10-K 1 g081930_10k.htm 10-K

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

 

For the Fiscal Year Ended December 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 

 

 

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 Act:

 

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

     
Securities registered pursuant to Section 12(b) of the Act: None  

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES   ☐            NO  

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES   ☐            NO  

 

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 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 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 ☒ 

 

The aggregate market value of the voting stock (common stock) held by non-affiliates of the registrant as of June 30, 2019 was $83,886,290.

 

At March 1, 2020, there were 16,556,950 shares of the registrant’s common stock, $.001 par value per share, outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Part III of this report incorporates by reference specific portions of the registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 5, 2020.  

 

 

 

HOUSTON WIRE & CABLE COMPANY

Form 10-K

For the Fiscal Year Ended December 31, 2019

 

INDEX

 

PART I.

 

2 

Item 1.

Business

2 

Item 1A.

Risk Factors

5 

Item 1B.

Unresolved Staff Comments

8 

Item 2.

Properties

8 

Item 3.

Legal Proceedings

8 

Item 4.

Mine Safety Disclosures

8 

 

Supplemental Item. Executive Officers of the Registrant

8 

 

 

 

PART II.

 

9 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

9 

Item 6.

Selected Financial Data

10 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

12 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

21 

Item 8.

Consolidated Financial Statements and Supplementary Data

22 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

23 

Item 9A.

Controls and Procedures

23 

Item 9B.

Other Information

26 

 

 

 

PART III.

 

26 

Item 10.

Directors, Executive Officers and Corporate Governance

26 

Item 11.

Executive Compensation

26 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

26 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

26 

Item 14.

Principal Accounting Fees and Services

26 

 

 

 

PART IV.

 

27 

Item 15.

Exhibits and Financial Statement Schedules

27 

Item 16.

Form 10-K Summary

27 

 

1

 

 

PART I

 

ITEM 1.  BUSINESS

 

Overview

 

We are a provider of industrial products including electrical and mechanical wire and cable, industrial fasteners, hardware and related services to the U.S. market. We sell electrical products through wholesale electrical distributors, steel wire rope and synthetic products through rigging wholesalers, fastener products through industrial distributors, and fabricated steel wire rope and synthetic lifting and hardware products to distributors and end users. 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.

 

Our wide product selection and specialized services support our position in the supply chain between manufacturers and the customer. The breadth and depth of wire and cable, fasteners, lifting products and related hardware that we offer requires significant warehousing resources and a large number of SKUs (stock-keeping units). While manufacturers may have the space and capabilities to maintain a large supply of inventory, we do not believe that any single manufacturer has the breadth and depth of product that we offer. More importantly, manufacturers historically have not offered the services that our customers need, such as complimentary custom cutting, cable coiling, custom manufactured slings and harnesses, paralleling, bundling, striping, cable management for large capital projects, and same day shipment, and do not have multiple distribution centers across the nation.

 

Our Cable Management Program addresses our customers’ requirement for sophisticated and efficient just-in-time product management for large capital projects. This program entails purchasing and storing dedicated inventory so our customers have immediate product availability for the duration of their projects. Advantages of this program include extra pre-allocated safety stock, firm pricing, zero cable surplus and just-in-time delivery. Used on large construction and capital expansion projects, our Cable Management Program combines the expertise of our cable specialists with dedicated project inventory and superior logistics to allow complex projects to be completed on time, within budget and with minimal residual waste.

 

History

 

We were founded in 1975 and have a long history of exceptional customer service, broad product selection and high levels of product expertise. In 1987, we completed our first initial public offering and were subsequently purchased in 1989 by ALLTEL Corporation and in 1997 by investment funds affiliated with Code, Hennessy & Simmons LLC. In 2006, we completed our second initial public offering. In 2010, we purchased Southwest Wire Rope LP (“Southwest”), its general partner Southwest Wire Rope GP LLC and its wholly owned subsidiary, Southern Wire (“Southern”), and subsequently merged the acquired businesses into our operating subsidiary. In 2016 we completed the acquisition of Vertex Corporate Holdings, Inc., and its subsidiaries (“Vertex”) from DXP Enterprises. Vertex is a master distributor of industrial fasteners, and this acquisition expanded our product offerings to the industrial marketplace that purchases our wire and cable products.

 

Products

 

We offer products in most categories of wire and cable, including: continuous and interlocked armor cable; control and power cable; electronic wire and cable; flexible and portable cord; instrumentation and thermocouple cable; lead and high temperature cable; medium voltage cable; premise and category wire and cable, primary and secondary aluminum distribution cable, steel wire rope and wire rope slings, as well as synthetic fiber rope slings, chain, shackles, related hardware and corrosion resistant products including inch and metric bolts, screws, nuts, washers, rivets and hose clamps. We also offer private branded products, including our proprietary brand LifeGuard, a low-smoke, zero-halogen cable. Our products are used in repair and replacement work, also referred to as Maintenance, Repair and Operations (“MRO”), and related projects, larger-scale projects in the utility, industrial and infrastructure markets and a diverse range of industrial applications including  communications, energy, engineering and construction, general manufacturing, marine construction and marine transportation, mining, infrastructure, oilfield services, petrochemical, transportation, utility, wastewater treatment and food and beverage.

 

Targeted Markets

 

Our business is driven, in part, by the strength, growth prospects and activity in the end-markets in which our products are used, which are primarily in the continental United States, where we target the utility, industrial and infrastructure markets.

 

Industrial Market. The industrial market is one of the largest segments of the U.S. economy and is comprised of a diverse base of manufacturing and production companies. The largest driver of our success in this market results from the level of U.S. investment in upstream, midstream and downstream oil and gas exploration, transportation and production. We provide a wide variety of products specifically designed for use in manufacturing, metal/mineral, and oil and gas markets.

 

2

 

 

Utility Market.  The utility market includes large investor-owned utilities, rural cooperatives and municipal power authorities. We are not a significant distributor of power lines used for the transmission of electricity but have products in our portfolio that are used in this sector. We sell our core products for the construction of power plants and the related pollution control equipment used to comply with environmental standards as well as plant modernizations implemented to extend the life of power generation facilities. Our customers utilize our cable management services to supply the wire and cable required in the construction of new power plants and upgrading of existing power plants.

 

Infrastructure Market. Investments in the development, construction and maintenance of infrastructure markets (including commercial buildings, education and health care; air, ground and rail transportation; telecommunications, and wastewater) are opportunities for our product and service offerings.

 

Distribution Logistics

 

Our national distribution presence and value-added services make us an essential partner in the supply chain for our suppliers, customers and end users. We have successfully expanded our business from the original location in Houston, Texas to 22 locations nationwide, which includes four third-party logistics providers. Our standard practice is to process customers’ orders the same day they are received. Our strategically located distribution centers generally allow for ground delivery nationwide within 24 hours of shipment. Orders are delivered through a variety of distribution methods, including less-than-truck-load, truck-load, air or parcel service providers, direct from supplier, cross-dock shipments and customer pick-up. Freight costs are typically borne by our customers. Due to our shipment volume, we have preferred pricing relationships with our contract carriers.

 

Customers

 

During 2019, we served over 10,000 customers, shipping approximately 44,000 SKUs to approximately 14,500 customer locations nationwide. No customer represented 10% or more of our 2019 sales.

 

Suppliers

 

We obtain products from leading suppliers and believe we have strong relationships with our top suppliers. We source a portion of our products from offshore. While alternative sources are available for the majority of our products, we have strategically concentrated our purchases with our top suppliers in order to maximize product quality, delivery dependability, purchasing efficiencies, and vendor rebates. As a result, in 2019, approximately 51% of our purchases came from five suppliers. We do not believe we are dependent on any one supplier for any of the industrial products that we sell.

 

Our top five suppliers in 2019 were AmerCable Incorporated, Belden Inc., General Cable Corporation, Nexans Energy USA, Inc. and Southwire Company.

 

Sales

 

We market our products and related services through an inside sales force situated in our regional offices, a field sales force focused on key geographic markets, and regional sales agencies. By operating under a decentralized structure, region managers are able to adapt quickly to market-specific occurrences, allowing us to compete effectively with local competitors. We believe the knowledge, experience and tenure of our sales force are critical to serving our fragmented and diverse customer and end-user base.

 

Competition

 

The industrial products market remains very competitive and fragmented, with several hundred electrical wire and cable, steel wire rope, and fastener competitors serving this market. The product offerings and levels of service from the other providers of product with which we compete vary widely at the national, regional or local levels. In addition to the direct competition with other product providers, we also face, on a varying basis, competitors that sell products directly or through multiple distribution channels to end-users or other resellers.

 

In the markets that we sell our industrial products, competition is primarily based on product line breadth, quality, product availability, service capabilities and price.

 

Employees

 

At December 31, 2019, we had 432 employees. Our sales and marketing staff accounted for 201 employees, including 30 field sales personnel and 127 inside sales and technical support personnel. We believe that our employee relations are good.

 

3

 

 

Website Access

 

We maintain an internet website at www.houwire.com. We make available, under the “Investor Relations” tab on our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and, if applicable, amendments to those reports, as well as proxy and information statements, as soon as reasonably practicable after such documents are electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”). Information contained on our website is not part of, and should not be construed as being incorporated by reference into, this Annual Report on Form 10-K.

 

Government Regulation

 

We are subject to regulation by various federal, state and local agencies. We believe we are in compliance in all material respects with existing applicable statutes and regulations affecting environmental issues and our employment, workplace health and workplace safety practices.

 

4

 

 

ITEM 1A.  RISK FACTORS

 

In addition to other information in this Annual Report on Form 10-K, the following risk factors should be carefully considered in evaluating our business, because such factors may have a significant impact on our business, operating results, cash flows and financial condition. As a result of the risks set forth below and elsewhere in this Annual Report, actual results could differ materially from those projected in any forward-looking statements.

 

Downturns in capital spending and cyclicality in the markets we serve have had and could continue to have a material adverse effect on our financial condition and results of operations.

 

The majority of our products are used in the construction, maintenance, repair and operation of facilities, plants and projects in the communications, energy, engineering and construction, general manufacturing, infrastructure, oil and gas, marine construction, marine transportation, mining, oilfield services, transportation, utility, wastewater treatment and food and beverage industries. The demand for our products and services depends to a large degree on the capital spending levels of end-users in these markets. Many of these end-users defer capital expenditures or cancel projects during economic downturns or periods of uncertainty. In addition, certain of the markets we serve are cyclical, which affects capital spending by end-users in these industries.

 

We have risks associated with our customers’ access to credit.

 

Poor credit market conditions may adversely impact the availability of construction and other project financing, upon which many of our customers depend, resulting in project cancellations or delays. Our utility and industrial customers may also face limitations when trying to access the credit markets to fund ongoing operations or capital projects. Credit constraints experienced by our customers may result in lost revenues, reduced gross margins for us and, in some cases, higher than expected bad debt losses.

 

We have risks associated with inventory.

 

Our business requires us to maintain substantial levels of inventory. We must identify the right mix and quantity of products to keep in our inventory to fulfill customer orders. Failure to do so could adversely affect our sales and earnings. However, if our inventory levels are too high, we are at risk that unexpected changes in circumstances, such as a shift in market demand, drop in prices or loss of a customer, could have a material adverse impact on the net realizable value of our inventory.

 

Our operating results are affected by fluctuations in commodity prices.

 

Copper, steel, aluminum, nickel and petrochemical products are components of the products we sell. Fluctuations in the costs of these and other commodities have historically affected our operating results. If commodity prices decline, the net realizable value of our existing inventory could be reduced, and our gross profit could be adversely affected. To the extent higher commodity prices result in increases in the costs we pay for our products, we attempt to reflect the increase in the prices we charge our customers. While we historically have been able to pass most of these cost increases on to our customers, to the extent we are unable to do so in the future, it could have a material adverse effect on our operating results. In addition, if commodity costs increase, our customers may delay or decrease their purchases of our products.

 

Our sales are impacted by the level of oil and gas drilling activity.

 

We estimate that approximately one-third of our sales directly depend upon the level of capital and operating expenditures in the oil and gas industry, including capital and other expenditures in connection with exploration, drilling, production, gathering, transportation, refining and processing operations. Demand for the products we distribute is sensitive to the level of exploration, development and production activity of, and the corresponding capital and other expenditures by, oil and gas companies. A material decline in oil or gas prices, inability to access capital, and consolidation within the industry could all depress levels of exploration, development and production activity and, therefore, could lead to a decrease in our sales due to curtailed capital and MRO expenditures.  

 

If we are unable to maintain our relationships with our customers, it could have a material adverse effect on our financial results.

 

We rely on customers to purchase our industrial products. The number, size, business strategy and operations of these customers vary widely from market to market. Our success depends heavily on our ability to identify and respond to our customers’ needs.

 

In 2019, our ten largest customers accounted for approximately 37% of our sales. If we were to lose one or more of our large customers, or if one or more of our large customers were to significantly reduce their purchases from us, and we were unable to replace the lost sales on similar terms, we could experience a significant loss of revenue and profits. In addition, if one or more of our key customers failed or were unable to pay, we could experience a write-off or write-down of the related receivables, which could adversely affect our earnings. We participate with national marketing groups and engage in joint promotional sales activities with the members of those groups. Any exclusion of us from, or refusal to allow us to participate in, such national marketing groups could have a material adverse effect on our sales and our results of operations.

 

5

 

 

An inability to obtain the products that we distribute could result in lost revenues and reduced profits and damage our relationships with customers.

 

In 2019, we sourced products from approximately 376 suppliers. However, we have adopted a strategy to concentrate our purchases with a small number of suppliers in order to maximize product quality, delivery dependability, purchasing efficiencies and vendor rebates. As a result, in 2019 approximately 51% of our purchases came from five suppliers. If any of these suppliers changes its sales strategy or decides to terminate its business relationship with us, our sales and earnings could be adversely affected unless and until we were able to establish relationships with suppliers of comparable products. In addition, if we are not able to obtain the products we distribute from either our current suppliers or other competitive sources, we could experience a loss of revenue, reduction in profits and damage to our relationships with our customers. Supply shortages may occur as a result of unanticipated demand or production cutbacks, shortages of raw materials, labor disputes or weather conditions affecting products or shipments, transportation disruptions or other reasons beyond our control. When shortages occur, suppliers often allocate products among their customers, and our allocations might not be adequate to meet our customers’ needs.

 

Loss of key personnel or our inability to attract and retain new qualified personnel could hurt our ability to operate and grow successfully.

 

Our success is highly dependent upon the services of James L. Pokluda III, our President and Chief Executive Officer, and Christopher M. Micklas, our Chief Financial Officer. Our success will continue to depend to a significant extent on our executive officers, key management and sales personnel. We do not have key man life insurance covering any of our executive officers. We may not be able to retain our executive officers, key personnel or attract additional qualified management and sales personnel. The loss of any of our executive officers or our other key management and sales personnel or our inability to recruit and retain qualified personnel could hurt our ability to operate and make it difficult to maintain our market share and to execute our growth strategies.

 

A change in vendor rebate programs could adversely affect our gross margins and results of operations.

 

The terms on which we purchase products from many of our suppliers entitle us to receive a rebate based on the volume of our purchases. These rebates effectively reduce our costs for products. If suppliers adversely change the terms of some or all of these programs, the changes may lower our gross margins on products we sell and may have an adverse effect on our operating results.

 

If we encounter difficulties with our management information systems, including cyber-attacks, we would experience problems managing our business.

 

We believe our management information systems are a competitive advantage in maintaining a leadership position in the industrial supply industry. We rely upon our management information systems to manage and replenish inventory, determine pricing, fill and ship orders on a timely basis and coordinate our sales and marketing activities. If we experience problems with our management information systems, we could experience product shortages, diminished inventory control or an increase in accounts receivable. Any failure by us to maintain our management information systems could adversely impact our ability to attract and serve customers and would cause us to incur higher operating costs and experience reduced profitability.

 

An increase in competition could decrease sales or earnings.

 

We operate in a highly competitive industry. We compete directly with national, regional and local providers of industrial products. Competition is primarily focused in the local service area and is generally based on product line breadth, quality, product availability, service capabilities and price. Some of our existing competitors have, and new market entrants may have, greater financial and marketing resources than we do. To the extent existing or future competitors seek to gain or retain market share by reducing prices, we may be required to lower our prices, thereby adversely affecting our financial results. Existing or future competitors also may seek to compete with us for acquisitions, which could have the effect of increasing the price and reducing the number of suitable acquisitions. Other companies, including our current customers, could seek to compete directly with our private branded products, which could adversely affect our sales of those products and ultimately our financial results. Our existing customers, as well as suppliers, could seek to compete with us by offering services similar to ours, as well as the increasing trend of our suppliers to sell direct to our customer and industry consolidation, which could adversely affect our market share and our financial results. In addition, competitive pressures resulting from economic conditions and the industry trend toward consolidation could adversely affect our growth and profit margins.

 

We may not be able to successfully identify acquisition candidates, effectively integrate newly acquired businesses into our operations or achieve expected profitability from our acquisitions.

 

To supplement our growth, we intend to selectively pursue acquisition opportunities. If we are not successful in finding attractive acquisition candidates that we can acquire on satisfactory terms, or if we cannot complete those acquisitions that we identify, we will not be able to realize the benefit of this growth strategy.

 

6

 

 

Acquisitions involve numerous possible risks, including unforeseen difficulties in integrating operations, technologies, services, accounting and personnel; the diversion of financial and management resources from existing operations; unforeseen difficulties related to entering geographic regions or target markets where we do not have prior experience; the potential loss of key employees; and the inability to generate sufficient profits to offset acquisition or investment-related expenses. If we finance acquisitions by issuing equity securities or securities convertible into equity securities, our existing stockholders could be diluted, which, in turn, could adversely affect the market price of our stock. If we finance an acquisition with debt, it could result in higher leverage and interest costs. As a result, if we fail to evaluate and execute acquisitions properly, we might not achieve the anticipated benefits of these acquisitions, and we may incur costs in excess of what we anticipate, and goodwill impairments may result.

 

We are anticipating growth in the businesses we acquired in 2010 and in 2016. However, the Southwest reporting unit had an impairment of intangibles in 2019 and 2018 and goodwill in 2015, and the Southern reporting unit had an impairment of intangibles in 2013 and 2016. Future goodwill and tradename impairments may result, should the acquired businesses not achieve their currently forecasted growth or profitability targets, which would adversely affect our results of operations.  

 

We may be subject to product liability claims that could be costly and time consuming.

 

We sell industrial products. As a result, from time to time we have been named as a defendant in lawsuits alleging that these products caused physical injury or injury to property. We rely on product warranties and indemnities from the product manufacturers, as well as insurance that we maintain, to protect us from these claims. However, if manufacturers’ warranties and indemnities and our insurance coverage are not available or inadequate to cover every claim, it could have an adverse effect on our operating results.

 

Changes to the U.S. tax, tariff and import/export regulations may have a negative effect on our results of operations.

 

We import a relatively small but growing percentage of our wire and cable products, as well as a significant portion of our hardware products, from foreign manufacturers. Changes resulting from the 2017 Tax Cuts and Jobs Act could disrupt supply chains on imported goods which could result in limited availability of supply, or cost competitiveness of supply. In addition, recent tariff proposals have created uncertainty about future trade policies and any changes in import tariffs or other trade regulations, could have a negative impact on our cash flow, and require us to change our sourcing and supply chain strategies, and adversely affect our profitability.

 

We may be adversely affected by the potential discontinuation of LIBOR.

 

In July 2017, the Financial Conduct Authority in the United Kingdom, which regulates LIBOR, publicly announced that it will no longer compel or persuade banks to make LIBOR submissions after 2021. This announcement is expected to effectively end LIBOR rates beginning in 2022, and, while other alternatives have been proposed, it is unclear which, if any, alternative to LIBOR will be available and widely accepted in major financial markets.

 

Our loan agreement permits both base rate borrowings and LIBOR borrowings. If an alternative to LIBOR is not available and widely accepted after 2021, our ability to borrow at an alternative to the base rate under our loan agreement may be adversely impacted, and the costs associated with any potential future borrowings may increase.

 

Epidemics and other events outside our control, and our inability to successfully mitigate the effects of such events, may harm our business.

 

All of our facilities are subject to natural or man-made disasters such as floods, fires, acts of terrorism, failures of utilities and epidemics or pandemics such as the coronavirus COVID-19. If such an event were to occur, our business could be harmed due to the event or our inability to successfully mitigate the effects of the particular event. Potential harms include the loss of business continuity, the loss of business data and damage to infrastructure.

 

Our production and supply chains could be severely affected if our employees or the regions in which our facilities or suppliers are located are affected by a significant outbreak of any disease, epidemic or pandemic. For example, a facility could be closed by government authorities for a sustained period of time, some or all of our workforce could be unavailable due to quarantine, fear of catching the disease or other factors, and local, national or international transportation or other infrastructure could be affected, leading to delays or loss of production. In addition, our suppliers and customers are subject to similar risks, which could lead to a shortage of inventory or components, or a reduction in our customers’ demand for our products.

 

7

 

 

ITEM 1B.  UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.  PROPERTIES

 

Facilities

 

We operate out of twenty-two distribution centers strategically located throughout the United States with approximately 922,000 square feet of distribution space. We own three facilities in Houston, Texas, including our corporate headquarters, and two facilities in Louisiana. All of the other facilities are leased, except for our four locations operated by third-party logistics providers, which are provided under service agreements. Nineteen of the facilities, in addition to containing inventory for re-sale, house knowledgeable sales staff. We believe that our properties are in good operating condition and adequately serve our current business operations.  

 

ITEM 3.  LEGAL PROCEEDINGS

 

From time to time, we are involved in lawsuits that are brought against us in the normal course of business. We are not currently a party to any legal proceedings that we expect, either individually or in the aggregate, to have a material adverse effect on our business or financial condition.

 

ITEM 4.  MINE SAFETY DISCLOSURES

 

Not applicable.

 

SUPPLEMENTAL ITEM.  EXECUTIVE OFFICERS OF THE REGISTRANT

 

Name/Office

 

Age

 

Business Experience

During Last 5 Years

 

 

 

 

 

James L. Pokluda III

President and Chief Executive Officer

 

55

 

Chief Executive Officer since January 2012 and President since May 2011. Prior thereto, Vice President Sales & Marketing of the Company from April 2007 until May 2011.

 

 

 

 

 

Christopher M. Micklas

Chief Financial Officer, Treasurer and Secretary

 

52

 

Chief Financial Officer, Treasurer and Secretary since April 2018. Prior thereto, Chief Financial Officer and Chief Accounting Officer at Par Pacific Holdings, Inc. from December 2013 until April 2017.

 

8

 

 

PART II

 

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock is listed on The NASDAQ Global Market under the symbol “HWCC”.  As of January 31, 2020, there were 1,498 holders of record, including participants in security position listings. This figure does not include those beneficial holders whose shares may be held by brokerage firms and clearing agencies. 

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

The board authorized a stock repurchase program of $25 million in March 2014. The program has no expiration date. Purchases under the stock repurchase program were suspended in November 2016 and reactivated in August 2019. At December 31, 2019, there was $8.1 million available under the program to repurchase stock. 

 

Dividend Policy

 

Holders of our common stock are entitled to receive dividends when, as and if declared by our Board of Directors. We paid a quarterly cash dividend from August 2007 until August 2016. The Board of Directors determined to suspend the regular dividend in November 2016, to redeploy funds for other purposes, including the Vertex acquisition.

 

As a holding company, our only source of funds to pay dividends is distributions from our operating subsidiaries. Our loan agreement does not limit the amount of dividends we may pay or stock we may repurchase, as long as we are not in default under the loan agreement and we maintain defined levels of fixed charge coverage and/or availability.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The information called for by this Item regarding securities available for issuance is provided in response to Item 12.

 

9

 

 

ITEM 6.  SELECTED FINANCIAL DATA

 

You should read the following selected financial information together with our consolidated financial statements and the related notes and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Form 10-K. We have derived the consolidated statement of operations data for each of the years ended December 31, 2019, 2018 and 2017, and the consolidated balance sheet data at December 31, 2019 and 2018, from our audited financial statements, which are included in this Form 10-K. We have derived the consolidated statement of operations data for each of the years ended December 31, 2016 and 2015, and the consolidated balance sheet data at December 31, 2017, 2016 and 2015 from our audited financial statements, which are not included in this Form 10-K.

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

 

(Dollars in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CONSOLIDATED STATEMENT OF OPERATIONS DATA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

338,286

 

 

$

356,858

 

 

$

317,697

 

 

$

261,644

 

 

$

308,133

 

Cost of sales

 

 

258,364

 

 

 

271,650

 

 

 

245,035

 

 

 

208,694

 

 

 

242,223

 

Gross profit

 

 

79,922

 

 

 

85,208

 

 

 

72,662

 

 

 

52,950

 

 

 

65,910

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and commissions

 

 

37,180

 

 

 

38,110

 

 

 

36,570

 

 

 

29,369

 

 

 

28,537

 

Other operating expenses

 

 

33,238

 

 

 

30,962

 

 

 

28,716

 

 

 

24,714

 

 

 

25,023

 

Depreciation and amortization

 

 

2,502

 

 

 

2,178

 

 

 

2,772

 

 

 

3,018

 

 

 

2,915

 

Impairment charge

 

 

120

 

 

 

60

 

 

 

 

 

 

2,384

 

 

 

3,417

 

Total operating expenses

 

 

73,040

 

 

 

71,310

 

 

 

68,058

 

 

 

59,485

 

 

 

59,892

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

6,882

 

 

 

13,898

 

 

 

4,604

 

 

 

(6,535

)

 

 

6,018

 

Interest expense

 

 

3,057

 

 

 

2,907

 

 

 

2,073

 

 

 

845

 

 

 

901

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

3,825

 

 

 

10,991

 

 

 

2,531

 

 

 

(7,380

)

 

 

5,117

 

Income tax expense (benefit)

 

 

1,275

 

 

 

2,355

 

 

 

2,753

 

 

 

(1,374

)

 

 

3,073

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

2,550

 

 

$

8,636

 

 

$

(222

)

 

$

(6,006

)

 

$

2,044

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.16

 

 

$

0.53

 

 

$

(0.01

)

 

$

(0.37

)

 

$

0.12

 

Diluted

 

$

0.15

 

 

$

0.52

 

 

$

(0.01

)

 

$

(0.37

)

 

$

0.12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

16,433,644

 

 

 

16,389,876

 

 

 

16,269,611

 

 

 

16,345,679

 

 

 

17,012,560

 

Diluted

 

 

16,552,866

 

 

 

16,523,599

 

 

 

16,269,611

 

 

 

16,345,679

 

 

 

17,067,593

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10

 

 

 

 

As of December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

 

(Dollars in thousands)

 

CONSOLIDATED BALANCE SHEET DATA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,096

 

 

$

1,393

 

 

$

 

 

$

 

 

$

 

Accounts receivable, net

 

$

56,965

 

 

$

59,793

 

 

$

57,396

 

 

$

44,677

 

 

$

46,250

 

Inventories, net

 

$

114,069

 

 

$

94,325

 

 

$

88,115

 

 

$

79,783

 

 

$

75,777

 

Total assets

 

$

240,148

 

 

$

203,057

 

 

$

194,039

 

 

$

175,870

 

 

$

159,113

 

Book overdraft (1)

 

$

 

 

$

 

 

$

3,028

 

 

$

3,181

 

 

$

3,701

 

Total debt

 

$

83,500

 

 

$

71,316

 

 

$

73,555

 

 

$

60,388

 

 

$

39,188

 

Stockholders’ equity

 

$

103,628

 

 

$

100,678

 

 

$

90,744

 

 

$

90,131

 

 

$

100,001

 

 

(1)

Our book overdraft is funded by our revolving credit facility as soon as the related checks clear our disbursement accounts.

 

11

 

 

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Form 10-K. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our expectations. Factors that could cause such differences include those described in “Risk Factors” and elsewhere in this Form 10-K. Certain tabular information may not foot due to rounding.

 

Overview

 

Since our founding 44 years ago, we have grown to be a large provider of industrial products to the U.S. market. Today, we serve over 10,000 customers. Our products are used in MRO activities and related projects, as well as for larger-scale projects in the utility, industrial and infrastructure markets and a diverse range of industrial applications including communications, energy, engineering and construction, general manufacturing, mining, marine construction and marine transportation, infrastructure, oilfield services, petrochemical, transportation, utility, wastewater treatment and food and beverage. In the past few years, activity in the MRO market has fluctuated, while the level of competition has increased.

 

Our revenue is driven in part by the level of capital spending within the end-markets we serve. Because many of these end-markets defer capital expenditures during periods of economic downturns, our business has experienced cyclicality. Our revenue has been and will continue to be impacted by fluctuations in capital spending and by our ability to drive demand through our sales and marketing initiatives and the continued development and marketing of our private branded products, such as LifeGuardTM. The recent increased levels of economic activity and commodity prices have impacted sales and the level of demand.

 

Our direct costs will continue to be influenced significantly by the prices we pay our suppliers to procure the products we distribute to our customers. Changes in these costs may result, for example, from increases or decreases in raw material costs, changes in our relationships with suppliers or changes in vendor rebates. Our operating expenses will continue to be affected by our investment in sales, marketing and customer support personnel and commissions paid to our sales force for revenue and profit generated. Some of our operating expenses are related to our fixed infrastructure, including rent, utilities, administrative salaries, maintenance, insurance and supplies. To meet our customers’ needs for an extensive product offering and short delivery times, we will need to continue to maintain adequate inventory levels. Our ability to obtain this inventory will depend, in part, on our relationships with suppliers.

 

Critical Accounting Policies and Estimates

 

Critical accounting policies are those that both are important to the accurate portrayal of a company’s financial condition and results of operations, and require subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

 

In order to prepare financial statements that conform to accounting principles generally accepted in the United States, commonly referred to as GAAP, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Certain estimates are particularly sensitive due to their significance to the financial statements and the possibility that future events may be significantly different from our expectations.

 

We have identified the following accounting policies as those that require us to make the most subjective or complex judgments in order to fairly present our consolidated financial position and results of operations. Actual results in these areas could differ materially from management’s estimates under different assumptions and conditions.

 

Inventory Reserves

 

Inventories are valued at the lower of cost, using the average cost method, or net realizable value. We continually monitor our inventory levels at each of our distribution centers. Our reserve for inventory is based on the age of the inventory, movements of our inventory over the prior twelve months and the experience of our purchasing and sales departments in estimating demand for the product in the succeeding year. Our inventories are generally not susceptible to technological obsolescence. At December 31, 2019 and 2018, inventory reserves totaled $3.6 million and $3.7 million, respectively. A 20% change in our inventory reserve estimate at December 31, 2019 would have resulted in a change in income before income taxes of $0.7 million.

 

12

 

 

Goodwill

 

Goodwill represents the excess of the amount we paid to acquire businesses over the estimated fair value of tangible assets and identifiable intangible assets acquired, less liabilities assumed. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash flows, discount rates and asset lives among other items. At December 31, 2019, our goodwill balance was $22.4 million, representing 9.3% of our total assets.

 

We conduct impairment testing for goodwill annually in the fourth quarter of our fiscal year and more frequently, on an interim basis, when an event occurs or circumstances change that indicate that the fair value of a reporting unit may have declined below its carrying value. Events or circumstances which could indicate a probable impairment include, but are not limited to, financial performance, industry and market conditions, macroeconomic conditions, reporting unit-specific events, historical results of goodwill impairment testing and the timing of the last performance of a quantitative assessment.

 

We test goodwill at the reporting unit level, which is defined as an operating segment or one level below an operating segment that constitutes a business for which financial information is available and is regularly reviewed by management. We have determined that we have four reporting units for this purpose. Before testing goodwill, we consider whether or not to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount and whether an impairment test is required.

 

The goodwill impairment test consists of assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, including goodwill. We may bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the quantitative goodwill impairment test. The quantitative goodwill impairment test, used to identify both the existence of impairment and the amount of impairment loss, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.

 

When performing goodwill impairment testing, the fair values of reporting units are determined based on valuation techniques using the best available information. Inherent in such fair value determinations are certain judgments and estimates relating to future cash flows, including our interpretation of current economic indicators and market valuations, and assumptions about our strategic plans. In developing fair values for our reporting units, we may employ a market multiple or a discounted cash flow methodology, or a combination thereof. The market multiple methodology compares us to similar companies on the basis of risk characteristics to determine our risk profile relative to the comparable companies as a group. This analysis generally focuses on quantitative considerations, which include financial performance and other quantifiable data, and qualitative considerations, which include any factors which are expected to impact future financial performance. The most significant assumptions affecting the market multiple methodology are the market multiples and control premium. A control premium represents the value an investor would pay above non-controlling interest transaction prices in order to obtain a controlling interest in the respective unit.

 

13

 

 

The discounted cash flow methodology establishes fair value by estimating the present value of the projected future cash flows to be generated from the reporting unit. The discount rate applied to the projected future cash flows to arrive at the present value is intended to reflect all risks of ownership and the associated risks of realizing the stream of projected future cash flows. The discounted cash flow methodology uses our projections of financial performance. The most significant assumptions used in the discounted cash flow methodology are the discount rate and expected future revenue and operating margins, which vary among reporting units. If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be exposed to future impairment losses that could be material to our results of operations.

 

Intangible Assets

 

Our intangible assets, excluding goodwill, represent tradenames and customer relationships acquired in purchase transactions. At December 31, 2019, our intangible asset balance was $10.3 million, representing 4.3% of our total assets. Tradenames are not being amortized and are treated as indefinite-lived assets. Tradenames are tested for recoverability in the fourth quarter of our fiscal year, and more frequently, on an interim basis, when an event occurs or circumstances change that indicate that the fair value may have declined below its carrying value. We consider whether or not to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of an intangible asset is less than its carrying amount. If as a result of our qualitative assessment, we determine that an impairment test is required, or alternatively, if we elect to forego the qualitative assessment, we perform a quantitative test and, if required, record an impairment for the difference in the discounted cash flows and the carrying value. The results of the annual qualitative test for 2019 indicated that certain of the tradenames at Southwest were impaired. Accordingly, we performed a quantitative test on Southwest which resulted in an impairment charge of $0.1 million in 2019.

 

We assign useful lives to our intangible assets based on the periods over which we expect the assets to contribute directly or indirectly to our future cash flows. Customer relationships are amortized over 6 to 9 year useful lives. If events or circumstances were to indicate that any of our definite-lived intangible assets might be impaired, we would assess recoverability based on the estimated undiscounted future cash flows to be generated from the applicable intangible asset.

 

When performing quantitative assessments for impairment, we use various assumptions in determining the current fair value of these indefinite-lived intangible assets, including future expected cash flows and discount rates under the relief from royalty method, as well as other fair value measures. If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be exposed to future impairment charges that could be material to our results of operations.

 

Income Taxes

 

We determine deferred tax assets and liabilities based on differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and measure them using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. On December 22, 2017, the Tax Cuts and Jobs Act was signed into law, making significant changes to the US Internal Revenue Code. In 2018, we completed our analysis of our accounting for the income tax effects of tax reform and as a result, no additional adjustments were recorded.

 

Estimates, judgments and assumptions are required in determining whether deferred tax assets will be fully or partially realized.  We establish a valuation allowance to reduce the deferred tax assets when it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. In evaluating the ability to realize deferred tax assets, we consider all available positive and negative evidence, in determining whether, based on the weight of that evidence, a valuation allowance is needed for part or all of the deferred tax assets. In determining the need for a valuation allowance on our deferred tax assets, we place greater weight on recent and objectively verifiable current information, as compared to more forward-looking information that is used in valuing other assets on the balance sheet. We have considered taxable income in prior carryback years, future reversals of existing taxable temporary differences, future taxable income, and tax planning strategies in assessing the need for the valuation allowance.

 

We establish liabilities for estimated tax issues, and the provisions and benefits resulting from changes to those liabilities are included in our annual tax provision along with related interest.  We recognize interest on any tax issue as a component of interest expense and any related penalties in other operating expenses.

 

Sales

 

Our primary source of revenue is the sale of industrial products based upon purchase orders or contracts with customers, as well as billing for freight charges. Revenue is recognized at a point in time once we have determined that the customer has obtained control over the product. Control is typically deemed to have been transferred to the customer when the product is shipped, or delivered (either by customer pickup or through common carrier. Sales incentives earned by customers are accrued in the same month as the shipment is invoiced and are accounted for as a reduction in sales.

 

Cost of Sales

 

Cost of sales consists primarily of the average cost of the industrial products that we sell. We also incur shipping and handling costs in the normal course of business. Cost of sales also reflects cash discounts for prompt payment to vendors and vendor rebates generally related to annual purchase targets, as well as inventory obsolescence charges.

 

Operating Expenses

 

Operating expenses include all expenses, excluding freight, incurred to receive, sell and ship product and administer the operations of the Company.

 

Salaries and Commissions.   Salary expense includes the base compensation, and any overtime earned by hourly personnel, for all sales, administrative and warehouse employees and stock compensation expense for options and restricted stock granted to employees. Commission expense is earned by inside sales personnel based on gross profit dollars generated, by field sales personnel from generating sales and meeting various objectives, by sales, national and marketing managers for driving the sales process, by region managers based on the profitability of their branches and by corporate managers based primarily on our profitability and also on other operating metrics.

 

Other Operating Expenses.   Other operating expenses include all payroll taxes, health insurance, travel expenses, public company expenses, advertising, management information system expenses, facility rent and all distribution expenses such as packaging, reels, and repair and maintenance of equipment and facilities.

 

14

 

 

Depreciation and Amortization.   We incur depreciation expense on costs related to capitalized property and equipment on a straight-line basis over the estimated useful lives of the assets, which range from three to thirty years. We incur amortization expense on leasehold improvements and finance leases over the shorter of the lease term or the life of the related asset and on intangible assets over the estimated life of the asset.

 

Interest Expense

 

Interest expense consists primarily of interest we incur on our debt.

 

15

 

 

Results of Operations

 

The following discussion compares our results of operations for the years ended December 31, 2019, 2018 and 2017.

 

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

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

Sales

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

Cost of sales

 

 

76.4

%

 

 

76.1

%

 

 

77.1

%

Gross profit

 

 

23.6

%

 

 

23.9

%

 

 

22.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and commissions

 

 

11.0

%

 

 

10.7

%

 

 

11.5

%

Other operating expenses

 

 

9.8

%

 

 

8.7

%

 

 

9.0

%

Depreciation and amortization

 

 

0.7

%

 

 

0.6

%

 

 

0.9

%

Impairment charge

 

 

n/m

 

 

 

n/m

 

 

 

0.0

%

Total operating expenses

 

 

21.6

%

 

 

20.0

%

 

 

21.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

2.0

%

 

 

3.9

%

 

 

1.4

%

Interest expense

 

 

0.9

%

 

 

0.8

%

 

 

0.7

%

Income before income taxes

 

 

1.1

%

 

 

3.1

%

 

 

0.8

%

Income tax expense

 

 

0.4

%

 

 

0.7

%

 

 

0.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

0.8

%

 

 

2.4

%

 

 

(0.1

)%

 

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

 

Comparison of Years Ended December 31, 2019 and 2018

 

Sales

 

 

 

Year Ended

 

 

 

December 31,

 

(Dollars in millions)

 

2019

 

 

2018

 

 

Change

 

Sales

 

$

338.3

 

 

$

356.9

 

 

$

(18.6

)

 

 

(5.2

)%

 

Our sales in 2019 decreased $18.6 million or 5.2% from 2018. 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, decreased 5%, while Maintenance, Repair, and Operations (MRO) sales decreased 6%, as compared to 2018. When adjusted for fluctuations in commodity prices of approximately 2%, we estimate that MRO and project business sales decreased by 4% and 3%, respectively.

 

Gross Profit

 

 

 

Year Ended

 

 

 

December 31,

 

(Dollars in millions)

 

2019

 

 

2018

 

 

Change

 

Gross profit

 

$

79.9

 

 

$

85.2

 

 

$

(5.3

)

 

 

(6.2

)%

Gross profit as a percent of sales

 

 

23.6

%

 

 

23.9

%

 

 

 

 

 

 

 

 

 

Gross profit decreased $5.3 million or 6.2% from 2018. The decrease in gross profit was primarily due to decreased sales. Gross margin (gross profit as a percentage of sales) was near flat at 23.6% in 2019 compared to 23.9% in 2018.

 

16

 

 

Operating Expenses 

 

 

 

Year Ended

 

 

 

December 31,

 

(Dollars in millions)

 

2019

 

 

2018

 

 

Change

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and commissions

 

$

37.2

 

 

$

38.1

 

 

$

(0.9

)

 

(2.4

)%

Other operating expenses

 

 

33.2

 

 

 

31.0

 

 

 

2.3

 

 

7.4

%

Depreciation and amortization

 

 

2.5

 

 

 

2.2

 

 

 

0.3

 

 

14.9

%

Impairment charge

 

 

0.1

 

 

 

0.1

 

 

 

0.1

 

 

0.0

%

Total operating expenses

 

$

73.0

 

 

$

71.3

 

 

$

1.7

 

 

2.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses as a percent of sales

 

 

21.6

%

 

 

20.0

%

 

 

 

 

 

 

 

 

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

 

Salaries and Commissions. Salaries and commissions decreased $0.9 million or 2.4% primarily due to lower commissions resulting from the reduction in sales and gross profit.

 

Other Operating Expenses. Other operating expenses increased $2.3 million or 7.4% primarily due to the $2.2 million early termination liability related to Vertex’s Massachusetts facility lease and additional warehouse distribution expenses resulting from the closure of this facility and two additional warehouse moves in the fourth quarter.

 

Depreciation and Amortization. Depreciation and amortization increased slightly to $2.5 million in 2019 from $2.2 million in 2018 primarily due to depreciation on right-of-use assets from the adoption of Accounting Standards Update (“ASU”) 842.

 

Impairment Charge. The Company recorded non-cash impairment charges in 2019 and 2018 with respect to tradenames at its Southwest reporting unit. (See Note 4 to our Consolidated Financial Statements)  

 

Operating expenses as a percentage of sales increased to 21.6% in 2019 from 20.0% in 2018, as operating expenses increased combined with a reduction in sales.

 

Interest Expense

 

Interest expense increased 5.2% to $3.1 million in 2019 from $2.9 million in 2018 due to higher average debt to fund increased working capital and the payment of the early termination liability discussed above. Average debt was $76.6 million in 2019 compared to $76.8 million in 2018. The average effective interest rate increased slightly to 3.8% in 2019 from 3.7% in 2018.

 

Income Tax

 

Income tax expense decreased 45.9% to $1.3 million in 2019 from $2.4 million in 2018. The effective income tax rate was 33.3% in 2019 compared to 21.4% in 2018. The effective tax rate is affected by recurring items, such as nondeductible expenses, share-based compensation and state taxes. In addition, the effective tax rate for 2018 included a benefit of (9.5%) for the release of the valuation allowance on our net deferred tax assets.

 

17

 

 

Comparison of Years Ended December 31, 2018 and 2017

 

Sales

 

 

 

Year Ended

 

 

 

December 31,

 

(Dollars in millions)

 

2018

 

 

2017

 

 

Change

 

Sales

 

$

356.9

 

 

$

317.7

 

 

$

39.2

 

 

 

12.3

%

 

Our sales in 2018 increased $39.2 million or 12.3% from 2017. The increase in sales was primarily due to improved industrial activity and disciplined pricing. We estimate sales for our project business, which targets end markets, encompassing Environmental Compliance, Engineering & Construction, Industrials, Utility Power Generation, and Mechanical Wire Rope, increased 17%, while MRO sales increased 11%, as compared to 2017.

 

Gross Profit

 

 

 

Year Ended

 

 

 

December 31,

 

(Dollars in millions)

 

2018

 

 

2017

 

 

Change

 

Gross profit

 

$

85.2

 

 

$

72.7

 

 

$

12.5

 

 

 

17.3

%

Gross profit as a percent of sales

 

 

23.9

%

 

 

22.9

%

 

 

 

 

 

 

 

 

 

Gross profit increased $12.5 million or 17.3% from 2017. The increase in gross profit was primarily due to increased sales. Gross margin increased to 23.9% in 2018 from 22.9% in 2017 primarily due to ongoing pricing discipline and product mix.

 

Operating Expenses 

 

 

 

Year Ended

 

 

 

December 31,

 

(Dollars in millions)

 

2018

 

 

2017

 

 

Change

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and commissions

 

$

38.1

 

 

$

36.6

 

 

$

1.5

 

 

4.2

%

Other operating expenses

 

 

31.0

 

 

 

28.7

 

 

 

2.2

 

 

7.8

%

Depreciation and amortization

 

 

2.2

 

 

 

2.8

 

 

 

(0.6

)

 

(21.4

)%

Impairment charge

 

 

0.1

 

 

 

 

 

 

0.1

 

 

100.0

%

Total operating expenses

 

$

71.3

 

 

$

68.1

 

 

$

3.3

 

 

4.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses as a percent of sales

 

 

20.0

%

 

 

21.4

%

 

 

 

 

 

 

 

 

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

 

Salaries and Commissions. Salaries and commissions increased $1.5 million or 4.2% primarily due to additional sales and warehouse personnel, as well as an increase in commissions due to higher sales and gross profit.

 

Other Operating Expenses. Other operating expenses increased $2.2 million or 7.8% primarily due to additional warehouse distribution expenses as sales increased and increased administrative expenses due to increased personnel.

 

Depreciation and Amortization. Depreciation and amortization decreased slightly to $2.2 million in 2018 from $2.8 million in 2017 primarily due to the full amortization of the Southern Wire reporting unit tradenames in 2017.

 

Impairment Charge. The Company recorded a non-cash impairment charge in 2018 with respect to tradenames at its Southwest Wire Rope reporting unit. (See Note 4 to our Consolidated Financial Statements)  

 

18

 

 

Operating expenses as a percentage of sales decreased to 20.0% in 2018 from 21.4% in 2017. This decrease primarily relates to the leverage obtained from increased sales, which rose at a higher rate than the increase in operating expenses. 

 

Interest Expense

 

Interest expense increased 40.2% to $2.9 million in 2018 from $2.1 million in 2017 due to higher average debt to fund increased working capital and an increase in the average effective interest rate. Average debt was $76.8 million in 2018 compared to $71.8 million in 2017. The average effective interest rate increased to 3.7% in 2018 from 2.8% in 2017.

 

Income Tax

 

Income tax expense decreased 14.5% to $2.4 million in 2018 from $2.8 million in 2017. The effective income tax rate was 21.4% in 2018 compared to 108.8% in 2017. The 2018 tax rate included a benefit of (9.5%) for the release of the valuation allowance on our net deferred tax assets and 1.2% for share-based compensation. This compares to the 2017 tax rate which included a 41.0% charge for the establishment of a valuation allowance on our net deferred tax assets, 15.2% for share-based compensation expense and a 12.9% charge for deferred tax assets in respect of the tax reform rate change.

  

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 can be adversely affected because of either reduced selling prices or lower of cost or net realizable value adjustments in the carrying value of our inventory. We turn our inventory approximately three times a year, therefore, the impact of changes in commodity prices in any particular quarter would primarily affect the results of the succeeding two calendar quarters. If we are unable to pass on to our customers future cost increases due to inflation or rising commodity prices, our operating results could be adversely affected.  

 

Liquidity and Capital Resources

 

Our primary capital needs are for working capital obligations, capital expenditures, and other general corporate purposes, including acquisitions. Our primary sources of working capital are cash from operations supplemented by bank borrowings.

 

        Liquidity is defined as the ability to generate adequate amounts of cash to meet the current need for cash. We assess our liquidity in terms of our ability to generate cash to fund our operating activities. Significant factors which could affect liquidity include the following:

 

the adequacy of available bank lines of credit;

cash flows generated from operating activities;

capital expenditures;

acquisitions; and

the ability to attract long-term capital with satisfactory terms

 

Comparison of Years Ended December 31, 2019 and 2018

 

Our net cash used in operating activities was $5.6 million in 2019 compared to cash provided by operating activities of $5.3 million in 2018. We had net income of $2.6 million in 2019 compared to $8.6 million in 2018.

 

Changes in our operating assets and liabilities resulted in cash used in operating activities of $19.3 million in 2019. The majority of the change was due to increased inventories of $20.3 million and lease payments of $6.2 million. Partially offsetting these uses of cash was the increase of accounts payable of $2.6 million, increase in accrued liabilities of $2.4 million and decrease in accounts receivable of $2.6 million.

 

Net cash used in investing activities was $2.4 million in 2019 compared to $1.5 million in 2018. The increase was primarily due to expenditures for the computer system upgrade and conversion.

 

19

 

 

Net cash provided by financing activities was $10.7 million in 2019 compared to cash used in financing activities of $2.5 million in 2018. Net borrowings under our revolver of $12.2 million and the purchase of treasury stock of $1.2 million were the main components of financing activities in 2019.

 

Comparison of Years Ended December 31, 2018 and 2017

 

Our net cash provided by operating activities was $5.3 million in 2018 compared to net cash used in operating activities of $11.3 million in 2017. We had net income of $8.6 million in 2018 compared to a net loss of $0.2 million in 2017.

 

Changes in our operating assets and liabilities resulted in cash used in operating activities of $6.2 million in 2018. Inventories increased $6.8 million in alignment with the increase in sales volume. Accounts receivable increased $2.5 million, primarily due to increased sales in 2018. Partially offsetting these uses of cash was the decrease in book overdraft of $3.0 million, an increase in accounts payable of $2.8 million, an increase in accrued and other current liabilities of $2.5 million primarily due to increased inventory and customer volume discounts and a decrease in prepaid expenses of $1.2 million.

 

Net cash used in investing activities was $1.5 million in 2018 compared to $1.6 million in 2017. 

 

Net cash used in financing activities was $2.5 million in 2018 compared to net cash provided by financing activities of $12.9 million in 2017. Net payments under our revolver of $2.2 million and the purchase of treasury stock of $0.2 million were the main components of financing activities in 2018.

 

Indebtedness

 

Our principal source of liquidity at December 31, 2019 was working capital of $138.5 million compared to $126.2 million at December 31, 2018. We also had available borrowing capacity of approximately $22.8 million at December 31, 2019 and $28.7 million at December 31, 2018 under our loan agreement.

 

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

 

Loan and Security Agreement

 

HWC Wire & Cable Company, Vertex, and Bank of America, N.A., as agent and lender, are parties to the Fourth Amended and Restated Loan and Security Agreement (the “Loan Agreement”), as amended on December 10, 2019. The Loan Agreement provides a $115 million revolving credit facility and expires on March 12, 2024. Under certain circumstances we may request an increase in the commitment by an additional $50 million. Borrowings under the Loan Agreement bear interest at the British Bankers Association LIBOR Rate plus 100 to 150 basis points based on availability, if a LIBOR loan, or at a fluctuating rate equal to the greatest of the agent’s prime rate, the federal funds rate plus 50 basis points, or LIBOR for a 30-day interest period plus 150 basis points, if a base rate loan. 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 our property, other than real estate.

 

Covenants in the Loan Agreement require us to maintain a specified minimum fixed charge coverage ratio, unless certain availability levels exist. Repaid amounts can be re-borrowed subject to the borrowing base. As of December 31, 2019, we met the availability-based covenant.

 

Capital Expenditures

 

We made capital expenditures of $2.4 million, $1.5 million and $1.8 million in the years ended December 31, 2019, 2018 and 2017, respectively.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements. 

 

Financial Derivatives

 

We have no financial derivatives.

 

20

 

 

Climate Risk

 

Our operations are subject to inclement weather conditions, which could potentially be related to global warming, including hurricanes, earthquakes and abnormal weather events. Our previous experience from these events has had a minimal effect on our operations.

 

Factors Affecting Future Results

 

This Annual Report on Form 10-K contains statements that may be considered forward-looking.  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. You should read statements that contain these words carefully, because they discuss our future expectations, contain projections of our future results of operations or of our financial position or state other “forward-looking” information.  Actual results could differ materially from the results indicated by these statements, because the realization of those results is subject to many risks and uncertainties.  Some of these risks and uncertainties are discussed in greater detail under Item 1A, “Risk Factors.”

 

All forward-looking statements are based on current management expectations and speak only as of the date of this filing. Except as required under federal securities laws and the rules and regulations of the SEC, we do not have any intention, and do not undertake, to update any forward-looking statements to reflect events or circumstances arising after the date of this Form 10-K.

 

ITEM 7A. – Not applicable and has been omitted.

 

21

 

 

ITEM 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Houston Wire & Cable Company

 

Index to consolidated financial statements

 

 

 

Page

Report of Independent Registered Public Accounting Firm

 

F-1

Consolidated Balance Sheets as of December 31, 2019 and 2018

 

F-2

Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017

 

F-3

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019, 2018 and 2017

 

F-4

Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017

 

F-5

Notes to Consolidated Financial Statements

 

F-6

 

22

 

Report of Independent Registered Public Accounting Firm

 

To the Stockholders and Board of Directors of Houston Wire & Cable Company

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Houston Wire & Cable Company (the Company) as of December 31, 2019 and 2018, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles. 

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 13, 2020 expressed an unqualified opinion thereon.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.  Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

We have served as the Company’s auditor since 1997.

 

/s/ Ernst & Young LLP

 

Houston, Texas

March 13, 2020

 

F-1 

 

Houston Wire & Cable Company

Consolidated Balance Sheets

 

 

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(In thousands, except
share data)

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

4,096

 

 

$

1,393

 

Accounts receivable, net

 

 

 

 

 

 

 

 

Trade

 

 

50,325

 

 

 

52,946

 

Other

 

 

6,640

 

 

 

6,847

 

Inventories, net

 

 

114,069

 

 

 

94,325

 

Income tax receivable

 

 

1,353

 

 

 

435

 

Prepaids and other current assets

 

 

1,833

 

 

 

737

 

Total current assets

 

 

178,316

 

 

 

156,683

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

14,589

 

 

 

11,456

 

Intangible assets, net

 

 

10,282

 

 

 

11,179

 

Goodwill

 

 

22,353

 

 

 

22,353

 

Deferred income taxes

 

 

600

 

 

 

930

 

Operating lease right-of-use assets, net

 

 

13,481

 

 

 

 

Other assets

 

 

527

 

 

 

456

 

Total assets

 

$

240,148

 

 

$

203,057

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Trade accounts payable

 

$

13,858

 

 

$

11,253

 

Accrued and other current liabilities

 

 

23,261

 

 

 

19,232

 

Operating lease liabilities

 

 

2,742

 

 

 

 

Total current liabilities

 

 

39,861

 

 

 

30,485

 

 

 

 

 

 

 

 

 

 

Debt

 

 

83,500

 

 

 

71,316

 

Operating lease long term liabilities

 

 

11,182

 

 

 

 

Other long-term obligations

 

 

1,977

 

 

 

578

 

Total liabilities

 

 

136,520

 

 

 

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: 16,556,950 and 16,611,651 shares outstanding at December 31, 2019 and 2018, respectively

 

 

21

 

 

 

21

 

Additional paid-in capital

 

 

52,304

 

 

 

53,514

 

Retained earnings

 

 

108,626

 

 

 

105,975

 

Treasury stock

 

 

(57,323

)

 

 

(58,832

)

Total stockholders’ equity

 

 

103,628

 

 

 

100,678

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

240,148

 

 

$

203,057

 

 

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

 

F-2 

 

Houston Wire & Cable Company

Consolidated Statements of Operations

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

     

Sales

 

$

338,286

 

 

$

356,858

 

 

$

317,697

 

Cost of sales

 

 

258,364

 

 

 

271,650

 

 

 

245,035

 

Gross profit

 

 

79,922

 

 

 

85,208

 

 

 

72,662

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and commissions

 

 

37,180

 

 

 

38,110

 

 

 

36,570

 

Other operating expenses

 

 

33,238

 

 

 

30,962

 

 

 

28,716

 

Depreciation and amortization

 

 

2,502

 

 

 

2,178

 

 

 

2,772

 

Impairment charge

 

 

120

 

 

 

60

 

 

 

 

Total operating expenses

 

 

73,040

 

 

 

71,310

 

 

 

68,058

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

6,882

 

 

 

13,898

 

 

 

4,604

 

Interest expense

 

 

3,057

 

 

 

2,907

 

 

 

2,073

 

Income before income taxes

 

 

3,825

 

 

 

10,991

 

 

 

2,531

 

Income tax expense

 

 

1,275

 

 

 

2,355

 

 

 

2,753

 

Net income (loss)

 

$

2,550

 

 

$

8,636

 

 

$

(222

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.16

 

 

$

0.53

 

 

$

(0.01

)

Diluted

 

$

0.15

 

 

$

0.52

 

 

$

(0.01

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

16,433,644

 

 

 

16,389,876

 

 

 

16,269,611

 

Diluted

 

 

16,552,866

 

 

 

16,523,599

 

 

 

16,269,611

 

 

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

 

F-3 

 

Houston Wire & Cable Company

Consolidated Statements of Stockholders’ Equity

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Retained

 

 

Treasury Stock

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Shares

 

 

Amount

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands, except share data)

 

Balance at January 1, 2017

 

 

20,988,952

 

 

 

21

 

 

 

53,824

 

 

 

97,550

 

 

 

(4,531,427

)

 

 

(61,264

)

 

 

90,131

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(222

)

 

 

 

 

 

 

 

 

(222

Repurchase of treasury shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(27,156

)

 

 

(177

)

 

 

(177

)

Amortization of unearned stock compensation

 

 

 

 

 

 

 

 

1,004

 

 

 

 

 

 

 

 

 

 

 

 

1,004

 

Impact of forfeited awards

 

 

 

 

 

 

 

 

361

 

 

 

 

 

 

(26,707

)

 

 

(361

)

 

 

 

Impact of released vested restricted stock units

 

 

 

 

 

 

 

 

(372

)

 

 

 

 

 

27,519

 

 

 

372

 

 

 

 

Issuance of restricted stock awards

 

 

 

 

 

 

 

 

(811

)

 

 

 

 

 

60,000

 

 

 

811

 

 

 

 

Dividends accrual reversal

 

 

 

 

 

 

 

 

 

 

 

8

 

 

 

 

 

 

 

 

 

8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

 

20,988,952

 

 

 

21

 

 

 

54,006

 

 

 

97,336

 

 

 

(4,497,771

)

 

 

(60,619

)

 

 

90,744

 

Net income

 

 

 

 

 

 

 

 

 

 

 

8,636

 

 

 

 

 

 

 

 

 

8,636

 

Repurchase of treasury shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(25,368

)

 

 

(175

)

 

 

(175

)

Amortization of unearned stock compensation

 

 

 

 

 

 

 

 

1,059

 

 

 

 

 

 

 

 

 

 

 

 

1,059

 

Amortization of reclassed liability awards

 

 

 

 

 

 

 

 

411

 

 

 

 

 

 

 

 

 

 

 

 

411

 

Impact of forfeited awards

 

 

 

 

 

 

 

 

179

 

 

 

 

 

 

(13,332

)

 

 

(179

)

 

 

 

Impact of released vested restricted stock units

 

 

 

 

 

 

 

 

(353

)

 

 

 

 

 

26,185

 

 

 

353

 

 

 

 

Issuance of restricted stock awards

 

 

 

 

 

 

 

 

(1,788

)

 

 

 

 

 

132,985

 

 

 

1,788

 

 

 

 

Dividend accrual reversal

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

 

20,988,952

 

 

 

21

 

 

 

53,514

 

 

 

105,975

 

 

 

(4,377,301

)

 

 

(58,832

)

 

 

100,678

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

2,550

 

 

 

 

 

 

 

 

 

2,550

 

Repurchase of treasury shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(262,231

)

 

 

(1,188

)

 

 

(1,188

)

Amortization of unearned stock compensation

 

 

 

 

 

 

 

 

1,471

 

 

 

 

 

 

 

 

 

 

 

 

1,471

 

Impact of forfeited awards

 

 

 

 

 

 

 

 

117

 

 

 

 

 

 

(9,142

)

 

 

(117

)

 

 

 

Impact of released vested restricted stock units

 

 

 

 

 

 

 

 

(1,019

)

 

 

 

 

 

77,046

 

 

 

1,019

 

 

 

 

Settlement of director’s deferred compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,251

 

 

 

16

 

 

 

16

 

Issuance of restricted stock awards

 

 

 

 

 

 

 

 

(1,779

)

 

 

 

 

 

137,375

 

 

 

1,779

 

 

 

 

Cumulative effect of accounting change (Note 10)

 

 

 

 

 

 

 

 

 

 

 

101

 

 

 

 

 

 

 

 

 

101

 

Balance at December 31, 2019

 

 

20,988,952

 

 

 

21

 

 

$

52,304

 

 

$

108,626

 

 

 

(4,432,002

)

 

$

(57,323

)

 

$

103,628

 

 

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

 

F-4 

 

Houston Wire & Cable Company

Consolidated Statements of Cash Flows

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Operating activities

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

2,550

 

 

$

8,636

 

 

$

(222

)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Impairment charge

 

 

120

 

 

 

60

 

 

 

 

Depreciation and amortization

 

 

2,502

 

 

 

2,178

 

 

 

2,772

 

Amortization of unearned stock compensation

 

 

1,471

 

 

 

1,298

 

 

 

1,176

 

Non-cash lease expense

 

 

5,887

 

 

 

 

 

 

 

Provision for doubtful accounts

 

 

119

 

 

 

73

 

 

 

68

 

Provision for refund liability

 

 

84

 

 

 

37

 

 

 

180

 

Provision for inventory obsolescence

 

 

515

 

 

 

615

 

 

 

34

 

Deferred income taxes

 

 

431

 

 

 

(1,344

)

 

 

1,314

 

Other non-cash items

 

 

54

 

 

 

25

 

 

 

42

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

2,625

 

 

 

(2,507

)

 

 

(12,719

)

Inventories

 

 

(20,259

)

 

 

(6,825

)

 

 

(7,942

)

Income taxes

 

 

(918

)

 

 

14

 

 

 

1,499

 

Prepaid expenses

 

 

(265

)

 

 

1,201

 

 

 

(1,368

)

Lease payments

 

 

(6,194

)

 

 

 

 

 

 

Book overdraft

 

 

 

 

 

(3,028

)

 

 

(153

)

Trade accounts payable

 

 

2,605

 

 

 

2,804

 

 

 

38

 

Accrued and other current liabilities

 

 

2,394

 

 

 

2,460

 

 

 

3,571

 

Other operating activities

 

 

673

 

 

 

(359

)

 

 

368

 

Net cash (used in) provided by operating activities

 

 

(5,606

)

 

 

5,338

 

 

 

(11,342

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(2,379

)

 

 

(1,503

)

 

 

(1,769

)

Proceeds from disposals of property and equipment

 

 

5

 

 

 

20

 

 

 

8

 

Cash refunded (paid) for acquisition

 

 

 

 

 

 

 

 

193

 

Net cash used in investing activities

 

 

(2,374

)

 

 

(1,483

)

 

 

(1,568

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings on revolver

 

 

364,671

 

 

 

367,513

 

 

 

333,301

 

Payments on revolver

 

 

(352,487

)

 

 

(369,752

)

 

 

(320,133

)

Payment of dividends

 

 

(36

)

 

 

(48

)

 

 

(81

)

Purchase of treasury stock/stock surrendered on vested awards

 

 

(1,172

)

 

 

(175

)

 

 

(177

)

Lease payments

 

 

(293

)

 

 

 

 

 

 

Net cash (used in) provided by financing activities

 

 

10,683

 

 

 

(2,462

)

 

 

12,910

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in cash

 

 

2,703

 

 

 

1,393

 

 

 

 

Cash at beginning of year

 

 

1,393

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash at end of year

 

$

4,096

 

 

$

1,393

 

 

$

 

Supplemental disclosures

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid during the year for interest

 

$

3,011

 

 

$

2,811

 

 

$

1,961

 

Cash paid during the year for income taxes

 

$

1,762

 

 

$

3,696

 

 

$

64

 

 

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

 

F-5 

 

Houston Wire & Cable Company 

Notes to Consolidated Financial Statements

 

1.

Organization and Summary of Significant Accounting Policies

 

Description of Business

 

Houston Wire & Cable Company (the “Company”), through its wholly owned subsidiaries, provides industrial products to the U.S. market through twenty-two locations in fourteen states throughout the United States. The Company has no other business activity.

 

Basis of Presentation and Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its subsidiaries and have been prepared following accounting principles generally accepted in the United States (“GAAP”) and the requirements of the Securities and Exchange Commission (“SEC”). The financial statements include all normal and recurring adjustments that are necessary for a fair presentation of the Company’s financial position and operating results. All significant inter-company balances and transactions have been eliminated.

 

Use of Estimates

 

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.

 

Reclassifications

 

Certain prior period amounts have been reclassified to conform to the current period presentation.

 

Accounts Receivable

 

Accounts receivable consists primarily of receivables from customers, less an allowance for doubtful accounts of $0.2 million at December 31, 2019 and 2018. The Company has no contractual repurchase arrangements with its customers. Credit losses have been within management’s expectations.

 

F-6 

 

 

Inventories

 

Inventories are carried at the lower of cost, using the average cost method, and net realizable value and consist primarily of goods purchased for resale, less a reserve for obsolescence and unusable items and unamortized vendor rebates. The reserve for inventory is based upon a number of factors, including the experience of the purchasing and sales departments, age of the inventory, new product offerings, and other factors. The reserve for inventory may periodically require adjustment as the factors identified above change.

 

Vendor Rebates

 

Under many of the Company’s arrangements with its vendors, the Company receives a rebate of a specified amount of consideration, payable when the Company achieves any of a number of measures, generally related to the volume level of purchases from the vendors. The Company accounts for such rebates as a reduction of the prices of the vendors’ products and therefore as a reduction of inventory until it sells the products, at which time such rebates reduce cost of sales in the accompanying consolidated statements of operations. Throughout the year, the Company estimates the amount of the rebates earned based on purchases to date relative to the total purchase levels expected to be achieved during the rebate period. At year end, the Company recalculates the rebates earned based on actual purchases made.

 

Property and Equipment

 

The Company provides for depreciation on a straight-line method over the following estimated useful lives:

 

Buildings

25 to 30 years

Machinery and equipment

3 to 10 years

 

Leasehold improvements are depreciated over their estimated life or the term of the lease, whichever is shorter.

 

Total depreciation expense was approximately $1.7 million for the year ended December 31, 2019, and $1.4 million for each of the years ended December 31, 2018 and 2017.

 

Goodwill

 

Goodwill represents the excess of the amount paid to acquire businesses over the estimated fair value of tangible assets and identifiable intangible assets acquired, less liabilities assumed.  Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash flows, discount rates and asset lives among other items. At December 31, 2019, the goodwill balance was $22.4 million, representing 9.3% of the Company’s total assets.

 

F-7 

 

 

The Company conducts impairment testing for goodwill annually in the fourth quarter of its fiscal year and more frequently, on an interim basis, when an event occurs or circumstances change that indicate that the fair value of a reporting unit may have declined below its carrying value. Events or circumstances which could indicate a probable impairment include, but are not limited to, financial performance, industry and market conditions, macroeconomic conditions, reporting unit-specific events, historical results of goodwill impairment testing and the timing of the last performance of a quantitative assessment.

 

The Company tests goodwill at the reporting unit level, which is defined as an operating segment or one level below an operating segment that constitutes a business for which financial information is available and is regularly reviewed by management. The Company determined that it has four reporting units for this purpose. Before testing goodwill, the Company considers whether or not to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount and whether an impairment test is required. If as a result of the qualitative assessment, the Company determines that an impairment test is required, or alternatively, if the Company elects to forego the qualitative assessment, the Company performs a quantitative assessment and records an impairment to goodwill to the extent the carrying amount of the reporting unit, including goodwill, exceeds the fair value of the reporting unit. See Note 4 for more details.

 

Intangibles

 

Intangible assets, from the acquisition of Southwest and Southern in 2010 and the acquisition of Vertex in 2016, consist of customer relationships and tradenames. The customer relationships are amortized over 6 to 9 year useful lives. If events or circumstances were to indicate that any of the Company’s definite-lived intangible assets might be impaired, the Company would assess recoverability based on the estimated undiscounted future cash flows to be generated from the applicable intangible asset. If the undiscounted cash flows were less than the carrying value, then the intangible assets would be written down to their fair value. Tradenames have an indefinite life and are not being amortized and are tested for impairment on an annual basis. See Note 4 for more details.

 

Leases

 

At the inception of a contract, the Company assesses whether the contract is, or contains, a lease. The assessment is based on (1) whether the contract involves the use of a distinct identified asset, (2) whether the Company obtains the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether the Company has the right to direct the use of the asset. All significant lease arrangements are recognized at lease commencement. Leases with a lease term of 12 months or less at inception are not recorded on the Consolidated Balance Sheets and are expensed on a straight-line basis over the lease term in the Consolidated Statements of Operations. The Company determines the lease term by assuming the exercise of renewal options that are reasonably certain. As most of the leases do not provide an implicit interest rate, the Company uses the incremental borrowing rate which approximates to a collateralized rate at the commencement date to determine the present value of future payments that are reasonably certain. See Note 11 for more details. 

 

Self Insurance

 

The Company retains certain self-insurance risks for health benefits. The Company limits its exposure to these self-insurance risks by maintaining excess and aggregate liability coverage. Self-insurance reserves are established based on claims filed and estimates of claims incurred but not reported. The estimates are based on information provided to the Company by its claims administrators.

 

Segment Reporting

 

The Company operates in a single operating and reportable segment, sales of industrial products, including electrical and mechanical wire and cable, industrial fasteners, hardware and related services to the U.S. market. The Company’s chief operating decision maker (“CODM”) is its Chief Executive Officer. The CODM makes operational and resource decisions based on company-wide sales and margin performance compared to the established strategic goals of the Company.

 

Revenue Recognition, Returns & Allowances

 

The Company’s primary source of revenue is the sale of industrial products based upon purchase orders or contracts with customers. Revenue is recognized at a point in time once the Company has determined that the customer has obtained control over the product. Control is typically deemed to have been transferred to the customer when the product is shipped, or delivered (either by customer pickup or through common carrier). It is not normal Company practice to grant extended payment terms. Revenue is recognized net of any sales taxes collected, which are subsequently remitted to the appropriate taxing authorities. The Company treats its transportation costs (shipping and handling) as fulfillment costs and not as a separate performance obligation. These transportation costs are recorded in cost of sales.

 

The amount of revenue recognized reflects the consideration the Company expects to be entitled to receive in exchange for products sold. Revenue is recorded at the transaction price net of estimates of variable consideration, which may include product returns, trade discounts and allowances. The Company accrues for variable consideration using the expected value method. Estimates of variable consideration are included in revenue to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur.

 

Customers are permitted to return product only on a case-by-case basis. Product exchanges are handled as a credit, with any replacement item being re-invoiced to the customer. Customer returns are recorded as a refund liability, included in accrued and other liabilities, with a corresponding reduction to sales. The Company has no installation obligations.

 

F-8 

 

 

The Company may offer sales incentives, which are accrued monthly as an adjustment to sales.

 

Shipping and Handling

 

The Company incurs shipping and handling costs in the normal course of business. Freight amounts invoiced to customers are included as sales, and freight charges are included as a component of cost of sales.

 

Credit Risk

 

No single customer accounted for 10% or more of the Company’s sales in 2019, 2018 or 2017. The Company performs periodic credit evaluations of its customers and generally does not require collateral.

 

Financial Instruments

 

The carrying values of accounts receivable, trade accounts payable and accrued and other current liabilities approximate fair value, due to the short maturity of these instruments.

 

Stock-Based Compensation

 

Restricted stock awards, units and cash awards are valued at the closing price of the Company’s stock on the grant date and are granted under the Company’s 2017 Stock Plan. Stock options issued under the Company’s now-expired 2006 Stock Plan have an exercise price equal to the fair value of the Company’s stock on the grant date. The Company recognizes compensation expense ratably over the vesting period. The Company’s stock-based compensation expense is included in salaries and commissions expense for employees and in other operating expenses for non-employee directors in the accompanying consolidated statements of operations.

 

The Company receives a tax deduction for certain stock option exercises in the period in which the options are exercised, generally for the excess of the market price on the date of exercise over the exercise price of the options. The Company reports excess tax benefits from the award of equity instruments as operating cash flows. Excess tax benefits result when a deduction reported for tax return purposes for an award of equity instruments exceeds the cumulative compensation cost for the instruments recognized for financial reporting purposes.

 

Income Taxes

 

Deferred tax assets and liabilities are determined based on differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance for deferred tax assets is recognized when it is more-likely-than-not that some or all of the benefit from the deferred tax assets will not be realized. To assess that likelihood, the Company uses its current financial position, results of operations, both actual and forecasted, the reversal of deferred tax liabilities, and tax planning strategies to determine whether a valuation allowance is required.

 

Recently Adopted Accounting Standards

 

The Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) is the sole source of authoritative GAAP other than SEC issued rules and regulations that apply only to SEC registrants. The FASB issues an Accounting Standard Update (“ASU”) to communicate changes to the codification. The Company considers the applicability and impact of all ASUs. The following are those recent ASUs that 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 11 for detailed information.

 

F-9 

 

 

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 2018-15, “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 November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses.  This ASU, among other narrow-scope improvements, clarifies guidance around how to report expected recoveries.  This ASU permits organizations to record expected recoveries on assets purchased with credit deterioration.  In addition to other narrow technical improvements, the ASU also reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities.  The effective date and transition methodology are the same as in ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  The FASB deferred the effective dates of this ASU for smaller reporting companies (“SRC”) to fiscal years beginning after December 15, 2022. As of December 31, 2019, the Company qualifies as a SRC and will adopt this ASU in the first quarter of 2023.

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.  This ASU removes specific exceptions to the general principles in Topic 740 in GAAP.  It eliminates the need for an organization to analyze whether certain exceptions apply in a given period.  This ASU also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for: a) Franchise taxes that are partially based on income; b) Transactions with a government that result in a step up in the tax basis of goodwill; c) Separate financial statements of legal entities that are not subject to tax; and d) Enacted changes in tax laws in interim periods.  For public business entities, ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.  The Company is currently assessing the impact of this ASU on its consolidated financial statements.

 

2.Earnings (loss) per Share

 

Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings (loss) per share include the dilutive effects of options and unvested restricted stock awards and units.

 

The following reconciles the denominator used in the calculation of diluted earnings (loss) per share:

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares for basic earnings per share

 

 

16,433,644

 

 

 

16,389,876

 

 

 

16,269,611

 

Effect of dilutive securities

 

 

119,222

 

 

 

133,723

 

 

 

 

Denominator for diluted earnings per share

 

 

16,552,866

 

 

 

16,523,599

 

 

 

16,269,611

 

 

Stock awards to purchase 369,325, 298,406 and 808,391 shares of common stock were not included in the diluted net income (loss) per share calculation for 2019, 2018 and 2017, respectively, as their inclusion would have been anti-dilutive. In 2017 and for the first quarter of 2018, the Company calculated earnings per share using the “two-class” method, whereby unvested share-based payment awards that contained non-forfeitable rights to dividends or dividend equivalents were considered “participating securities”, as discussed in Note 9, and therefore, these participating securities were treated as a separate class in computing earnings per share.

 

3.

Detail of Selected Balance Sheet Accounts

 

Accounts Receivable

 

The following table summarizes the changes in the allowance for doubtful accounts for the past three years:

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Balance at beginning of year

 

$

182

 

 

$

172

 

 

$

151

 

Bad debt expense

 

 

119

 

 

 

73

 

 

 

68

 

Write-offs, net of recoveries

 

 

(90

)

 

 

(63

)

 

 

(47

)

Balance at end of year

 

$

211

 

 

$

182

 

 

$

172

 

 

Inventories

 

The following table summarizes the changes in the inventory reserves for the past three years:

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Balance at beginning of year

 

$

3,709

 

 

$

3,925

 

 

$

4,366

 

Provision for inventory write-downs

 

 

515

 

 

 

615

 

 

 

34

 

Deduction for inventory write-offs

 

 

(640

)

 

 

(831

)

 

 

(475

)

Balance at end of year

 

$

3,584

 

 

$

3,709

 

 

$

3,925

 

 

F-10 

 

 

Property and Equipment, net

 

Property and equipment are stated at cost and consist of:

 

 

 

At December 31,

 

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

Land

 

$

2,476

 

 

$

2,476

 

Buildings

 

 

8,712

 

 

 

8,501

 

Machinery and equipment (1)

 

 

19,199

 

 

 

14,867

 

 

 

 

30,387 

 

 

 

25,844

 

Less accumulated depreciation

 

 

(15,798

)

 

 

(14,388

)

Total

 

$

14,589

 

 

$

11,456

 

 

(1)This includes finance leases. See Note 11 for more details.

 

Intangible assets

 

Intangible assets consist of:  

 

At December 31,

 

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

Tradenames

 

$

5,816

 

 

$

5,936

 

Customer relationships

 

 

18,620

 

 

 

18,620

 

 

 

 

24,436

 

 

 

24,556

 

Less accumulated amortization:

 

 

 

 

 

 

 

 

Tradenames

 

 

 

 

 

 

Customer relationships

 

 

(14,154

)

 

 

(13,377

)

 

 

 

(14,154

 

 

(13,377

)

 

 

 

 

 

 

 

 

 

Total

 

$

10,282

 

 

$

11,179

 

 

As of December 31, 2019, accumulated amortization on the acquired intangible assets was $14.2 million, and amortization expense was $0.8 million in the years ended December 31, 2019 and 2018 and $1.4 million in the year ended December 31, 2017. Future amortization expense to be recognized on the acquired intangible assets is expected to be as follows:

 

 

 

Annual
Amortization
Expense

 

 

 

(In thousands)

 

2020

 

$

777

 

2021

 

 

777

 

2022

 

 

777

 

2023

 

 

777

 

2024

 

 

777

 

2025

 

 

583

 

 

Goodwill

 

 

 

At December 31,

 

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

Balance at beginning of year

 

$

22,353

 

 

$

22,353

 

Less purchase price adjustment

 

 

 

 

 

 

Balance at end of year (1)

 

$

22,353

 

 

$

22,353

 

 

(1) The balance is net of $12.6 million of accumulated impairment losses, of which none were recorded in 2019 or 2018.

 

F-11 

 

 

Accrued and Other Current Liabilities

 

Accrued and other current liabilities consist of:

 

At December 31,

 

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

Customer rebates

 

$

4,979

 

 

$

6,163

 

Payroll, commissions, and bonuses

 

 

1,930

 

 

 

3,047

 

Accrued inventory purchases

 

 

11,122

 

 

 

5,140

 

Property taxes

 

 

977

 

 

 

1,041

 

Freight

 

 

464

 

 

 

689

 

Refund liability

 

 

1,182

 

 

 

435

 

Professional fees

 

 

399

 

 

 

415

 

Accrued interest