| Organization and Summary of Significant Accounting Policies | 1. Organization and Summary of Significant Accounting Policies Description of Business Houston
Wire & Cable Company (the “Company”), through its wholly owned subsidiaries, provides industrial products to the
U.S. market through twenty-two locations in fourteen states throughout the United States. The Company has no other business activity. Basis of Presentation and Principles
of Consolidation The
consolidated financial statements include the accounts of the Company and its subsidiaries and have been prepared following accounting
principles generally accepted in the United States (“GAAP”) and the requirements of the Securities and Exchange Commission
(“SEC”). The financial statements include all normal and recurring adjustments that are necessary for a fair presentation
of the Company’s financial position and operating results. All significant inter-company balances and transactions have
been eliminated. Use of Estimates The
preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. The most significant estimates are those relating to
the allowance for doubtful accounts, the refund liability, the inventory obsolescence reserve, vendor rebates, the realization
of deferred tax assets and the valuation of goodwill and indefinite-lived assets. Actual results could differ materially from
the estimates and assumptions used for the preparation of the financial statements. Reclassifications Certain
prior period amounts have been reclassified to conform to the current period presentation. Accounts Receivable Accounts
receivable consists primarily of receivables from customers, less an allowance for doubtful accounts of $0.2 million at December
31, 2019 and 2018. The Company has no contractual repurchase arrangements with its customers. Credit losses have been within management’s
expectations. Inventories Inventories
are carried at the lower of cost, using the average cost method, and net realizable value and consist primarily of goods purchased
for resale, less a reserve for obsolescence and unusable items and unamortized vendor rebates. The reserve for inventory is based
upon a number of factors, including the experience of the purchasing and sales departments, age of the inventory, new product
offerings, and other factors. The reserve for inventory may periodically require adjustment as the factors identified above change. Vendor Rebates Under
many of the Company’s arrangements with its vendors, the Company receives a rebate of a specified amount of consideration,
payable when the Company achieves any of a number of measures, generally related to the volume level of purchases from the vendors.
The Company accounts for such rebates as a reduction of the prices of the vendors’ products and therefore as a reduction
of inventory until it sells the products, at which time such rebates reduce cost of sales in the accompanying consolidated statements
of operations. Throughout the year, the Company estimates the amount of the rebates earned based on purchases to date relative
to the total purchase levels expected to be achieved during the rebate period. At year end, the Company recalculates the rebates
earned based on actual purchases made. Property and Equipment The Company provides
for depreciation on a straight-line method over the following estimated useful lives:
Buildings 25 to 30 years
Machinery and equipment 3 to 10 years Leasehold improvements
are depreciated over their estimated life or the term of the lease, whichever is shorter. Total
depreciation expense was approximately $1.7 million for the year ended December 31, 2019, and $1.4 million for each of the years
ended December 31, 2018 and 2017. Goodwill Goodwill
represents the excess of the amount paid to acquire businesses over the estimated fair value of tangible assets and identifiable
intangible assets acquired, less liabilities assumed. Determining the fair value of assets acquired and liabilities assumed
requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions
with respect to future cash flows, discount rates and asset lives among other items. At December 31, 2019, the goodwill balance
was $22.4 million, representing 9.3% of the Company’s total assets. The
Company conducts impairment testing for goodwill annually in the fourth quarter of its fiscal year and more frequently, on an
interim basis, when an event occurs or circumstances change that indicate that the fair value of a reporting unit may have declined
below its carrying value. Events or circumstances which could indicate a probable impairment include, but are not limited to,
financial performance, industry and market conditions, macroeconomic conditions, reporting unit-specific events, historical results
of goodwill impairment testing and the timing of the last performance of a quantitative assessment. The
Company tests goodwill at the reporting unit level, which is defined as an operating segment or one level below an operating segment
that constitutes a business for which financial information is available and is regularly reviewed by management. The Company
determined that it has four reporting units for this purpose. Before testing goodwill, the Company considers whether or not to
first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it
is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount and whether an impairment test
is required. If as a result of the qualitative assessment, the Company determines that an impairment test is required, or alternatively,
if the Company elects to forego the qualitative assessment, the Company performs a quantitative assessment and records an impairment
to goodwill to the extent the carrying amount of the reporting unit, including goodwill, exceeds the fair value of the reporting
unit. See Note 4 for more details. Intangibles Intangible
assets, from the acquisition of Southwest and Southern in 2010 and the acquisition of Vertex in 2016, consist of customer relationships
and tradenames. The customer relationships are amortized over 6 to 9 year useful lives. If events or circumstances were to indicate
that any of the Company’s definite-lived intangible assets might be impaired, the Company would assess recoverability based
on the estimated undiscounted future cash flows to be generated from the applicable intangible asset. If the undiscounted cash
flows were less than the carrying value, then the intangible assets would be written down to their fair value. Tradenames have
an indefinite life and are not being amortized and are tested for impairment on an annual basis. See Note 4 for more details. Leases At the inception
of a contract, the Company assesses whether the contract is, or contains, a lease. The assessment is based on (1) whether the
contract involves the use of a distinct identified asset, (2) whether the Company obtains the right to substantially all the economic
benefit from the use of the asset throughout the period, and (3) whether the Company has the right to direct the use of the asset.
All significant lease arrangements are recognized at lease commencement. Leases with a lease term of 12 months or less at inception
are not recorded on the Consolidated Balance Sheets and are expensed on a straight-line basis over the lease term in the Consolidated
Statements of Operations. The Company determines the lease term by assuming the exercise of renewal options that are reasonably
certain. As most of the leases do not provide an implicit interest rate, the Company uses the incremental borrowing rate which
approximates to a collateralized rate at the commencement date to determine the present value of future payments that are reasonably
certain. See Note 11 for more details. Self Insurance The
Company retains certain self-insurance risks for health benefits. The Company limits its exposure to these self-insurance risks
by maintaining excess and aggregate liability coverage. Self-insurance reserves are established based on claims filed and estimates
of claims incurred but not reported. The estimates are based on information provided to the Company by its claims administrators. Segment Reporting The
Company operates in a single operating and reportable segment, sales of industrial products, including electrical and mechanical
wire and cable, industrial fasteners, hardware and related services to the U.S. market. The Company’s chief operating decision
maker (“CODM”) is its Chief Executive Officer. The CODM makes operational and resource decisions based on company-wide
sales and margin performance compared to the established strategic goals of the Company. Revenue Recognition, Returns &
Allowances The
Company’s primary source of revenue is the sale of industrial products based upon purchase orders or contracts with customers.
Revenue is recognized at a point in time once the Company has determined that the customer has obtained control over the product.
Control is typically deemed to have been transferred to the customer when the product is shipped, or delivered (either by customer
pickup or through common carrier). It is not normal Company practice to grant extended payment terms. Revenue is recognized net
of any sales taxes collected, which are subsequently remitted to the appropriate taxing authorities. The Company treats its transportation
costs (shipping and handling) as fulfillment costs and not as a separate performance obligation. These transportation costs are
recorded in cost of sales. The
amount of revenue recognized reflects the consideration the Company expects to be entitled to receive in exchange for products
sold. Revenue is recorded at the transaction price net of estimates of variable consideration, which may include product returns,
trade discounts and allowances. The Company accrues for variable consideration using the expected value method. Estimates of variable
consideration are included in revenue to the extent that it is probable that a significant reversal in the amount of cumulative
revenue recognized will not occur. Customers
are permitted to return product only on a case-by-case basis. Product exchanges are handled as a credit, with any replacement
item being re-invoiced to the customer. Customer returns are recorded as a refund liability, included in accrued and other liabilities,
with a corresponding reduction to sales. The Company has no installation obligations. The
Company may offer sales incentives, which are accrued monthly as an adjustment to sales. Shipping and
Handling The
Company incurs shipping and handling costs in the normal course of business. Freight amounts invoiced to customers are included
as sales, and freight charges are included as a component of cost of sales. Credit Risk No
single customer accounted for 10% or more of the Company’s sales in 2019, 2018 or 2017. The Company performs periodic credit
evaluations of its customers and generally does not require collateral. Financial
Instruments The
carrying values of accounts receivable, trade accounts payable and accrued and other current liabilities approximate fair value,
due to the short maturity of these instruments. Stock-Based Compensation Restricted
stock awards, units and cash awards are valued at the closing price of the Company’s stock on the grant date and are granted
under the Company’s 2017 Stock Plan. Stock options issued under the Company’s now-expired 2006 Stock Plan have an
exercise price equal to the fair value of the Company’s stock on the grant date. The Company recognizes compensation expense
ratably over the vesting period. The Company’s stock-based compensation expense is included in salaries and commissions
expense for employees and in other operating expenses for non-employee directors in the accompanying consolidated statements of
operations. The
Company receives a tax deduction for certain stock option exercises in the period in which the options are exercised, generally
for the excess of the market price on the date of exercise over the exercise price of the options. The Company reports excess
tax benefits from the award of equity instruments as operating cash flows. Excess tax benefits result when a deduction reported
for tax return purposes for an award of equity instruments exceeds the cumulative compensation cost for the instruments recognized
for financial reporting purposes. Income Taxes Deferred
tax assets and liabilities are determined based on differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse. A
valuation allowance for deferred tax assets is recognized when it is more-likely-than-not that some or all of the benefit from
the deferred tax assets will not be realized. To assess that likelihood, the Company uses its current financial position, results
of operations, both actual and forecasted, the reversal of deferred tax liabilities, and tax planning strategies to determine
whether a valuation allowance is required. Recently Adopted Accounting Standards The
Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) is the sole
source of authoritative GAAP other than SEC issued rules and regulations that apply only to SEC registrants. The FASB issues an
Accounting Standard Update (“ASU”) to communicate changes to the codification. The Company considers the applicability
and impact of all ASUs. The following are those recent ASUs that were recently adopted by the Company. In
February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Under the new guidance as amended, a lessee
is required to recognize a right-of use asset and a lease liability for leases greater than 1 year, both finance and operating
leases. This update was effective for public companies for fiscal years beginning after December 15, 2018. Under the transition
rules, an entity initially applies the new leases standard at the adoption date, and recognizes a cumulative effect adjustment
to the opening balance of retained earnings in the period of adoption and the comparative periods presented in the financial statements
continue to be in accordance with previously-existing GAAP. The Company adopted this ASU effective January 1, 2019. See Note 11
for detailed information. In
June 2018, the FASB issued ASU No. 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee
Share-Based Payment Accounting,” which simplifies the accounting for share-based payment arrangements with nonemployees
for goods and services. Under the ASU, the guidance on such payments to nonemployees is aligned with the accounting for share-based
payments granted to employees, including the measurement of equity-classified awards, which is fixed at the grant date under the
new guidance. The ASU superseded Subtopic 505-50, “Equity - Equity-Based Payments to Non-Employees,” and was effective
for public entities for interim and annual reporting periods beginning after December 15, 2018. The Company adopted this ASU in
the first quarter of 2019, and the adoption did not have a material impact on the Company’s consolidated financial statements. Recent Accounting Pronouncements
In
August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the
Disclosure Requirements for Fair Value Measurement.” The amendments in this update eliminate, add and modify certain disclosure
requirements for fair value measurements as part of the FASB’s disclosure framework project. The guidance is effective for
public companies beginning in the first quarter of 2020. The Company is currently assessing the impact of this ASU on its consolidated
financial statements. In
August 2018, the FASB issued ASU 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic
350-40); Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.”
The amendments in this update require implementation costs incurred by customers in cloud computing arrangements (i.e., hosting
arrangements) to be capitalized under the same premises of authoritative guidance for internal-use software, and deferred over
the non-cancellable term of the cloud computing arrangement plus any option renewal periods that are reasonably certain to be
exercised by the customer or for which the exercise is controlled by the service provider. The guidance is effective for public
companies beginning in the first quarter of 2020. The Company is currently assessing the impact of this ASU on its consolidated
financial statements. In
November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses.
This ASU, among other narrow-scope improvements, clarifies guidance around how to report expected recoveries. This ASU permits
organizations to record expected recoveries on assets purchased with credit deterioration. In addition to other narrow technical
improvements, the ASU also reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale
debt securities. The effective date and transition methodology are the same as in ASU 2016-13, Financial Instruments –
Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The FASB deferred the effective dates
of this ASU for smaller reporting companies (“SRC”) to fiscal years beginning after December 15, 2022. As of December
31, 2019, the Company qualifies as a SRC and will adopt this ASU in the first quarter of 2023. In December 2019, the
FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying
the Accounting for Income Taxes. This ASU removes specific exceptions to the general principles in Topic 740 in GAAP.
It eliminates the need for an organization to analyze whether certain exceptions apply in a given period. This ASU also
improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for: a) Franchise
taxes that are partially based on income; b) Transactions with a government that result in a step up in the tax basis of goodwill;
c) Separate financial statements of legal entities that are not subject to tax; and d) Enacted changes in tax laws in interim
periods. For public business entities, ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, and
interim periods within those fiscal years. The Company is currently assessing the impact of this ASU on its consolidated
financial statements. |
