HOUSTON WIRE & CABLE COMPANY
Consolidated Balance Sheets
(In thousands, except share data)
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|
September 30,
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|
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December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(unaudited)
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|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
42,929
|
|
|
$
|
46,250
|
|
Inventories, net
|
|
|
63,563
|
|
|
|
75,777
|
|
Income taxes
|
|
|
1,577
|
|
|
|
932
|
|
Prepaids
|
|
|
1,095
|
|
|
|
648
|
|
Total current assets
|
|
|
109,164
|
|
|
|
123,607
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
10,884
|
|
|
|
10,899
|
|
Intangible assets, net
|
|
|
4,734
|
|
|
|
5,984
|
|
Goodwill
|
|
|
12,504
|
|
|
|
14,866
|
|
Deferred income taxes
|
|
|
4,090
|
|
|
|
3,338
|
|
Other assets
|
|
|
415
|
|
|
|
419
|
|
Total assets
|
|
$
|
141,791
|
|
|
$
|
159,113
|
|
|
|
|
|
|
|
|
|
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Liabilities and stockholders' equity
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|
|
|
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Current liabilities:
|
|
|
|
|
|
|
|
|
Book overdraft
|
|
$
|
1,102
|
|
|
$
|
3,701
|
|
Trade accounts payable
|
|
|
8,488
|
|
|
|
6,380
|
|
Accrued and other current liabilities
|
|
|
11,053
|
|
|
|
9,568
|
|
Total current liabilities
|
|
|
20,643
|
|
|
|
19,649
|
|
|
|
|
|
|
|
|
|
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Debt
|
|
|
28,619
|
|
|
|
39,188
|
|
Other long term obligations
|
|
|
516
|
|
|
|
275
|
|
Total liabilities
|
|
|
49,778
|
|
|
|
59,112
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|
|
|
|
|
|
|
|
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Stockholders' equity:
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|
|
|
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Preferred stock, $0.001 par value; 5,000,000 shares authorized, none issued and outstanding
|
|
|
—
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|
|
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—
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|
Common stock, $0.001 par value; 100,000,000 shares authorized: 20,988,952 shares issued: 16,402,204 and 16,712,626 outstanding at September 30, 2016 and December 31, 2015, respectively
|
|
|
21
|
|
|
|
21
|
|
Additional paid-in-capital
|
|
|
55,007
|
|
|
|
54,621
|
|
Retained earnings
|
|
|
99,374
|
|
|
|
106,048
|
|
Treasury stock
|
|
|
(62,389
|
)
|
|
|
(60,689
|
)
|
Total stockholders' equity
|
|
|
92,013
|
|
|
|
100,001
|
|
Total liabilities and stockholders' equity
|
|
$
|
141,791
|
|
|
$
|
159,113
|
|
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)
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Three Months Ended
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Nine Months Ended
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|
|
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September 30,
|
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September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Sales
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|
$
|
65,222
|
|
|
$
|
78,260
|
|
|
$
|
192,387
|
|
|
$
|
237,819
|
|
Cost of sales
|
|
|
53,177
|
|
|
|
62,129
|
|
|
|
154,513
|
|
|
|
187,029
|
|
Gross profit
|
|
|
12,045
|
|
|
|
16,131
|
|
|
|
37,874
|
|
|
|
50,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Operating expenses:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and commissions
|
|
|
7,148
|
|
|
|
7,311
|
|
|
|
20,895
|
|
|
|
21,717
|
|
Other operating expenses
|
|
|
5,969
|
|
|
|
6,300
|
|
|
|
17,302
|
|
|
|
18,629
|
|
Depreciation and amortization
|
|
|
732
|
|
|
|
737
|
|
|
|
2,198
|
|
|
|
2,175
|
|
Impairment charge
|
|
|
—
|
|
|
|
—
|
|
|
|
2,384
|
|
|
|
2,994
|
|
Total operating expenses
|
|
|
13,849
|
|
|
|
14,348
|
|
|
|
42,779
|
|
|
|
45,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(1,804
|
)
|
|
|
1,783
|
|
|
|
(4,905
|
)
|
|
|
5,275
|
|
Interest expense
|
|
|
129
|
|
|
|
237
|
|
|
|
453
|
|
|
|
719
|
|
Income (loss) before income taxes
|
|
|
(1,933
|
)
|
|
|
1,546
|
|
|
|
(5,358
|
)
|
|
|
4,556
|
|
Income tax expense (benefit)
|
|
|
(494
|
)
|
|
|
870
|
|
|
|
(1,178
|
)
|
|
|
2,313
|
|
Net income (loss)
|
|
$
|
(1,439
|
)
|
|
$
|
676
|
|
|
$
|
(4,180
|
)
|
|
$
|
2,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Basic
|
|
$
|
(0.09
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.26
|
)
|
|
$
|
0.13
|
|
Diluted
|
|
$
|
(0.09
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.26
|
)
|
|
$
|
0.13
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,302,870
|
|
|
|
17,017,334
|
|
|
|
16,388,892
|
|
|
|
17,137,730
|
|
Diluted
|
|
|
16,302,870
|
|
|
|
17,072,128
|
|
|
|
16,388,892
|
|
|
|
17,190,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend declared per share
|
|
$
|
0.03
|
|
|
$
|
0.12
|
|
|
$
|
0.15
|
|
|
$
|
0.36
|
|
The accompanying Notes are an integral part
of these Consolidated Financial Statements.
HOUSTON WIRE & CABLE COMPANY
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
|
|
Nine Months
Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4,180
|
)
|
|
$
|
2,243
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Impairment charge
|
|
|
2,384
|
|
|
|
2,994
|
|
Depreciation and amortization
|
|
|
2,198
|
|
|
|
2,175
|
|
Amortization of unearned stock compensation
|
|
|
626
|
|
|
|
668
|
|
Provision for inventory obsolescence
|
|
|
355
|
|
|
|
351
|
|
Deferred income taxes
|
|
|
(752
|
)
|
|
|
(727
|
)
|
Other non-cash items
|
|
|
(11
|
)
|
|
|
70
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
3,360
|
|
|
|
10,370
|
|
Inventories
|
|
|
11,859
|
|
|
|
11,667
|
|
Book overdraft
|
|
|
(2,599
|
)
|
|
|
(808
|
)
|
Trade accounts payable
|
|
|
2,108
|
|
|
|
1,264
|
|
Accrued and other current liabilities
|
|
|
1,486
|
|
|
|
(278
|
)
|
Income taxes
|
|
|
(645
|
)
|
|
|
(909
|
)
|
Other operating activities
|
|
|
(230
|
)
|
|
|
(288
|
)
|
Net cash provided by operating activities
|
|
|
15,959
|
|
|
|
28,792
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Expenditures for property and equipment
|
|
|
(955
|
)
|
|
|
(2,946
|
)
|
Net cash used in investing activities
|
|
|
(955
|
)
|
|
|
(2,946
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Borrowings on revolver
|
|
|
195,914
|
|
|
|
233,187
|
|
Payments on revolver
|
|
|
(206,483
|
)
|
|
|
(248,208
|
)
|
Payment of dividends
|
|
|
(2,477
|
)
|
|
|
(6,166
|
)
|
Purchase of treasury stock
|
|
|
(1,958
|
)
|
|
|
(4,659
|
)
|
Net cash used in financing activities
|
|
|
(15,004
|
)
|
|
|
(25,846
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
—
|
|
|
|
—
|
|
Cash at beginning of period
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
—
|
|
|
$
|
—
|
|
The accompanying Notes are an integral part
of these Consolidated Financial Statements.
HOUSTON WIRE & CABLE COMPANY
Notes to Consolidated Financial Statements
(Unaudited)
1.
|
Basis of Presentation and Principles of Consolidation
|
Houston Wire & Cable Company (the “Company”),
through its wholly owned subsidiaries, provides wire and cable, hardware and related services to the U.S. market through eighteen
locations in thirteen states throughout the United States as of September 30, 2016. The Company has no other business activity.
The consolidated financial statements as
of September 30, 2016 and for the nine months ended September 30, 2016 and 2015 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 inter-company 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 inventory obsolescence reserve, the
reserve for returns and allowances, vendor rebates and asset impairments. 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, 2015 filed with the SEC.
Recent Accounting Pronouncements
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 recently
issued ASUs are relevant to the Company.
In August 2016, the FASB issued ASU No.
2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The amendments
in this ASU address eight cash flow issues with the intention of reducing current diversity in practice among business entities.
The Company will evaluate the eight issues in the amendment and determine if any changes are necessary for compliance. ASU 2016-15
is effective for annual and interim periods beginning after December 15, 2017; early adoption is permitted and should be applied
retrospectively where practical. The Company will determine the date of adoption, once the Company has evaluated the impact of
this ASU.
In March 2016, the FASB issued ASU No.
2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The
new guidance addresses several aspects of the accounting for share-based payment award transactions, including: (a) the recognition
of the income tax effects of awards in the income statement when the awards vest, forfeit, or are settled, thus eliminating additional
paid-in-capital pools, (b) classification of awards as either equity or liabilities, and (c) classification on the statement of
cash flows. This update is effective for public companies for fiscal years beginning after December 15, 2016 with early adoption
permitted. The Company is currently evaluating the elections the Company may make as well as the effects the adoption of this guidance
may have on the Company's consolidated financial statements and will adopt this ASU in the first quarter of 2017.
In February 2016, the FASB issued ASU No.
2016-02, “Leases (Topic 842).” Under the new guidance, a lessee will be required to recognize assets and liabilities
for leases greater than 1 year, regardless of whether they were previously accounted for as capital or operating leases. This update
is effective for public companies for fiscal years beginning after December 15, 2018 with early adoption permitted. The Company
is currently evaluating the impacts of adopting as well as the timing of when it will adopt this ASU.
In November 2015, the FASB issued ASU No.
2015-17, “Income Taxes (Topic 740) — Balance Sheet Classification of Deferred Taxes.” ASU No. 2015-17 eliminates
the requirement to classify deferred tax assets and liabilities as current or long-term based on how the related assets or liabilities
are classified. All deferred taxes are now required to be classified as long-term including any associated valuation allowances.
This guidance is effective for public companies for fiscal years beginning after December 15, 2016 with early adoption permitted
on either a prospective or retrospective basis. The Company adopted this guidance in the third quarter and has applied it retrospectively.
It did not have a material impact on the consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11,
“Simplifying the Measurement of Inventory (Topic 330),” which changes guidance for subsequent measurement of inventory
within the scope of the update from the lower of cost or market to the lower of cost and net realizable value. This update is effective
for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. The Company does not believe
there will be any material impact upon the adoption of this guidance on the Company's consolidated financial statements and will
adopt this ASU in the first quarter of 2017.
In April 2015, the FASB issued ASU No.
2015-03, “Simplifying the Presentation of Debt Issuance Costs (Subtopic 835-30).” The amendments in this ASU require
debt issuance costs to be presented on the balance sheet as a direct reduction from the carrying amount of the related debt liability.
However, the guidance in this ASU did not address the presentation or subsequent measurement of debt issuance costs related to
line-of-credit arrangements. As a result, in August 2015 the FASB issued ASU No. 2015-15 “Interest—Imputation of Interest
(Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Agreements,”
to clarify that, with respect to a line-of-credit agreement, the SEC staff would not object to an entity deferring and presenting
debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit
arrangement. The Company adopted this guidance in the first quarter and will continue to treat debt issuance costs associated with
its revolving credit facility as a deferred asset and amortize the deferred asset over the term of the credit agreement. Therefore,
the adoption did not have any impact on the Company’s financial position or results of operations.
In May 2014, the FASB issued ASU No. 2014-09,
“Revenue from Contracts with Customers (Topic 606),” which supersedes the revenue recognition requirements in ASC Topic
605, “Revenue Recognition,” and most industry-specific guidance. This ASU is based on the principle that revenue is
recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount,
timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in
judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The amendments in the ASU must be applied
using one of two retrospective methods and are effective for annual and interim periods beginning after December 15, 2017. Early
adoption for annual and interim periods beginning after December 31, 2016 is permitted. The Company is still evaluating the impact
of this ASU on its financial position and results of operations, timing of adoption, and which implementation method the Company
will use.
2.
|
Earnings (loss) per Share
|
Basic earnings (loss) per share are calculated
by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings (loss) per share include
the dilutive effects of stock options and unvested restricted stock awards and units.
The following reconciles the denominator
used in the calculation of diluted earnings (loss) per share:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
for basic earnings (loss) per share
|
|
|
16,302,870
|
|
|
|
17,017,334
|
|
|
|
16,388,892
|
|
|
|
17,137,730
|
|
Effect
of dilutive securities
|
|
|
—
|
|
|
|
54,794
|
|
|
|
—
|
|
|
|
52,934
|
|
Weighted average common
shares for diluted earnings (loss) per share
|
|
|
16,302,870
|
|
|
|
17,072,128
|
|
|
|
16,388,892
|
|
|
|
17,190,664
|
|
The weighted average common shares for
diluted earnings (loss) per share exclude stock options and unvested restricted stock awards and units to purchase 736,968 and
632,736 shares for the three months ended September 30, 2016 and 2015, respectively, and 772,012 and 606,405 shares for the nine
months ended September 30, 2016 and 2015. These securities have been excluded from the calculation, as including them would have
an anti-dilutive effect on earnings (loss) per share for the respective periods.
3.
|
Impairment of Goodwill and Intangibles
|
During the second quarter of 2016 and prior
to the annual impairment test of goodwill in October, the Company concluded that impairment indicators existed at the Houston Wire
& Cable (HWC) reporting unit, due to a decline in the overall financial performance, decrease in the market capitalization
and overall market demand. In the second quarter, the Company also concluded that there were impairment indicators for certain
of the Company’s tradenames related to the Southwest Wire Rope (Southwest) and Southern Wire reporting units.
The Company performed step one of the impairment
test and concluded that the fair value of the HWC reporting unit was less than its carrying value. Therefore, the Company performed
step two of the impairment analysis. The step one test also indicated that one of the tradenames at Southern Wire was impaired,
and the Company recorded a non-cash charge of less than $0.1 million against the tradenames during the quarter ended June 30, 2016.
Step two of the impairment analysis measures
the impairment charge by allocating the HWC reporting unit’s fair value to all of the assets and liabilities of the reporting
unit in a hypothetical analysis that calculates implied fair value of goodwill in the same manner as if the reporting unit was
being acquired in a business combination and recording the deferred tax impact. Any excess of the carrying value of the reporting
unit’s goodwill over the implied fair value of the reporting unit’s goodwill is recorded as an impairment loss.
The fair value of the HWC reporting unit
was estimated using a discounted cash flow model (income approach) and a guideline public company method, giving 50% weight to
each. The material assumptions used included a weighted average cost of capital of 11.0% and a long-term growth rate of 3-7% for
the income approach and an adjusted invested capital multiple of 0.2 times revenue and a control premium of 10.0% for the guideline
public company method. The carrying value of the HWC reporting unit’s goodwill was $2.4 million and its implied fair value
resulting from step two of the impairment test was zero. As a result, the Company recorded a non-cash goodwill impairment charge
of $2.4 million during the quarter ended June 30, 2016.
The fair value for goodwill and tradenames
(indefinite-lived intangible assets) were both determined using a Level 3 measurement approach. The Level 3 value of all of the
Company’s tradenames at June 30, 2016 was $4.5 million.
During the second quarter of 2015 and prior
to the annual impairment test of goodwill in October, the Company concluded that impairment indicators existed at the Southwest
Wire Rope (Southwest) reporting unit, due to a decline in the overall financial performance and overall market demand. Impairment
indicators also existed for certain of the Company’s tradenames related to the Southwest and Southern Wire reporting units.
After performing the necessary analysis
the Company recorded, during the quarter ended June 30, 2015, a non-cash charge of $0.4 million against the tradenames and a non-cash
goodwill impairment charge of $2.6 million.
On October 1, 2015, HWC Wire & Cable
Company, as borrower, entered into the Fourth Amended and Restated Loan and Security Agreement (the “2015 Loan Agreement”),
with Bank of America, N.A., as agent and lender, and the Company, as guarantor, executed a Third Amended and Restated Guaranty
of the borrower’s obligations thereunder. The 2015 Loan Agreement provides a $100 million revolving credit facility, bears
interest at the agent’s base rate, with a London Interbank Offered Rate (“LIBOR”) rate option, and expires on
September 30, 2020. Under certain circumstances, the Company may request an increase in the commitment by an additional $50 million.
The 2015 Loan Agreement is secured by substantially all of the property of the Company, other than real estate. Availability under
the 2015 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 2015 Loan Agreement was amended on October 3, 2016 in connection with the Vertex acquisition.
See Note 8.
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.
The 2015 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 2015 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 2015
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 as
September 30, 2020. At September 30, 2016, 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.”
During each of the first and second quarters
of 2016, the Board of Directors approved a quarterly dividend of $0.06 per share payable to stockholders and during the third quarter
of 2016, the Board of Directors approved a quarterly dividend of $0.03 per share payable to stockholders. Dividends paid were
$2.5 million and $6.2 million during the nine months ended September 30, 2016 and 2015, respectively.
6.
|
Stock Based Compensation
|
Stock Option Awards
There were no stock option awards granted
during the first nine months of 2016 or 2015.
Restricted Stock Awards and Restricted Stock Units
Following the Annual Meeting of Stockholders
on May 3, 2016, the Company awarded restricted stock units with a value of $50,000 to each non-employee director who was elected
or re-elected, for an aggregate of 35,515 restricted stock units. Each award of restricted stock units vests at the date of the
2017 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 August 4, 2016, the Company granted
7,000 shares of restricted stock to a new member of the management team. These shares vest in one third increments, on the third,
fourth and fifth anniversaries of the date of grant as long as the recipient is then employed by the Company. Any dividends declared
will be accrued and paid to the recipient if and when the related shares vest.
Total stock-based compensation cost was
$0.2 million for each of the three months ended September 30, 2016 and 2015 and $0.6 million and $0.7 million for the nine months
ended September 30, 2016 and 2015, respectively, and is included in salaries and commissions.
7.
|
Commitments and Contingencies
|
As part of the acquisition of Southwest
Wire and Southern Wire in 2010, the Company assumed the liability for the post-remediation monitoring of the water quality at one
of the acquired facilities in Louisiana. The expected liability of $0.1 million at September 30, 2016 relates to the cost of the
monitoring, which the Company estimates will be incurred over approximately the next two years, and also the cost to plug the wells.
Remediation work was completed prior to the acquisition in accordance with the requirements of the Louisiana Department of Environmental
Quality.
The Company, along with many other defendants,
has been named in a number of lawsuits in the state courts of Minnesota, North Dakota, and South Dakota alleging that certain wire
and cable which may have contained asbestos caused injury to the plaintiffs who were exposed to this wire and cable. These lawsuits
are individual personal injury suits that seek unspecified amounts of money damages as the sole remedy. It is not clear whether
the alleged injuries occurred as a result of the wire and cable in question or whether the Company, in fact, distributed the wire
and cable alleged to have caused any injuries. The Company maintains general liability insurance that, to date, has
covered the defense of and all costs associated with these claims. In addition, the Company did not manufacture any of the wire
and cable at issue, and the Company would rely on any warranties from the manufacturers of such cable if it were determined that
any of the wire or cable that the Company distributed contained asbestos which caused injury to any of these plaintiffs. In connection
with ALLTEL’s sale of the Company in 1997, ALLTEL provided indemnities with respect to costs and damages associated with
these claims that the Company believes it could enforce if its insurance coverage proves inadequate.
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 from operations.
On October 3, 2016,
HWC Wire & Cable Company (the “Buyer”), a subsidiary of the Company acquired all of the issued and outstanding
shares of common stock of Vertex Corporate Holdings, Inc. and its subsidiaries (“Vertex”) from DXP Enterprises, Inc.
(“DXP”) pursuant to a Stock Purchase Agreement, dated as of October 3, 2016 between DXP and the Buyer (the “Purchase
Agreement”). The Company has guaranteed the obligations of the Buyer under the Purchase Agreement. Vertex is engaged in the
wholesale distribution of industrial fasteners.
The purchase price
for the acquisition consisted of $32.3 million in cash and is subject to a post-closing adjustment based on the net working capital
of Vertex as of the closing date. The Buyer financed the payment of the purchase price through borrowings under an amendment
to the 2015 Loan Agreement.
In addition, the
Company granted 21,000 shares of restricted stock to four members of the Vertex management team. The shares will vest and
declared dividends will be accrued, subject to their employment with the Company.
Also on October 3,
2016, in connection with the Vertex acquisition, the Buyer, the Company, Vertex, and Bank of America, N.A., as agent and lender,
entered into a First Amendment to the Fourth Amended and Restated Loan and Security Agreement (the “Loan Agreement Amendment”)
amending the 2015 Loan Agreement. The Loan Agreement Amendment adds Vertex as borrower (and lien grantor) and provides the terms
for inclusion of Vertex’s eligible accounts receivable and eligible inventory in the borrowing base for the 2015 Loan Agreement.
The 2015 Loan Agreement was expanded to include incremental availability on eligible accounts receivable and inventory up to $5
million, which will be amortized quarterly, effective April 1, 2017, over two and a half years. Total borrowing capacity will remain
at $100 million.
Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The following Management’s Discussion
and Analysis (“MD&A”) is intended to help the reader understand the Company’s financial position and results
of operations. This 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, 2015.
Overview
We are one of the largest distributors
of wire and cable and related services to the U.S. market. We provide our customers with a single-source solution for wire and
cable, hardware and related services by offering a large selection of in-stock items, exceptional customer service and high levels
of product expertise.
Critical Accounting Policies
The preparation of our consolidated financial
statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and
expenses. On an on-going basis, we make and evaluate estimates and judgments, including those related to the inventory obsolescence
reserve, the reserve for returns and allowances, vendor rebates and asset impairments. 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, 2015 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 nine months ended September 30, 2016.
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, acquired
businesses 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, 2015, as well as any cautionary language in this report, provide examples of risks, uncertainties and events
that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements.
Results of Operations
The following table shows, for the periods
indicated, information derived from our consolidated statements of operations, expressed as a percentage of net sales for the periods
presented.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
81.5
|
%
|
|
|
79.4
|
%
|
|
|
80.3
|
%
|
|
|
78.6
|
%
|
Gross profit
|
|
|
18.5
|
%
|
|
|
20.6
|
%
|
|
|
19.7
|
%
|
|
|
21.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and commissions
|
|
|
11.0
|
%
|
|
|
9.3
|
%
|
|
|
10.9
|
%
|
|
|
9.1
|
%
|
Other operating expenses
|
|
|
9.2
|
%
|
|
|
8.1
|
%
|
|
|
9.0
|
%
|
|
|
7.8
|
%
|
Depreciation and amortization
|
|
|
1.1
|
%
|
|
|
0.9
|
%
|
|
|
1.1
|
%
|
|
|
0.9
|
%
|
Impairment charge
|
|
|
—
|
|
|
|
—
|
|
|
|
1.2
|
%
|
|
|
1.3
|
%
|
Total operating expenses
|
|
|
21.2
|
%
|
|
|
18.3
|
%
|
|
|
22.2
|
%
|
|
|
19.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(2.8
|
)%
|
|
|
2.3
|
%
|
|
|
(2.5
|
)%
|
|
|
2.2
|
%
|
Interest expense
|
|
|
0.2
|
%
|
|
|
0.3
|
%
|
|
|
0.2
|
%
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(3.0
|
)%
|
|
|
2.0
|
%
|
|
|
(2.8
|
)%
|
|
|
1.9
|
%
|
Income tax expense (benefit)
|
|
|
(0.8
|
)%
|
|
|
1.1
|
%
|
|
|
(0.6
|
)%
|
|
|
1.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(2.2
|
)%
|
|
|
0.9
|
%
|
|
|
(2.2
|
)%
|
|
|
0.9
|
%
|
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, 2016 and
2015
Sales
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
(Dollars in millions)
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Sales
|
|
$
|
65.2
|
|
|
$
|
78.3
|
|
|
$
|
(13.0
|
)
|
|
|
(16.7
|
)%
|
Our sales for the third quarter decreased
16.7% to $65.2 million from $78.3 million in 2015. We estimate that, when adjusted for the fluctuation in metal prices, sales for
2016 were down approximately 10% compared to the third quarter of 2015. Our project business, which targets end markets encompassing
Environmental Compliance, Engineering & Construction, Industrials, Utility Power Generation, and Mechanical Wire Rope, is estimated
to have decreased 52%, or approximately 45% on a metals adjusted basis, from 2015. Maintenance, Repair, and Operations (MRO) sales
increased 1%, or approximately 8% when adjusted for metals, from 2015.
Gross Profit
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
(Dollars in millions)
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Gross profit
|
|
$
|
12.0
|
|
|
$
|
16.1
|
|
|
$
|
(4.1
|
)
|
|
|
(25.3
|
)%
|
Gross margin
|
|
|
18.5
|
%
|
|
|
20.6
|
%
|
|
|
(2.1
|
)%
|
|
|
|
|
Gross profit decreased 25.3% to $12.0 million
in 2016 from $16.1 million in 2015. The decrease in gross profit is primarily attributable to the lower sales in 2016. Gross margin
(gross profit as a percent of sales) fell to 18.5% in 2016 from 20.6% in 2015, primarily due to competitive market conditions.
Operating Expenses
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
(Dollars in millions)
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and commissions
|
|
$
|
7.1
|
|
|
$
|
7.3
|
|
|
$
|
(0.2
|
)
|
|
|
(2.2
|
)%
|
Other operating expenses
|
|
|
6.0
|
|
|
|
6.3
|
|
|
|
(0.3
|
)
|
|
|
(5.3
|
)%
|
Depreciation and amortization
|
|
|
0.7
|
|
|
|
0.7
|
|
|
|
—
|
|
|
|
(0.7
|
)%
|
Total operating expenses
|
|
$
|
13.8
|
|
|
$
|
14.3
|
|
|
$
|
(0.5
|
)
|
|
|
(3.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses as a percent of sales
|
|
|
21.2
|
%
|
|
|
18.3
|
%
|
|
|
2.9
|
%
|
|
|
|
|
Note: Due to rounding, numbers may not add up to
total operating expenses.
Salaries and commissions decreased $0.2
million between the periods primarily due to a headcount reduction.
Other operating expenses decreased $0.3
million as facility costs decreased due to rationalization and lower employee related expenses including healthcare, offset by
increased professional fees, due to the Vertex acquisition and other administrative expenses.
Depreciation and amortization remained
consistent between the periods.
Operating expenses as a percentage of sales
increased to 21.2% in 2016 from 18.3% in 2015, as sales levels fell at a greater rate than the reduction in operating expenses.
Interest Expense
Interest expense decreased 45.6% from $0.2
million in 2015 to $0.1 million in 2016 due to lower average debt levels and lower interest rates. Average debt was $28.5 million
in 2016 compared to $41.5 million in 2015. The average effective interest rate was 1.7% in 2016 compared to 2.2% in 2015.
Income Taxes
We recorded an income tax benefit of $0.5
million in 2016, due to the pre-tax loss, compared to the $0.9 million income tax expense in the prior year period. The effective
income tax rate decreased to 25.6% in 2016 from 56.3% in 2015. The 2016 income tax benefit was net of a $0.2 million charge resulting
from the write-off of deferred tax assets related to share-based awards that vested or were forfeited during the quarter. In 2015,
the effective tax rate for the third quarter was impacted by the non-deductible goodwill impairment. If the Company's stock price
remains below the grant-date values of share-based compensation, future forfeitures, vesting and exercises will result in charges
to income tax expense, which will negatively impact the effective tax rate.
Net Income (Loss)
We incurred a net loss of $1.4 million
in 2016 compared to net income of $0.7 million in 2015, primarily due to the decline in sales and the resulting decrease in gross
profit.
Comparison of the Nine Months Ended September 30, 2016 and
2015
Sales
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
(Dollars in millions)
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Sales
|
|
$
|
192.4
|
|
|
$
|
237.8
|
|
|
$
|
(45.4
|
)
|
|
|
(19.1
|
)%
|
Our sales for the nine month period decreased
19.1% to $192.4 million in 2016 from $237.8 million in 2015. We estimate that, when adjusted for the fluctuation in metal prices,
sales for 2016 were down approximately 11% compared to the first nine months of 2015. Our project business, which targets end
markets encompassing Environmental Compliance, Engineering & Construction, Industrials, Utility Power Generation, and Mechanical
Wire Rope, is estimated to have decreased 38%, or approximately 30% on a metals adjusted basis, from 2015. MRO sales fell 10%,
or approximately 2% when adjusted for metals, from 2015.
Gross Profit
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
(Dollars in millions)
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Gross profit
|
|
$
|
37.9
|
|
|
$
|
50.8
|
|
|
$
|
(12.9
|
)
|
|
|
(25.4
|
)%
|
Gross margin
|
|
|
19.7
|
%
|
|
|
21.4
|
%
|
|
|
(1.7
|
)%
|
|
|
|
|
Gross profit decreased 25.4% to $37.9 million
in 2016 from $50.8 million in 2015. The decrease in gross profit was primarily attributable to the lower sales in 2016. Gross margin
decreased to 19.7% in 2016 from 21.4% in 2015, primarily due to competitive market conditions.
Operating Expenses
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
(Dollars in millions)
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and commissions
|
|
$
|
20.9
|
|
|
$
|
21.7
|
|
|
$
|
(0.8
|
)
|
|
|
(3.8
|
)%
|
Other operating expenses
|
|
|
17.3
|
|
|
|
18.6
|
|
|
|
(1.3
|
)
|
|
|
(7.1
|
)%
|
Depreciation and amortization
|
|
|
2.2
|
|
|
|
2.2
|
|
|
|
—
|
|
|
|
1.1
|
%
|
Impairment charge
|
|
|
2.4
|
|
|
|
3.0
|
|
|
|
(0.6
|
)
|
|
|
(20.4
|
)%
|
Total operating expenses
|
|
$
|
42.8
|
|
|
$
|
45.5
|
|
|
$
|
(2.7
|
)
|
|
|
(6.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses as a percent of sales
|
|
|
22.2
|
%
|
|
|
19.1
|
%
|
|
|
3.1
|
%
|
|
|
|
|
Note: Due to rounding, numbers may not add up to
total operating expenses.
Salaries and commissions decreased $0.8
million between the periods as sales and gross margin levels declined reducing commissions and due to a lower headcount.
Other operating expenses decreased $1.3
million due to a decrease in facility occupancy costs, lower employee related expenses including healthcare due to a lower headcount
and the absence of moving costs incurred with the 2015 consolidation of the Southwest Houston facilities, offset by increased professional
fees due to the Vertex acquisition.
Depreciation and amortization remained
consistent between the periods.
The impairment charge in 2016 relates to
the write-off of goodwill on the HWC reporting unit and the write-down of tradenames at the Southern Wire reporting unit. In 2015
the impairment consisted of the write-off of goodwill at the Southwest reporting unit and the write-down of tradenames at the Southwest
and Southern Wire reporting units. (See Note 3)
Operating expenses as a percentage of sales
increased to 22.2% in 2016 from 19.1% in 2015, as sales levels fell at a greater rate than the reduction in operating expenses.
Interest Expense
Interest expense decreased 37.0% to $0.5
million in 2016 from $0.7 million in 2015 due to lower average debt levels and lower interest rates. Average debt was $32.4 million
in 2016 compared to $45.2 million in 2015. The average effective interest rate fell to 1.7% in 2016 from 2.1% in the prior year
period.
Income Taxes
The income tax benefit of $1.2 million
changed from the $2.3 million expense in 2015, primarily due to the pre-tax loss incurred in the 2016 period. The effective
income tax rate decreased to 22.0% in 2016 from 50.8% in 2015. The 2016 rate was impacted by the $0.3 million charge resulting
from the write-off of deferred tax assets related to share-based awards that vested or were forfeited in 2016 and the non-deductible
portion of the goodwill impairment of $0.5 million. The 2015 rate of 50.8% was due to the non-deductible portion of the impairment
charge.
Net Income (Loss)
We incurred a net loss of $4.2 million
in 2016 compared to net income of $2.2 million in 2015, which was due to the sales shortfall and the resulting decrease in gross
profit.
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 and petrochemical products are
components of the wire and cable and related hardware 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, dividend payments, our stock repurchase program 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:
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·
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the adequacy of available bank lines of credit;
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·
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cash flows generated from operating activities;
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·
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capital expenditures;
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·
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additional stock repurchases;
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·
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payment of dividends;
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·
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acquisitions; and
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·
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the ability to attract long-term capital with satisfactory terms
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Comparison of the Nine Months Ended September 30, 2016 and
2015
Our net cash provided by operating activities
was $16.0 million for the nine months ended September 30, 2016 compared to $28.8 million in 2015. We had a net loss of $4.2 million
in 2016 compared to net income of $2.2 million in 2015.
Changes in our operating assets and liabilities
provided cash from operating activities of $15.3 million in 2016. A reduction in our inventory investment of $11.9 million as inventory
profiles were reduced to align with current activity levels, a decrease in accounts receivables of $3.4 million due to the decrease
in sales and an increase in accounts payable of $2.1 million were the main sources of cash. Partially offsetting these sources
of cash was the reduction of the book overdraft of $2.6 million.
Net cash used in investing activities was
$1.0 million in 2016 compared to $2.9 million in 2015. The decrease was primarily attributable to the renovation costs of the Southwest
Wire Rope facility consolidation in 2015 and miscellaneous equipment purchases.
Net cash used in financing activities was
$15.0 million in 2016 compared to $25.8 million in 2015. Net payments on the revolver of $10.6 million, the payment of dividends
of $2.5 million and the purchase of treasury stock of $2.0 million were the components of financing activities in 2016.
Indebtedness
Our principal source of liquidity at September
30, 2016 was working capital of $88.5 million compared to $104.0 million at December 31, 2015. We also had additional available
borrowing capacity of approximately $44.8 million at September 30, 2016 and $41.5 million at December 31, 2015 under our loan agreement.
The availability at September 30, 2016 is net of outstanding letters of credit of less than $0.1 million.
On October 3, 2016, we purchased Vertex,
which was funded under the amended 2015 Loan Agreement. See Note 8.
We believe that we will have adequate availability
of capital to fund our present operations, meet our commitments on our existing debt, fund our dividend payments and stock repurchase
program, and fund anticipated growth over the next twelve months, including expansion in existing and targeted market areas. We
continually seek potential acquisitions and from time to time hold discussions with acquisition candidates. If suitable acquisition
opportunities or working capital needs arise that would require additional financing, we believe that our financial position and
earnings history provide a solid base for obtaining additional financing resources at competitive rates and terms. Additionally,
based on market conditions, we may decide to issue additional shares of common or preferred stock to raise funds.
Contractual Obligations
The following table summarizes our loan
commitment at September 30, 2016:
In millions
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Total
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Less than
1 year
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1-3 years
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3-5 years
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More
than
5 years
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|
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Total debt
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$
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28.6
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|
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$
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—
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|
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$
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—
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|
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$
|
28.6
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|
|
$
|
—
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There were no material changes in operating
lease obligations or non-cancellable purchase obligations since December 31, 2015.