10-Q 1 s117854_10q.htm 10-Q

 

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 March 31, 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)

  

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 ☒

 

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

 

At May 1, 2019 there were 16,612,396 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 March 31, 2019

 

INDEX

 

PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements (Unaudited)  
  Consolidated Balance Sheets 2
  Consolidated Statements of Operations  3
  Consolidated Statements of Stockholders’ Equity 4
  Consolidated Statements of Cash Flows  5
  Notes to Consolidated Financial Statements  6
     
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  13
  Liquidity and Capital Resources  13
  Contractual Obligations 14
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk  15
     
Item 4. Controls and Procedures  15
     
PART II. OTHER INFORMATION  15
     
Item 1. Legal Proceedings  15
Item 1A. Risk Factors  15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  15
Item 3. Defaults Upon Senior Securities  15
Item 4. Mine Safety Disclosures  15
Item 5. Other Information  15
Item 6. Exhibits  16
   
Signature Page  17

 

1

 

 

HOUSTON WIRE & CABLE COMPANY

Consolidated Balance Sheets

(In thousands, except share data)

 

   March 31,   December 31, 
   2019   2018 
   (unaudited)      
Assets          
Current assets:          
 Cash  $256   $1,393 
Accounts receivable, net:          
 Trade   58,350    52,946 
 Other   1,585    6,847 
 Inventories, net   95,325    94,325 
 Income taxes       435 
 Prepaids   1,742    737 
 Other current assets   490     
Total current assets   157,748    156,683 
           
Property and equipment, net   11,377    11,456 
Intangible assets, net   10,984    11,179 
Goodwill   22,353    22,353 
Operating lease right-of-use assets, net   11,954     
Deferred income taxes   747    930 
Other assets   503    456 
Total assets  $215,666   $203,057 
           
Liabilities and stockholders’ equity          
Current liabilities:          
Trade accounts payable  $7,829   $11,253 
Accrued and other current liabilities   12,583    19,232 

Operating lease liabilities

   3,082     
Income taxes   99     

Total current liabilities

   23,593    30,485 
           
Debt   78,940    71,316 
Operating lease long term liabilities   9,280     
Other long term liabilities   440    578 
Total liabilities   112,253    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: 16,612,396 and 16,611,651 outstanding at March 31, 2019 and December 31, 2018, respectively   21    21 
Additional paid-in-capital   53,856    53,514 
Retained earnings   108,360    105,975 
Treasury stock   (58,824)   (58,832)
Total stockholders’ equity   103,413    100,678 
Total liabilities and stockholders’ equity  $215,666   $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 
   March 31, 
   2019   2018 
         
Sales  $85,270   $85,026 
Cost of sales   64,011    64,537 
Gross profit   21,259    20,489 
           
Operating expenses:          
Salaries and commissions   9,180    9,194 
Other operating expenses   7,663    7,480 
Depreciation and amortization   553    545 
Total operating expenses   17,396    17,219 
           
Operating income   3,863    3,270 
Interest expense   741    644 
Income before income taxes   3,122    2,626 
Income tax expense   838    679 
Net income  $2,284   $1,947 
           
Earnings per share:          
Basic  $0.14   $0.12 
Diluted  $0.14   $0.12 
Weighted average common shares outstanding:          
Basic   16,477,855    16,349,902 
Diluted   16,577,126    16,422,961 

 

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 
Impact of released deferred restricted stock units                   2,251    16    16 
Impact of adoption of ASU 2016-02 (Note 7)               101            

101

 
Balance at March 31, 2019   20,988,952   $21   $53,856   $108,360    (4,376,556)  $(58,824)  $103,413 

 

       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 

 

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)

 

  

Three Months

Ended March 31,

 
   2019   2018 
         
Operating activities          
Net income  $2,284   $1,947 
Adjustments to reconcile net income to net cash used in operating activities:          
Depreciation and amortization   553    545 
Amortization of unearned stock compensation   342    313 
Non-cash lease expense   986     
Provision for refund liability   559    50 
Provision for inventory obsolescence   170    224 
Deferred income taxes   284    (137)
Other non-cash items   34    11 
Changes in operating assets and liabilities:          
Accounts receivable   (723)   2,749 
Inventories   (1,170)   (5,511)
Prepaids   (1,005)   (1,435)
Other assets   (549)    
Lease payments   (982)    
Book overdraft       149 
Trade accounts payable   (3,424)   297 
Accrued and other current liabilities   (6,460)   (6,204)
Income taxes   534    809 
Other operating activities   93    109 
Net cash used in operating activities   (8,474)   (6,084)
           
Investing activities          
Expenditures for property and equipment   (278)   (452)
Net cash used in investing activities   (278)   (452)
           
Financing activities          
Borrowings on revolver   94,333    91,514 
Payments on revolver   (86,709)   (84,886)
Payment of dividends       (29)
Release (purchase) of treasury stock/stock surrendered on vested awards   8    (63)

Lease payments

   (17)    
Net cash provided by financing activities   7,615    6,536 
           
Net change in cash   (1,137)    
Cash at beginning of period   1,393     
           
Cash at end of period  $256   $ 

 

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 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 March 31, 2019 and for the three months ended March 31, 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 with early adoption permitted. 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 has 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 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.

 

6

 

 

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.

 

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 and evaluating the timing of adoption.

 

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 per share:

 

   Three Months Ended 
   March 31, 
   2019   2018 
Denominator:        
Weighted average common shares for basic earnings per share   16,477,855    16,349,902 
Effect of dilutive securities   99,271    73,059 
Weighted average common shares for diluted earnings per share   16,577,126    16,422,961 

 

Stock awards to purchase 356,890 shares and 422,947 shares of common stock were not included in the diluted net income per share calculation for the three months ended March 31, 2019 and 2018, respectively, 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 March 31, 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 three months of 2019 or 2018.

 

Restricted Stock Awards and Restricted Stock Units

 

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 $0.3 million for each of the three months ended March 31, 2019 and 2018, 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 51 months at March 31, 2019.

 

The Company had outstanding under the Loan Agreement, letters of credit totaling $0.5 million to certain vendors as of March 31, 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 Accounting Standards Updates 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 for 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. 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, were considered. 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 ended March 31, 2019 were as follows:

 

Lease Type  Income Statement Classification  Amount 
(Dollars in thousands)        
Consolidated operating lease expense  Operating expenses  $986 
         
Consolidated financing lease amortization  Operating expenses   17 
Consolidated financing lease interest  Interest expense   2 
Consolidating financing lease expense      19 
         
 Net lease cost  Operating expenses  $1,005 

 

9

 

 

The value of the net assets and liabilities generated by the leasing activity of the Company as lessee as of March 31, 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  $11,954 
Total ROU financing lease assets (2)  Property and equipment, net   220 
 Total lease assets     $12,174 
         
Total current operating lease obligation  Operating lease liabilities  $3,082 
Total current financing lease obligation  Accrued and other current liabilities   70 
 Total current lease obligation     $3,152 
         
Total long term operating lease obligation  Operating lease long term liabilities  $9,280 
Total long term financing lease obligation  Other long term liabilities   159 
 Total long term lease obligation     $9,439 

 

(1) Operating lease assets are recorded net of accumulated amortization of $0.8 million as of March 31, 2019

(2) Financing lease assets are recorded net of accumulated amortization of $0.1 million as of March 31, 2019

 

The future minimum lease payments for finance and operating lease liabilities of the Company as lessee as of March 31, 2019 were as follows:

 

Maturity Date of Lease Liabilities  Operating Leases   Financing Leases   Total 
(Dollars in thousands)               
Year one  $3,665   $77   $3,742 
Year two   2,831    72    2,903 
Year three   2,680    61    2,741 
Year four   2,322    32    2,354 
Year five   1,081    1    1,082 
Subsequent years   1,462        1,462 
 Total lease payments   14,041    243    14,284 
Less: Interest   1,679    14    1,693 
 Present value of lease liabilities  $12,362   $229   $12,591 

 

The weighted average remaining lease terms and discount rates of the leases held by the Company as of March 31, 2019 were as follows:

 

Lease Type 

Weighted Average

Term in Years

   Weighted Average Interest Rate 
Operating leases   4.7    5.5 
Financing leases   3.3    3.6 

 

The cash outflows of the leasing activity of the Company as lessee for the three months ended March 31, 2019 were as follows:

 

Cash Flow Source  Classification  Amount 
(Dollars in thousands)        
Operating cash outflows from operating leases  Operating activities  $980 
Operating cash outflows from financing leases  Operating activities   2 
Financing cash outflows from financing leases  Financing activities   17 

 

Any leases, new or modified, for the three months ended March 31, 2019 are not material.

 

8. Subsequent Events

 

Following the Annual Meeting of Stockholders on May 7, 2019, the Company approved the award of 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.

 

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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 months ended March 31, 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.

 

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Results of Operations

 

The following table shows, for the periods indicated, information derived from our consolidated statements of operations, expressed as a percentage of net sales for the periods presented.

 

   Three Months Ended 
   March 31, 
   2019   2018 
         
Sales   100.0%   100.0%
Cost of sales   75.1%   75.9%
Gross profit   24.9%   24.1%
           
Operating expenses:          
Salaries and commissions   10.8%   10.8%
Other operating expenses   9.0%   8.8%
Depreciation and amortization   0.6%   0.6%
Total operating expenses:   20.4%   20.3%
           
Operating income   4.5%   3.8%
Interest expense   0.9%   0.8%
           
Income before income taxes   3.7%   3.1%
Income tax expense   1.0%   0.8%
           
Net income   2.7%   2.3%

 

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 March 31, 2019 and 2018

 

Sales

 

   Three Months Ended 
   March 31, 
(Dollars in millions)  2019   2018   Change 
Sales  $85.3   $85.0   $0.3    0.3%
                     

Our sales for the first quarter were near flat at $85.3 million in 2019 compared to $85.0 million in 2018. 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 5%, while Maintenance, Repair, and Operations (MRO) sales decreased 1%, as compared to 2018.

 

Gross Profit

 

   Three Months Ended 
   March 31, 
(Dollars in millions)  2019   2018   Change 
Gross profit  $21.3   $20.5   $0.8    3.8%
Gross margin   24.9%   24.1%          

 

Gross profit increased 3.8% to $21.3 million in 2019 from $20.5 million in 2018. The increase in gross profit was primarily attributable to higher product gross margin. Gross margin (gross profit as a percentage of sales) increased slightly to 24.9 % in 2019 from 24.1% in 2018 primarily due to improved pricing discipline and product mix.

 

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Operating Expenses

 

   Three Months Ended 
   March 31, 
(Dollars in millions)  2019   2018   Change 
Operating expenses:                    
Salaries and commissions  $9.2   $9.2   $0.0    (0.2)%
Other operating expenses   7.7    7.5    0.2    2.4%
Depreciation and amortization   0.6    0.5    0.1    1.5%
Total operating expenses  $17.4   $17.2   $0.2    1.0%
                     
Operating expenses as a percent of sales   20.4%   20.3%          

 

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

 

Operating expenses in 2019 were almost flat compared to 2018, in line with the change in sales in 2019 versus 2018.

 

Interest Expense

 

Interest expense increased to $0.7 million in 2019 from $0.6 million in 2018 due to an increase in the average effective interest rate. Average debt was $73.5 million in 2019 compared to $76.9 million in 2018. The average effective interest rate was 3.9% in 2019 compared to 3.3% in 2018.

 

Income Taxes

 

The income tax expense of $0.8 million increased slightly from $0.7 million in the prior year period. The effective income tax rate for the quarter increased to 26.8% in 2019 from 25.9% in 2018 due to forfeited vested share-based awards.

 

Net Income

 

We achieved net income of $2.3 million in 2019 compared to $1.9 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.

 

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

 

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Comparison of the Three Months Ended March 31, 2019 and 2018

 

Our net cash used in operating activities was $8.5 million for the three months ended March 31, 2019 compared to $6.1 million in 2018. We had net income of $2.3 million in 2019 compared to $1.9 million in 2018.

 

Changes in our operating assets and liabilities resulted in cash used in operating activities of $13.7 million in 2019. A decrease in accrued and other liabilities of $6.5 million and a decrease in accounts payable of $3.4 million combined with an increase of $1.2 million in inventories, $1.0 million in lease payments, $1.0 million in prepaid expenses, and $0.7 million in accounts receivable were the main uses of cash.

 

Net cash used in investing activities was $0.3 million in 2019 compared to $0.5 million in 2018.

 

Net cash provided by financing activities was $7.6 million in 2019 compared to $6.5 million in 2018. Net borrowings on the revolver of $7.6 million were the primary source for financing activities in 2019.

 

Indebtedness

 

Our principal source of liquidity at March 31, 2019 was working capital of $134.2 million compared to $126.2 million at December 31, 2018. We also had available borrowing capacity of $20.6 million at March 31, 2019 and $28.7 million at December 31, 2018 under our loan agreement. The availability at March 31, 2019 is net of outstanding letters of credit of $0.5 million.

 

We believe that we will have adequate availability of capital to fund our present operations, meet our commitments on our existing debt, and fund anticipated growth over the next twelve months, including expansion in existing and targeted market areas. We continually seek potential acquisitions and from time to time hold discussions with acquisition candidates. If suitable acquisition opportunities or working capital needs arise that would require additional financing, we believe that our financial position and earnings history provide a solid base for obtaining additional financing resources at competitive rates and terms. Additionally, based on market conditions, we may decide to issue additional shares of common or preferred stock to raise funds.

 

Contractual Obligations

 

The following table summarizes our loan commitment at March 31, 2019.

 

In thousands   Total    

Less than 

1 year 

    1-3 years     3-5 years    

More 

than 

5 years 

 
                               
Total debt    $  78,940     $     $     $ 78,940     $  
                                         

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

 

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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 March 31, 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.

 

Effective January 1, 2019, the Company adopted Financial Accounting Standards Board Accounting Standards Update (ASU) No. 2016-02, “Leases (Topic 842).” Changes were made to business processes, including information systems, to capture the additional recording and reporting obligations required by the new ASU. To maintain adequate controls over these new business processes and information systems, the Company evaluated, updated and added new internal controls over financial reporting applicable to lease accounting and reporting. There have been no other changes in its internal control over financial reporting in the quarterly period ended March 31, 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.

 

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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 March 31, 2019 and December 31, 2018; (ii) the Consolidated Statements of Operations for the three month periods ended March 31, 2019 and 2018; (iii) the Consolidated Statements of Cash Flows for the three month periods ended March 31, 2019 and 2018; and (vi) Notes to the Consolidated Financial Statements.

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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:  May 10, 2019 HOUSTON WIRE & CABLE COMPANY
     
  BY: /s/ Christopher M. Micklas
  Christopher M. Micklas, Chief Financial Officer

 

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