HOUSTON WIRE & CABLE COMPANY
Consolidated Balance Sheets
(In thousands, except share data)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
51,469
|
|
|
$
|
44,677
|
|
Inventories, net
|
|
|
80,308
|
|
|
|
79,783
|
|
Income taxes
|
|
|
2,055
|
|
|
|
1,948
|
|
Prepaids
|
|
|
1,201
|
|
|
|
570
|
|
Total current assets
|
|
|
135,033
|
|
|
|
126,978
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
11,589
|
|
|
|
11,261
|
|
Intangible assets, net
|
|
|
12,860
|
|
|
|
13,378
|
|
Goodwill
|
|
|
22,629
|
|
|
|
22,770
|
|
Deferred income taxes
|
|
|
1,049
|
|
|
|
892
|
|
Other assets
|
|
|
504
|
|
|
|
591
|
|
Total assets
|
|
$
|
183,664
|
|
|
$
|
175,870
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders' equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Book overdraft
|
|
$
|
818
|
|
|
$
|
3,181
|
|
Trade accounts payable
|
|
|
8,630
|
|
|
|
8,406
|
|
Accrued and other current liabilities
|
|
|
11,977
|
|
|
|
13,248
|
|
Total current liabilities
|
|
|
21,425
|
|
|
|
24,835
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
71,849
|
|
|
|
60,388
|
|
Other long term obligations
|
|
|
461
|
|
|
|
516
|
|
Total liabilities
|
|
|
93,735
|
|
|
|
85,739
|
|
|
|
|
|
|
|
|
|
|
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: 16,501,791 and 16,457,525 outstanding at March 31, 2017 and December 31, 2016, respectively
|
|
|
21
|
|
|
|
21
|
|
Additional paid-in-capital
|
|
|
53,454
|
|
|
|
53,824
|
|
Retained earnings
|
|
|
97,097
|
|
|
|
97,550
|
|
Treasury stock
|
|
|
(60,643
|
)
|
|
|
(61,264
|
)
|
Total stockholders' equity
|
|
|
89,929
|
|
|
|
90,131
|
|
Total liabilities and stockholders' equity
|
|
$
|
183,664
|
|
|
$
|
175,870
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
78,709
|
|
|
$
|
64,711
|
|
Cost of sales
|
|
|
61,778
|
|
|
|
51,312
|
|
Gross profit
|
|
|
16,931
|
|
|
|
13,399
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Salaries and commissions
|
|
|
8,844
|
|
|
|
6,909
|
|
Other operating expenses
|
|
|
7,477
|
|
|
|
5,837
|
|
Depreciation and amortization
|
|
|
860
|
|
|
|
692
|
|
Total operating expenses
|
|
|
17,181
|
|
|
|
13,438
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(250
|
)
|
|
|
(39
|
)
|
Interest expense
|
|
|
450
|
|
|
|
175
|
|
Loss before income taxes
|
|
|
(700
|
)
|
|
|
(214
|
)
|
Income tax benefit
|
|
|
(247
|
)
|
|
|
(30
|
)
|
Net loss
|
|
$
|
(453
|
)
|
|
$
|
(184
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
Diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,241,215
|
|
|
|
16,481,122
|
|
Diluted
|
|
|
16,241,215
|
|
|
|
16,481,122
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share
|
|
$
|
—
|
|
|
$
|
0.06
|
|
The accompanying Notes are an integral
part of these Consolidated Financial Statements.
HOUSTON WIRE & CABLE
COMPANY
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
|
|
Three Months
Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(453
|
)
|
|
$
|
(184
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
860
|
|
|
|
692
|
|
Amortization of unearned stock compensation
|
|
|
275
|
|
|
|
209
|
|
Provision for inventory obsolescence
|
|
|
27
|
|
|
|
166
|
|
Deferred income taxes
|
|
|
(16
|
)
|
|
|
(205
|
)
|
Other non-cash items
|
|
|
29
|
|
|
|
30
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(6,810
|
)
|
|
|
3,153
|
|
Inventories
|
|
|
(552
|
)
|
|
|
5,175
|
|
Book overdraft
|
|
|
(2,363
|
)
|
|
|
(2,115
|
)
|
Trade accounts payable
|
|
|
224
|
|
|
|
1,457
|
|
Accrued and other current liabilities
|
|
|
(981
|
)
|
|
|
(729
|
)
|
Prepaids
|
|
|
(631
|
)
|
|
|
(551
|
)
|
Income taxes
|
|
|
(107
|
)
|
|
|
186
|
|
Other operating activities
|
|
|
21
|
|
|
|
302
|
|
Net cash (used in) provided by operating activities
|
|
|
(10,477
|
)
|
|
|
7,586
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Expenditures for property and equipment
|
|
|
(930
|
)
|
|
|
(337
|
)
|
Net cash used in investing activities
|
|
|
(930
|
)
|
|
|
(337
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Borrowings on revolver
|
|
|
81,991
|
|
|
|
61,842
|
|
Payments on revolver
|
|
|
(70,530
|
)
|
|
|
(67,383
|
)
|
Payment of dividends
|
|
|
(30
|
)
|
|
|
(989
|
)
|
Purchase of treasury stock/stock surrendered on vested awards
|
|
|
(24
|
)
|
|
|
(719
|
)
|
Net cash provided by (used in) financing activities
|
|
|
11,407
|
|
|
|
(7,249
|
)
|
|
|
|
|
|
|
|
|
|
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, industrial fasteners, hardware and related services to the U.S.
market through twenty-two locations in fourteen states throughout the United States. The Company has no other business activity.
The consolidated financial statements as
of March 31, 2017 and for the three months ended March 31, 2017 and 2016 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 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, 2016 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 followings are
those ASUs that are relevant to the Company.
In March 2017, the FASB issued ASU 2017-07
“Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic
Postretirement Benefit Cost.” The new guidance required that an employer disaggregate the service cost component from the
other components of net benefit cost. This update is effective for public companies for annual periods beginning after December
15, 2017. The Company is currently evaluating the impact of adopting as well as the timing of when it will adopt this ASU.
In January 2017, the FASB issued ASU No.
2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The amendment
in this ASU provides final guidance that simplifies the accounting for goodwill impairment for all entities by requiring impairment
charges to be based on the first step in today’s two-step impairment test under ASC 350. ASU No. 2017-04 is effective for
annual and interim impairment test performed in periods beginning after December 15, 2019. Early adoption is permitted for annual
and interim goodwill impairment testing dates after January 1, 2017. The Company is currently evaluating the impact of adopting
as well as the timing of when it will adopt this ASU.
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 No.
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 adopted this guidance in the first quarter of 2017 and there was no material impact on the consolidated
financial statements.
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, both capital and 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 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 adopted this guidance
in the first quarter of 2017 and the adoption did not have a material impact on the Company’s consolidated financial statements.
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. As the
Company recognizes revenue only once product has shipped, it does not believe this ASU will have a significant impact on its revenue
recognition policy. The Company will adopt this ASU effective January 1, 2018 and is still evaluating its impact on its financial
position and results of operations and which implementation method the Company will use.
|
2.
|
Earnings (loss) per Share
|
Basic earnings (loss) per share is 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 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
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares for basic earnings per share
|
|
|
16,241,215
|
|
|
|
16,481,122
|
|
Effect of dilutive securities
|
|
|
—
|
|
|
|
—
|
|
Weighted average common shares for diluted earnings per share
|
|
|
16,241,215
|
|
|
|
16,481,122
|
|
Stock awards to purchase 697,026 and 536,580
shares of common stock were not included in the diluted net income (loss) per share calculation for the three months ended March
31, 2017 and 2016, respectively, as their inclusion would have been anti-dilutive.
On October 3, 2016, the Company
completed the acquisition of Vertex from DXP Enterprises (“the acquisition”). The acquisition has been accounted
for in accordance with ASC Topic 805, “Business Combinations.” Accordingly, the total purchase price has been
allocated to the assets acquired and liabilities assumed based on their fair values as of the acquisition date. Vertex is a
master distributor of industrial fasteners, specializing in corrosion resistant and specialty alloy inch and metric threaded
fasteners, rivets, and hose clamps, to the industrial market. Under the terms of the acquisition agreement, the purchase
price was $32.3 million, subject to an adjustment based on the net working capital of Vertex as of the date of closing. The
current working capital adjustment (which is still subject to change) is $0.1 million, making the total purchase price $32.4
million. See Note 8 – Subsequent Events. The Company treated the acquisition as a stock purchase for tax purposes. The
amount of goodwill deductible for tax purposes is $1.0 million. The acquisition was funded by borrowing under the
Company’s loan agreement. This acquisition expands the Company’s product offerings to the industrial
marketplace that purchases its wire and cable products.
The following table summarizes the current
estimated fair value of the acquired assets and assumed liabilities recorded as of the date of acquisition. The fair value of all
assets acquired and liabilities assumed are preliminary and subject to the completion of an incremental analysis of the fair values
of the assets acquired and liabilities assumed:
|
|
At October 3, 2016
|
|
|
|
(In thousands)
|
|
Cash
|
|
$
|
3
|
|
Accounts receivable
|
|
|
2,626
|
|
Inventories
|
|
|
14,582
|
|
Prepaids
|
|
|
46
|
|
Property and equipment
|
|
|
59
|
|
Intangibles
|
|
|
9,161
|
|
Goodwill
|
|
|
10,266
|
|
Other assets
|
|
|
116
|
|
Total assets acquired
|
|
|
36,859
|
|
|
|
|
|
|
Trade accounts payable
|
|
|
1,130
|
|
Accrued and other current liabilities
|
|
|
919
|
|
Deferred income taxes
|
|
|
2,440
|
|
Total liabilities assumed
|
|
|
4,489
|
|
|
|
|
|
|
Net assets purchased
|
|
$
|
32,370
|
|
The preliminary fair values of the assets
acquired and liabilities assumed were determined using the market, income and cost approaches. The market approach used by the
Company included prices at which comparable assets were purchased under similar circumstances. The income approach indicated value
for the subject net assets based on the present value of cash flows projected to be generated by the net assets over their useful
life. Projected cash flows were discounted at a market rate of return that reflects the relative risk associated with the asset
and the time value of money. The cost approach estimated value by determining the current cost of replacing the asset with another
of equivalent economic utility. The cost to replace a given asset reflected the estimated reproduction or replacement cost for
the asset, less an allowance for loss in value due to depreciation.
Intangible assets acquired consist of customer
relationships - $7.0 million and trade names - $2.1 million. Trade names are not being amortized, while customer relationships
are being amortized over a 9 year useful life. Amortization expense to be recognized on the acquired intangible assets is expected
to be $0.8 million per year in 2017 through 2024 and $0.6 million in 2025. Amortization expense for the quarter was $0.2 million
and as of March 31, 2017, accumulated amortization and amortization expense recognized on the acquired intangible assets was $0.4
million.
The results of operations of Vertex are
included in the consolidated statement of operations prospectively from October 3, 2016. The unaudited pro forma combined historical
results of the Company, giving effect to the acquisition assuming the transaction was consummated on January 1, 2016, are as follows:
|
|
Three Months ended
|
|
|
|
March 31, 2016
|
|
|
|
(In thousands, except
earnings per share)
|
|
Sales
|
|
$
|
72,497
|
|
Net income
|
|
|
102
|
|
Basic earnings per share
|
|
|
0.01
|
|
Diluted earnings per share
|
|
|
0.01
|
|
The unaudited pro forma combined historical
results do not reflect any cost savings or other synergies that might result from the transaction. They are provided for informational
purposes only and are not necessarily indicative of the results of operations for future periods or the results that actually would
have been realized had the acquisition occurred as of January 1, 2016.
On October 3, 2016, in connection with
the acquisition, HWC Wire & Cable Company , the Company, Vertex, and Bank of America, N.A., as agent and lender, entered into
a First Amendment (“the Loan Agreement Amendment”) amending the Fourth Amended and Restated Loan and Security Agreement
(“the 2015 Loan Agreement”). The Loan Agreement Amendment adds Vertex as a 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, starting April 1, 2017, over two and a half years. The 2015 Loan Agreement
provides a $100 million revolving credit facility and expires on September 30, 2020. 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 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 is secured by substantially all of the property of the Company, other than real estate.
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 March 31, 2017, 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.”
No dividend was declared during the first
quarter 2017. Dividends paid were $1.0 million during the three months ended March 31, 2016.
|
6.
|
Stock Based Compensation
|
Stock Option Awards
There were no stock option awards granted
during the first three months of 2017 or 2016.
Restricted Stock Awards and Restricted Stock Units
On January 30, 2017, the Board of Directors
granted to the Company’s President and CEO 60,000 shares of restricted stock and performance stock units with respect to
an additional 40,000 shares of common stock. The 60,000 shares of restricted stock vest in one-third increments on January 30,
2018, December 19, 2018 and December 19, 2019, in each case as long as Mr. Pokluda is then employed by the Company. The performance
stock units vest on December 31, 2019 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 Mr. Pokluda 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 Mr. Pokluda if and when the related shares vest.
Total stock-based compensation cost was
$0.3 million and $0.2 million for the three months ended March 31, 2017 and 2016, respectively, and is included in salaries and
commissions.
|
7.
|
Commitments and Contingencies
|
As part of the acquisition of Southwest
Wire Rope and Southern Wire made 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 March 31, 2017 relates to the cost of
the monitoring, which the Company estimates will be incurred in the next year 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 had outstanding under the 2015
Loan Agreement, letters of credit totaling $0.6 million to certain vendors as of March 31, 2017.
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 of
operations.
On May 2, 2017, the Company and DXP
Enterprises finalized the working capital adjustment, which resulted in an amount due the Company of less than $0.1 million
and a final purchase price of approximately $32.2 million.
Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The following Management’s Discussion
and Analysis (“MD&A”) is intended to help the reader understand the Company’s financial position and results
of operations. MD&A is provided as a supplement to the Company’s Consolidated Financial Statements (unaudited) and the
accompanying Notes to Consolidated Financial Statements (unaudited) and should be read in conjunction with the MD&A included
in the Company’s Form 10-K for the year ended December 31, 2016.
Overview
We are a provider of industrial products
including electrical and mechanical wire and cable, industrial fasteners, hardware and related services 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 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, 2016 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 months ended March 31, 2017.
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, 2016, 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
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
78.5
|
%
|
|
|
79.3
|
%
|
Gross profit
|
|
|
21.5
|
%
|
|
|
20.7
|
%
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Salaries and commissions
|
|
|
11.2
|
%
|
|
|
10.7
|
%
|
Other operating expenses
|
|
|
9.5
|
%
|
|
|
9.0
|
%
|
Depreciation and amortization
|
|
|
1.1
|
%
|
|
|
1.1
|
%
|
Total operating expenses:
|
|
|
21.8
|
%
|
|
|
20.8
|
%
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(0.3
|
)%
|
|
|
(0.1
|
)%
|
Interest expense
|
|
|
0.6
|
%
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(0.9
|
)%
|
|
|
(0.3
|
)%
|
Income tax benefit
|
|
|
(0.3
|
)%
|
|
|
(0.0
|
)%
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(0.6
|
)%
|
|
|
(0.3
|
)%
|
Note:
Due to rounding, percentages may not add
up to total operating expenses, operating loss, loss before income taxes or net loss.
Comparison of the Three Months Ended March 31, 2017 and 2016
Sales
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(Dollars in millions)
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
Sales
|
|
$
|
78.7
|
|
|
$
|
64.7
|
|
|
$
|
14.0
|
|
|
|
21.6
|
%
|
Our sales for the first quarter increased
21.6% to $78.7 million in 2017 from $64.7 million in 2016. The primary reasons for the increase were $7.8 million in sales from
Vertex and a 9.6% increase in organic sales. We estimate that, when adjusted for the fluctuation in metal prices, sales for 2017
when compared to pro-forma sales in the comparable period were up 5.5%. We estimate our project business, which targets
end markets and encompassing Environmental Compliance, Engineering & Construction, Industrials, Utility Power Generation, and
Mechanical Wire Rope, decreased 31%, or approximately 34% on a metals adjusted basis, from 2016. Maintenance, Repair, and Operations
(MRO) increased 21%, or approximately 18% when adjusted for metals, over 2016.
Gross Profit
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(Dollars in millions)
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
Gross profit
|
|
$
|
16.9
|
|
|
$
|
13.4
|
|
|
$
|
3.5
|
|
|
|
26.4
|
%
|
Gross margin
|
|
|
21.5
|
%
|
|
|
20.7
|
%
|
|
|
|
|
|
|
|
|
Gross profit increased 26.4% to $16.9 million
in 2017 from $13.4 million in 2016. The increase in gross profit was primarily attributable to the increased sales in the first
quarter of 2017 due to the acquisition of Vertex. Gross margin (gross profit as a percentage of sales) increased to 21.5% in 2017
from 20.7% in 2016 primarily due to the higher margins earned by Vertex.
Operating Expenses
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(Dollars in millions)
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and commissions
|
|
$
|
8.8
|
|
|
$
|
6.9
|
|
|
$
|
1.9
|
|
|
|
28.0
|
%
|
Other operating expenses
|
|
|
7.5
|
|
|
|
5.8
|
|
|
|
1.6
|
|
|
|
28.1
|
%
|
Depreciation and amortization
|
|
|
0.9
|
|
|
|
0.7
|
|
|
|
0.2
|
|
|
|
24.3
|
%
|
Total operating expenses
|
|
$
|
17.2
|
|
|
$
|
13.4
|
|
|
$
|
3.7
|
|
|
|
27.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses as a percent of sales
|
|
|
21.8
|
%
|
|
|
20.8
|
%
|
|
|
|
|
|
|
|
|
Note: Due to rounding, numbers may not add up to
total operating expenses.
Salaries and commissions increased $1.9
million between the periods primarily due to the additional personnel from the acquisition and slightly increased commissions due
to higher sales.
Other operating expenses increased $1.6
million primarily due to the additional operations obtained from the acquisition, increased operational expenses associated with
higher sales, and costs incurred during the integration of Vertex.
Depreciation and amortization increased
slightly to $0.9 million in 2017 from $0.7 million in 2016 due to the amortization of intangibles acquired in the acquisition.
Operating expenses as a percentage of sales
increased to 21.8% in 2017 from 20.8% in 2016, as operating expenses increased at a slightly higher rate than the increase in sales.
Interest Expense
Interest expense increased to $0.5 million
in 2017 from $0.2 million in 2016 due to higher debt as a result of the Vertex acquisition and to an increase in the average effective
interest rate. Average debt was $68.0 million in 2017 compared to $36.7 million in 2016. The average effective interest rate was
2.6% in 2017 compared to 1.7% in 2016.
Income Taxes
The income tax benefit $0.2
million, due to the pre-tax loss, increased, compared to the less than $0.1 million income tax benefit in the prior year
period. The effective income tax rate increased to 35.3% in 2017 from 14.0% in 2016, primarily due to the higher net loss in
the current quarter compared to the prior year quarter and the impact to the tax rate in both periods from forfeited vested
share-based awards.
Net Loss
We incurred a net loss of $0.5 million
in 2017 compared to a net loss of $0.2 million in 2016, primarily due to increased operating expenses.
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 net realizable value 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 Three Months Ended March 31, 2017 and 2016
Our net cash used in operating activities
was $10.5 million for the three months ended March 31, 2017 compared to net cash provided by of $7.6 million in 2016. We had a
net loss of $0.5 million in 2017 compared to net loss of $0.2 million in 2016.
Changes in our operating assets and liabilities
resulted in cash used in operating activities of $11.2 million in 2017. An increase in accounts receivable of $6.8 million due
to the increase in sales, a decrease in book overdraft of $2.4 million, a decrease in accrued and other liabilities of $1.0 million,
an increase in our inventory investment of $0.6 million as inventory values have increased to meet current activity levels, and
an increase in prepaid expenses of $0.6 million were the main uses of cash.
Net cash used in investing activities was
$0.9 million in 2017 compared to $0.3 million in 2016. The 2017 amount included an anticipated investment in equipment at Vertex.
Net cash provided by financing activities
was $11.4 million in 2017 compared to cash used of $7.2 million in 2016. Net borrowings on the revolver of $11.5 million was the
primary source for financing activities in 2017.
Indebtedness
Our principal source of liquidity at March
31, 2017 was working capital of $113.6 million compared to $102.1 million at December 31, 2016. We also had additional available
borrowing capacity of approximately $24.2 million at March 31, 2017 and $25.6 million at December 31, 2016 under our loan agreement.
The availability at March 31, 2017 is net of outstanding letters of credit of $0.6 million.
We believe that we will have adequate availability
of capital to fund our present operations, meet our commitments on our existing debt, and fund anticipated growth over the next
twelve months, including expansion in existing and targeted market areas. We continually seek potential acquisitions and from time
to time hold discussions with acquisition candidates. If suitable acquisition opportunities or working capital needs arise that
would require additional financing, we believe that our financial position and earnings history provide a solid base for obtaining
additional financing resources at competitive rates and terms. Additionally, based on market conditions, we may decide to issue
additional shares of common or preferred stock to raise funds.
Contractual Obligations
The following table summarizes our loan
commitment at March 31, 2017:
In thousands
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More
than
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
71,849
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
71,849
|
|
|
$
|
—
|
|
There were no material changes in operating
lease obligations or non-cancellable purchase obligations since December 31, 2016.