The accompanying Notes are an integral part
of these Consolidated Financial Statements.
The accompanying Notes are an integral part
of these Consolidated Financial Statements.
The accompanying notes
are an integral part of these consolidated financial statements.
The accompanying Notes are an integral part
of these Consolidated Financial Statements.
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 September 30, 2019 and for the three and nine months ended September 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.
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.
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
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares for basic earnings per share
|
|
|
16,443,446
|
|
|
|
16,404,805
|
|
|
|
16,475,131
|
|
|
|
16,380,807
|
|
Effect of dilutive securities
|
|
|
—
|
|
|
|
158,440
|
|
|
|
82,937
|
|
|
|
111,410
|
|
Weighted average common shares for diluted earnings per share
|
|
|
16,443,446
|
|
|
|
16,563,245
|
|
|
|
16,558,068
|
|
|
|
16,492,217
|
|
Stock awards to purchase
658,420 and 223,477 shares of common stock for the three months ended September 30, 2019 and 2018, respectively, and 322,771 and
295,387 shares for the nine months ended September 30, 2019 and 2018, respectively, were not included in the diluted net (loss)
income per share calculation as their inclusion would have been anti-dilutive.
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 September 30, 2019, the Company was in compliance with the availability-based covenant and fixed coverage ratio 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.”
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.
During the third quarter of 2019, the
Company modified certain terms of the lease agreement with the landlord of Vertex’s Massachusetts facility, further described
in the Lease footnote. In connection with the modification, the Company recognized expense of approximately $2.2 million, which
was treated as a discrete item.
In the third quarter
2018, the valuation allowance of $1.0 million was released.
Stock Option Awards
There were no stock option awards granted
during the first nine 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, 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 September 30, 2019 and 2018, and $1.1 million for each of
the nine months ended September 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
|
The Company had
outstanding under the Loan Agreement letters of credit totaling $1.8 million to certain vendors as of September 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.
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.
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 nine months ended September 30, 2019 were as follows:
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
Lease Type
|
|
Income Statement Classification
|
|
September 30, 2019
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Consolidated operating lease expense
|
|
Operating expenses
|
|
$
|
3,175
|
|
|
$
|
5,143
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated financing lease amortization
|
|
Operating expenses
|
|
|
110
|
|
|
|
160
|
|
Consolidated financing lease interest
|
|
Interest expense
|
|
|
24
|
|
|
|
30
|
|
Consolidated financing lease expense
|
|
|
|
|
134
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
Net lease cost
|
|
|
|
$
|
3,309
|
|
|
$
|
5,333
|
|
The value of the net
assets and liabilities generated by the leasing activity of the Company as lessee as of September 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
|
|
$
|
9,872
|
|
Total ROU financing lease assets (2)
|
|
Property and equipment, net
|
|
|
1,972
|
|
Total lease assets
|
|
|
|
$
|
11,844
|
|
|
|
|
|
|
|
|
Total current operating lease obligation
|
|
Operating lease liabilities
|
|
$
|
4,737
|
|
Total current financing lease obligation
|
|
Accrued and other current liabilities
|
|
|
449
|
|
Total current lease obligation
|
|
|
|
$
|
5,186
|
|
|
|
|
|
|
|
|
Total long term operating lease obligation
|
|
Operating lease long term liabilities
|
|
$
|
7,671
|
|
Total long term financing lease obligation
|
|
Other long term liabilities
|
|
|
1,537
|
|
Total long term lease obligation
|
|
|
|
$
|
9,208
|
|
(1) Operating lease assets
are recorded net of accumulated amortization of $1.9 million as of September 30, 2019
(2) Financing lease assets are
recorded net of accumulated amortization of $0.3 million as of September 30, 2019
The future minimum
lease payments for finance and operating lease liabilities of the Company as lessee as of September 30, 2019 were as follows:
Maturity Date of Lease Liabilities
|
|
Operating Leases
|
|
|
Financing Leases
|
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year one
|
|
$
|
5,204
|
|
|
$
|
543
|
|
|
$
|
5,747
|
|
Year two
|
|
|
2,293
|
|
|
|
507
|
|
|
|
2,800
|
|
Year three
|
|
|
2,304
|
|
|
|
477
|
|
|
|
2,781
|
|
Year four
|
|
|
1,549
|
|
|
|
409
|
|
|
|
1,958
|
|
Year five
|
|
|
1,258
|
|
|
|
298
|
|
|
|
1,556
|
|
Subsequent years
|
|
|
1,159
|
|
|
|
—
|
|
|
|
1,159
|
|
Total lease payments
|
|
|
13,767
|
|
|
|
2,234
|
|
|
|
16,001
|
|
Less: Interest
|
|
|
1,359
|
|
|
|
248
|
|
|
|
1,607
|
|
Present value of lease liabilities
|
|
$
|
12,408
|
|
|
$
|
1,986
|
|
|
$
|
14,394
|
|
The weighted
average remaining lease terms and discount rates of the leases held by the Company as of September 30, 2019 were as follows:
Lease Type
|
|
Weighted
Average
Term in Years
|
|
|
Weighted Average
Interest Rate
|
|
Operating leases
|
|
|
4.7
|
|
|
|
5.4
|
|
Financing leases
|
|
|
4.4
|
|
|
|
5.3
|
|
The cash outflows
of the leasing activity of the Company as lessee for the nine months ended September 30, 2019 were as follows:
Cash Flow Source
|
|
Classification
|
|
Amount
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Operating cash outflows from operating leases
|
|
Operating activities
|
|
$
|
2,993
|
|
Operating cash outflows from financing leases
|
|
Operating activities
|
|
|
23
|
|
Financing cash outflows from financing leases
|
|
Financing activities
|
|
|
154
|
|
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 recognized expense related to an early termination liability of
approximately $2.2 million in the third quarter of 2019. The payment to the landlord will be made in November 2019. During
the quarter, the Company also extended the terms of one of the Houston Wire & Cable facilities for five years, resulting
in an increase to the ROU operating lease asset and obligation by approximately $2.2 million.
During the nine months
ended September 30, 2019, the Company recorded non-cash ROU financing lease assets and corresponding financing lease obligations
totaling $1.9 million primarily related to IT infrastructure lease agreements. Any operating leases, new or modified, with exception
of the two leases previously mentioned, as well as any sublease income for the nine months ended September 30, 2019 are not material.
The Company has entered into operating leases that will be commencing in the fourth quarter of 2019, with significant rights and
obligations of approximately $2.9 million.