UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

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

 

For the quarterly period ended JuneSeptember 30, 2019

 

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

 

(GRAPHIC)

(Exact  (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 Securities Exchange Act of 1934:

 

Title of each classTrading symbolName of each exchange on which registered
Common stock, par value $0.001 per shareHWCCThe Nasdaq Stock Market

 

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

 

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

 

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

 

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

 

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

 

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

 

At AugustNovember 1, 2019 there were 16,645,18216,399,484 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 JuneSeptember 30, 2019

 

INDEX

 

PART I. FINANCIAL INFORMATION 
   
Item 1.Financial Statements (Unaudited) 
 Consolidated Balance Sheets2
 Consolidated Statements of Operations3
 Consolidated Statements of Stockholders’ Equity4
 Consolidated Statements of Cash Flows5  6
 Notes to Consolidated Financial Statements6  7
   
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview11 13
 Overview11 13
 Cautionary Statement for Purposes of the “Safe Harbor”11 13
 Results of Operations12  14
 Impact of Inflation and Commodity Prices14  17
 Liquidity and Capital Resources15  17
 Contractual Obligations15 17
   
Item 3.Quantitative and Qualitative Disclosures about Market Risk16  18
   
Item 4.Controls and Procedures16  18
   
PART II. OTHER INFORMATION 18
   
Item 1.Legal Proceedings16  18
Item 1A.Risk Factors16  18
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds16  18
Item 3.Defaults Upon Senior Securities16  18
Item 4.Mine Safety Disclosures16  18
Item 5.Other Information16  18
Item 6.Exhibits17  19
  
Signature Page18 20

 

1

 

 

HOUSTON WIRE & CABLE COMPANY

Consolidated Balance Sheets

(In thousands, except share data)

 

 June 30, December 31,  September 30, December 31, 
 2019 2018  2019  2018 
  (unaudited)      (unaudited)     
Assets                
Current assets:                
Cash $—  $1,393  $6  $1,393 
Accounts receivable, net:                
Trade  55,877   52,946   55,681   52,946 
Other  3,313   6,847   4,847   6,847 
Inventories, net  106,273   94,325   105,867   94,325 
Income taxes  577   435   1,323   435 
Prepaids  2,108   737   1,508   737 
Other current assets  490   —   768   — 
Total current assets  168,638   156,683   170,000   156,683 
                
Property and equipment, net  12,033   11,456   13,890   11,456 
Intangible assets, net  10,790   11,179   10,596   11,179 
Goodwill  22,353   22,353   22,353   22,353 
Operating lease right-of-use assets, net  11,176   —   

9,872

   — 
Deferred income taxes  571   930   578   930 
Other assets  490   456   464   456 
Total assets $226,051  $203,057  $

227,753

  $203,057 
                
Liabilities and stockholders’ equity                
Current liabilities:                
Book overdraft $330  $—  $—  $— 
Trade accounts payable  13,359   11,253   12,289   11,253 
Accrued and other current liabilities  21,612   19,232   19,547   19,232 
Operating lease liabilities  2,961   —   

4,737

   — 
Total current liabilities  38,262   30,485   36,573   30,485 
                
Debt  73,107   71,316   77,903   71,316 
Operating lease long term liabilities  8,628   —   7,671   — 
Other long term liabilities  706   578   1,658   578 
Total liabilities  120,703   102,379   123,805   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: 16,645,182 and 16,611,651 outstanding at June 30, 2019 and December 31, 2018, respectively  21   21 
Common stock, $0.001 par value; 100,000,000 shares authorized: 20,988,952 shares issued: 16,408,916 and 16,611,651 outstanding at September 30, 2019 and December 31, 2018, respectively  21   21 
Additional paid-in-capital  53,620   53,514   53,996   53,514 
Retained earnings  110,003   105,975   109,282   105,975 
Treasury stock  (58,296)  (58,832)  (59,351)  (58,832)
Total stockholders’ equity  105,348   100,678   103,948   100,678 
Total liabilities and stockholders’ equity $226,051  $203,057  $227,753  $203,057 

 

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

 


HOUSTON WIRE & CABLE COMPANY

Consolidated Statements of Operations

(Unaudited)

(In thousands, except share and per share data)

 

 Three Months Ended Six Months Ended  Three Months Ended Nine Months Ended 
 June 30, June 30,  September 30, September 30, 
 2019 2018 2019 2018  2019 2018 2019 2018 
                  
Sales $85,326  $93,852  $170,596  $178,878  $85,403  $90,074  $255,999  $268,952 
Cost of sales  64,789   71,505   128,800   136,042   65,972   68,681   194,772   204,723 
Gross profit  20,537   22,347   41,796   42,836   19,431   21,393   61,227   64,229 
                                
Operating expenses:                                
Salaries and commissions  9,244   9,906   18,424   19,100   9,249   9,778   27,673   28,878 
Other operating expenses  7,729   7,508   15,392   14,988   9,602   8,028   24,994   23,016 
Depreciation and amortization  534   541   1,087   1,086   667   541   1,754   1,627 
Total operating expenses  17,507   17,955   34,903   35,174   19,518   18,347   54,421   53,521 
                                
Operating income  3,030   4,392   6,893   7,662 
Operating income (loss)  (87)  3,046   6,806   10,708 
Interest expense  738   773   1,479   1,417   812   739   2,291   2,156 
Income before income taxes  2,292   3,619   5,414   6,245 
Income tax expense  649   1,013   1,487   1,692 
Net income $1,643  $2,606  $3,927  $4,553 
Income (loss) before income taxes  (899)  2,307   4,515   8,552 
Income tax expense (benefit)  (178)  (148)  1,309   1,544 
Net income (loss) $(721) $2,455  $3,206  $7,008 
                                
Earnings per share:                
Earnings (loss) per share:                
Basic $0.10  $0.16  $0.24  $0.28  $(0.04) $0.15  $0.19  $0.43 
Diluted $0.10  $0.16  $0.24  $0.28  $(0.04) $0.15  $0.19  $0.42 
Weighted average common shares outstanding:                                
Basic  16,504,471   16,387,112   16,491,236   16,368,610   16,443,446   16,404,805   16,475,131   16,380,807 
Diluted  16,597,496   16,489,671   16,571,113   16,459,736   16,443,446   16,563,245   16,558,068   16,492,217 

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

3

HOUSTON WIRE & CABLE COMPANY

Consolidated Statements of Stockholders’ Equity

(Unaudited)

     Additional        Total 
  Common Stock  Paid-In  Retained  Treasury Stock  Stockholders’ 
  Shares  Amount  Capital  Earnings  Shares  Amount  Equity 
  (In thousands, except share data) 
    
Balance at December 31, 2018  20,988,952  $21  $53,514  $105,975   (4,377,301) $(58,832) $100,678 
                             
Net income  —   —   —   2,284   —   —   2,284 
Repurchase of treasury shares  —   —   —   —   (1,506)  (8)  (8)
Amortization of unearned stock compensation  —   —   342   —   —   —   342 
Settlement of director’s deferred compensation  —   —   —   —   2,251   16   16 
Cumulative effect of accounting change (Note 7)  —   —   —   101   —   —   101 
Balance at March 31, 2019  20,988,952  $21  $53,856  $108,360   (4,376,556) $(58,824) $103,413 
                             
Net income  —   —   —   1,643   —   —   1,643 
Repurchase of treasury shares  —   —   —   —   (11,951)  (73)  (73)
Amortization of unearned stock compensation  —   —   365   —   —   —   365 
Impact of released vested restricted stock units  —   —   (601)  —   44,737   601   — 
Balance at June 30, 2019  20,988,952  $21  $53,620  $110,003   (4,343,770) $(58,296) $105,348 
                             
Net loss  —   —   —   (721)  —   —   (721)
Repurchase of treasury shares  —   —   —   —   (236,266)  (1,055)  (1,055)
Amortization of unearned stock compensation  —   —   376   —   —   —   376 
Balance at September 30, 2019  20,988,952  $21  $53,996  $109,282   (4,580,036) $(59,351) $103,948 


     Additional        Total 
  Common Stock  Paid-In  Retained  Treasury Stock  Stockholders’ 
  Shares  Amount  Capital  Earnings  Shares  Amount  Equity 
  (In thousands, except share data) 
    
Balance at December 31, 2017  20,988,952  $21  $54,006  $97,336   (4,497,771) $(60,619) $90,744 
                             
Net income  —   —   —   1,947   —   —   1,947 
Repurchase of treasury shares  —   —   —   —   (8,798)  (63)  (63)
Amortization of unearned stock compensation  —   —   158   —   —   —   158 
Balance at March 31, 2018  20,988,952  $21  $54,164  $99,283   (4,506,569) $(60,682) $92,786 
                             
Net income  —   —   —   2,606   —   —   2,606 
Repurchase of treasury shares  —   —   —   —   (10,273)  (75)  (75)
Amortization of unearned stock compensation  —   —   304   —   —   —   304 
Amortization of reclassed liability awards  —   —   411   —   —   —   411 
Impact of released vested restricted stock units  —   —   (353)  —   26,185   353   — 
Issuance of restricted stock award  —   —   (379)  —   28,144   379   — 
Balance at June 30, 2018  20,988,952  $21  $54,147  $101,889   (4,462,513) $(60,025) $96,032 
                             
Net income  —   —   —   2,455   —   —   2,455 
Amortization of unearned stock compensation  —   —   384   —   —   —   384 
Impact of forfeited awards  —   —   40   —   (3,000)  (40)  — 
Balance at September 30, 2018  20,988,952  $21  $54,571  $104,344   (4,465,513) $(60,065) $98,871 

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


HOUSTON WIRE & CABLE COMPANY

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

  

Nine Months

Ended September 30,

 
  2019  2018 
       
Operating activities        
Net income $3,206  $7,008 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:        
Depreciation and amortization  1,754   1,627 
Amortization of unearned stock compensation  1,083   1,085 
Non-cash lease expense  5,143   — 
Provision for refund liability  751   40 
Provision for inventory obsolescence  426   813 
Deferred income taxes  453   (1,537)
Other non-cash items  101   53 
Changes in operating assets and liabilities:        
Accounts receivable  (1,546)  (7,668)
Inventories  (11,968)  833 
Prepaids  (771)  316 
Other assets  (817)  (192)
Lease payments  (3,016)  — 
Book overdraft  —   (1,300)
Trade accounts payable  1,036   901 
Accrued and other current liabilities  (1,186)  (267)
Income taxes  (888)  (101)
Other operating activities  1,311   (72)
Net cash (used in) provided by operating activities  (4,928)  1,539 
         
Investing activities        
Expenditures for property and equipment  (1,742)  (1,210)
Net cash used in investing activities  (1,742)  (1,210)
         
Financing activities        
Borrowings on revolver  266,322   270,609 
Payments on revolver  (259,735)  (270,761)
Payment of dividends  (30)  (39)
Purchase of treasury stock/stock surrendered on vested awards  (1,120)  (138)
Lease payments  (154)  — 
Net cash provided by (used in) financing activities  5,283   (329)
         
Net change in cash  (1,387)  — 
Cash at beginning of period  1,393   — 
         
Cash at end of period $6  $— 

 

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


HOUSTON WIRE & CABLE COMPANY

Consolidated Statements of Stockholders’ Equity

(Unaudited)

     Additional        Total 
  Common Stock  Paid-In  Retained  Treasury Stock  Stockholders’ 
  Shares  Amount  Capital  Earnings  Shares  Amount  Equity 
  (In thousands, except share data) 
    
Balance at December 31, 2018  20,988,952  $21  $53,514  $105,975   (4,377,301) $(58,832) $100,678 
                             
Net income  —   —   —   2,284   —   —   2,284 
Repurchase of treasury shares  —   —   —   —   (1,506)  (8)  (8)
Amortization of unearned stock compensation  —   —   342   —   —   —   342 
Settlement of director’s deferred compensation  —   —   —   —   2,251   16   16 
Cumulative effect of accounting change (Note 7)  —   —   —   101   —   —   101 
Balance at March 31, 2019  20,988,952  $21  $53,856  $108,360   (4,376,556) $(58,824) $103,413 
                             
Net income  —   —   —   1,643   —   —   1,643 
Repurchase of treasury shares  —   —   —   —   (11,951)  (73)  (73)
Amortization of unearned stock compensation  —   —   365   —   —   —   365 
Impact of released vested restricted stock units  —   —   (601)  —   44,737   601   — 
Balance at June 30, 2019  20,988,952  $21  $53,620  $110,003   (4,343,770) $(58,296) $105,348 
                             

     Additional        Total 
  Common Stock  Paid-In  Retained  Treasury Stock  Stockholders’ 
  Shares  Amount  Capital  Earnings  Shares  Amount  Equity 
  (In thousands, except share data) 
    
Balance at December 31, 2017  20,988,952  $21  $54,006  $97,336   (4,497,771) $(60,619) $90,744 
                             
Net income  —   —   —   1,947   —   —   1,947 
Repurchase of treasury shares  —   —   —   —   (8,798)  (63)  (63 
Amortization of unearned stock compensation  —   —   158   —   —   —   158 
Balance at March 31, 2018  20,988,952  $21  $54,164  $99,283   (4,506,569) $(60,682) $92,786 
                             
Net income  —   —   —   2,606   —   —   2,606 
Repurchase of treasury shares  —   —   —   —   (10,273)  (75)  (75)
Amortization of unearned stock compensation  —   —   304   —   —   —   304 
Amortization of reclassed liability awards  —   —   411   —   —   —   411 
Impact of released vested restricted stock units  —   —   (353)  —   26,185   353   — 
Issuance of restricted stock award  —   —   (379)  —   28,144   379   — 
Balance at June 30, 2018  20,988,952  $21  $54,147  $101,889   (4,462,513) $(60,025) $96,032 

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


HOUSTON WIRE & CABLE COMPANY

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

  

Six Months

Ended June 30,

 
  2019  2018 
       
Operating activities        
Net income $3,927  $4,553 
Adjustments to reconcile net income to net cash used in operating activities:        
Depreciation and amortization  1,087   1,086 
Amortization of unearned stock compensation  707   703 
Non-cash lease expense  1,968   — 
Provision for refund liability  471   108 
Provision for inventory obsolescence  459   191 
Deferred income taxes  460   (82)
Other non-cash items  83   21 
Changes in operating assets and liabilities:        
Accounts receivable  75   (5,403)
Inventories  (12,407)  105 
Prepaids  (1,371)  196 
Other assets  (550)  (12)
Lease payments  (1,963)  — 
Book overdraft  330   (1,716)
Trade accounts payable  2,106   (439)
Accrued and other current liabilities  2,235   (4,483)
Income taxes  (142)  (399)
Other operating activities  359   (104)
Net cash used in operating activities  (2,166)  (5,675)
         
Investing activities        
Expenditures for property and equipment  (875)  (741)
Net cash used in investing activities  (875)  (741)
         
Financing activities        
Borrowings on revolver  175,417   179,994 
Payments on revolver  (173,626)  (173,401)
Payment of dividends  (30)  (39)
Purchase of treasury stock/stock surrendered on vested awards  (65)  (138)
Lease payments  (48)  — 
Net cash provided by financing activities  1,648   6,416 
         
Net change in cash  (1,393)  — 
Cash at beginning of period  1,393   — 
         
Cash at end of period $—  $— 

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

5 

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 through twenty-one locations in fourteen states throughout the United States. The Company has no other business activity.

 

The consolidated financial statements as of JuneSeptember 30, 2019 and for the three and sixnine months ended JuneSeptember 30, 2019 and 2018 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, 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, 2018 filed with the SEC.

 

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 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 7 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 2018-14, “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. 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 June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this update amend the guidance of 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 capture expected credit losses through the establishment of an allowance account, which will be presented as an offset to the amortized cost basis of the related financial asset. The guidance is effective for interim and annual periods beginning after December 15, 2019. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

 

2.Earnings per Share

 

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

 

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

 

 Three Months Ended Six Months Ended  Three Months Ended Nine Months Ended 
 June 30, June 30,  September 30, September 30, 
 2019 2018 2019 2018  2019 2018 2019 2018 
Denominator:                  
Weighted average common shares for basic earnings per share  16,504,471   16,387,112   16,491,236   16,368,610   16,443,446   16,404,805   16,475,131   16,380,807 
Effect of dilutive securities  93,025   102,559   79,877   91,126   —   158,440   82,937   111,410 
Weighted average common shares for diluted earnings per share  16,597,496   16,489,671   16,571,113   16,459,736   16,443,446   16,563,245   16,558,068   16,492,217 

 

Stock awards to purchase 275,494658,420 and 300,117223,477 shares of common stock for the three months ended JuneSeptember 30, 2019 and 2018, respectively, and 286,141322,771 and 286,121295,387 shares for the sixnine months ended JuneSeptember 30, 2019 and 2018, respectively, were not included in the diluted net (loss) income 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 and Vertex, as borrowers, and Bank of America, N.A., as agent and lender, entered into a Second Amendment 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 of the Company’s $100 million revolving credit facility 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 Agreement remains March 12, 2024. At JuneSeptember 30, 2019, the Company was in compliance with the availability-based covenantscovenant 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.”

 

4.Income Taxes

 

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

 

During the third quarter of 2019, the Company modified certain terms of the lease agreement with the landlord of Vertex’s Massachusetts facility, further described in the Lease footnote. In connection with the modification, the Company recognized expense of approximately $2.2 million, which was treated as a discrete item.

In the third quarter 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 sixnine months of 2019 or 2018.

 

Restricted Stock Awards and Restricted Stock Units

 

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 non-employee director who was elected, and re-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.

 

Total stock-based compensation cost was $0.4 million for each of the three months ended JuneSeptember 30, 2019 and 2018, and $0.7$1.1 million for each of the sixnine months ended JuneSeptember 30, 2019 and 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 a 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 48 months at June 30, 2019. See Note 8.

 

The Company had outstanding under the Loan Agreement letters of credit totaling $1.7$1.8 million to certain vendors as of JuneSeptember 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.

 

7.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 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 sixnine months ended JuneSeptember 30, 2019 were as follows:

 

   Three Months
Ended		  Six Months
Ended		    Three Months Ended  Nine Months Ended 
Lease Type Income Statement Classification June 30, 2019  Income Statement Classification September 30, 2019 
(Dollars in thousands)              
Consolidated operating lease expense Operating expenses $982  $1,968  Operating expenses $

3,175

  $

5,143

 
                    
Consolidated financing lease amortization Operating expenses  33   50  Operating expenses  110   160 
Consolidated financing lease interest Interest expense  4   6  Interest expense  24   30 
Consolidating financing lease expense    37   56 
Consolidated financing lease expense    134   190 
                    
Net lease cost Operating expenses $1,019  $2,024    $

3,309

  $

5,333

 

 


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

 

Lease Type Balance Sheet Classification Amount  Balance Sheet Classification Amount 
(Dollars in thousands)            
Total ROU operating lease assets(1) Operating lease right-of-use assets, net $11,176  Operating lease right-of-use assets, net $9,872 
Total ROU financing lease assets(2) Property and equipment, net  609  Property and equipment, net  1,972 
Total lease assets   $11,785    $

11,844

 
            
Total current operating lease obligation Operating lease liabilities $2,961  Operating lease liabilities $

4,737

 
Total current financing lease obligation Accrued and other current liabilities  169  Accrued and other current liabilities  449 
Total current lease obligation   $3,130    $

5,186

 
            
Total long term operating lease obligation Operating lease long term liabilities $8,628  Operating lease long term liabilities $

7,671

 
Total long term financing lease obligation Other long term liabilities  451  Other long term liabilities  1,537 
Total long term lease obligation   $9,079    $9,208 

 

(1)Operating lease assets are recorded net of accumulated amortization of $1.6$1.9 million as of JuneSeptember 30, 2019

(2)Financing lease assets are recorded net of accumulated amortization of $0.2$0.3 million as of JuneSeptember 30, 2019

 


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

 

Maturity Date of Lease Liabilities Operating Leases  Financing Leases  Total  Operating Leases  Financing Leases  Total 
(Dollars in thousands)                        
Year one $3,504  $192  $3,696  $5,204  $543  $

5,747

 
Year two  2,721   177   2,898   

2,293

   507   

2,800

 
Year three  2,694   149   2,843   2,304   477   

2,781

 
Year four  2,103   101   2,204   1,549   409   

1,958

 
Year five  795   57   852   

1,258

   298   

1,556

 
Subsequent years  1,290   —   1,290   

1,159

   —   

1,159

 
Total lease payments  13,107   676   13,783   

13,767

   2,234   16,001 
Less: Interest  1,518   56   1,574   

1,359

   248   1,607 
Present value of lease liabilities $11,589  $620  $12,209  $

12,408

  $1,986  $14,394 

 

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

 

Lease Type

 

Weighted Average
Term in Years

  Weighted Average
Interest Rate		  

Weighted Average

Term in Years

  Weighted Average
Interest Rate		 
Operating leases  4.5   5.5   4.7   5.4 
Financing leases  3.9   4.3   4.4   5.3 

 

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

 

Cash Flow Source Classification Amount  Classification Amount 
(Dollars in thousands)          
Operating cash outflows from operating leases Operating activities $1,957  Operating activities $2,993 
Operating cash outflows from financing leases Operating activities  6  Operating activities  23 
Financing cash outflows from financing leases Financing activities  48  Financing activities  154 

 

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. 

8.Subsequent Events

On July 22, 2019, the Company modified certain terms of the lease agreement with the landlord of Vertex’sVertex'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 paymentrecognized expense related to an early termination liability of approximately $2.5$2.2 million in the third quarter of 2019. The payment to the lessor. The Companylandlord will be relievedmade in November 2019. During the quarter, the Company also extended the terms of $2.8 millionone of future rent payments, along with other future costs associated with the Houston Wire & Cable facilities for five years, resulting in an increase to the ROU operating lease including property taxes, insurance, utilitiesasset and maintenance otherwise required in the original lease agreement.obligation by approximately $2.2 million.

 


During the nine months ended September 30, 2019, the Company recorded non-cash ROU financing lease assets and corresponding financing lease obligations totaling $1.9 million primarily related to IT infrastructure lease agreements. Any operating leases, new or modified, with exception of the two leases previously mentioned, as well as any sublease income for the nine months ended September 30, 2019 are not material. The Company has entered into operating leases that will be commencing in the fourth quarter of 2019, with significant rights and obligations of approximately $2.9 million. 


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, 2018.

  

On July 22, 2019, an agreement was reached which allowed for the early termination, during the fourth quarter 2019, of the Vertex warehouse in Attleboro, Massachusetts. We agreed to pay $2.5 million, which includes $0.3 million for repairs, in consideration for the reduction in lease term. In connection with the closure of the Attleboro warehouse, we are increasing our Vertex Chicago warehouse capacity and will open a new facility in Edison, New Jersey by the end on 2019. Going forward, it is anticipated that the net annual operating expense savings resulting from these warehouse activities will be approximately $1 million. 

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 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, 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, 2018 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 sixnine months ended JuneSeptember 30, 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, 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.

 

 Three Months Ended Six Months Ended  Three Months Ended Nine Months Ended
 June 30, June 30,   September 30,   September 30, 
 2019 2018 2019 2018   2019   2018   2019   2018 
                 
Sales  100.0%  100.0%  100.0%  100.0%  100.0%  100.0%  100.0%  100.0%
Cost of sales  75.9%  76.2%  75.5%  76.1%  77.2%  76.2%  76.1%  76.1%
Gross profit  24.1%  23.8%  24.5%  23.9%  22.8%  23.8%  23.9%  23.9%
                                
Operating expenses:                                
Salaries and commissions  10.8%  10.6%  10.8%  10.7%  10.8%  10.9%  10.8%  10.7%
Other operating expenses  9.1%  8.0%  9.0%  8.4%  11.2%  8.9%  9.8%  8.6%
Depreciation and amortization  0.6%  0.6%  0.6%  0.6%  0.8%  0.6%  0.7%  0.6%
Total operating expenses  20.5%  19.1%  20.5%  19.7%  22.9%  20.4%  21.3%  19.9%
                                
Operating income  3.6%  4.7%  4.0%  4.3%
Operating income (loss)  (0.1)%  3.4%  2.7%  4.0%
Interest expense  0.9%  0.8%  0.9%  0.8%  1.0%  0.8%  0.9%  0.8%
                                
Income before income taxes  2.7%  3.9%  3.2%  3.5%
Income tax expense  0.8%  1.1%  0.9%  0.9%
Income (loss) before income taxes  (1.1)%  2.6%  1.8%  3.2%
Income tax expense (benefit)  (0.2)%  (0.2)%  0.5%  0.6%
                                
Net income  1.9%  2.8%  2.3%  2.5%
Net income (loss)  (0.8)%  2.7%  1.3%  2.6%

 

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

 

Comparison of the Three Months Ended JuneSeptember 30, 2019 and 2018

 

Sales

 

 Three Months Ended  Three Months Ended 
 June 30,  September 30, 
(Dollars in millions) 2019 2018 Change  2019 2018 Change 
Sales $85.3  $93.9  $(8.5)  (9.1)% $85.4  $90.1  $(4.7)  (5.2)%

 

Our sales for the secondthird quarter decreased from $93.9$90.1 million in 2018 to $85.3$85.4 million in 2019. 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, increased 2%decreased 3%, while Maintenance, Repair, and Operations (MRO) sales decreased 11%6%, as compared to 2018.

 

Gross Profit

 

 Three Months Ended  Three Months Ended 
 June 30,  September 30, 
(Dollars in millions) 2019 2018 Change  2019 2018 Change 
Gross profit $20.5  $22.3  $(1.8)  (8.1)% $19.4  $21.4  $(2.0)  (9.2)%
Gross margin  24.1%  23.8%          22.8%  23.8%        

 


Gross profit decreased 8.1%9.2% to $20.5$19.4 million in 2019 from $22.3$21.4 million in 2018. The decrease in gross profit was attributable to reduced sales from oil and gas geographies and fasteners. Gross margin (gross profit as a percentage of sales) increaseddecreased slightly to 24.1%22.8% in 2019 from 23.8% in 2018 primarily due to product mixdeclines in copper and pricing discipline.competitive market conditions.

 


Operating Expenses

 

 Three Months Ended  Three Months Ended 
 June 30,  September 30, 
(Dollars in millions) 2019 2018 Change  2019 2018 Change 
Operating expenses:                                
Salaries and commissions $9.2  $9.9  $(0.7)  (6.7)% $9.2  $9.8  $(0.5)  (5.4)%
Other operating expenses  7.7   7.5   0.2   2.9%  9.6   8.0   1.6   19.6%
Depreciation and amortization  0.5   0.5   0.0   (1.3)%  0.7   0.5   0.1   23.3%
Total operating expenses $17.5  $18.0  $0.4   (2.5)% $19.5  $18.3  $1.2   6.4%
                                
Operating expenses as a percent of sales  20.5%  19.1%          22.9%  20.4%        

 

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

 

Salaries and commissions decreased $0.7$0.5 million from the secondthird quarter 2018 compared to 2019 due to lower commissions resulting from the reduction in sales and gross profit, offset by an increase in headcount.profit.

 

Other operating expenses increased slightly due to higher expense, approximately $0.2the $2.2 million fromearly termination liability related to Vertex’s Massachusetts facility lease, payment which will be made in the computer system upgradefourth quarter, offset by lower warehouse and conversion.insurance expenses.

 

Depreciation and amortization were flat year over year.increased primarily due to depreciation on right-of-use assets from the adoption of ASU 842.

 

Operating expenses as a percentage of sales increased to 20.5%22.9% in 2019 from 19.1%20.4% in 2018, as theoperating expenses increased combined with a reduction in sales changed at a greater rate than the decrease in operating expenses.sales.

 

Interest Expense

 

Interest expense decreasedincreased slightly from $0.8$0.7 million in 2018 to $0.7$0.8 million in 2019 as a result of lowerhigher average debt offset byand an increase in interest rates. Average debt was $74.3$78.0 million in 2019 compared to $82.5$76.8 million in 2018. The average effective interest rate was 3.9%4.0% in 2019 compared to 3.7%3.8% in 2018.

 

Income Taxes

 

The income tax expensebenefit of $0.6$0.2 million decreasedincreased from $1.0$0.1 million in the prior year period due to lowera pretax income.loss in the third quarter of 2019. The effective income tax rate for the quarter was near flat at 28.3 %19.8% in 2019 compared to 28.0%(6.4)% in 2018, primarily due to the release of the $1.0 million valuation allowance in the third quarter of 2018.

 

Net Income (Loss)

 

We achievedincurred a net incomeloss of $1.6$0.7 million in 2019 compared to $2.6net income of $2.5 million in 2018.2018, primarily due to lower sales and the recognition of expense related to the early termination of Vertex’s Massachusetts facility lease.

 

Comparison of the SixNine Months Ended JuneSeptember 30, 2019 and 2018

 

 Six Months Ended 
Sales Nine Months Ended 
 June 30,  September 30, 
(Dollars in millions) 2019 2018 Change  2019 2018 Change 
Sales $170.6  $178.9  $(8.3)  (4.6)% $256.0  $269.0  $(13.0)  (4.8)%

 

Our sales for the six monthnine-month period decreased 4.6%4.8% from $178.9$269.0 million in 2018 to $170.6$256.0 million in 2019. The primary reasons for the decrease were 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. OurWe estimate that 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 3%decreased 1%, from 2018.and MRO decreased 6%, from 2018.

 


Gross Profit

 Six Months Ended  Nine Months Ended 
 June 30,  September 30, 
(Dollars in millions) 2019 2018 Change  2019 2018 Change 
Gross profit $41.8  $42.8  $(1.0)  (2.4)% $61.2  $64.2  $(3.0)  (4.7)%
Gross margin  24.5%  23.9%  0.6%      23.9%  23.9%  —%    

 

Gross profit decreased 2.4%7.4% from $42.8$64.2 million in 2018 to $41.8$61.2 million in 2019. The decrease in gross profit was primarily attributable to the reduction in sales. Gross margin increased slightly to 24.5%remained flat at 23.9% in 2019 from 23.9% in 2018, primarily due to product mix and pricing discipline.2018.

 

Operating Expenses

 Six Months Ended  Nine Months Ended 
 June 30,  September 30, 
(Dollars in millions) 2019 2018 Change  2019 2018 Change 
Operating expenses:                                
Salaries and commissions $18.4  $19.1  $(0.7)  (3.5)% $27.7  $28.9  $(1.2)  (4.2)%
Other operating expenses  15.4   15.0   0.4   2.7%  25.0   23.0   2.0   8.6%
Depreciation and amortization  1.1   1.1   0.0   0.1%  1.8   1.6   0.1   7.8%
Total operating expenses $34.9  $35.2  $(0.3)  (0.8)% $54.4  $53.5  $0.9   1.7%
                                
Operating expenses as a percent of sales  20.5%  19.7%  0.8%      21.3%  19.9%  1.4%    

 

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

 

Salaries and commissions decreased $0.7$1.2 million between the periods due to lower commissions resulting from the reduction in sales and gross profit, offset by a slight increase in headcount.profit.

 

Other operating expenses increased slightly due to higher expense, approximately $0.2the $2.2 million fromearly termination liability related to Vertex’s Massachusetts facility lease, payment which will be made in the fourth quarter, and the computer system upgrade and conversion.conversion, offset by lower warehouse and insurance expenses.

 

Depreciation and amortization were flat year over year.increased primarily due to depreciation on right-of-use assets from the adoption of ASU 842.

 

Operating expenses as a percentage of sales increased to 20.5%21.3% in 2019 from 19.7%19.9% in 2018, as operating expenses increased while sales levels fell at a greater rate than the reduction in operating expenses.decreased.

 

Interest Expense

 

Interest expense increased 4.4%6.3% to $1.5$2.3 million in 2019 from $1.4$2.2 million in 2018 due to higher interest rates. Average debt was $73.9 million in 2019 compared to $79.7$78.8 million in 2018. The average effective interest rate rose to 3.9% in 2019 from 3.5%3.6% in the prior year period.

 

Income Taxes

 

The income tax expense of $1.5$1.3 million in 2019 decreased from $1.7$1.5 million in 2018 due to lower pretax income. The effective income tax rate increased slightly to 27.5%29.0% in 2019 to 27.1%from 18.1% in 2018, primarily due to the release of vested share-based awards.the $1.0 million valuation allowance in the third quarter of 2018.

 

Net Income

 

We achieved net income of $3.9$3.2 million in 2019 compared to $4.6$7.0 million in 2018.2018, primarily due to lower sales and the early termination liability related to Vertex’s Massachusetts facility lease.

 


Impact of Inflation and Commodity Prices

 

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

 


Liquidity and Capital Resources

 

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

 

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

 

 ●the adequacy of available bank lines of credit;
 ●cash flows generated from operating activities;
 ●capital expenditures;
 ●acquisitions; and
 ●the ability to attract long-term capital with satisfactory terms

 

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

 

Our net cash used in operating activities was $2.2$4.9 million for the sixnine months ended JuneSeptember 30, 2019 compared to $5.7net cash provided of $1.5 million in 2018. We had net income of $3.9$3.2 million in 2019 compared to $4.6$7.0 million in 2018.

 

Changes in our operating assets and liabilities resulted in cash used in operating activities of $11.3$17.8 million in 2019. An increase in inventories of $12.4$12.0 million, primarily due to incentives offered by certain vendors on high volume inventory, as well as rebalancing inventory levels at regional locations, lease payments of $1.9$3.0 million, accounts receivable of $1.5 million and prepaid expenses of $1.4$0.8 million were the main uses of cash. Partially offsetting these uses of cash were increases in accounts payable and accruedlong-term liabilities of $2.1$1.0 million and $2.2$1.3 million, respectively, primarily due to increased inventory purchases and IT infrastructure equipment leases in the secondthird quarter of 2019.

 

Net cash used in investing activities was $0.9$1.7 million in 2019 compared to $0.7$1.2 million in 2018. The increase was primarily due to expenditures for the computer system upgrade and conversion.

 

Net cash provided by financing activities was $1.6$5.3 million in 2019 compared to $6.4net cash used of $0.3 million in 2018. Net borrowings on the revolver of $1.8$6.6 million and the purchase of treasury stock of $1.1 million were the primary source forcomponents of financing activities in 2019.

 

Indebtedness

 

Our principal source of liquidity at JuneSeptember 30, 2019 was working capital of $130.4$133.4 million compared to $126.2 million at December 31, 2018. We also had available borrowing capacity of $25.2$20.3 million at JuneSeptember 30, 2019 and $28.7 million at December 31, 2018 under our loan agreement. The availability at JuneSeptember 30, 2019 is net of outstanding letters of credit of $1.7$1.8 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 JuneSeptember 30, 2019.

In thousands Total  Less than
1 year		  1-3 years  3-5 years  More
than
5 years		 
                
Total debt $77,903  $—  $—  $77,903  $— 

 

In thousands Total  

Less than

1 year

  1-3 years  3-5 years  

More

than

5 years

 
                
Total debt $73,107  $—  $—  $73,107  $— 


There were no material changes in operating lease obligations or non-cancellable purchase obligations since December 31, 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, 2018.

 

Item 4. Controls and Procedures

 

As of JuneSeptember 30, 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 JuneSeptember 30, 2019, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Part II. Other Information

 

Item 1 - Not applicable and has been omitted.

 

Item 1A.  Risk Factors

 

There were no material changes in the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

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

The following table provides information about our purchases of common stock for the three months ended September 30, 2019.

Period  Total number
of shares
purchased		  Average price
paid per
share		  

Total number

of shares

purchased as

part of publicly

announced

plans or

programs (1)

  

Maximum

dollar value

that may yet

be used for

purchases

under the

plan(1)

 
July 1 – 31, 2019   —  $—   —  $9,166,906 
August 1 – 31, 2019   133,100   4.39   133,100   8,582,099 
September 1 – 30, 2019   102,400   4.56   102,400   8,114,886 
Total   235,500  $4.47   235,500     

(1)

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.

 

Item 23 - Not applicable and has been omitted.

 

Item 34 - Not applicable and has been omitted.

 

Item 45 - Not applicable and has been omitted.


Item 5 - Not applicable and has been omitted.


Item 6.  Exhibits

 

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

 

Exhibit

Number

 Document Description
   
31.110.1 Form of Performance Stock Unit Award Agreement for Key Employees
31.1Certification by James L. Pokluda III pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2 Certification by Christopher M. Micklas pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1 Certification by James L. Pokluda III and Christopher M. Micklas pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101.INS XBRL Instance Document(1)
   
101.SCH XBRL Taxonomy Extension Schema
   
101.CAL XBRL Taxonomy Extension Calculation Linkbase
   
101.DEF XBRL Taxonomy Extension Definition Linkbase
   
101.LAB XBRL Taxonomy Extension Label Linkbase
   
101.PRE XBRL Taxonomy Extension Presentation Linkbase

 

(1)

Attached as exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets at JuneSeptember 30, 2019 and December 31, 2018; (ii) the Consolidated Statements of Operations for the three and sixnine month periods ended JuneSeptember 30, 2019 and 2018; (iii) the Consolidated Statements of Stockholders’ Equity for the nine month periods ended September 30, 2019 and 2018; (iv) Consolidated Statements of Cash Flows for the sixnine month periods ended JuneSeptember 30, 2019 and 2018; and (vi)(v) Notes to the Consolidated Financial Statements.


Signature

 

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

 

Date:  August 9,November 8, 2019HOUSTON WIRE & CABLE COMPANY
   
 BY:/s/ Christopher M. Micklas
 Christopher M. Micklas, Chief Financial Officer

 

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