Houston Wire & Cable (HWCC) 10-Q 2019 Q3 Quarterly report

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

 For the quarterly period ended September 30, 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

  (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 class	Trading symbol	Name of each exchange on which registered
Common stock, par value $0.001 per share	HWCC	The 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 November 1, 2019 there were 16,399,484 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 September 30, 2019

INDEX

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets	2
	Consolidated Statements of Operations	3
	Consolidated Statements of Stockholders’ Equity	4
	Consolidated Statements of Cash Flows	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview	13
	Overview	13
	Cautionary Statement for Purposes of the “Safe Harbor”	13
	Results of Operations	14
	Impact of Inflation and Commodity Prices	17
	Liquidity and Capital Resources	17
	Contractual Obligations	17
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	18
Item 4.	Controls and Procedures	18
PART II. OTHER INFORMATION		18
Item 1.	Legal Proceedings	18
Item 1A.	Risk Factors	18
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	18
Item 3.	Defaults Upon Senior Securities	18
Item 4.	Mine Safety Disclosures	18
Item 5.	Other Information	18
Item 6.	Exhibits	19
Signature Page		20

1

HOUSTON WIRE & CABLE COMPANY

Consolidated Balance Sheets

(In thousands, except share data)

	September 30,			December 31,
	2019			2018
	(unaudited)
Assets
Current assets:
Cash	$	6		$	1,393
Accounts receivable, net:
Trade		55,681			52,946
Other		4,847			6,847
Inventories, net		105,867			94,325
Income taxes		1,323			435
Prepaids		1,508			737
Other current assets		768			—
Total current assets		170,000			156,683
Property and equipment, net		13,890			11,456
Intangible assets, net		10,596			11,179
Goodwill		22,353			22,353
Operating lease right-of-use assets, net		9,872			—
Deferred income taxes		578			930
Other assets		464			456
Total assets	$	227,753		$	203,057
Liabilities and stockholders’ equity
Current liabilities:
Book overdraft	$	—		$	—
Trade accounts payable		12,289			11,253
Accrued and other current liabilities		19,547			19,232
Operating lease liabilities		4,737			—
Total current liabilities		36,573			30,485
Debt		77,903			71,316
Operating lease long term liabilities		7,671			—
Other long term liabilities		1,658			578
Total liabilities		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: 16,408,916 and 16,611,651 outstanding at September 30, 2019 and December 31, 2018, respectively		21			21
Additional paid-in-capital		53,996			53,514
Retained earnings		109,282			105,975
Treasury stock		(59,351	)		(58,832	)
Total stockholders’ equity		103,948			100,678
Total liabilities and stockholders’ equity	$	227,753		$	203,057

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

2

HOUSTON WIRE & CABLE COMPANY

Consolidated Statements of Operations

(Unaudited)

(In thousands, except share and per share data)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019		2018
Sales	$	85,403		$	90,074		$	255,999	$	268,952
Cost of sales		65,972			68,681			194,772		204,723
Gross profit		19,431			21,393			61,227		64,229
Operating expenses:
Salaries and commissions		9,249			9,778			27,673		28,878
Other operating expenses		9,602			8,028			24,994		23,016
Depreciation and amortization		667			541			1,754		1,627
Total operating expenses		19,518			18,347			54,421		53,521
Operating income (loss)		(87	)		3,046			6,806		10,708
Interest expense		812			739			2,291		2,156
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 (loss) per share:
Basic	$	(0.04	)	$	0.15		$	0.19	$	0.43
Diluted	$	(0.04	)	$	0.15		$	0.19	$	0.42
Weighted average common shares outstanding:
Basic		16,443,446			16,404,805			16,475,131		16,380,807
Diluted		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

4

					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.

5

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.

6

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 September 30, 2019 and for the three and nine months ended September 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.

7

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				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Denominator:
Weighted average common shares for basic earnings per share		16,443,446		16,404,805		16,475,131		16,380,807
Effect of dilutive securities		—		158,440		82,937		111,410
Weighted average common shares for diluted earnings per share		16,443,446		16,563,245		16,558,068		16,492,217

Stock awards to purchase 658,420 and 223,477 shares of common stock for the three months ended September 30, 2019 and 2018, respectively, and 322,771 and 295,387 shares for the nine months ended September 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 September 30, 2019, the Company was in compliance with the availability-based covenant and fixed coverage ratio governing its indebtedness.

8

 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 nine 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, 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 September 30, 2019 and 2018, and $1.1 million for each of the nine months ended September 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

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

9

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 nine months ended September 30, 2019 were as follows:

		Three Months Ended		Nine Months Ended
Lease Type	Income Statement Classification	September 30, 2019
(Dollars in thousands)
Consolidated operating lease expense	Operating expenses	$	3,175	$	5,143
Consolidated financing lease amortization	Operating expenses		110		160
Consolidated financing lease interest	Interest expense		24		30
Consolidated financing lease expense			134		190
Net lease cost		$	3,309	$	5,333

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

Lease Type	Balance Sheet Classification	Amount
(Dollars in thousands)
Total ROU operating lease assets(1)	Operating lease right-of-use assets, net	$	9,872
Total ROU financing lease assets(2)	Property and equipment, net		1,972
Total lease assets		$	11,844
Total current operating lease obligation	Operating lease liabilities	$	4,737
Total current financing lease obligation	Accrued and other current liabilities		449
Total current lease obligation		$	5,186
Total long term operating lease obligation	Operating lease long term liabilities	$	7,671
Total long term financing lease obligation	Other long term liabilities		1,537
Total long term lease obligation		$	9,208

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

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

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

Maturity Date of Lease Liabilities	Operating Leases		Financing Leases		Total
(Dollars in thousands)
Year one	$	5,204	$	543	$	5,747
Year two		2,293		507		2,800
Year three		2,304		477		2,781
Year four		1,549		409		1,958
Year five		1,258		298		1,556
Subsequent years		1,159		—		1,159
Total lease payments		13,767		2,234		16,001
Less: Interest		1,359		248		1,607
Present value of lease liabilities	$	12,408	$	1,986	$	14,394

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

Lease Type	Weighted Average Term in Years		Weighted Average Interest Rate
Operating leases		4.7		5.4
Financing leases		4.4		5.3

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

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

On July 22, 2019, the Company modified certain terms of the lease agreement with the landlord of Vertex's Massachusetts facility, including early termination of the lease on November 30, 2019 and Vertex subleasing a portion of the space until the end of November. In connection with the modification, the Company recognized expense related to an early termination liability of approximately $2.2 million in the third quarter of 2019. The payment to the landlord will be made in November 2019. During the quarter, the Company also extended the terms of one of the Houston Wire & Cable facilities for five years, resulting in an increase to the ROU operating lease asset and obligation by approximately $2.2 million.

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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. 

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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 nine months ended September 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.

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Results of Operations

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

	Three Months Ended					Nine Months Ended
		September 30,					September 30,
		2019		2018			2019		2018
Sales		100.0	%	100.0	%		100.0	%	100.0	%
Cost of sales		77.2	%	76.2	%		76.1	%	76.1	%
Gross profit		22.8	%	23.8	%		23.9	%	23.9	%
Operating expenses:
Salaries and commissions		10.8	%	10.9	%		10.8	%	10.7	%
Other operating expenses		11.2	%	8.9	%		9.8	%	8.6	%
Depreciation and amortization		0.8	%	0.6	%		0.7	%	0.6	%
Total operating expenses		22.9	%	20.4	%		21.3	%	19.9	%
Operating income (loss)		(0.1	)%	3.4	%		2.7	%	4.0	%
Interest expense		1.0	%	0.8	%		0.9	%	0.8	%
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 (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 (loss).

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

Sales

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

Our sales for the third quarter decreased from $90.1 million in 2018 to $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, decreased 3%, while Maintenance, Repair, and Operations (MRO) sales decreased 6%, as compared to 2018.

Gross Profit 

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

Gross profit decreased 9.2% to $19.4 million in 2019 from $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) decreased slightly to 22.8% in 2019 from 23.8% in 2018 primarily due to declines in copper and competitive market conditions.

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Operating Expenses

	Three Months Ended
	September 30,
(Dollars in millions)	2019			2018			Change
Operating expenses:
Salaries and commissions	$	9.2		$	9.8		$	(0.5	)	(5.4	)%
Other operating expenses		9.6			8.0			1.6		19.6	%
Depreciation and amortization		0.7			0.5			0.1		23.3	%
Total operating expenses	$	19.5		$	18.3		$	1.2		6.4	%
Operating expenses as a percent of sales		22.9	%		20.4	%

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

Salaries and commissions decreased $0.5 million from the third quarter 2018 compared to 2019 due to lower commissions resulting from the reduction in sales and gross profit.

Other operating expenses increased due to the $2.2 million early termination liability related to Vertex’s Massachusetts facility lease, payment which will be made in the fourth quarter, offset by lower warehouse and insurance expenses.

Depreciation and amortization 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 22.9% in 2019 from 20.4% in 2018, as operating expenses increased combined with a reduction in sales.

Interest Expense

Interest expense increased slightly from $0.7 million in 2018 to $0.8 million in 2019 as a result of higher average debt and an increase in interest rates. Average debt was $78.0 million in 2019 compared to $76.8 million in 2018. The average effective interest rate was 4.0% in 2019 compared to 3.8% in 2018.

Income Taxes

The income tax benefit of $0.2 million increased from $0.1 million in the prior year period due to a pretax loss in the third quarter of 2019. The effective income tax rate for the quarter was 19.8% in 2019 compared to (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 incurred a net loss of $0.7 million in 2019 compared to net income of $2.5 million in 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 Nine Months Ended September 30, 2019 and 2018

Sales	Nine Months Ended
	September 30,
(Dollars in millions)	2019		2018		Change
Sales	$	256.0	$	269.0	$	(13.0	)	(4.8	)%

Our sales for the nine-month period decreased 4.8% from $269.0 million in 2018 to $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. 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 1%, and MRO decreased 6%, from 2018.

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Gross Profit 

	Nine Months Ended
	September 30,
(Dollars in millions)	2019			2018			Change
Gross profit	$	61.2		$	64.2		$	(3.0	)	(4.7	)%
Gross margin		23.9	%		23.9	%		—	%

Gross profit decreased 7.4% from $64.2 million in 2018 to $61.2 million in 2019. The decrease in gross profit was primarily attributable to the reduction in sales. Gross margin remained flat at 23.9% in 2019 and 2018.

Operating Expenses 

	Nine Months Ended
	September 30,
(Dollars in millions)	2019			2018			Change
Operating expenses:
Salaries and commissions	$	27.7		$	28.9		$	(1.2	)	(4.2	)%
Other operating expenses		25.0			23.0			2.0		8.6	%
Depreciation and amortization		1.8			1.6			0.1		7.8	%
Total operating expenses	$	54.4		$	53.5		$	0.9		1.7	%
Operating expenses as a percent of sales		21.3	%		19.9	%		1.4	%

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

Salaries and commissions decreased $1.2 million between the periods due to lower commissions resulting from the reduction in sales and gross profit.

Other operating expenses increased due to the $2.2 million early 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, offset by lower warehouse and insurance expenses.

Depreciation and amortization 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 21.3% in 2019 from 19.9% in 2018, as operating expenses increased while sales decreased.

Interest Expense

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

Income Taxes

The income tax expense of $1.3 million in 2019 decreased from $1.5 million in 2018 due to lower pretax income. The effective income tax rate increased to 29.0% in 2019 from 18.1% in 2018, primarily due to the release of the $1.0 million valuation allowance in the third quarter of 2018.

Net Income

We achieved net income of $3.2 million in 2019 compared to $7.0 million in 2018, primarily due to lower sales and the early termination liability related to Vertex’s Massachusetts facility lease.

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Impact of Inflation and Commodity Prices

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

Liquidity and Capital Resources

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

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

● the adequacy of available bank lines of credit;

● cash flows generated from operating activities;

● capital expenditures;

● acquisitions; and

● the ability to attract long-term capital with satisfactory terms

Comparison of the Nine Months Ended September 30, 2019 and 2018

Our net cash used in operating activities was $4.9 million for the nine months ended September 30, 2019 compared to net cash provided of $1.5 million in 2018. We had net income of $3.2 million in 2019 compared to $7.0 million in 2018.

Changes in our operating assets and liabilities resulted in cash used in operating activities of $17.8 million in 2019. An increase in inventories of $12.0 million, lease payments of $3.0 million, accounts receivable of $1.5 million and prepaid expenses of $0.8 million were the main uses of cash. Partially offsetting these uses of cash were increases in accounts payable and long-term liabilities of $1.0 million and $1.3 million, respectively, primarily due to increased inventory purchases and IT infrastructure equipment leases in the third quarter of 2019.

Net cash used in investing activities was $1.7 million in 2019 compared to $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 $5.3 million in 2019 compared to net cash used of $0.3 million in 2018. Net borrowings on the revolver of $6.6 million and the purchase of treasury stock of $1.1 million were the primary components of financing activities in 2019.

Indebtedness

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

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There were no material changes in 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 September 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 September 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 3 - Not applicable and has been omitted.

Item 4 - Not applicable and has been omitted.

Item 5 - Not applicable and has been omitted.  

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Item 6.  Exhibits

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

Exhibit Number	Document Description
10.1	Form of Performance Stock Unit Award Agreement for Key Employees
31.1	Certification by James L. Pokluda III pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification by 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 September 30, 2019 and December 31, 2018; (ii) the Consolidated Statements of Operations for the three and nine month periods ended September 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 nine month periods ended September 30, 2019 and 2018; and (v) Notes to the Consolidated Financial Statements.

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Signature

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

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

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