HOUSTON WIRE & CABLE COMPANY
Consolidated Balance Sheets
(In thousands, except share data)
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|
June 30,
|
|
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December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
|
|
|
|
|
|
Trade
|
|
$
|
59,685
|
|
|
$
|
51,031
|
|
Other
|
|
|
3,006
|
|
|
|
6,365
|
|
Inventories, net
|
|
|
87,819
|
|
|
|
88,115
|
|
Income taxes
|
|
|
848
|
|
|
|
449
|
|
Prepaids
|
|
|
1,742
|
|
|
|
1,938
|
|
Total current assets
|
|
|
153,100
|
|
|
|
147,898
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
11,399
|
|
|
|
11,355
|
|
Intangible assets, net
|
|
|
11,627
|
|
|
|
12,015
|
|
Goodwill
|
|
|
22,353
|
|
|
|
22,353
|
|
Other assets
|
|
|
409
|
|
|
|
418
|
|
Total assets
|
|
$
|
198,888
|
|
|
$
|
194,039
|
|
|
|
|
|
|
|
|
|
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Liabilities and stockholders' equity
|
|
|
|
|
|
|
|
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Current liabilities:
|
|
|
|
|
|
|
|
|
Book overdraft
|
|
$
|
1,312
|
|
|
$
|
3,028
|
|
Trade accounts payable
|
|
|
8,010
|
|
|
|
8,449
|
|
Accrued and other current liabilities
|
|
|
12,301
|
|
|
|
16,823
|
|
Total current liabilities
|
|
|
21,623
|
|
|
|
28,300
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
80,149
|
|
|
|
73,555
|
|
Deferred income taxes
|
|
|
332
|
|
|
|
414
|
|
Other long term obligations
|
|
|
752
|
|
|
|
1,026
|
|
Total liabilities
|
|
|
102,856
|
|
|
|
103,295
|
|
|
|
|
|
|
|
|
|
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Stockholders' equity:
|
|
|
|
|
|
|
|
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Preferred stock, $0.001 par value; 5,000,000 shares authorized, none issued and outstanding
|
|
|
—
|
|
|
|
—
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|
Common stock, $0.001 par value; 100,000,000 shares authorized: 20,988,952 shares issued: 16,526,439 and 16,491,181 outstanding at June 30, 2018 and December 31, 2017, respectively
|
|
|
21
|
|
|
|
21
|
|
Additional paid-in-capital
|
|
|
54,147
|
|
|
|
54,006
|
|
Retained earnings
|
|
|
101,889
|
|
|
|
97,336
|
|
Treasury stock
|
|
|
(60,025
|
)
|
|
|
(60,619
|
)
|
Total stockholders' equity
|
|
|
96,032
|
|
|
|
90,744
|
|
Total liabilities and stockholders' equity
|
|
$
|
198,888
|
|
|
$
|
194,039
|
|
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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|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
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Sales
|
|
$
|
93,852
|
|
|
$
|
75,646
|
|
|
$
|
178,878
|
|
|
$
|
154,355
|
|
Cost of sales
|
|
|
71,505
|
|
|
|
59,328
|
|
|
|
136,042
|
|
|
|
121,106
|
|
Gross profit
|
|
|
22,347
|
|
|
|
16,318
|
|
|
|
42,836
|
|
|
|
33,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and commissions
|
|
|
9,906
|
|
|
|
8,828
|
|
|
|
19,100
|
|
|
|
17,672
|
|
Other operating expenses
|
|
|
7,508
|
|
|
|
6,827
|
|
|
|
14,988
|
|
|
|
14,304
|
|
Depreciation and amortization
|
|
|
541
|
|
|
|
825
|
|
|
|
1,086
|
|
|
|
1,685
|
|
Total operating expenses
|
|
|
17,955
|
|
|
|
16,480
|
|
|
|
35,174
|
|
|
|
33,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
4,392
|
|
|
|
(162
|
)
|
|
|
7,662
|
|
|
|
(412
|
)
|
Interest expense
|
|
|
773
|
|
|
|
499
|
|
|
|
1,417
|
|
|
|
949
|
|
Income (loss) before income taxes
|
|
|
3,619
|
|
|
|
(661
|
)
|
|
|
6,245
|
|
|
|
(1,361
|
)
|
Income tax expense (benefit)
|
|
|
1,013
|
|
|
|
(607
|
)
|
|
|
1,692
|
|
|
|
(854
|
)
|
Net income (loss)
|
|
$
|
2,606
|
|
|
$
|
(54
|
)
|
|
$
|
4,553
|
|
|
$
|
(507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.16
|
|
|
$
|
(0.00
|
)
|
|
$
|
0.28
|
|
|
$
|
(0.03
|
)
|
Diluted
|
|
$
|
0.16
|
|
|
$
|
(0.00
|
)
|
|
$
|
0.28
|
|
|
$
|
(0.03
|
)
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,387,112
|
|
|
|
16,266,342
|
|
|
|
16,368,610
|
|
|
|
16,253,848
|
|
Diluted
|
|
|
16,489,671
|
|
|
|
16,266,342
|
|
|
|
16,459,736
|
|
|
|
16,253,848
|
|
The accompanying Notes are an integral
part of these Consolidated Financial Statements.
HOUSTON WIRE & CABLE COMPANY
Consolidated Statements of Cash
Flows
(Unaudited)
(In thousands)
|
|
Six Months
Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,553
|
|
|
$
|
(507
|
)
|
Adjustments to reconcile net income (loss) to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,086
|
|
|
|
1,685
|
|
Amortization of unearned stock compensation
|
|
|
703
|
|
|
|
513
|
|
Provision for inventory obsolescence
|
|
|
191
|
|
|
|
111
|
|
Deferred income taxes
|
|
|
(82
|
)
|
|
|
1,033
|
|
Other non-cash items
|
|
|
129
|
|
|
|
99
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(5,403
|
)
|
|
|
(3,624
|
)
|
Inventories
|
|
|
105
|
|
|
|
1,172
|
|
Prepaids
|
|
|
196
|
|
|
|
(740
|
)
|
Income taxes
|
|
|
(399
|
)
|
|
|
(1,826
|
)
|
Book overdraft
|
|
|
(1,716
|
)
|
|
|
(2,663
|
)
|
Trade accounts payable
|
|
|
(439
|
)
|
|
|
(2,132
|
)
|
Accrued and other current liabilities
|
|
|
(4,483
|
)
|
|
|
(1,454
|
)
|
Other operating activities
|
|
|
(116
|
)
|
|
|
(59
|
)
|
Net cash used in operating activities
|
|
|
(5,675
|
)
|
|
|
(8,392
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Expenditures for property and equipment
|
|
|
(741
|
)
|
|
|
(1,226
|
)
|
Cash received for acquisition
|
|
|
—
|
|
|
|
134
|
|
Net cash used in investing activities
|
|
|
(741
|
)
|
|
|
(1,092
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Borrowings on revolver
|
|
|
179,994
|
|
|
|
165,025
|
|
Payments on revolver
|
|
|
(173,401
|
)
|
|
|
(155,483
|
)
|
Payment of dividends
|
|
|
(39
|
)
|
|
|
(34
|
)
|
Purchase of treasury stock/stock surrendered on vested awards
|
|
|
(138
|
)
|
|
|
(24
|
)
|
Net cash provided by financing activities
|
|
|
6,416
|
|
|
|
9,484
|
|
|
|
|
|
|
|
|
|
|
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 industrial products to the U.S.
market through twenty-one locations in fourteen states throughout the United States. The Company has no other business activity.
The consolidated
financial statements as of June 30, 2018 and for the three and six months ended June 30, 2018, and 2017 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, the realization of deferred tax assets and the valuation
of goodwill and indefinite-lived assets. Actual results could differ materially from the estimates and assumptions used for the
preparation of the financial statements.
For further
information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC.
Reclassifications
Certain prior
period amounts have been reclassified to conform to the current period presentation.
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 are relevant to the Company.
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 amendments in the ASU
were effective for annual and interim periods beginning after December 15, 2017. The Company adopted this ASU effective January
1, 2018, using the modified retrospective method, and it had no material impact on the Company’s consolidated financial statements.
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
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.
In May 2017,
the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting.” The
amendments in this update provide guidance about which changes to the terms and conditions of a share-based payment award require
the application of modification accounting. This update was effective for public companies for annual periods beginning after December
15, 2017. The Company adopted this ASU in the first quarter of 2018 and the adoption did not have a material impact on the Company’s
consolidated financial statements.
In March 2017,
the FASB issued ASU No. 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net
Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The new guidance requires that an employer disaggregate
the service cost component from the other components of net benefit cost. This update was effective for public companies for annual
periods beginning after December 15, 2017. The Company adopted this ASU in the first quarter of 2018 and the adoption did not have
a material impact on the Company’s consolidated financial statements.
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 the two-step impairment test under ASC 350. ASU No.
2017-04 is effective for annual and interim impairment tests 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 elected to early adopt
this ASU in the first quarter of 2018 and the adoption did not have a material impact on the Company’s consolidated financial
statements.
In March 2018, the FASB issued ASU
2018-05, “Income Taxes (Topic 740): Amendments to SEC Paragraph Pursuant to SEC Staff Accounting Bulletin No. 118 (SEC Update).”
This ASU added the SEC guidance released on December 22, 2017 regarding the U.S tax reform to the FASB ASC. At June 30, 2018, the
Company has not made a material adjustment to the tax provision recorded under this ASU at December 31, 2017. The Company has not
completed its accounting for all of the tax effects of the Tax Cuts and Jobs Act; however, the Company has made reasonable estimates
of these effects.
Recent Accounting Pronouncements
In June 2018,
the FASB issued ASU No. 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting” that 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 supersedes Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees and is effective for public entities for interim
and annual reporting periods beginning after December 15, 2018. The Company is assessing ASU 2018-07 and does not expect it to
have a material impact on its accounting and disclosures.
In February
2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Under the new guidance, a lessee will be required to recognize
a right-to-use asset and a lease liability 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 has started
gathering information on its leases and is evaluating the impact that adopting this ASU will have on the Company’s consolidated
financial statements.
|
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
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares for basic earnings (loss) per share
|
|
|
16,387,112
|
|
|
|
16,266,342
|
|
|
|
16,368,610
|
|
|
|
16,253,848
|
|
Effect of dilutive securities
|
|
|
102,559
|
|
|
|
—
|
|
|
|
91,126
|
|
|
|
—
|
|
Weighted average common shares for diluted earnings (loss) per share
|
|
|
16,489,671
|
|
|
|
16,266,342
|
|
|
|
16,459,736
|
|
|
|
16,253,848
|
|
Stock awards to purchase 300,117
and 655,448 shares of common stock were not included in the diluted net income (loss) per share calculation for the three months
ended June 30, 2018 and 2017, respectively, and 286,121 and 658,463 shares for the six months ended June 30, 2018 and 2017, respectively,
as their inclusion would have been anti-dilutive.
HWC Wire &
Cable Company, the Company, Vertex, and Bank of America, N.A., as agent and lender, are parties to the Fourth Amended and Restated
Loan and Security Agreement (the “Loan Agreement”), as amended as of October 3, 2016. The 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 Loan Agreement is limited to a borrowing base equal to 85% of the value of eligible accounts receivable, plus the lesser
of 70% of the value of eligible inventory or 90% of the net orderly liquidation value percentage of the value of eligible inventory,
in each case less certain reserves. The Loan Agreement is secured by substantially all of the property of the Company, other than
real estate.
The Loan Agreement
includes, among other things, covenants that require the Company to maintain a specified minimum fixed charge coverage ratio, unless
certain availability levels exist. Additionally, the Loan Agreement allows for the unlimited payment of dividends and repurchases
of stock, subject to the absence of events of default and maintenance of a fixed charge coverage ratio and minimum level of availability.
The Loan Agreement contains certain provisions that may cause the debt to be classified as a current liability, in accordance with
GAAP, if availability falls below certain thresholds, even though the ultimate maturity date under the loan agreement remains as
September 30, 2020. At June 30, 2018, the Company was in compliance with the availability-based covenants governing its indebtedness.
The carrying amount of long term
debt approximates fair value as it bears interest at variable rates. The fair value is a Level 2 measurement as defined in ASC
Topic 820, “Fair Value Measurement.”
On December 22, 2017 the Tax Cuts
and Jobs Act was signed into law, making significant changes to the U.S. Internal Revenue Code. The major provisions include a
corporate tax rate decrease from 35% to 21%, effective for years beginning after December 31, 2017, and changes in business-related
exclusions and deductions.
The Company
calculates its provision for income taxes during interim reporting periods by applying the estimated annual effective tax rate
for the full fiscal year to pre-tax income or loss, excluding discrete items, for the reporting period.
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, as well as the current and forecasted business economics, to determine whether a valuation allowance is
required. The Company has determined that a $1.0 million valuation allowance was required at December 31, 2017 and June 30,
2018.
Stock Option Awards
There were no stock option awards
granted during the first six months of 2018 or 2017.
Restricted Stock Awards and Restricted Stock Units
The 2017 Stock Plan (the “2017
Plan”) was approved by the stockholders at the 2018 Annual Meeting on May 8, 2018. As a result, all awards outstanding under the
2017 Plan (including those cash/liability awards granted prior to the approval of the 2017 Plan) will entitle the recipient to
receive shares of the Company’s common stock.
All awards outstanding prior to
the approval of the 2017 Plan were reclassified to restricted stock units (equity) effective May 8, 2018. The total liability reclassified
to additional paid-in-capital was $0.4 million. This modification resulted in an increase in total fair value of $0.1 million,
recognized over the term of the grants, which range from 1 to 5 years.
On June 1, 2018, the Company awarded
restricted stock units with a grant date value of $55,000, for a total of 6,667 restricted stock units, to its newly-appointed
non-employee director. This award of restricted stock units vests at the date of the 2019 Annual Meeting of Stockholders. The grant
entitles the non-employee director 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.
Following the
Annual Meeting of Stockholders on May 8, 2018, the Company approved the award of restricted stock units with a grant date value
of $60,000 to each non-employee director who was re-elected, for an aggregate of 31,372 restricted stock units. Each award of restricted
stock units vests at the date of the 2019 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.
Also on May
8, 2018, the Company granted 28,144 voting shares of restricted stock to new members of the management team. Of the 28,144 shares
granted, 26,144 shares vest in one third increments on the first, second and third anniversaries of the date of grant and the remaining
2,000 shares vest in one third increments on the third, fourth and fifth anniversaries of the date of grant, in each case as long
as the recipient is then employed by the Company. Any dividends declared will be accrued and paid if and when the related shares
vest.
Total stock-based
compensation cost was $0.4 and $0.2 million for the three months ended June 30, 2018 and 2017, respectively, and $0.7 million and
$0.5 million for the six months ended June 30, 2018 and 2017, respectively, and is included in salaries and commissions for employees,
and in other operating expenses for non-director employees.
|
6.
|
Commitments and Contingencies
|
As a result
of unfavorable lease terms relative to market for one of the leases acquired as part of the Vertex acquisition in 2016, there is
a remaining additional liability of $0.2 million that is being amortized over the remaining term of the lease, which was 60 months
at June 30, 2018.
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.
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, 2017.
Overview
We are a provider
of industrial products to the U.S. market. We provide our customers with a single-source solution by offering a large selection
of in-stock items, exceptional customer service and high levels of product expertise.
Critical Accounting Policies
The
preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported
amounts of assets and liabilities, revenue and expenses. On an on-going basis, we make and evaluate estimates and judgments,
including those related to the inventory obsolescence reserve, the reserve for returns and allowances, vendor rebates, the
realization of deferred tax assets and liabilities and the valuation of goodwill and indefinite-lived assets. We base our
estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances; the
results of which form the basis for making judgments about amounts and timing of revenue and expenses, the carrying values of
assets and the recorded amounts of liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates and such estimates may change if the underlying conditions or assumptions change. We have discussed the
development and selection of critical accounting policies and estimates with the Audit Committee of our Board of Directors,
and the Audit Committee has reviewed our related disclosures. The critical accounting policies related to the estimates and
judgments are discussed in our Annual Report on Form 10-K for the year ended December 31, 2017 under Management’s
Discussion and Analysis of Financial Condition and Results of Operations. There have been no changes to our critical
accounting policies and estimates during the three and six months ended June 30, 2018.
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, 2017, 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
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
76.2
|
%
|
|
|
78.4
|
%
|
|
|
76.1
|
%
|
|
|
78.5
|
%
|
Gross profit
|
|
|
23.8
|
%
|
|
|
21.6
|
%
|
|
|
23.9
|
%
|
|
|
21.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and commissions
|
|
|
10.6
|
%
|
|
|
11.7
|
%
|
|
|
10.7
|
%
|
|
|
11.4
|
%
|
Other operating expenses
|
|
|
8.0
|
%
|
|
|
9.0
|
%
|
|
|
8.4
|
%
|
|
|
9.3
|
%
|
Depreciation and amortization
|
|
|
0.6
|
%
|
|
|
1.1
|
%
|
|
|
0.6
|
%
|
|
|
1.1
|
%
|
Total operating expenses
|
|
|
19.1
|
%
|
|
|
21.8
|
%
|
|
|
19.7
|
%
|
|
|
21.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
4.7
|
%
|
|
|
(0.2
|
)%
|
|
|
4.3
|
%
|
|
|
(0.3
|
)%
|
Interest expense
|
|
|
0.8
|
%
|
|
|
0.7
|
%
|
|
|
0.8
|
%
|
|
|
0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
3.9
|
%
|
|
|
(0.9
|
)%
|
|
|
3.5
|
%
|
|
|
(0.9
|
)%
|
Income tax expense (benefit)
|
|
|
1.1
|
%
|
|
|
(0.8
|
)%
|
|
|
0.9
|
%
|
|
|
(0.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
2.8
|
%
|
|
|
(0.1
|
)%
|
|
|
2.5
|
%
|
|
|
(0.3
|
)%
|
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 June 30, 2018
and 2017
Sales
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
(Dollars in millions)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
Sales
|
|
$
|
93.9
|
|
|
$
|
75.6
|
|
|
$
|
18.2
|
|
|
|
24.1
|
%
|
Our sales for
the second quarter increased 24.1% to $93.9 million in 2018 from $75.6 million in 2017. The increase in sales
is due to improved industrial activity, increased commodity prices and disciplined pricing. We estimate sales for our project business, which targets end markets, encompassing Environmental Compliance,
Engineering & Construction, Industrials, Utility Power Generation, and Mechanical Wire Rope, increased 26%, while Maintenance,
Repair, and Operations (MRO) sales increased 23%, as compared to the second quarter of 2017.
Gross Profit
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
(Dollars in millions)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
Gross profit
|
|
$
|
22.3
|
|
|
$
|
16.3
|
|
|
$
|
6.0
|
|
|
|
36.9
|
%
|
Gross margin
|
|
|
23.8
|
%
|
|
|
21.6
|
%
|
|
|
|
|
|
|
|
|
Gross profit
increased 36.9% to $22.3 million in 2018 from $16.3 million in 2017. The increase in gross profit was primarily attributable to
the increased sales in the second quarter of 2018. Gross margin (gross profit as a percentage of sales) increased to 23.8% in 2018
from 21.6% in 2017 primarily due to improved pricing discipline and product mix.
Operating Expenses
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
(Dollars in millions)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and commissions
|
|
$
|
9.9
|
|
|
$
|
8.8
|
|
|
$
|
1.1
|
|
|
|
12.2
|
%
|
Other operating expenses
|
|
|
7.5
|
|
|
|
6.8
|
|
|
|
0.7
|
|
|
|
10.0
|
%
|
Depreciation and amortization
|
|
|
0.5
|
|
|
|
0.8
|
|
|
|
(0.3
|
)
|
|
|
(34.4
|
)%
|
Total operating expenses
|
|
$
|
18.0
|
|
|
$
|
16.5
|
|
|
$
|
1.5
|
|
|
|
9.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses as a percent of sales
|
|
|
19.1
|
%
|
|
|
21.8
|
%
|
|
|
|
|
|
|
|
|
Note: Due to rounding, numbers may not add
up to total operating expenses.
Salaries and
commissions increased $1.1 million between the periods primarily due to additional personnel and increased commissions resulting
from higher sales and gross profit.
Other operating expenses increased
$0.7 million primarily due to higher distribution expenses as a result of increased volume and higher administrative expenses.
Depreciation and amortization decreased
$0.3 million primarily due to certain intangibles which became fully amortized in 2017.
Operating
expenses as a percentage of sales decreased to 19.1% in 2018 from 21.8% in 2017, as operating expenses increased at a lower
rate than the increase in sales, due to improved leverage.
Interest Expense
Interest expense
increased to $0.8 million in 2018 from $0.5 million in 2017 due to higher debt and to an increase in the average effective interest
rate. Average debt was $82.5 million in 2018 compared to $72.6 million in 2017. The average effective interest rate was 3.7% in
2018 compared to 2.7% in 2017.
Income Taxes
The income
tax expense of $1.0 million increased compared to the $0.6 million income tax benefit in the prior year period. The effective income
tax rate decreased to 28.0% in 2018 from 91.8% in 2017, primarily due to higher estimated annual earnings for 2018 offset by the
benefit in 2017 which also reflected the impact of a full valuation allowance on the net deferred tax assets as of June 30, 2017.
The 2018 tax rate is also lower due to the lower corporate tax rate as a result of the 2017 Tax Cuts and Jobs Act.
Net Income
We achieved net income of $2.6 million
in 2018 compared to a net loss of $0.1 million in 2017.
Comparison of the Six Months Ended June 30, 2018 and
2017
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
(Dollars in millions)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
Sales
|
|
$
|
178.9
|
|
|
$
|
154.4
|
|
|
$
|
24.5
|
|
|
|
15.9
|
%
|
Our sales for the six month period increased 15.9% to $178.9 million in 2018 from $154.4 million in 2017. The primary reasons
for the increase are improved industrial activity, increased commodity prices and disciplined pricing. Our project business,
which includes our key growth initiatives encompassing Environmental Compliance, Engineering & Construction, Industrials,
Utility Power Generation, and Mechanical Wire Rope, is estimated to have increased 30%, from 2017. MRO increased 12%, from
2017.
Gross Profit
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
(Dollars in millions)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
Gross profit
|
|
$
|
42.8
|
|
|
$
|
33.2
|
|
|
$
|
9.6
|
|
|
|
28.8
|
%
|
Gross margin
|
|
|
23.9
|
%
|
|
|
21.5
|
%
|
|
|
2.4
|
%
|
|
|
|
|
Gross profit increased 28.8% to
$42.8 million in 2018 from $33.2 million in 2017. The increase in gross profit was attributable to the higher sales and higher
product gross margin. Gross margin increased to 23.9% in 2018 from 21.5% in 2017, primarily due to improved pricing discipline and product mix.
Operating Expenses
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
(Dollars in millions)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and commissions
|
|
$
|
19.1
|
|
|
$
|
17.7
|
|
|
$
|
1.4
|
|
|
|
8.1
|
%
|
Other operating expenses
|
|
|
15.0
|
|
|
|
14.3
|
|
|
|
0.7
|
|
|
|
4.8
|
%
|
Depreciation and amortization
|
|
|
1.1
|
|
|
|
1.7
|
|
|
|
(0.6
|
)
|
|
|
(35.5
|
)%
|
Total operating expenses
|
|
$
|
35.2
|
|
|
$
|
33.7
|
|
|
$
|
1.5
|
|
|
|
4.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses as a percent of sales
|
|
|
19.7
|
%
|
|
|
21.8
|
%
|
|
|
(2.1
|
)%
|
|
|
|
|
Note: Due to rounding, numbers may not add
up to total operating expenses.
Salaries and commissions increased
$1.4 million between the periods due to additional personnel, as well as increased commissions resulting from increased sales and
gross profit.
Other operating expenses increased
$0.7 million, as distribution expenses increased due to higher sales and increased administrative expenses.
Depreciation and amortization decreased
primarily due to certain intangibles which became fully amortized in 2017.
Operating
expenses as a percentage of sales decreased to 19.7% in 2017 from 21.8% in 2017, as operating expenses increased at a lower
rate than the increase in sales, due to improved leverage.
Interest Expense
Interest expense
increased 49.3% to $1.4 million in 2018 from $0.9 million in 2017 due to higher average debt levels due to increased inventory
investment and higher interest rates. Average debt was $79.7 million in 2018 compared to $70.3 million in 2017. The average effective
interest rate rose to 3.5% in 2018 from 2.6% in the prior year period.
Income Taxes
The income
tax expense of $1.7 million increased from a tax benefit of $0.9 million in 2017. The effective income tax rate decreased to 27.1%
in 2018 from 62.7% in 2017, primarily due to higher estimated annual earnings for 2018 offset by the benefit in 2017 which also
reflected the impact of a full valuation allowance on the net deferred tax assets as of June 30, 2017. The 2018 tax rate is also
lower due to the lower corporate tax rate as a result of the 2017 Tax Cuts and Jobs Act.
Net Income
We achieved net income of $4.6 million
in 2018 compared to a net loss of $0.5 million in 2017.
Impact of Inflation and Commodity Prices
Our results
of operations are affected by changes in the inflation rate and commodity prices. Moreover, because copper, steel, aluminum, nickel
and petrochemical products are components of the industrial products we sell, fluctuations in the costs of these and other commodities
have historically affected our operating results. To the extent commodity prices decline, the net realizable value of our existing
inventory could also decline, and our gross profit could be adversely affected because of either reduced selling prices or lower
of cost or market adjustments in the carrying value of our inventory. We turn our inventory approximately three times a year, therefore,
the impact of changes in commodity prices in any particular quarter would primarily affect the results of the succeeding two calendar
quarters. If we are unable to pass on to our customers future cost increases due to inflation or rising commodity prices, our operating
results could be adversely affected.
Liquidity and Capital Resources
Our primary capital needs are for
working capital obligations, capital expenditures and other general corporate purposes, including acquisitions. Our primary sources
of working capital are cash from operations supplemented by bank borrowings.
Liquidity
is defined as the ability to generate adequate amounts of cash to meet the current need for cash. We assess our liquidity in terms
of our ability to generate cash to fund our operating activities. Significant factors which could affect liquidity include the
following:
|
·
|
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 Six Months Ended June 30, 2018 and
2017
Our net cash
used in operating activities was $5.7 million for the six months ended June 30, 2018 compared to $8.4 million in 2017. We had net
income of $4.6 million in 2018 compared to a net loss of $0.5 million in 2017.
Changes in
our operating assets and liabilities resulted in cash used in operating activities of $12.3 million in 2018. An increase in accounts
receivable of $5.4 million due to the increase in sales, a decrease in accrued and other liabilities of $4.5 million and a decrease
in book overdraft of $1.7 million were the main uses of cash.
Net cash used
in investing activities was $0.7 million in 2018 compared to $1.1 million in 2017.
Net cash provided
by financing activities was $6.4 million in 2018 compared to $9.5 million in 2017. Net borrowings on the revolver of $6.6 million
were the primary source for financing activities in 2018.
Indebtedness
Our principal
source of liquidity at June 30, 2018 was working capital of $131.5 million compared to $119.6 million at December 31, 2017. We
also had additional available borrowing capacity of approximately $19.9 million at June 30, 2018 and $23.0 million at December
31, 2017 under our loan agreement.
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 June 30, 2018.
In thousands
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More
than
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
80,149
|
|
|
$
|
—
|
|
|
$
|
80,149
|
|
|
$
|
—
|
|
|
$
|
—
|
|
There were no material changes in
operating lease obligations or non-cancellable purchase obligations since December 31, 2017.