction, Industrials, Utility Power Generation, and Mechanical Wire Rope, is estimated to have increased 24%3%, from 2017.2018. MRO increased 12%decreased 6%, from 2017.2018.

Gross Profit

Gross profit increased 23.9% to $64.2decreased 2.4% from $42.8 million in 2018 from $51.8to $41.8 million in 2017.2019. The increasedecrease in gross profit was primarily attributable to the increasereduction in sales over the prior year.sales. Gross margin increased slightly to 24.5% in 2019 from 23.9% in 2018, from 22.0% in 2017, primarily due to ongoingproduct mix and pricing discipline and product mix.discipline.

Operating Expenses

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

Salaries and commissions increased $2.2decreased $0.7 million between the periods due to additional sales, administrative and warehouse personnel, as well as increasedlower commissions resulting from increasedthe reduction in sales and gross profit.profit, offset by a slight increase in headcount.

Other operating expenses increased $1.7 million, as distribution expenses increased primarilyslightly due to higher expense, approximately $0.2 million, from the sales increase, increased professionalcomputer system upgrade and warehouse expenses and higher insurance expenses as a result of increased personnel.conversion.

Depreciation and amortization decreased primarily due to certain intangibles which became fully amortized in 2017.were flat year over year.

Operating expenses as a percentage of sales decreasedincreased to 19.9%20.5% in 2019 from 19.7% in 2018, from 21.3% in 2017, as operating expenses increasedsales levels fell at a lowergreater rate than the increasereduction in sales, due to improved leverage.operating expenses.

Interest Expense

Interest expense increased 44.5%4.4% to $2.2$1.5 million in 2019 from $1.4 million in 2018 from $1.5 million in 2017 due to higher average debt levels to fund increased working capital levels and higher interest rates. Average debt was $78.8$73.9 million in 20182019 compared to $70.6$79.7 million in 2017.2018. The average effective interest rate rose to 3.6%3.9% in 20182019 from 2.8%3.5% in the prior year period.

Income Taxes

The income tax expense of $1.5 million in 20182019 decreased from $2.4$1.7 million in 2017.2018 due to lower pretax income. The effective income tax rate decreasedincreased slightly to 18.1%27.5% in 2018 from 1,651.0%2019 to 27.1% in 2017,2018, primarily due to the release of the $1.0 million valuation allowance at September 30, 2018 and higher estimated annual earnings for 2018. In 2017, the income tax expense was impacted by the establishment of a full valuation allowance on the net deferred tax assets. The 2018 tax rate is also lower due to the lower corporate tax rate as a result of the 2017 Tax Cuts and Jobs Act.vested share-based awards.

Net Income

We achieved net income of $7.0$3.9 million in 20182019 compared to a net loss of $2.2$4.6 million in 2017.2018.

Impact of Inflation and Commodity Prices

Our results of operations are affected by changes in the inflation rate and commodity prices. Moreover, because copper, steel, aluminum, nickel and petrochemical products are components of the industrial products we sell, fluctuations in the costs of these and other commodities have historically affected our operating results. To the extent commodity prices decline, the net realizable value of our existing inventory could also decline, and our gross profit could be adversely affected because of either reduced selling prices or lower of cost or net realizable valuemarket adjustments in the carrying value of our inventory. WeIf 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:

Comparison of the NineSix Months Ended September 30,June, 2019 and 2018 and 2017

Our net cash provided byused in operating activities was $1.5$2.2 million for the ninesix months ended SeptemberJune 30, 20182019 compared to net cash used of $10.9$5.7 million in 2017.2018. We had net income of $7.0$3.9 million in 20182019 compared to a net loss of $2.2$4.6 million in 2017.2018.

Changes in our operating assets and liabilities resulted in cash used in operating activities of $7.6$11.3 million in 2018.2019. An increase in accounts receivableinventories of $7.7$12.4 million primarily due to the increase in sales wasincentives offered by certain vendors on high volume inventory, as well as rebalancing inventory levels at regional locations, lease payments of $1.9 million and prepaid expenses of $1.4 million were the main useuses of cash. Partially offsetting these uses of cash were increases in accounts payable and accrued liabilities of $2.1 million and $2.2 million, respectively, primarily due to increased inventory purchases in the second quarter of 2019.

Net cash used in investing activities was $1.2$0.9 million in 20182019 compared to $1.1$0.7 million in 2017.2018.

Net cash used in financing activities was $0.3 million in 2018 compared to net cash provided by financing activities of $12.0was $1.6 million in 2017.2019 compared to $6.4 million in 2018. Net paymentsborrowings on the revolver of $0.2 million and the purchase of treasury stock associated with stock surrendered on vested awards of $0.1$1.8 million were the components ofprimary source for financing activities in 2018.2019.

Indebtedness

Our principal source of liquidity at SeptemberJune 30, 20182019 was working capital of $126.0$130.4 million compared to $119.6$126.2 million at December 31, 2017.2018. We also had additional available borrowing capacity of approximately $26.6$25.2 million at SeptemberJune 30, 20182019 and $23.0$28.7 million at December 31, 20172018 under our loan agreement. The availability at June 30, 2019 is net of outstanding letters of credit of $1.7 million.

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

Contractual Obligations

The following table summarizes our loan commitment at SeptemberJune 30, 2018.2019.

There were no material changes in operating lease obligations or non-cancellable purchase obligations since December 31, 2017.2018.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There were no material changes to our market risk as set forth in Items 7A and 7 of our Annual Report on Form 10-K for the year ended December 31, 2017.2018.

Item 4. Controls and Procedures

As of SeptemberJune 30, 2018,2019, an evaluation was performed by the Company’s management, under the supervision and with the participation of the Company’s chief executive officer and chief financial officer, of the effectiveness of the Company’s disclosure controls and procedures. Based on that evaluation, the chief executive officer and the chief financial officer concluded that the Company’s disclosure controls and procedures were effective. There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended SeptemberJune 30, 20182019, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company implemented internal controls to ensure it adequately evaluated its controls and properly assessed the impact of the new accounting standard related to revenue recognition on its financial statements to facilitate the adoption on January 1, 2018. There were no significant changes to the Company’s internal control over financial reporting due to the adoption of the new standard.

Part II. Other Information

Item 1 –- Not applicable and has been omitted.

Item 1A. Risk Factors

There were no material changes in the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.2018.

Item 2 –- Not applicable and has been omitted.

Item 3 –- Not applicable and has been omitted.

Item 4 –- Not applicable and has been omitted.

Item 5 –- Not applicable and has been omitted.

Item 6. Exhibits

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

EXHIBIT INDEX

Signature

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