UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2019

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                    to

 

Commission File Number: 000-52046

 

(Exact name of registrant as specified in its charter)

 

Delaware   36-4151663
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
10201 North Loop East    
Houston, Texas   77029
(Address of principal executive offices)   (Zip Code)

 

(713) 609-2100

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

 

Title of each class Trading symbol Name of each exchange on which registered
Common stock, par value $0.001 per share HWCC The Nasdaq Stock Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days YES ☒  NO ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☒  NO ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act

 

Large Accelerated Filer   ☐ Accelerated Filer   ☒ Non-Accelerated Filer   ☐ Smaller Reporting Company   ☒
Emerging Growth Company   ☐      

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES ☐  NO ☒

 

At August 1, 2019 there were 16,645,182 outstanding shares of the registrant’s common stock, $0.001 par value per share.

 

 

 

 

HOUSTON WIRE & CABLE COMPANY

Form 10-Q

For the Quarter Ended June 30, 2019

 

INDEX

 

PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements (Unaudited)  
  Consolidated Balance Sheets
  Consolidated Statements of Operations
  Consolidated Statements of Stockholders’ Equity
  Consolidated Statements of Cash Flows
  Notes to Consolidated Financial Statements
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview 11 
  Overview 11 
  Cautionary Statement for Purposes of the “Safe Harbor” 11 
  Results of Operations 12 
  Impact of Inflation and Commodity Prices 14 
  Liquidity and Capital Resources 15 
  Contractual Obligations 15 
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16 
     
Item 4. Controls and Procedures 16 
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 16 
Item 1A. Risk Factors 16 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 16 
Item 3. Defaults Upon Senior Securities 16 
Item 4. Mine Safety Disclosures 16 
Item 5. Other Information 16 
Item 6. Exhibits 17 
   
Signature Page 18 

 

1  

 

 

HOUSTON WIRE & CABLE COMPANY

Consolidated Balance Sheets

(In thousands, except share data)

 

    June 30,     December 31,  
    2019     2018  
      (unaudited)          
Assets                
Current assets:                
Cash   $     $ 1,393  
Accounts receivable, net:                
Trade     55,877       52,946  
Other     3,313       6,847  
Inventories, net     106,273       94,325  
Income taxes     577       435  
Prepaids     2,108       737  
Other current assets     490        
Total current assets     168,638       156,683  
                 
Property and equipment, net     12,033       11,456  
Intangible assets, net     10,790       11,179  
Goodwill     22,353       22,353  
Operating lease right-of-use assets, net     11,176        
Deferred income taxes     571       930  
Other assets     490       456  
Total assets   $ 226,051     $ 203,057  
                 
Liabilities and stockholders’ equity                
Current liabilities:                
Book overdraft   $ 330     $  
Trade accounts payable     13,359       11,253  
Accrued and other current liabilities     21,612       19,232  
Operating lease liabilities     2,961        
Total current liabilities     38,262       30,485  
                 
Debt     73,107       71,316  
Operating lease long term liabilities     8,628        
Other long term liabilities     706       578  
Total liabilities     120,703       102,379  
                 
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: 16,645,182 and 16,611,651 outstanding at June 30, 2019 and December 31, 2018, respectively     21       21  
Additional paid-in-capital     53,620       53,514  
Retained earnings     110,003       105,975  
Treasury stock     (58,296 )     (58,832 )
Total stockholders’ equity     105,348       100,678  
Total liabilities and stockholders’ equity   $ 226,051     $ 203,057  

 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

 

2  

 

 

HOUSTON WIRE & CABLE COMPANY

Consolidated Statements of Operations

(Unaudited)

(In thousands, except share and per share data)

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2019     2018     2019     2018  
                         
Sales   $ 85,326     $ 93,852     $ 170,596     $ 178,878  
Cost of sales     64,789       71,505       128,800       136,042  
Gross profit     20,537       22,347       41,796       42,836  
                                 
Operating expenses:                                
Salaries and commissions     9,244       9,906       18,424       19,100  
Other operating expenses     7,729       7,508       15,392       14,988  
Depreciation and amortization     534       541       1,087       1,086  
Total operating expenses     17,507       17,955       34,903       35,174  
                                 
Operating income     3,030       4,392       6,893       7,662  
Interest expense     738       773       1,479       1,417  
Income before income taxes     2,292       3,619       5,414       6,245  
Income tax expense     649       1,013       1,487       1,692  
Net income   $ 1,643     $ 2,606     $ 3,927     $ 4,553  
                                 
Earnings per share:                                
Basic   $ 0.10     $ 0.16     $ 0.24     $ 0.28  
Diluted   $ 0.10     $ 0.16     $ 0.24     $ 0.28  
Weighted average common shares outstanding:                                
Basic     16,504,471       16,387,112       16,491,236       16,368,610  
Diluted     16,597,496       16,489,671       16,571,113       16,459,736  

 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

 

3  

 

 

HOUSTON WIRE & CABLE COMPANY

Consolidated Statements of Stockholders’ Equity

(Unaudited)

 

          Additional                 Total  
    Common Stock     Paid-In     Retained     Treasury Stock     Stockholders’  
    Shares     Amount     Capital     Earnings     Shares     Amount     Equity  
    (In thousands, except share data)  
       
Balance at December 31, 2018     20,988,952     $ 21     $ 53,514     $ 105,975       (4,377,301 )   $ (58,832 )   $ 100,678  
                                                         
Net income                       2,284                   2,284  
Repurchase of treasury shares                             (1,506 )     (8 )     (8 )
Amortization of unearned stock compensation                 342                         342  
Settlement of director’s deferred compensation                             2,251       16       16  
Cumulative effect of accounting change (Note 7)                       101                   101  
Balance at March 31, 2019     20,988,952     $ 21     $ 53,856     $ 108,360       (4,376,556 )   $ (58,824 )   $ 103,413  
                                                         
Net income                       1,643                   1,643  
Repurchase of treasury shares                             (11,951 )     (73 )     (73 )
Amortization of unearned stock compensation                 365                         365  
Impact of released vested restricted stock units                 (601 )           44,737       601        
Balance at June 30, 2019     20,988,952     $ 21     $ 53,620     $ 110,003       (4,343,770 )   $ (58,296 )   $ 105,348  
                                                         

 

          Additional                 Total  
    Common Stock     Paid-In     Retained     Treasury Stock     Stockholders’  
    Shares     Amount     Capital     Earnings     Shares     Amount     Equity  
    (In thousands, except share data)  
       
Balance at December 31, 2017     20,988,952     $ 21     $ 54,006     $ 97,336       (4,497,771 )   $ (60,619 )   $ 90,744  
                                                         
Net income                       1,947                   1,947  
Repurchase of treasury shares                             (8,798 )     (63 )     (63  
Amortization of unearned stock compensation                 158                         158  
Balance at March 31, 2018     20,988,952     $ 21     $ 54,164     $ 99,283       (4,506,569 )   $ (60,682 )   $ 92,786  
                                                         
Net income                       2,606                   2,606  
Repurchase of treasury shares                             (10,273 )     (75 )     (75 )
Amortization of unearned stock compensation                 304                         304  
Amortization of reclassed liability awards                 411                         411  
Impact of released vested restricted stock units                 (353 )           26,185       353        
Issuance of restricted stock award                 (379 )           28,144       379        
Balance at June 30, 2018     20,988,952     $ 21     $ 54,147     $ 101,889       (4,462,513 )   $ (60,025 )   $ 96,032  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4  

 

 

HOUSTON WIRE & CABLE COMPANY

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

   

Six Months

Ended June 30,

 
    2019     2018  
             
Operating activities                
Net income   $ 3,927     $ 4,553  
Adjustments to reconcile net income to net cash used in operating activities:                
Depreciation and amortization     1,087       1,086  
Amortization of unearned stock compensation     707       703  
Non-cash lease expense     1,968        
Provision for refund liability     471       108  
Provision for inventory obsolescence     459       191  
Deferred income taxes     460       (82 )
Other non-cash items     83       21  
Changes in operating assets and liabilities:                
Accounts receivable     75       (5,403 )
Inventories     (12,407 )     105  
Prepaids     (1,371 )     196  
Other assets     (550 )     (12 )
Lease payments     (1,963 )      
Book overdraft     330       (1,716 )
Trade accounts payable     2,106       (439 )
Accrued and other current liabilities     2,235       (4,483 )
Income taxes     (142 )     (399 )
Other operating activities     359       (104 )
Net cash used in operating activities     (2,166 )     (5,675 )
                 
Investing activities                
Expenditures for property and equipment     (875 )     (741 )
Net cash used in investing activities     (875 )     (741 )
                 
Financing activities                
Borrowings on revolver     175,417       179,994  
Payments on revolver     (173,626 )     (173,401 )
Payment of dividends     (30 )     (39 )
Purchase of treasury stock/stock surrendered on vested awards     (65 )     (138 )
Lease payments     (48 )      
Net cash provided by financing activities     1,648       6,416  
                 
Net change in cash     (1,393 )      
Cash at beginning of period     1,393        
                 
Cash at end of period   $     $  

 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

 

5  

 

 

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 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, 2019 and for the three and six months ended June 30, 2019 and 2018 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 allowance for doubtful accounts, the refund liability, the inventory obsolescence reserve, vendor rebates, the realization of deferred tax assets and the valuation of goodwill and indefinite-lived assets. Actual results could differ materially from the estimates and assumptions used for the preparation of the financial statements.

 

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, 2018 filed with the SEC.

 

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 ASUs that were recently adopted by the Company.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Under the new guidance as amended, a lessee is required to recognize a right-of-use asset and a lease liability for leases greater than 1 year, both finance and operating leases. This update was effective for public companies for fiscal years beginning after December 15, 2018. Under the transition rules, an entity initially applies the new leases standard at the adoption date, and recognizes a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption and the comparative periods presented in the financial statements continue to be in accordance with previously-existing GAAP. The Company adopted this ASU effective January 1, 2019. See Note 7 for detailed information.

 

In June 2018, the FASB issued ASU No. 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,” which simplifies the accounting for share-based payment arrangements with nonemployees for goods and services. Under the ASU, the guidance on such payments to nonemployees is aligned with the accounting for share-based payments granted to employees, including the measurement of equity-classified awards, which is fixed at the grant date under the new guidance. The ASU superseded Subtopic 505-50, “Equity - Equity-Based Payments to Non-Employees,” and was effective for public entities for interim and annual reporting periods beginning after December 15, 2018. The Company adopted this ASU in the first quarter of 2019, and the adoption did not have a material impact on the Company’s consolidated financial statements.

 

Recent Accounting Pronouncements

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments in this update eliminate, add and modify certain disclosure requirements for fair value measurements as part of the FASB’s disclosure framework project. The guidance is effective for public companies beginning in the first quarter of 2020. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-14, “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. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

 

6  

 

 

In August 2018, the FASB issued ASU 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40); Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The amendments in this update require implementation costs incurred by customers in cloud computing arrangements (i.e., hosting arrangements) to be capitalized under the same premises of authoritative guidance for internal-use software, and deferred over the non-cancellable term of the cloud computing arrangement plus any option renewal periods that are reasonably certain to be exercised by the customer or for which the exercise is controlled by the service provider. The guidance is effective for public companies beginning in the first quarter of 2020. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this update amend the guidance of the impairment of financial instruments and add an impairment model, known as the current expected credit loss (CECL) model. The CECL model is designed to capture expected credit losses through the establishment of an allowance account, which will be presented as an offset to the amortized cost basis of the related financial asset. The guidance is effective for interim and annual periods beginning after December 15, 2019. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

 

2. Earnings per Share

 

Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding. Diluted earnings 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,  
    2019     2018     2019     2018  
Denominator:                        
Weighted average common shares for basic earnings per share     16,504,471       16,387,112       16,491,236       16,368,610  
Effect of dilutive securities     93,025       102,559       79,877       91,126  
Weighted average common shares for diluted earnings per share     16,597,496       16,489,671       16,571,113       16,459,736  

 

Stock awards to purchase 275,494 and 300,117 shares of common stock for the three months ended June 30, 2019 and 2018, respectively, and 286,141 and 286,121 shares for the six months ended June 30, 2019 and 2018, respectively, were not included in the diluted net income per share calculation as their inclusion would have been anti-dilutive.

 

3. Debt

 

On March 12, 2019, the Company, as guarantor, HWC Wire & Cable Company and Vertex, as borrowers, and Bank of America, N.A., as agent and lender, entered into a Second Amendment to the Fourth Amended and Restated Loan and Security Agreement (such agreement, as so amended, the “Loan Agreement”). The Second Amendment extends the expiration date of the Company’s $100 million revolving credit facility until March 12, 2024. 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 March 12, 2024. At June 30, 2019, the Company was in compliance with the availability-based covenants governing its indebtedness.

 

7  

 

 

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

 

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.

 

5. Incentive Plans

 

Stock Option Awards

 

There were no stock option awards granted during the first six months of 2019 or 2018.

 

Restricted Stock Awards and Restricted Stock Units

 

Following the Annual Meeting of Stockholders on May 7, 2019, the Company granted restricted stock units with a grant date value of $60,000 to each non-employee director who was elected and re-elected, for an aggregate of 58,920 restricted stock units. Each award of restricted stock units vests at the date of the 2020 Annual Meeting of Stockholders. Each non-employee director is entitled to receive a number of shares of the Company’s common stock equal to the number of vested restricted stock units, together with dividend equivalents from the date of grant, at such time as the director’s service on the board terminates for any reason.

 

On March 12, 2019, the Board of Directors granted 52,910 performance stock units to the Company’s President and CEO and 13,228 performance stock units to the CFO. Each grant of performance stock units vests on December 31, 2021, 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 the grantee 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 the grantee if and when the related shares vest.

 

Total stock-based compensation cost was $0.4 million for each of the three months ended June 30, 2019 and 2018, and $0.7 million for each of the six months ended June 30, 2019 and 2018, 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 a facility in Massachusetts 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 48 months at June 30, 2019. See Note 8.

 

The Company had outstanding under the Loan Agreement letters of credit totaling $1.7 million to certain vendors as of June 30, 2019.

 

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.

 

7. Leases

 

Effective January 1, 2019, the Company adopted ASU No. 2016-02, “Leases (Topic 842)” and the series of related ASUs that followed (collectively referred to as “Topic 842”). The most significant changes under the new guidance include clarification of the definition of a lease, and the requirements for lessees to recognize a right-of-use (ROU) asset and a lease liability for all qualifying leases with terms longer than twelve months in the consolidated balance sheet. In addition, under Topic 842, additional disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.

 

The Company elected the practical expedient available under ASU 2018-11 “Leases: Targeted Improvements,” which allows the Company to apply the transition provision for Topic 842 at the Company’s adoption date instead of at the earliest comparative period presented in the Company’s financial statements. Therefore, the Company recognized and measured leases existing at January 1, 2019 but without retrospective application. The Company also elected all other available practical expedients except the hindsight practical expedient. In electing the practical expedients, the Company utilized the transition practical expedient package whereby the Company did not reassess (i) whether any of the Company’s expired or existing contracts contain a lease, (ii) the classification for any expired or existing leases and (iii) initial direct costs for any existing leases.

 

8  

 

 

The impact of Topic 842 on the Company’s consolidated balance sheet as of January 1, 2019 was the recognition of ROU assets and lease liabilities for operating leases, while the Company’s accounting for finance leases remained substantially unchanged. The Company’s finance leases were immaterial prior to the adoption of Topic 842, and no change was made to the classification of these leases. As a result of the adoption of Topic 842, beginning retained earnings was impacted by $0.1 million and there was no impact to the income statement.

 

The Company leases property including warehouse space, offices, vehicles and office equipment. The Company determines if an arrangement is a lease at inception. As part of the transition to the new standard, the Company reviewed agreements with suppliers, vendors, customers, and other outside parties to determine if any agreements met the definition of an embedded lease. This is based on the nature of the contracts reviewed, and various factors, including identified assets included in the agreement to which the Company has exclusive rights of control as described by Topic 842. The Company concluded that these are not material agreements with parties that would constitute an embedded lease. For purposes of calculating operating lease liabilities, lease terms may be deemed to include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

 

Beginning January 1, 2019, operating ROU assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Operating leases in effect prior to January 1, 2019 were recognized at the present value of the remaining lease payments over the remaining lease term as of January 1, 2019. The Company is required to determine a discount rate in order to calculate the present value of lease payments. If the rate is not included in the lease or cannot be readily determined, the Company uses its incremental secured borrowing rate based on lease term information available at the commencement date of the lease in determining the present value of lease payments. The Company recognizes lease components and non-lease components together and not as separate parts of a lease for all leases. The Company will exercise this practical expedient in the future by asset class.

 

The expenses generated by the lease activity of the Company as lessee for the three months and six months ended June 30, 2019 were as follows:

 

        Three Months
Ended
    Six Months
Ended
 
Lease Type   Income Statement Classification   June 30, 2019  
(Dollars in thousands)                
Consolidated operating lease expense   Operating expenses   $ 982     $ 1,968  
                     
Consolidated financing lease amortization   Operating expenses     33       50  
Consolidated financing lease interest   Interest expense     4       6  
Consolidating financing lease expense         37       56  
                     
Net lease cost   Operating expenses   $ 1,019     $ 2,024  

 

The value of the net assets and liabilities generated by the leasing activity of the Company as lessee as of June 30, 2019 were as follows:

 

Lease Type   Balance Sheet Classification   Amount  
(Dollars in thousands)            
Total ROU operating lease assets (1)   Operating lease right-of-use assets, net   $ 11,176  
Total ROU financing lease assets (2)   Property and equipment, net     609  
Total lease assets       $ 11,785  
             
Total current operating lease obligation   Operating lease liabilities   $ 2,961  
Total current financing lease obligation   Accrued and other current liabilities     169  
Total current lease obligation       $ 3,130  
             
Total long term operating lease obligation   Operating lease long term liabilities   $ 8,628  
Total long term financing lease obligation   Other long term liabilities     451  
Total long term lease obligation       $ 9,079  

 

(1) Operating lease assets are recorded net of accumulated amortization of $1.6 million as of June 30, 2019

 

(2) Financing lease assets are recorded net of accumulated amortization of $0.2 million as of June 30, 2019

 

9  

 

 

The future minimum lease payments for finance and operating lease liabilities of the Company as lessee as of June 30, 2019 were as follows:

 

Maturity Date of Lease Liabilities   Operating Leases     Financing Leases     Total  
(Dollars in thousands)                        
Year one   $ 3,504     $ 192     $ 3,696  
Year two     2,721       177       2,898  
Year three     2,694       149       2,843  
Year four     2,103       101       2,204  
Year five     795       57       852  
Subsequent years     1,290             1,290  
Total lease payments     13,107       676       13,783  
Less: Interest     1,518       56       1,574  
Present value of lease liabilities   $ 11,589     $ 620     $ 12,209  

 

The weighted average remaining lease terms and discount rates of the leases held by the Company as of June 30, 2019 were as follows:

 

Lease Type

 

Weighted Average
Term in Years

    Weighted Average
Interest Rate
 
Operating leases     4.5       5.5  
Financing leases     3.9       4.3  

 

The cash outflows of the leasing activity of the Company as lessee for the six months ended June 30, 2019 were as follows:

 

Cash Flow Source   Classification   Amount  
(Dollars in thousands)            
Operating cash outflows from operating leases   Operating activities   $ 1,957  
Operating cash outflows from financing leases   Operating activities     6  
Financing cash outflows from financing leases   Financing activities     48  

 

During the six months ended June 30, 2019, the Company recorded non-cash ROU financing lease assets and corresponding financing lease obligations totaling $0.4 million related to new and modified lease agreements. Any operating leases, new or modified, as well as any sublease income for the six months ended June 30, 2019, are not material. 

 

8. Subsequent Events

 

On July 22, 2019, the Company modified certain terms of the lease agreement with the landlord of Vertex’s Massachusetts facility, including early termination of the lease on November 30, 2019 and Vertex subleasing a portion of the space until the end of November. In connection with the modification, the Company will make a payment of approximately $2.5 million to the lessor. The Company will be relieved of $2.8 million of future rent payments, along with other future costs associated with the lease including property taxes, insurance, utilities and maintenance otherwise required in the original lease agreement.

  

10  

 

 

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, 2018.

 

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 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, 2018 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, 2019.

 

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, 2018, 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.

 

11  

 

 

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,  
    2019     2018     2019     2018  
                         
Sales     100.0 %     100.0 %     100.0 %     100.0 %
Cost of sales     75.9 %     76.2 %     75.5 %     76.1 %
Gross profit     24.1 %     23.8 %     24.5 %     23.9 %
                                 
Operating expenses:                                
Salaries and commissions     10.8 %     10.6 %     10.8 %     10.7 %
Other operating expenses     9.1 %     8.0 %     9.0 %     8.4 %
Depreciation and amortization     0.6 %     0.6 %     0.6 %     0.6 %
Total operating expenses     20.5 %     19.1 %     20.5 %     19.7 %
                                 
Operating income     3.6 %     4.7 %     4.0 %     4.3 %
Interest expense     0.9 %     0.8 %     0.9 %     0.8 %
                                 
Income before income taxes     2.7 %     3.9 %     3.2 %     3.5 %
Income tax expense     0.8 %     1.1 %     0.9 %     0.9 %
                                 
Net income     1.9 %     2.8 %     2.3 %     2.5 %

 

Note:     Due to rounding, percentages may not add up to total operating expenses, operating income, income before income taxes or net income.

 

Comparison of the Three Months Ended June 30, 2019 and 2018

 

Sales

 

    Three Months Ended  
    June 30,  
(Dollars in millions)   2019     2018     Change  
Sales   $ 85.3     $ 93.9     $ (8.5 )     (9.1 )%

 

Our sales for the second quarter decreased from $93.9 million in 2018 to $85.3 million in 2019. The decrease in sales was primarily due to reduced industrial market demand in oil and gas geographies, reduced demand for fasteners and reduced availability of inventory due to supply chain disruptions resulting from the on-going trade discussions between the United States and China. We estimate sales for our project business, which targets end markets for Environmental Compliance, Engineering & Construction, Industrials, Utility Power Generation, and Mechanical Wire Rope, increased 2%, while Maintenance, Repair, and Operations (MRO) sales decreased 11%, as compared to 2018.

 

Gross Profit

 

    Three Months Ended  
    June 30,  
(Dollars in millions)   2019     2018     Change  
Gross profit   $ 20.5     $ 22.3     $ (1.8 )     (8.1 )%
Gross margin     24.1 %     23.8 %                

 

12  

 

 

Gross profit decreased 8.1% to $20.5 million in 2019 from $22.3 million in 2018. The decrease in gross profit was attributable to reduced sales from oil and gas geographies and fasteners. Gross margin (gross profit as a percentage of sales) increased slightly to 24.1% in 2019 from 23.8% in 2018 primarily due to product mix and pricing discipline.

 

Operating Expenses

 

    Three Months Ended  
    June 30,  
(Dollars in millions)   2019     2018     Change  
Operating expenses:                                
Salaries and commissions   $ 9.2     $ 9.9     $ (0.7 )     (6.7 )%
Other operating expenses     7.7       7.5       0.2       2.9 %
Depreciation and amortization     0.5       0.5       0.0       (1.3 )%
Total operating expenses   $ 17.5     $ 18.0     $ 0.4       (2.5 )%
                                 
Operating expenses as a percent of sales     20.5 %     19.1 %                

 

Note: Due to rounding, numbers may not add up to total operating expenses.

 

Salaries and commissions decreased $0.7 million from the second quarter 2018 compared to 2019 due to lower commissions resulting from the reduction in sales and gross profit, offset by an increase in headcount.

 

Other operating expenses increased slightly due to higher expense, approximately $0.2 million, from the computer system upgrade and conversion.

 

Depreciation and amortization were flat year over year.

 

Operating expenses as a percentage of sales increased to 20.5% in 2019 from 19.1% in 2018, as the reduction in sales changed at a greater rate than the decrease in operating expenses.

 

Interest Expense

 

Interest expense decreased slightly from $0.8 million in 2018 to $0.7 million in 2019 as a result of lower average debt, offset by an increase in interest rates. Average debt was $74.3 million in 2019 compared to $82.5 million in 2018. The average effective interest rate was 3.9% in 2019 compared to 3.7% in 2018.

 

Income Taxes

 

The income tax expense of $0.6 million decreased from $1.0 million in the prior year period due to lower pretax income. The effective income tax rate for the quarter was near flat at 28.3 % in 2019 compared to 28.0% in 2018.

 

Net Income

 

We achieved net income of $1.6 million in 2019 compared to $2.6 million in 2018.

 

Comparison of the Six Months Ended June 30, 2019 and 2018

 

    Six Months Ended  
    June 30,  
(Dollars in millions)   2019     2018     Change  
Sales   $ 170.6     $ 178.9     $ (8.3 )     (4.6 )%

 

Our sales for the six month period decreased 4.6% from $178.9 million in 2018 to $170.6 million in 2019. The primary reasons for the decrease were reduced industrial market demand in oil and gas geographies, reduced demand for fasteners and reduced availability of inventory due to supply chain disruptions resulting from the on-going trade discussions between the United States and China. 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 3%, from 2018. MRO decreased 6%, from 2018.

 

13  

 

 

Gross Profit

 

    Six Months Ended  
    June 30,  
(Dollars in millions)   2019     2018     Change  
Gross profit   $ 41.8     $ 42.8     $ (1.0 )     (2.4 )%
Gross margin     24.5 %     23.9 %     0.6 %        

 

Gross profit decreased 2.4% from $42.8 million in 2018 to $41.8 million in 2019. The decrease in gross profit was primarily attributable to the reduction in sales. Gross margin increased slightly to 24.5% in 2019 from 23.9% in 2018, primarily due to product mix and pricing discipline.

 

Operating Expenses

 

    Six Months Ended  
    June 30,  
(Dollars in millions)   2019     2018     Change  
Operating expenses:                                
Salaries and commissions   $ 18.4     $ 19.1     $ (0.7 )     (3.5 )%
Other operating expenses     15.4       15.0       0.4       2.7 %
Depreciation and amortization     1.1       1.1       0.0       0.1 %
Total operating expenses   $ 34.9     $ 35.2     $ (0.3 )     (0.8 )%
                                 
Operating expenses as a percent of sales     20.5 %     19.7 %     0.8 %        

 

Note: Due to rounding, numbers may not add up to total operating expenses.

 

Salaries and commissions decreased $0.7 million between the periods due to lower commissions resulting from the reduction in sales and gross profit, offset by a slight increase in headcount.

 

Other operating expenses increased slightly due to higher expense, approximately $0.2 million, from the computer system upgrade and conversion.

 

Depreciation and amortization were flat year over year.

 

Operating expenses as a percentage of sales increased to 20.5% in 2019 from 19.7% in 2018, as sales levels fell at a greater rate than the reduction in operating expenses.

 

Interest Expense

 

Interest expense increased 4.4% to $1.5 million in 2019 from $1.4 million in 2018 due to higher interest rates. Average debt was $73.9 million in 2019 compared to $79.7 million in 2018. The average effective interest rate rose to 3.9% in 2019 from 3.5% in the prior year period.

 

Income Taxes

 

The income tax expense of $1.5 million in 2019 decreased from $1.7 million in 2018 due to lower pretax income. The effective income tax rate increased slightly to 27.5% in 2019 to 27.1% in 2018, primarily due to the release of vested share-based awards.

 

Net Income

 

We achieved net income of $3.9 million in 2019 compared to $4.6 million in 2018.

 

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. 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.

 

14  

 

 

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, 2019 and 2018

 

Our net cash used in operating activities was $2.2 million for the six months ended June 30, 2019 compared to $5.7 million in 2018. We had net income of $3.9 million in 2019 compared to $4.6 million in 2018.

 

Changes in our operating assets and liabilities resulted in cash used in operating activities of $11.3 million in 2019. An increase in inventories of $12.4 million primarily due to incentives offered by certain vendors on high volume inventory, as well as rebalancing inventory levels at regional locations, lease payments of $1.9 million and prepaid expenses of $1.4 million were the main uses of cash. Partially offsetting these uses of cash were increases in accounts payable and accrued liabilities of $2.1 million and $2.2 million, respectively, primarily due to increased inventory purchases in the second quarter of 2019.

 

Net cash used in investing activities was $0.9 million in 2019 compared to $0.7 million in 2018.

 

Net cash provided by financing activities was $1.6 million in 2019 compared to $6.4 million in 2018. Net borrowings on the revolver of $1.8 million were the primary source for financing activities in 2019.

 

Indebtedness

 

Our principal source of liquidity at June 30, 2019 was working capital of $130.4 million compared to $126.2 million at December 31, 2018. We also had available borrowing capacity of $25.2 million at June 30, 2019 and $28.7 million at December 31, 2018 under our loan agreement. The availability at June 30, 2019 is net of outstanding letters of credit of $1.7 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 June 30, 2019.

 

In thousands   Total    

Less than

1 year

    1-3 years     3-5 years    

More

than

5 years

 
                               
Total debt   $ 73,107     $     $     $ 73,107     $  

 

There were no material changes in operating lease obligations or non-cancellable purchase obligations since December 31, 2018.

 

15  

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

There were no material changes to our market risk as set forth in Items 7A and 7 of our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Item 4. Controls and Procedures

 

As of June 30, 2019, an evaluation was performed by the Company’s management, under the supervision and with the participation of the Company’s chief executive officer and chief financial officer, of the effectiveness of the Company’s disclosure controls and procedures. Based on that evaluation, the chief executive officer and the chief financial officer concluded that the Company’s disclosure controls and procedures were effective. There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2019, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Part II. Other Information

 

Item 1 - Not applicable and has been omitted.

 

Item 1A. Risk Factors

 

There were no material changes in the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Item 2 - Not applicable and has been omitted.

 

Item 3 - Not applicable and has been omitted.

 

Item 4 - Not applicable and has been omitted.

 

Item 5 - Not applicable and has been omitted.

 

16  

 

 

Item 6. Exhibits

 

(a) Exhibits required by Item 601 of Regulation S-K.

 

Exhibit

Number

  Document Description
     
31.1   Certification by James L. Pokluda III pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification by Christopher M. Micklas pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1   Certification by James L. Pokluda III and Christopher M. Micklas pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS   XBRL Instance Document (1)
     
101.SCH   XBRL Taxonomy Extension Schema
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase
     
101.LAB   XBRL Taxonomy Extension Label Linkbase
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase

 

(1) Attached as exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets at June 30, 2019 and December 31, 2018; (ii) the Consolidated Statements of Operations for the three and six month periods ended June 30, 2019 and 2018; (iii) the Consolidated Statements of Cash Flows for the six month periods ended June 30, 2019 and 2018; and (vi) Notes to the Consolidated Financial Statements.

 

17  

 

 

Signature

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: August 9, 2019 HOUSTON WIRE & CABLE COMPANY
     
  BY: /s/ Christopher M. Micklas
  Christopher M. Micklas, Chief Financial Officer

 

18  

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