UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 For the quarterly period ended March 31,September 30, 2020

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 MayNovember 1, 2020 there were 16,584,46016,544,542 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 March 31,September 30, 2020

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

Consolidated Statements of Stockholders’ Equity

(Unaudited) 

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 including Electrical Wireelectrical wire and Cable, Steel Wire Ropecable, steel wire rope and Hardware,hardware, and Fastenersfasteners to the U.S. market through twenty-two20 locations in fourteen14 states throughout the United States. The Company has no other business activity.

The consolidated financial statements as of March 31,September 30, 2020 and for the three and nine months ended March 31,September 30, 2020 and 2019 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 intangible 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, 2019 filed with the SEC.

Risks and Uncertainties

The Company is currently subject to additional risks and uncertainties due to the COVID-19 pandemic. The pandemic, and governmental and other actions taken in response to it, have had an adverse effect on the demand for the Company’s products and on its results of operations, and the virus continues to spread. Capital markets and economies worldwide have been negatively impacted by the COVID-19 pandemic, and it is possible that the impact could cause an extended local and/or global economic recession. Such economic disruption could continue to have a material adverse effect on our business as companies in many industries curtail and reduce capital and overall spending. Policymakers around the globe have responded with fiscal policy actions to support specific industries and their economies as a whole. However, the overall effectiveness of these actions remains uncertain.

The long-term severity of the impact of the COVID-19 pandemic on the Company’s business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company’s customers, all of which are uncertain and cannot be predicted. The Company’s future results of operations and liquidity could be materially adversely affected by delays in payments of outstanding receivables, supply chain disruptions, uncertain or reduced demand, and the impact of any initiatives or programs that the Company may undertake to address financial and operational challenges faced by its customers. As of the date of issuance of these financial statements, the extent to which the COVID-19 pandemic may materially adversely affect the Company’s financial condition, liquidity, or results of operations is uncertain.

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 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 Company adopted this ASU in the first quarter of 2020, and the adoption did not have a material impact on the Company’s 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 Company adopted this ASU in the first quarter of 2020, and the adoption did not have a material impact on the Company’s consolidated financial statements.

Recent Accounting Pronouncements

In November 2019, the FASB issued ASU 2019-11, Codification“Codification Improvements to Topic 326, Financial Instruments - Credit Losses.” This ASU, among other narrow-scope improvements, clarifies guidance around how to report expected recoveries. This ASU permits organizations to record expected recoveries on assets purchased with credit deterioration. In addition to other narrow technical improvements, the ASU also reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities. The effective date and transition methodology are the same as in ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The FASB deferred the effective dates of this ASUthese ASUs for smaller reporting companies (“SRC”) to fiscal years beginning after December 15, 2022. As of March 31,September 30, 2020, the Company qualifies as a SRC and willexpects to adopt this ASUthese ASUs in the first quarter of 2023.

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

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The amendments in the ASU provide optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued due to reference rate reform. The provisions of the new guidance were effective upon issuance and generally can be applied through December 31, 2022 with the option to apply the guidance at any point during that time period. The Company currently has a debt agreement that references LIBOR and will apply the new guidance as these contracts are modified to reference other rates.

2.    Earnings per Share

Basic earnings per share is calculated by dividing net income (loss) 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:

Schedule of reconciles the denominator used in the calculation of diluted earnings (loss) per share

Stock awards to purchase 553,547 shares751,042 and 356,890658,420 shares of common stock for the three months ended September 30, 2020 and 2019, respectively, and 896,018 and 322,771 shares for the nine months ended September 30, 2020 and 2019, respectively, were not included in the diluted net income (loss) per share calculation for the three months ended March 31, 2020 and 2019, respectively, as their inclusion would have been anti-dilutive.

3.    Debt

On March 12, 2019 and December 10, 2019, the Company, as guarantor, HWC Wire & Cable Company and Vertex, as borrowers, and Bank of America, N.A., as agent and lender, entered into thea Second and Third Amendments, respectively, to the Fourth Amended and Restated Loan and Security Agreement (such agreement, as so amended, the “Loan Agreement”). The Second Amendment extendedextends the expiration date until March 12, 2024 and the Third Amendment increased the revolving credit facility to $115$115 million. Under certain circumstances, the Company may request an increase in the commitment by an additional $50$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%85% of the value of eligible accounts receivable, plus the lesser of 70%70% of the value of eligible inventory or 90%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.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 March 31,September 30, 2020, the Company was in compliance with the availability-based covenants governing its indebtedness.

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

On May 4, 2020, the Company received a $6.2 million Paycheck Protection Program (“PPP”) loan from Bank of America (“Lender”), funded under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), pursuant to a Promissory Note issued by the Company to Lender. The Company used the funds to pay its payroll related expenses as well as rent expenses, as allowed by the terms of the loan. The Company intends to apply for loan forgiveness in the fourth quarter 2020. Under current rules, which could still be clarified further, the Company believes it will achieve around 80-90% forgiveness. The forgiveness amount will be equal to the amount that the Company uses for the approved expenses, a minimum of 60% on payroll related expenses and up to 40% on non-payroll expenses. If the total of the loan is not forgiven, the Company will have two years from the funded date of May 4, 2020 to repay the balance of the PPP loan to Bank of America. No principal or interest payments will be due prior to the end of the six-month deferment period and the interest rate on the balance of the loan will not exceed 1.0% per annum.

4.Impairment of Goodwill and Intangible Assets

The Company tests goodwill and indefinite lived intangibles for impairment at least annually or more frequently whenever events or circumstances occur indicating that it might be impaired. During the first and second quarter of 2020, the Company’s market capitalization declined significantly, driven by current macroeconomic and geopolitical conditions due in large part to the COVID-19 outbreak, which has contributed to a decline in demand for the Company’s products, a decline in overall financial performance, partially due to the decline in oil prices, and decline in industry and market conditions. Based on these events, the Company concluded that it was more-likely-than-not that the fair valuevalues of certain of its reporting units were less than their carrying values. Therefore, the Company performed an interim goodwill impairment test.

test for both the first and second quarter.

Goodwill and intangible asset impairment isare evaluated at each of the four4 reporting units. TheDuring the first and second quarters of 2020, the Company determined the fair values of the two reporting units with goodwill and certain of its indefinite lived intangibles exceeded their respective carrying values. The amount of goodwill at September 30, 2020 for the two reporting units, Southern Wire and Vertex, were $12.5 million and $9.8 million, respectively, and the Vertex reporting unit has a negative carrying value. Additionally, the Company determined the fair value of its SouthwestVertex reporting unit’s tradenames was below its carrying value, and as a result recorded an impairment charge of $0.2$0.1 million in June 2020. The Company also determined the fair value of its Southwest Wire Rope reporting unit’s tradenames was below its carrying value, and as a result, recorded an impairment charge of $0.1 million in June 2020 and $0.2 million in March 2020.

5.Income Taxes

The Company calculated its provision for income taxes during the third quarter by applying the estimated annual effective tax rate for the three months ended March 31, 2020 was 29.5% compared to 26.8% for the same period in 2019. Comparedfull fiscal year to the U.S. statutory rate, the effective tax rate was impacted by state income taxes and nondeductible expenses.pre-tax loss, excluding discrete items. Due to the continuing uncertainty in the Company’s industry, the Company hashad utilized the method of recording income taxes on a year-to-date effective tax rate for the threesix months ended March 31,June 30, 2020. The Company will evaluate its use of this method each quarter until such time as a return to the annualized estimated effective tax rate method is deemed appropriate.

The Coronavirus Aid, Relief and Economic SecurityCARES Act (“CARES Act”) was signed into law on March 27, 2020. The CARES Act contains several tax law changes for corporations, including modifications for net operating loss carrybacks, the refundability of prior-year minimum tax liability, limitations on business interest and limitations on charitable contribution deductions. These benefits did not impact the Company’s tax provision for the threenine months ended March 31,September 30, 2020.

6.Incentive Plans

Stock Option Awards

There were no0 stock option awards granted during the first threenine months of 2020 or 2019.

Restricted Stock Awards and Restricted Stock Units

There were noOn June 26, 2020, the Board of Directors granted 10,000 restricted stock units to the newly named executive chairman of the board. The award vests in two equal installments on June 26, 2021 and June 26, 2022. The award entitles the executive chairman of the board 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 his service on the board terminates for any reason.

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 or re-elected, for an aggregate of 58,920 restricted stock units. Each award of restricted stock units vested 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. The Company did not grant equity awards or units granted duringto the first three months of 2020.non-employee directors following the 2020 Annual Meeting.

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 former CFO. Each grant ofThe former CFO’s units were forfeited when he left the Company in July 2020. The President and CEO’s performance stock units vestsvest on December 31, 2021, based on and subject to the Company’s achievement of cumulative EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) and stock price performance goals over a three-yearthree 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 (benefit) cost was $0.3($0.1) million and $0.4 million for each of the three months ended March 31,September 30, 2020 and 2019, respectively, and $0.7 million and $1.1 million for the nine months ended September 30, 2020 and 2019, respectively, and is included in salaries and commissions for employees, and in other operating expenses for non-employee directors. In the third quarter of 2020, the Company recorded a reversal of the accrual on the former CFO’s forfeited awards, as well as a reversal of portions of the CEO’s performance grant that is not expected to vest.

7.    Commitments and Contingencies

The Company had outstanding under the Loan Agreement letters of credit totaling $0.7$0.7 million to certain vendors as of March 31,September 30, 2020.

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

The COVID-19 pandemic has spread throughout the United States and the countries in which our offshore suppliers are located. Governments in affected regions have implemented, and may continue to implement, safety precautions which include quarantines, travel restrictions, business closures, cancellations of public gatherings and other measures as they deem necessary. Many organizations and individuals, including the Company and its employees are taking additional steps to avoid or reduce infection, including limiting travel and working remotely. The Company continues to monitor its operations and government recommendations and has made modifications to its normal operations because of the pandemic, including requiring most of its non-essential employees to work remotely. The Company has maintained a substantial portion of its operational capacity at its warehouses across the continental United States and has instituted several health and safety protocols and procedures to safeguard its employees.

The rapid development and uncertainty of the COVID-19 pandemic precludes any prediction as to the ultimate adverse impact of the COVID-19 outbreak on the Company’s business. However, the outbreak has caused the Company to experience adverse impacts, including reductions in the demand for its products. In response, the Company has implemented several cost savings measures which include furloughing employees, payroll reductions, and other measures to decrease corporate and non-critical expenses. While we cannot reasonably estimate the length or severity of this pandemic, we currently anticipate an adverse impact on our consolidated financial position, consolidated results of operations, and consolidated cash flows in fiscal 2020.

On May 4, 2020, the Company received a $6.2 million Payroll Protection Program loan from Bank of America, funded under the CARES Act. The loan has a 1.0% interest rate after a six-month deferment period.  

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 Annual Report on Form 10-K for the year ended December 31, 2019.

Overview

We are a provider of industrial products including Electrical Wireelectrical wire and Cable, Steel Wire Ropecable, steel wire rope and Hardware,hardware, and Fastenersfasteners 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 and Estimates

The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses. On an on-going basis, we make and evaluate estimates and assumptions, including those related 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. 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 judgmentsassumptions are discussed in our Annual Report on Form 10-K for the year ended December 31, 2019 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 threenine months ended March 31,September 30, 2020.

Impact of the COVID-19 Pandemic

The COVID-19 pandemic has spread throughout the United States and the countries in which our offshore suppliers are located. Governments in affected regions have implemented, and may continue to implement, safety precautions which include quarantines, travel restrictions, business closures, cancellations of public gatherings and other measures as they deem necessary. Many organizations and individuals, including the Company and our employees are taking additional steps to avoid or reduce infection, including limiting travel and working remotely. We continue to monitor our operations and government recommendations and have made modifications to our normal operations because of the pandemic, including requiring most of our non-essential employees to work remotely. We have maintained a substantial portion of our operational capacity at our warehouses across the continental United States and have instituted several health and safety protocols and procedures to safeguard our employees.

The rapid development and uncertainty of the COVID-19 pandemic precludes any prediction as to the ultimate adverse impacteffect of the COVID-19 outbreak on the Company’sour business. However, the outbreak has caused the Company to experiencehad an adverse impacts,impact on our business, including reductions in the demand for its products.our products, especially from the oil and gas market. In response, we applied for and received funds under the Company hasPaycheck Protection Program and have implemented several cost savings measures which include furloughing employees, reducing headcount, temporary payroll reductions, and other measuresactions to decrease corporate and non-critical expenses. These cost savings measures, which began to have an impact in the latter part of the second quarter, resulted in additional savings in the third quarter and we expect, will continue for the balance of the year. While we cannot reasonably estimate the length or severity of this pandemic, we currently anticipate an adverse impact on our consolidated financial position, consolidated results of operations, and consolidated cash flows inat least through the end of fiscal 2020.

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 the duration, extent and impact of the COVID-19 pandemic, 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, 2019 and in Part II, Item 1A of this report, as well as any other 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.

Website Disclosure

The Company uses its website, www.houwire.com, in the “Investors” section, as a channel of distribution of Company information. Financial and other important information about the Company is routinely accessible through and posted on its website. Accordingly, investors should monitor the Company’s website, in addition to following its press releases, SEC filings and public conference calls and webcasts. The contents of the Company’s website and information accessible through the Company’s website is not incorporated by reference into, and is not a part of, this document.

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 (loss), income (loss) before income taxes or net income.income (loss).

Comparison of the Three Months Ended March 31,September 30, 2020 and 2019

Sales

Our sales for the firstthird quarter were slightly down at $83.5 million in 2020 compared to $85.3decreased from $85.4 million in 2019 to $70.2 million in 2020. The decrease in sales was primarily due to the decline in the oil and gas market, in addition to reduced market demand, both as a result of current economic conditions caused by the COVID-19 pandemic. We estimate sales for our project business, which targets end markets for Environmental Compliance, Engineering & Construction, Industrials, Utility Power Generation, and Mechanical Wire Rope, decreased 5%21%, while Maintenance, Repair, and Operations (MRO) sales decreased 1.0%18%, as compared to 2019. In general, rising copper and aluminum prices increase our sales and profitability, however, due to our average cost accounting treatment there is a time lag between changes in commodity prices and the impact to our income statement. We would anticipate recent increases in copper and aluminum prices to translate into higher revenue and earnings in future quarters, all else being equal.

Gross Profit

Gross profit decreased 7.8%22.9% to $19.6$15.0 million in 2020 from $21.3$19.4 million in 2019. The decrease in gross profit was primarily attributable to reduced sales from the reductiondecline in salesthe oil and lower product margins.gas market caused by the COVID-19 pandemic. Gross margin (gross profit as a percentage of sales) decreased to 23.5%21.3% in 2020 from 24.9 %22.8% in 2019, primarily due to a decline in copper prices.lower vendor rebates and reduced prompt pay discounts.

Operating Expenses

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

Salaries and commissions increased $0.3decreased $1.7 million in 2020from the third quarter 2019 compared to 20192020 due to slightly higherexpense management necessitated by the decrease in oil and gas prices and the COVID-19 pandemic. Reduced full-time headcount, reduced temporary warehouse labor, and salary reductions, as a result ofwell as lower commissions resulting from the warehouse movesreduction in sales and gross profit all contributed to the fourth quarter of 2019.lower salaries and commission expense.

Other operating expenses in 2020 were almost flat compareddecreased due to 2019, as we focus on expense management in light of current economic conditions caused byresponse to the COVID-19 pandemic.

pandemic, mainly lower travel and entertainment and advertising expenses. In the third quarter of 2019, we recorded a $2.2 million early termination liability related to Vertex’s Massachusetts facility lease.

Depreciation and amortization increased primarily due to depreciation on additional right-of-use assets acquired in the third quarter of 2020.

Interest Expense

Interest expense decreased from $0.8 million in 2019 to $0.3 million in 2020 as a result of lower average debt and a decrease in interest rates. Average debt was $69.6 million in 2020 compared to $78.0 million in 2019. The average effective interest rate was 1.7% in 2020 compared to 4.0% in 2019.

Income Taxes

The income tax benefit of $0.1 million changed from $0.2 million in the prior year period due to a pretax loss in the third quarter of 2020. The effective income tax rate for the quarter was 14.8% in 2020 compared to 19.8% in 2019, primarily due to non-deductible expenses in 2020.

Comparison of the Nine Months Ended September 30, 2020 and 2019

Our sales for the nine-month period decreased 13.8% from $256.0 million in 2019 to $220.6 million in 2020. The primary reasons for the decrease were the decline in the oil and gas market and to reduced market demand, both as a result of the COVID-19 pandemic. We estimate that our project business, which includes our key growth initiatives encompassing Environmental Compliance, Engineering & Construction, Industrials, Utility Power Generation, and Mechanical Wire Rope, decreased 11%, and MRO decreased 14%, from 2019. In general, rising copper and aluminum prices increase our sales and profitability, however, due to our average cost accounting treatment there is a time lag between changes in commodity prices and the impact to our income statement. We would anticipate recent increases in copper and aluminum prices to translate into higher revenue and earnings in future quarters, all else being equal.

Gross Profit 

Gross profit decreased 20.3% from $61.2 million in 2019 to $48.8 million in 2020. The decrease in gross profit was attributable to reduced sales from the decline in oil and gas market and caused by COVID-19 pandemic. Gross margin decreased slightly to 22.1% in 2020 from 23.9% in 2019, primarily due to the one-time adjustment for a vendor return in the second quarter of 2020, as well as lower vendor rebates and reduced prompt pay discounts.

Operating Expenses

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

Salaries and commissions decreased $2.3 million between the periods due to expense management necessitated by the decrease in oil and gas prices and the COVID-19 pandemic. Reduced full-time headcount, reduced temporary labor and salary reductions, as well as lower commissions resulting from the reduction in sales and gross profit, all contributed to the decrease in salaries and commissions.

Other operating expenses decreased $3.3 million to expense management in response to the COVID-19 pandemic, mainly lower travel and entertainment and advertising expenses. In the third quarter of 2019, we recorded a $2.2 million early termination liability related to Vertex’s Massachusetts facility lease.

Depreciation and amortization increased primarily due to depreciation on right-of-use acquired in the first quarternine months of 2020.

We recorded an impairment charge in the first quarterand second quarters of 2020 with respect to tradenames at our Southwest Wire Rope and Vertex reporting unit.units. (See Note 4 of our Consolidated Financial Statements)

Interest Expense

Interest expense increaseddecreased 28.8% to $0.8$1.6 million in 2020 from $0.7$2.3 million in 2019 due to an increase in the average debt, offset by a lower average effective interest rate.rates. Average debt was $89.2$78.9 million in 2020 compared to $73.5$73.9 million in 2019. The average effective interest rate was 3.4%fell to 2.5% in 2020 compared tofrom 3.9% in 2019.the prior year period.

Income Taxes

The income tax benefit of $0.4 million in 2020 decreased from the income tax expense of $0.2 million decreased from $0.8$1.3 million in the prior year period, primarily2019 due to the decreasepretax loss in income before income taxes.Due to the continuing uncertainty in our industry, we utilized the method of recording income taxes on a year-to-date effective tax rate for the three months ended March 31, 2020.The actual effective income tax rate for the quarter increased slightlydecreased to 29.5%14.5% in 2020 from the estimated rate of 26.8%29.0% in 2019, primarily due to state income taxes and nondeductible expenses.non-deductible expenses in 2020.

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. In general, rising copper and aluminum prices increase our sales and profitability, however, due to our average cost accounting treatment there is a time lag between changes in commodity prices and the impact to our income statement. We would anticipate recent increases in copper and aluminum prices to translate into higher revenue and earnings in future quarters, all else being equal. To the extent commodity prices decline, the net realizable value of our existing inventory could also decline, and our gross profit cancould be adversely affected because of either reduced selling prices or lower of cost or net realizable value adjustments in the carrying value of our inventory. 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 ThreeNine Months Ended March 31,September 30, 2020 and 2019

Our net cash used inprovided by operating activities was $2.0$20.9 million for the threenine months ended March 31,September 30, 2020 compared to $8.5net cash used of $4.9 million in 2019. We had a net incomeloss of $0.5$2.4 million in 2020 compared to $2.3net income of $3.2 million in 2019.

Changes in our operating assets and liabilities resulted in cash used inprovided by operating activities of $4.9$16.1 million in 2020. ADecreases in inventories of $23.9 million primarily due to efforts to reduce debt and accounts receivable of $8.6 million due to decreased sales were the main sources of cash. The main uses of cash were a decrease in accrued and other current liabilities of $8.3$8.4 million, was the main use of cash, offset by a decrease in trade accounts payable of $5.2 million as a result of the decrease in inventory and lease payments of $4.5$2.7 million.

Net cash used in investing activities was $0.8 million in 2020 compared to $0.3 million in 2019.

Net cash provided by financing activities was $2.3 million in 2020 compared to $7.6$1.7 million in 2019. The increase was primarily due to expenditures for IT equipment, including software and infrastructure, and machinery and equipment.

Net cash used in financing activities was $22.7 million in 2020 compared to net cash provided by financing activities of $5.3 million in 2019. Net borrowingspayments on the revolver of $2.4$28.2 million were the primary source for financing activitiesuses of cash in 2020, offset by the Paycheck Protection Plan loan of $6.2 million received in the second quarter of 2020.

Liquidity and Indebtedness

Our principal source of liquidity at March 31,September 30, 2020 was working capital of $141.5$113.8 million compared to $138.5 million at December 31, 2019. We also had available borrowing capacity of $27.4$30.9 million at March 31,September 30, 2020 and $22.8 million at December 31, 2019 under our loan agreement. The availability at March 31,September 30, 2020 is net of outstanding letters of credit of $0.7 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 March 31,September 30, 2020.

There were no material changes in non-cancellable purchase obligations since December 31, 2019.

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, 2019.

Item 4. Controls and Procedures

As of March 31,September 30, 2020, 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 periodquarter ended March 31,September 30, 2020, 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

The COVID-19 pandemic, efforts to mitigate or disrupt the pandemic and the related weak, or weakening of, economic or other negative conditions, have impactedhad a negative impact on our business, and the duration and extent of the pandemic could result in a materialprolong or increase the adverse effect on our operations, liquidity, financial condition and financial results.impact.

A novel strain of coronavirus (COVID-19) was first identified in Wuhan, China in December 2019 and subsequently declared a pandemic by the World Health Organization. ToAs of the date of this outbreak, which has surfaced in nearly all regions aroundreport, the world,virus continues to spread and there is no effective vaccine available. The preventative measures taken to contain or mitigate the outbreak have caused, and are continuing to cause, business slowdown or shutdown in affected areas and significant disruption in the financial markets both globally and in the United States, which could lead to a decline in capital spending, and in turn further impact, possibly materially, our business, sales, financial condition and results of operations. It is currently not practicable to predict the precise potential impact, as well as the extent of any impact, of the COVID-19 pandemic on our business, and on the global economy as a whole. It is also currently not possible to predict how long the pandemic will last or the time that it will take for economic activity to return to prior levels. A prolonged situation could have a significant adverse effect on economies and financial markets globally, potentially leading to a significant worldwide economic downturn, which could have a significant adverse effect on our business, operating results and financial condition.

The extent to which the COVID-19 pandemic adversely affects our business, results of operations, and financial condition will likely depend on numerous evolving factors which are highly uncertain and cannot be predicted, including but not limited to:

We intend to continue to monitor the situation and adjust our current policies and practices as more information and guidance become available.

Other than this item, there were no material changes in the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.

Item 2 –2.  Unregistered Sales of Equity Securities and Use of ProceedsProceeds.

Our 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.

No shares of common stock were purchased during the three months ended March 31,September 30, 2020. As of March 31,September 30, 2020, $8.1 million remained available under the repurchase authorization.

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.

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.