HOUSTON
WIRE & CABLE COMPANY
Consolidated
Balance Sheets
(In
thousands, except share data)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
|
|
|
|
|
|
Trade
|
|
$
|
60,022
|
|
|
$
|
51,031
|
|
Other
|
|
|
4,981
|
|
|
|
6,365
|
|
Inventories, net
|
|
|
86,469
|
|
|
|
88,115
|
|
Income taxes
|
|
|
550
|
|
|
|
449
|
|
Prepaids
|
|
|
1,622
|
|
|
|
1,938
|
|
Total current assets
|
|
|
153,644
|
|
|
|
147,898
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
11,522
|
|
|
|
11,355
|
|
Intangible assets, net
|
|
|
11,433
|
|
|
|
12,015
|
|
Goodwill
|
|
|
22,353
|
|
|
|
22,353
|
|
Deferred income taxes
|
|
|
1,123
|
|
|
|
—
|
|
Other assets
|
|
|
578
|
|
|
|
418
|
|
Total assets
|
|
$
|
200,653
|
|
|
$
|
194,039
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders’ equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Book overdraft
|
|
$
|
1,728
|
|
|
$
|
3,028
|
|
Trade accounts payable
|
|
|
9,350
|
|
|
|
8,449
|
|
Accrued and other current liabilities
|
|
|
16,517
|
|
|
|
16,823
|
|
Total current liabilities
|
|
|
27,595
|
|
|
|
28,300
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
73,403
|
|
|
|
73,555
|
|
Deferred income taxes
|
|
|
—
|
|
|
|
414
|
|
Other long term obligations
|
|
|
784
|
|
|
|
1,026
|
|
Total liabilities
|
|
|
101,782
|
|
|
|
103,295
|
|
|
|
|
|
|
|
|
|
|
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: 16,523,439 and 16,491,181 outstanding at September 30, 2018 and December 31, 2017, respectively
|
|
|
21
|
|
|
|
21
|
|
Additional paid-in-capital
|
|
|
54,571
|
|
|
|
54,006
|
|
Retained earnings
|
|
|
104,344
|
|
|
|
97,336
|
|
Treasury stock
|
|
|
(60,065
|
)
|
|
|
(60,619
|
)
|
Total stockholders’ equity
|
|
|
98,871
|
|
|
|
90,744
|
|
Total liabilities and stockholders’ equity
|
|
$
|
200,653
|
|
|
$
|
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)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
90,074
|
|
|
$
|
81,196
|
|
|
$
|
268,952
|
|
|
$
|
235,551
|
|
Cost of sales
|
|
|
68,681
|
|
|
|
62,626
|
|
|
|
204,723
|
|
|
|
183,732
|
|
Gross profit
|
|
|
21,393
|
|
|
|
18,570
|
|
|
|
64,229
|
|
|
|
51,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and commissions
|
|
|
9,778
|
|
|
|
8,975
|
|
|
|
28,878
|
|
|
|
26,647
|
|
Other operating expenses
|
|
|
8,028
|
|
|
|
6,999
|
|
|
|
23,016
|
|
|
|
21,303
|
|
Depreciation and amortization
|
|
|
541
|
|
|
|
549
|
|
|
|
1,627
|
|
|
|
2,234
|
|
Total operating expenses
|
|
|
18,347
|
|
|
|
16,523
|
|
|
|
53,521
|
|
|
|
50,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
3,046
|
|
|
|
2,047
|
|
|
|
10,708
|
|
|
|
1,635
|
|
Interest expense
|
|
|
739
|
|
|
|
543
|
|
|
|
2,156
|
|
|
|
1,492
|
|
Income before income taxes
|
|
|
2,307
|
|
|
|
1,504
|
|
|
|
8,552
|
|
|
|
143
|
|
Income tax (benefit) expense
|
|
|
(148
|
)
|
|
|
3,215
|
|
|
|
1,544
|
|
|
|
2,361
|
|
Net income (loss)
|
|
$
|
2,455
|
|
|
$
|
(1,711
|
)
|
|
$
|
7,008
|
|
|
$
|
(2,218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.15
|
|
|
$
|
(0.11
|
)
|
|
$
|
0.43
|
|
|
$
|
(0.14
|
)
|
Diluted
|
|
$
|
0.15
|
|
|
$
|
(0.11
|
)
|
|
$
|
0.42
|
|
|
$
|
(0.14
|
)
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,404,805
|
|
|
|
16,274,663
|
|
|
|
16,380,807
|
|
|
|
16,260,862
|
|
Diluted
|
|
|
16,563,245
|
|
|
|
16,274,663
|
|
|
|
16,492,217
|
|
|
|
16,260,862
|
|
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,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
7,008
|
|
|
$
|
(2,218
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,627
|
|
|
|
2,234
|
|
Stock-based compensation
|
|
|
1,085
|
|
|
|
770
|
|
Provision for inventory obsolescence
|
|
|
813
|
|
|
|
78
|
|
Deferred income taxes
|
|
|
(1,537
|
)
|
|
|
3,163
|
|
Other non-cash items
|
|
|
93
|
|
|
|
195
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(7,668
|
)
|
|
|
(12,619
|
)
|
Inventories
|
|
|
833
|
|
|
|
(2,082
|
)
|
Prepaids
|
|
|
316
|
|
|
|
(639
|
)
|
Income taxes
|
|
|
(101
|
)
|
|
|
(742
|
)
|
Book overdraft
|
|
|
(1,300
|
)
|
|
|
(1,293
|
)
|
Trade accounts payable
|
|
|
901
|
|
|
|
(1,790
|
)
|
Accrued and other current liabilities
|
|
|
(267
|
)
|
|
|
4,031
|
|
Other operating activities
|
|
|
(264
|
)
|
|
|
18
|
|
Net cash provided by (used in) operating activities
|
|
|
1,539
|
|
|
|
(10,894
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Expenditures for property and equipment
|
|
|
(1,210
|
)
|
|
|
(1,307
|
)
|
Cash received for acquisition
|
|
|
—
|
|
|
|
193
|
|
Net cash used in investing activities
|
|
|
(1,210
|
)
|
|
|
(1,114
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Borrowings on revolver
|
|
|
270,609
|
|
|
|
243,651
|
|
Payments on revolver
|
|
|
(270,761
|
)
|
|
|
(231,509
|
)
|
Payment of dividends
|
|
|
(39
|
)
|
|
|
(60
|
)
|
Purchase of treasury stock/stock surrendered on vested awards
|
|
|
(138
|
)
|
|
|
(74
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(329
|
)
|
|
|
12,008
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2018 and for the three and nine months ended September 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 adoption 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 amends prior guidance and 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 Paragraphs Pursuant to SEC Staff Accounting
Bulletin No. 118 (SEC Update).” This ASU added the SEC guidance released on December 22, 2017 regarding the income tax accounting
implication of the Tax Cuts and Jobs Act to ASC Topic 740. At September 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
August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the
Disclosure Requirements for Fair Value Measurement.” The amendments in this update eliminate, add and modify certain disclosure
requirements for fair value measurements as part of its disclosure framework project. The guidance is effective for public companies
beginning in the first quarter of 2020 and early adoption is permitted. The Company is currently assessing the impact of this
ASU on its consolidated financial statements and evaluating the timing of adoption.
In
August 2018, the FASB issued ASU 2018-14, “Disclosure Framework – Changes to the Disclosure Requirements for Defined
Benefit Plans.” The amendments in this update eliminate, add and modify certain disclosure requirements for defined benefit
pension plans. The guidance is effective for public companies beginning in the first quarter of 2020 and early adoption is permitted.
The Company is currently assessing the impact of this ASU on its consolidated financial statements and evaluating the timing of
adoption.
In
August 2018, the FASB issued ASU 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic
350-40); Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.”
The amendments in this update require implementation costs incurred by customers in cloud computing arrangements (i.e., hosting
arrangements) to be capitalized under the same premises of authoritative guidance for internal-use software, and deferred over
the non-cancellable term of the cloud computing arrangement plus any option renewal periods that are reasonably certain to be
exercised by the customer or for which the exercise is controlled by the service provider. The guidance is effective for public
companies beginning in the first quarter of 2020 and early adoption is permitted. The Company is currently assessing the impact
of this ASU on its consolidated financial statements and evaluating the timing of adoption.
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. In
August 2018, the FASB amended the ASU with an additional (and optional) transition method to adopt the new leases standard. Under
the new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative
effect adjustment to the opening balance of retained earnings in the period of adoption and the comparative periods presented
in the financial statements will continue to be in accordance with current GAAP. The Company will elect to use the package of
practical expedients available under this amendment and will not elect the use of hindsight during transition. The Company has
completed the evaluation of its lease contract population and is reviewing contract data as it continues to evaluate the impact
that adopting this ASU will have on the Company’s consolidated financial statements. The Company is evaluating several system-based
software options to facilitate in the identification, tracking and reporting of leases based upon the requirements of the new
leases standard and will continue monitoring industry implementation activities.
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
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares for basic earnings (loss) per share
|
|
|
16,404,805
|
|
|
|
16,274,663
|
|
|
|
16,380,807
|
|
|
|
16,260,862
|
|
Effect of dilutive securities
|
|
|
158,440
|
|
|
|
—
|
|
|
|
111,410
|
|
|
|
—
|
|
Weighted average common shares for diluted earnings (loss) per share
|
|
|
16,563,245
|
|
|
|
16,274,663
|
|
|
|
16,492,217
|
|
|
|
16,260,862
|
|
Stock
awards to purchase 223,477 and 667,239 shares of common stock for the three months ended September 30, 2018 and 2017, respectively,
and 295,387 and 683,847 shares for the nine months ended September 30, 2018 and 2017, respectively, were not included in the diluted
net income (loss) per share calculation as their inclusion would have been anti-dilutive.
3.
Debt
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 dated as of October 3, 2016 (the “Loan Agreement”). 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 September 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.”
4.
Income Taxes
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 result of the Company’s
assessment is that it is more likely than not that the Company will generate sufficient taxable income to utilize the deferred
tax assets. Therefore, as of September 30, 2018, the valuation allowance of $1.0 million was released.
5.
Incentive Plans
Stock
Option Awards
There
were no stock option awards granted during the first nine months of 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 terms 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 million and $0.3 million for the three months ended September 30, 2018 and 2017, respectively,
and $1.1 million and $0.8 million for the nine months ended September 30, 2018 and 2017, respectively, and is included in salaries
and commissions for employees, and in other operating expenses for non-employee directors.
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 57 months at September 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 nine months ended September
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
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
76.2
|
%
|
|
|
77.1
|
%
|
|
|
76.1
|
%
|
|
|
78.0
|
%
|
Gross profit
|
|
|
23.8
|
%
|
|
|
22.9
|
%
|
|
|
23.9
|
%
|
|
|
22.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and commissions
|
|
|
10.9
|
%
|
|
|
11.1
|
%
|
|
|
10.7
|
%
|
|
|
11.3
|
%
|
Other operating expenses
|
|
|
8.9
|
%
|
|
|
8.6
|
%
|
|
|
8.6
|
%
|
|
|
9.0
|
%
|
Depreciation and amortization
|
|
|
0.6
|
%
|
|
|
0.7
|
%
|
|
|
0.6
|
%
|
|
|
0.9
|
%
|
Total operating expenses
|
|
|
20.4
|
%
|
|
|
20.3
|
%
|
|
|
19.9
|
%
|
|
|
21.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
3.4
|
%
|
|
|
2.5
|
%
|
|
|
4.0
|
%
|
|
|
0.7
|
%
|
Interest expense
|
|
|
0.8
|
%
|
|
|
0.7
|
%
|
|
|
0.8
|
%
|
|
|
0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
2.6
|
%
|
|
|
1.9
|
%
|
|
|
3.2
|
%
|
|
|
0.1
|
%
|
Income tax (benefit) expense
|
|
|
(0.2
|
)%
|
|
|
4.0
|
%
|
|
|
0.6
|
%
|
|
|
1.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
2.7
|
%
|
|
|
(2.1
|
)%
|
|
|
2.6
|
%
|
|
|
(0.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
Due to rounding, percentages may not add up to total operating expenses, operating income, income before income taxes or net income
(loss).
Comparison
of the Three Months Ended September 30, 2018 and 2017
Sales
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
(Dollars in millions)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
Sales
|
|
$
|
90.1
|
|
|
$
|
81.2
|
|
|
$
|
8.9
|
|
|
|
10.9
|
%
|
Our
sales for the third quarter increased 10.9% to $90.1 million in 2018 from $81.2 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 13%, while Maintenance, Repair, and Operations (MRO) sales increased 10%, as compared to the
third quarter of 2017.
Gross
Profit
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
(Dollars in millions)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
Gross profit
|
|
$
|
21.4
|
|
|
$
|
18.6
|
|
|
$
|
2.8
|
|
|
|
15.2
|
%
|
Gross margin
|
|
|
23.8
|
%
|
|
|
22.9
|
%
|
|
|
|
|
|
|
|
|
Gross
profit increased 15.2% to $21.4 million in 2018 from $18.6 million in 2017. The increase in gross profit was primarily attributable
to increased sales. Gross margin (gross profit as a percentage of sales) increased to 23.8% in 2018 from 22.9% in 2017 primarily
due to ongoing pricing discipline and product mix.
Operating
Expenses
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
(Dollars in millions)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and commissions
|
|
$
|
9.8
|
|
|
$
|
9.0
|
|
|
$
|
0.8
|
|
|
|
8.9
|
%
|
Other operating expenses
|
|
|
8.0
|
|
|
|
7.0
|
|
|
|
1.0
|
|
|
|
14.7
|
%
|
Depreciation and amortization
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
0.0
|
|
|
|
(1.5
|
)%
|
Total operating expenses
|
|
$
|
18.3
|
|
|
$
|
16.5
|
|
|
$
|
1.8
|
|
|
|
11.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses as a percent of sales
|
|
|
20.4
|
%
|
|
|
20.3
|
%
|
|
|
|
|
|
|
|
|
Note:
Due to rounding, numbers may not add up to total operating expenses.
Salaries
and commissions increased $0.8 million between the periods primarily due to additional administrative and warehouse personnel
and increased commissions resulting from higher sales and gross profit.
Other
operating expenses increased $1.0 million primarily due to increased warehouse expenses as a result of higher volume and higher
insurance expenses as a result of increased personnel.
Depreciation
and amortization remained consistent between the periods.
Operating
expenses as a percentage of sales increased slightly to 20.4% in 2018 from 20.3% in 2017, as operating expenses increased with
the increase in sales.
Interest
Expense
Interest
expense increased to $0.7 million in 2018 from $0.5 million in 2017 due to higher debt to fund increased working capital and to
an increase in the average effective interest rate. Average debt was $76.8 million in 2018 compared to $71.2 million in 2017.
The average effective interest rate was 3.8% in 2018 compared to 3.0% in 2017.
Income
Taxes
We
recorded an income tax benefit of $0.1 million in 2018 compared to the $3.2 million income tax expense in the prior year period.
The effective income tax rate decreased to (6.4)% in 2018 from 213.8% in 2017, primarily due to the release of the $1.0 million
valuation allowance at September 30, 2018 and higher estimated annual earnings for 2018. In 2017, the income tax expense was impacted
by the establishment of a full valuation allowance on the net deferred tax assets. 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 $2.5 million in 2018 compared to a net loss of $1.7 million in 2017.
Comparison
of the Nine Months Ended September 30, 2018 and 2017
Sales
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
(Dollars in millions)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
Sales
|
|
$
|
269.0
|
|
|
$
|
235.6
|
|
|
$
|
33.4
|
|
|
|
14.2
|
%
|
Our
sales for the nine month period increased 14.2% to $269.0 million in 2018 from $235.6 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 24%, from 2017. MRO increased 12%, from 2017.
Gross
Profit
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
(Dollars in millions)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
Gross profit
|
|
$
|
64.2
|
|
|
$
|
51.8
|
|
|
$
|
12.4
|
|
|
|
23.9
|
%
|
Gross margin
|
|
|
23.9
|
%
|
|
|
22.0
|
%
|
|
|
|
|
|
|
|
|
Gross
profit increased 23.9% to $64.2 million in 2018 from $51.8 million in 2017. The increase in gross profit was attributable to the
increase in sales over the prior year. Gross margin increased to 23.9% in 2018 from 22.0% in 2017, primarily due to ongoing pricing
discipline and product mix.
Operating
Expenses
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
(Dollars in millions)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and commissions
|
|
$
|
28.9
|
|
|
$
|
26.7
|
|
|
$
|
2.2
|
|
|
|
8.4
|
%
|
Other operating expenses
|
|
|
23.0
|
|
|
|
21.3
|
|
|
|
1.7
|
|
|
|
8.0
|
%
|
Depreciation and amortization
|
|
|
1.6
|
|
|
|
2.2
|
|
|
|
(0.6
|
)
|
|
|
(27.2
|
)%
|
Total operating expenses
|
|
$
|
53.5
|
|
|
$
|
50.2
|
|
|
$
|
3.3
|
|
|
|
6.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses as a percent of sales
|
|
|
19.9
|
%
|
|
|
21.3
|
%
|
|
|
|
|
|
|
|
|
Note:
Due to rounding, numbers may not add up to total operating expenses.
Salaries
and commissions increased $2.2 million between the periods due to additional sales, administrative and warehouse personnel, as
well as increased commissions resulting from increased sales and gross profit.
Other
operating expenses increased $1.7 million, as distribution expenses increased primarily due to the sales increase, increased professional
and warehouse expenses and higher insurance expenses as a result of increased personnel.
Depreciation
and amortization decreased primarily due to certain intangibles which became fully amortized in 2017.
Operating
expenses as a percentage of sales decreased to 19.9% in 2018 from 21.3% in 2017, as operating expenses increased at a lower rate
than the increase in sales, due to improved leverage.
Interest
Expense
Interest
expense increased 44.5% to $2.2 million in 2018 from $1.5 million in 2017 due to higher average debt levels to fund increased
working capital levels and higher interest rates. Average debt was $78.8 million in 2018 compared to $70.6 million in 2017. The
average effective interest rate rose to 3.6% in 2018 from 2.8% in the prior year period.
Income
Taxes
The
income tax expense of $1.5 million in 2018 decreased from $2.4 million in 2017. The effective income tax rate decreased to 18.1%
in 2018 from 1,651.0% in 2017, primarily due to the release of the $1.0 million valuation allowance at September 30, 2018 and
higher estimated annual earnings for 2018. In 2017, the income tax expense was impacted by the establishment of a full valuation
allowance on the net deferred tax assets. 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 $7.0 million in 2018 compared to a net loss of $2.2 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 net realizable value 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 Nine Months Ended September 30, 2018 and 2017
Our
net cash provided by operating activities was $1.5 million for the nine months ended September 30, 2018 compared to net cash used
of $10.9 million in 2017. We had net income of $7.0 million in 2018 compared to a net loss of $2.2 million in 2017.
Changes
in our operating assets and liabilities resulted in cash used in operating activities of $7.6 million in 2018. An increase in
accounts receivable of $7.7 million due to the increase in sales was the main use of cash.
Net
cash used in investing activities was $1.2 million in 2018 compared to $1.1 million in 2017.
Net
cash used in financing activities was $0.3 million in 2018 compared to net cash provided by financing activities of $12.0 million
in 2017. Net payments on the revolver of $0.2 million and the purchase of treasury stock associated with stock surrendered on
vested awards of $0.1 million were the components of financing activities in 2018.
Indebtedness
Our
principal source of liquidity at September 30, 2018 was working capital of $126.0 million compared to $119.6 million at December
31, 2017. We also had additional available borrowing capacity of approximately $26.6 million at September 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 September 30, 2018.
In
thousands
|
|
Total
|
|
|
Less
than
1 year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
|
More
than
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
debt
|
|
$
|
73,403
|
|
|
$
|
—
|
|
|
$
|
73,403
|
|
|
$
|
—
|
|
|
$
|
—
|
|
There
were no material changes in operating lease obligations or non-cancellable purchase obligations since December 31, 2017.