2 0 0 9 A n n u A l r e p o r t
Wired for success, positioned for growth.
Financial HigHligHts
(dollars in thousands except per share data)
2009
2008
2007
2006
2005
net sales
sales per employee
operating income
operating margin
net income
Diluted earnings per share
total assets
long-term obligations
stockholders’ equity
$254,819
$360,939
$359,115
$323,467
$213,957
907
1,168
1,201
1,131
781
13,772
40,384
49,708
53,074
22,768
5.40%
11.19%
13.84%
16.41%
10.64%
8,032
0.45
23,737
30,225
30,674
12,514
1.33
1.48
1.62
122,014
134,753
139,091
116,864
17,479
29,808
34,507
12,059
80,813
76,595
71,170
81,674
742
0.75
81,241
57,938
net sales
operating margin
net income
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current ratio
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H o U S T o N W I R E & C a B L E C o M P a N y > 2 0 0 9 a R > 1
Houston Wire & Cable Company
Specializing in utility, infrastructure and industrial markets,
HWCC is one of the nation’s largest distributors of specialty
electrical and electronic wire and cable. With an $80 million
inventory from industry-leading manufacturers, our team
remains focused on providing superior customer service and
quality in-stock items for immediate shipment.
focused on
O u r f i v e g r O w t h i n i t i a t i v e s
Utility Power Generation
Natural Gas | Coal | Hydro | Nuclear | Solar | Biomass | Wind
Environmental Compliance
Selective Catalytic Reduction | Flue Gas Desulfurization | Mercury Reduction
Engineering & Construction
United States and International | Infrastructure | Industrial and Commercial
Government | New Build | Capital Expansion
Industrials
LifeGuard™
Energy | Mining | Petrochemical | Steel | Transit | Waste Water
Low-smoke Zero-halogen Cable Jackets | Superior Flame Resistance
Low-smoke Production | Reduced Toxicity | Green-recognized
2 <
To My Fellow Shareholders
Utility Power Generation—as electric demand grows, so too does the
need for additional power generation. according to the 2010 Global
Industrial outlook Report by Industrial Information Resources (IIR), it
is estimated that electric demand in the United States will increase
26% through 2030. Experts speculate that clean coal initiatives will
remain a major solution provider for this demand and that next-
generation technologies such as integrated gasification com bined
cycle (IGCC) will have significant upside acceptance and investment.
In addition to clean coal generation, we believe that natural gas
combined cycle technology (NGCC) will also play a large part in our
nation’s energy portfolio. In 2009, approximately 50% of the United
States’ new generation capacity came from natural gas-fired plants.
Environmental Compliance—The average age of existing power
plants in the U.S. exceeds 35 years and significant investment
remains necessary in order to upgrade dated generation technolo-
gies to present-day requirements. Partially driven by the environ-
mental regulatory initiatives, these upgrades often require the
addition of highly-engineered and capital-intensive environmental
compliance devices such as selective catalytic reduction (SCR)
and flue gas desulfurization (FGD) systems to remove harmful
emissions from these existing power generation units.
2009 was a year that tested the ability of Houston Wire & Cable
Company (HWCC) to perform in difficult market conditions. While
the economic turmoil that most businesses experienced in 2009 is
reflected in our results, we were successful in reaching many of our
business development goals. Major objectives for 2009 included
With one of the largest inventories of utility-grade wire and cable in
the industry, HWCC’s products are ideally profiled to service both
maintenance, repair and operations (MRo) and capital project needs
in these applications. Combined with our superior customer service
and broad distribution platform, we are well positioned for growth
continued execution of our growth plan, new customer development
in this market.
and retention, operational excellence, further strengthening of the
balance sheet and expense control. HWCC is unable to control the
global economies; however, we can control our behavior during a
recession by focusing on business development. The following will
give you additional insight for each of these objectives and how our
team performed in achieving these goals.
Our GrOWtH Plan > our growth plan is designed to target key
end-markets that are the most significant users of our products and
services. These markets, utility, industrial and infrastructure, are large
and highly service dependent on qualified and reliable suppliers of
specialty electrical and electronic wire and cable. HWCC’s growth plan
encompasses five major initiatives within these markets. They include:
> Utility Power Generation
> Environmental Compliance
> Engineering & Construction
> Industrials
> LifeGuard™ Low-smoke Zero-halogen Cable
Engineering & Construction—although the global economic crisis
and resultant market uncertainty have reduced engineering and con-
struction backlogs, they do remain in line with 2006 historic levels
which I consider to be relatively healthy. our project business in this
space during 2009 was good and to a large extent driven by existing
backlogs HWCC generated over the prior 12 months.
We believe the $130 billion in the american Recovery and Reinvest-
ment act (aRRa) of 2009 that has been earmarked for the con-
struction industry will favorably impact engineering and construction
companies as they are an integral part of large capital investment
projects. We remain cautious, though, as the design, licensing and
funding for these projects can take several years and likely will not
get full traction until the credit markets regain strength, demand
stabilizes and consumer confidence returns.
H o U S T o N W I R E & C a B L E C o M P a N y > 2 0 0 9 a R > 3
Long-standing relationships with top tier suppliers,
eleven strategically located distribution centers
and continued on-time performance…we are
able to provide our customers with the right
product, at the right place, at the right time.
Notwithstanding the above, however, HWCC continues to invest in
and grow the capital project end of our business. We had several
neW CuStOmer DevelOPment anD retentiOn > as the
markets declined in 2009, we knew our financial performance would
big wins in 2009 and we remain strategically focused and positioned
be negatively affected. accordingly, tough decisions were made
to capitalize on this large opportunity for our Company.
across multiple areas in the Company to assure that we would be
Industrials—In spite of the 2009 downturn, the industrial market
remains a very large component of the U.S. economy and according
to IIR is expected to account for an estimated $168 billion in spending
in 2010. We service a diverse base of manufacturing and production
prepared to operate efficiently in the recessionary marketplace. In
spite of these difficult events, our passion for customer service, new
customer development and existing customer retention remained at
high levels.
companies and anticipate that production output will slowly improve
During 2009, we were able to increase customer service metrics from
throughout the year and MRo spend will follow. The specialty prod-
what I feel were already very high numbers. our on-time deliveries
ucts we sell are critical to support the operations of these facilities
and order accuracy for the full year 2009 reached new record levels.
and we believe HWCC will continue to benefit from the backlog
This is an amazing feat given virtually every order we receive is
demand in these and other markets.
customized by part number and length. In addition to achieving
LifeGuard™ Low-smoke Zero-halogen Cable—Unlike the other growth
initiatives which are market-focused, our LifeGuard™ cable initiative
these record customer service metrics, we were also able to increase
productivity in our distribution centers by 17%.
is product-driven. HWCC is the exclusive supplier of LifeGuard™
New customer development and existing customer retention must
which is a low-smoke zero-halogen jacketed cable that provides many
always remain a cornerstone goal for our Company. This premise is
advantages over traditional cable constructions. Traditional cable
fundamental to our value proposition, company culture and business
designs have exterior jackets made from compounds that contain
development strategy and will never be compromised. In spite of
chlorine or fluorine halogens. In the event of a fire, the halogenated
the soft market conditions in 2009, one of our primary goals was to
acid gas smoke produced from these compounds is extremely toxic,
increase market share. Measuring market share is a difficult process
dangerous to life and can cause significant damage to metallic
surfaces such as electrical contacts in expensive computers and
machinery.
as the dynamics of the marketplace continue to change in concert
with the economic environment surrounding them. one metric we
use in terms of measuring market share is new customer gains and
LifeGuard™ cable jackets contain zero halogens and do not pro-
duce dangerous acid gas if subjected to combustion. These safety
features, when combined with the additional benefits of excellent
electrical and mechanical characteristics, superior flame resistance,
low smoke production and reduced toxicity, make LifeGuard™ an
in 2009, HWCC added over 200 new customers. Considering the
difficult economic environment, I feel this is quite an achievement
as most customers had significant levels of reduced spending and
looked towards consolidating suppliers, not increasing them, in order
to improve purchasing leverage.
ideal green product offering for a broad range of utility, engineering
The above efficiency and market share gains were largely achieved
and construction and industrial applications.
by process changes that we identified through our operational
Excellence Program.
4 <
OPeratiOnal exCellenCe > Now in its tenth year, HWCC’s
operational Excellence Program remains a critical initiative for the
the communities in which we operate. an example of this commit-
ment is the recycling program that we implemented two years ago.
Company and key driver of customer retention and increased market
In 2009, we were able to recycle over 700,000 pounds of material
share. our customers require high-quality, consistently executed
that in prior years would have gone to waste.
services and rely significantly on order accuracy and on-time ship-
ping. Last year overall shipment accuracy increased to 99.8% and
on-time performance increased to 99.9%. Both are new records for
the Company.
We also launched a companywide community outreach program,
which parallels our previous contributions to such organizations as
the american Red Cross, american Cancer Society, Houston Food
Bank, Hurricane Relief Efforts, March of Dimes, M.D. anderson
operational Excellence is a journey, not a destination, and during
Cancer Center Toys for Tots and the Salvation army. HWCC recruited
2010 we will strive for continued improvement to our processes,
volunteers from various departments within the organization to lead
greater refinement to the skills of our staff, further reductions in
the outreach initiative. our goal is to strengthen the program and
waste and continued passion to be the most operationally excellent
encourage new volunteers each year.
supplier in our marketplace.
StrenGtHeninG tHe BalanCe SHeet > We reduced our
working capital requirements primarily due to a decrease in our
mOvinG aHeaD > Now that 2009 is behind us and we have the
benefit of hindsight, we feel that last year was the most difficult eco-
nomic environment in which the Company has operated since its
inventory investment of $12 million. our current ratio is 4.79 and
founding in 1975. We are fortunate to have a great team and thus
demonstrates continued near-term liquidity. outstanding debt fell
were able to accomplish many of the goals that we set for 2009. We
by 41% and our debt-to-equity ratio now stands at 22%. We are
were able to maintain profitability throughout the year and continue
particularly proud of these accomplishments as they were achieved
our quarterly dividend and, while we did not achieve the high returns
while the Company was managing dual objectives of new product
on capital and equity that we have in the past, we did achieve results
investment and existing inventory reductions—the latter to be
accom plished without losing sales due to lack of product availability.
We also negotiated a renewed credit facility with our long-term
banking partner for an additional four years. This new facility should
give HWCC the necessary financing in order to comfortably operate
that most companies would be happy with in the best of times. as
in the prior two years, we were once again included in Forbes’ Top
200 Best Small Companies. In 2009, we maintained our third place
return-on-equity ranking. This inclusion is a reflection of our long-
term focus on key customer and financial objectives.
the Company within our current business plan.
although we expect continued weak demand until marketplace con-
exPenSe COntrOl > The final objective in 2009 was to aggres-
sively reduce costs. The economic events of late 2008 and 2009
caused a decrease in activity for HWCC. accordingly, the Company
took action to reduce its operating expenses. These actions included
reducing the employee base, limiting new hires and freezing pay
fidence returns, we feel we have the right business model in place
and a solid team to support our goals. accordingly, our goals in
2010 will parallel those of 2009 as we continue to push for greater
financial performance, continuously improving customer service,
aggressive cost management and increased market share gains.
increases for salaried personnel. HWCC also re-bid supply contracts
I am confident that we will exit this difficult economic period a stron-
for such items as office supplies, shipping materials and many other
ger organization and even better positioned to service our customers
consumables. Salespersons were directed to be more efficient with
and shareholders. on behalf of the Board of Directors and our entire
their travel expenses and many discretionary items were curtailed or
team at Houston Wire & Cable Company, I want to thank you for the
eliminated. Sales commission expense also decreased due to the
continued support and trust you have placed in our Company.
lower level of sales and gross margin dollars. Ultimately, total operat-
ing expenses decreased by 14% in 2009 compared to 2008 and
most importantly, these reductions were realized without impacting
customer service.
Sincerely,
SOCial reSPOnSiBility > Houston Wire & Cable also recognizes
its duty to conduct business in a manner that is responsible to our
Charles a. Sorrentino
environment, customers, employees, shareholders, suppliers and
President, Chief Executive officer and Director
1 0 - K F I N A N C I A L R E P O R T
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(cid:2)(cid:3) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 2009
or
(cid:4)(cid:3) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-52046
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
36-4151663
(I.R.S. Employer Identification No.)
10201 North Loop East
Houston, Texas
(Address of principal executive offices)
77029
(Zip Code)
(713) 609-2100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Class
Common stock, par value $0.001 per share
Name of Each Exchange on Which Registered
The Nasdaq Stock Market
Securities registered pursuant to Section 12(g) 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(cid:3)(cid:4) NO(cid:3)(cid:3)(cid:2)(cid:3)
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(cid:3)(cid:4) NO(cid:3)(cid:3)(cid:2)(cid:3)
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(cid:3)(cid:3)(cid:2)(cid:3) NO(cid:3)(cid:3)(cid:4)(cid:3)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). YES(cid:3)(cid:2)
NO(cid:3)(cid:3)(cid:4)(cid:3)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not be contained, to
the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (cid:3)(cid:2)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer(cid:3)(cid:4)(cid:3)
Accelerated Filer(cid:3)(cid:2)(cid:3)
Non-Accelerated Filer(cid:3)(cid:4)(cid:3)
Smaller reporting company(cid:3)(cid:4)(cid:3)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES(cid:3)(cid:4) NO(cid:3)(cid:3)(cid:2)(cid:3)
The aggregate market value of the voting stock (common stock) held by non-affiliates of the registrant as of June 30, 2009 was $191,423,284.
At March 1, 2010, there were 17,732,737 outstanding shares of the registrant’s common stock, $.001 par value per share.
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 7, 2010.
HOUSTON WIRE & CABLE COMPANY
Form 10-K
For the Fiscal Year Ended December 31, 2009
INDEX
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Reserved
Supplemental Item. Executive Officers of the Registrant
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Consolidated Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
PART I.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Part IV.
Item 15.
3
11
13
13
14
14
14
15
17
19
28
29
46
46
49
49
49
49
49
49
50
2
ITEM 1. BUSINESS
Overview
PART I
We are one of the largest distributors of specialty wire and cable and related services to the U.S. electrical distribution
market. During 2009, we served approximately 3,000 customers, including virtually all of the top 200 electrical distributors in
the U.S. We have strong relationships with leading wire and cable manufacturers and provide them with efficient access to the
fragmented electrical distribution market. During 2009, we distributed approximately 21,000 SKUs (stock-keeping units) to
over 8,700 customer locations nationwide from eleven strategically located distribution centers in ten states. We are focused on
providing our electrical distributor customers with a single-source solution for specialty wire and cable and related services by
offering a large selection of in-stock items, exceptional customer service and high levels of product expertise.
We offer products in most categories of specialty wire and cable, including: continuous and interlocked armor cable;
control and power cable; electronic wire and cable; flexible and portable cords; instrumentation and thermocouple cable; lead
and high temperature cable; medium voltage cable; and premise and category wire and cable. We also offer private branded
products, including our LifeGuard™ low-smoke, zero-halogen cable. Our specialty wire and cable is primarily used in repair
and replacement, also referred to as maintenance, repair and operations ("MRO"), and related projects and is increasingly
purchased for larger-scale projects in the utility, industrial and infrastructure markets. Our specialty wire and cable is used
within a diverse range of industries, including the communications, energy, engineering and construction, general
manufacturing, infrastructure, petrochemical, transportation, utility and wastewater treatment industries.
Our wide product selection and specialized services support our position in the supply chain between wire and cable
manufacturers and electrical distributors and their customers. Offering the breadth and depth of specialty wire and cable that
we do, requires significant warehousing resources and a large number of SKUs. An electrical distributor, however, typically
sells a wide variety of electrical products ranging from lighting to MRO supplies, and only a small percentage of these items
represent specialty wire and cable. In addition, given their bulk and weight, specialty wire and cable require a
disproportionately high percentage of warehouse space and materials handling capabilities compared to the sales volume they
generate for an electrical distributor. Instead of dedicating larger amounts of warehouse space to inventory and making the
investments in employee training, same-day shipment capabilities for specialty wire and cable, end-user support, and
information technology needed to maintain industry leading levels of service, our distributor customers rely on us to supply
much of their specialty wire and cable. At the other end of the supply chain, 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 of product
that we offer. More importantly, manufacturers historically have not offered the services that our customers need, such as
complimentary custom cutting and same day shipment, and do not have multiple distribution centers across the nation. As a
result, we believe that we serve an important role in the supply chain for specialty wire and cable and that it would be
undesirable for manufacturers or electrical distributors to compete with us, given our nationwide product and service
capabilities.
Our Cable Management Program addresses our customers’ growing demand for more sophisticated and efficient
processes for large quantities of product procurement, in order to meet budgets and reduce expenses. This program entails
purchasing and storing dedicated inventory, so our customers have immediate product availability for the duration of their
projects. Some advantages of this program are 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 finish complex projects on time and within
budget.
History
We were founded in 1975 and have a long history of reliable customer service, broad product selection and strong product
expertise. In 1987, we completed our first initial public offering and were subsequently purchased in 1989 by ALLTEL
Corporation. In 1997, we were purchased by investment funds affiliated with Code, Hennessy & Simmons LLC. In June 2006,
we completed our second initial public offering. During our 34 year history, we have successfully expanded our business from
one original location in Houston, Texas to eleven strategic locations nationwide, which includes two third-party logistic
providers.
In 2000, we acquired our largest direct competitor, the Futronix division of Kent Electronics Corporation. In 2003, we
implemented a new sales and marketing strategy to expand our sales force, to introduce new private branded products and to
work in concert with our distributor customers to generate demand from end-users in our targeted markets, including the utility,
industrial and infrastructure markets. As part of this initiative, we are partnering with our distributor customers and
strengthening our relationships with project and specifying engineers to generate demand for our specialty wire and cable. For
example, in the utility markets, we seek to capitalize on increased spending on new power generation assets and environmental
3
compliance initiatives. In addition, in the engineering and construction market we work with specifying engineers to drive
specialty wire and cable specifications in large capital projects and market our Cable Management Program as a tool to manage
wire and cable at those projects.
U.S. Industry Overview
We operate within the U.S. electrical distribution market, which Electrical Wholesaling magazine estimates had industry-
wide sales of $75.3 billion in 2009. Within the electrical distribution industry, our business focuses on specialty wire and cable.
According to the U.S. Census Bureau, the total value of manufacturers' shipments of specialty wire and cable totaled
approximately $9.6 billion in 2008. The products we sell are often highly engineered and require sophisticated knowledge to
insure proper application. Examples of primary end-markets for specialty wire and cable include the communications, energy,
engineering and construction, general manufacturing, infrastructure, petrochemical, transportation, utility and wastewater
treatment industries.
The sales channel for specialty wire and cable depends on a number of factors, including order type, product selection,
service level expectations, inventory management and delivery requirements. The greater the need for customization and high
service levels, the more likely the transaction will involve a specialty wire and cable distributor such as us.
In certain circumstances, manufacturers of specialty wire and cable sell their products directly to the end-user. These
transactions typically consist of a bulk volume of wire and cable, involve little or no customized services and may require long
lead times between order and delivery. An example of this type of transaction would be the purchase of full reels of cable with
manufacturing lead times ranging from 8 to 16 weeks after receipt of the order. More frequently, an electrical distributor serves
as the sales channel directly between the manufacturer and the contractor or end-user. The typical sale by an electrical
distributor may involve a commonly purchased item that is specifically designated by the end-user and shipped from stock
along with a variety of other electrical products. It is generally most economical for electrical distributors to carry in their
inventories only those wire and cable SKUs that are commonly ordered and do not require high levels of specialized
knowledge or services.
For customers requiring highly specialized wire and cable, custom cut lengths, technical expertise, short lead times or
additional services, electrical distributors will generally source products from a specialty wire and cable distributor. We believe
that the increasing complexity of specialty wire and cable specifications and the growing need for just-in-time delivery and
logistics support will drive further growth in purchases through specialty wire and cable distributors.
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. We have targeted three of these markets—the utility, industrial and infrastructure markets—in our recent sales and
marketing initiatives.
Utility Market. The utility market includes large investor-owned utilities, rural cooperatives and municipal power
authorities. According to Industrial Information Resource’s 2010 Global Industrial Outlook, the spending on the power market
in 2010 is expected to be $58 billion. While we do not distribute the power lines used for the transmission of electricity, we sell
many products used in the construction of a power plant and the related pollution control equipment. As such we are positioned
to benefit from expenditures for new power generation needed to satisfy a growing population with increasing energy demands
and to comply with federal mandates to reduce toxic outputs from power generating facilities. We expect to benefit from this
trend as our customers utilize our cable management services to support the distribution of specialty wire and cable required
for the construction of new power plants and upgrading of existing power plants. These upgrades often require the addition of
highly-engineered and capital-intensive environmental compliance devices such as selective catalytic reduction (SCR) and flue
gas desulfurization (FGD) systems to remove harmful emissions from these existing power generation units. These projects
require the specialty instrumentation, power and control products that we distribute.
Industrial Market. The industrial market is one of the largest segments of the U.S. economy, comprised of a diverse base
of manufacturing and production companies. According to Industrial Information Resource’s 2010 Global Industrial Outlook,
the 2010 projected total industrial spending within the United States is expected to be $168 billion. We help our electrical
distributor partners provide a wide variety of products specifically designed for the petroleum refining, chemical processing,
metal/mineral, and manufacturing industries where there may be significant exposure to caustic materials or extreme
temperatures. As with the utilities market, we are positioned to benefit from several environmental compliance projects, for
example benzine reductions at refineries and sulphur dioxide reductions at chemical processing facilities.
Infrastructure Market. We believe that significant infrastructure improvements and additions to support population
density and growth will be needed over the next several years. Infrastructure market opportunities include construction
within the transportation, water management, waste management, education and health care industries. The American
Recovery and Reinvestment Act (ARRA), passed in February 2009, is providing $787 billion to support infrastructure projects
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throughout the country. According to Electrical Wholesaling magazine, $130 billion of the ARRA funds are earmarked for the
construction industry. We believe we are positioned to benefit from this investment as capital projects associated
with multiple opportunities including waste water management, mass transit, and newly emerging energy markets, require the
products and services offered by our company. We are assisting our customers to further penetrate the engineering and
construction market by working with application engineers to drive specialty wire and cable specifications in these large
construction projects.
LifeGuard™ Opportunity
We believe that demand for low-smoke, zero-halogen products is in its infancy in the U.S. and represents a significant
opportunity across our targeted markets. Low-smoke, zero-halogen cables have been used extensively in Europe and Asia for
many years. We are leading the development of the market for low-smoke, zero-halogen cable in the U.S. When traditional
cable burns, the acid gases produced are particularly destructive to electrical and electronic equipment, which represents a
significant investment for many businesses. In contrast, low-smoke, zero-halogen compounds provide significant flame
resistance, minimal smoke production and substantially reduced toxicity and corrosiveness when burned, as compared to
traditional wire and cable. We sell our LifeGuard™ products across most of our end-user markets.
Products
Through our relationships with many of the large wire and cable manufacturers, we have access to a full spectrum of
specialty wire and cable, allowing us to consistently meet the needs of our customers. Our focus is on specialty wire and cable
that is engineered for specific usage and supplies critical power and data to end-users across diverse markets. We custom cut
our wire and cable to exact specifications so that they can be installed as soon as they arrive at the destination. Our product
strategy is to carry an extensive array of specialty wire and cable to meet the diverse, dynamic and time-sensitive needs of our
customers. In addition, our infrastructure is designed to respond to short lead times with high levels of product availability and
same day shipment.
Product Categories. We distribute a wide array of wire and cable types for a host of applications, including:
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Continuous Corrugated Armor. Continuous armor cable is available in low voltage and medium voltage constructions
and is used in harsh environments where maximum conductor protection is required. The corrugated seamless
aluminum armor sheath prevents the entrance of water, gas and corrosive elements into the electrical core of the cable.
Continuous armor cable is used in a wide variety of applications including industrial power distribution, pulp and
paper, utility and petrochemical operations. This product can be used indoors and outdoors, aerially, in conduits, ducts,
cable trays and direct burial applications.
Control & Power. Control and power cable is 600 volt single or multiple conductor cable used in a broad range of
commercial, industrial and utility applications. Applications include lighting, control and power circuits in wet and
dry locations in conduits, ducts and raceways. Control and power cable is chemical, gasoline and oil resistant, and may
be directly buried or installed in cable trays.
Electronic. Electronic cable is primarily used in audio, control, instrumentation and computer applications. It is highly
engineered cable that provides specific electrical performance characteristics for a broad range of data, communications
and industrial applications.
Flexible & Portable Cord. Flexible and portable cord is a highly flexible and durable single or multiple conductor cable
used in heavy-duty industrial applications. These cables are commonly used for energizing mobile mining equipment,
diesel electric locomotives, lifting magnets, cranes and loaders, as well as for portable power distribution for tools,
equipment, small motors and machinery.
Instrumentation & Thermocouple. Instrumentation and thermocouple cable is 300 volt or 600 volt, twisted pair or triad
cable used to transmit signals for instrument, process and control, or heat sensing instruments. It may be used in wet
and dry locations, indoors or outdoors, aerially, in conduits, ducts, cable trays or 600 volt direct burial applications.
Interlocked Armor. Interlocked armor cable is available in low voltage and medium voltage constructions and is used in
harsh environments where maximum conductor protection is required. The protective armor sheath is made from a
thick corrugated metal tape that locks together as it is wrapped around the cable core. It is used in a wide variety of
applications including industrial power distribution, pulp and paper, utility and petrochemical operations. This product
can be used indoors and outdoors, aerially, in conduits, ducts, cable trays and direct burial applications.
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Lead & High Temperature. Lead and high temperature cable is 600 volt single conductor cable used to create or
complete electrical circuits. Many of these cables are capable of withstanding flame temperatures in excess of 2,000°C
or higher. This product is commonly used for power, control, and instrumentation circuits in iron, steel, glass,
aluminum and refining applications, and in industrial heating and cooking equipment.
Medium Voltage. Medium voltage cable is a single or multi-conductor cable that is rated for 2,001 volts to 35,000 volts.
This power cable can be used in open air, conduit, duct, cable tray (when CT rated), wet and dry locations or be directly
buried in earth. It is commonly used in chemical plants, refineries, steel mills, industrial plants, commercial buildings,
utility substations and generating stations.
Premise & Category Wiring. Premise wiring is used for general purpose remote control signaling and voice and data
applications. Category cables are used for high speed data transmission of voice, data and telephony information.
Our Private Branded Products. We also sell our own private branded products, LifeGuard™, DataGuard® and
Houwire®, across many of the product categories identified above.
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LifeGuard™ cable is a low-smoke, zero-halogen cable constructed with highly engineered polymers. LifeGuard's™
properties exceed those of standard cable construction, and have excellent electrical and mechanical characteristics. The
jacket on LifeGuard™ cable is highly flame-retardant, produces very small amounts of smoke when burned and
contains no halogens. LifeGuard™ is used in harsh environments for power, control and lighting circuits in a broad
range of commercial, industrial and utility applications. LifeGuard™ cable is ideal for applications where a high degree
of safety and equipment protection is required. Our LifeGuard™ cable has been accepted for use by several hundred
end-users, including leading engineering and construction firms. We are currently marketing LifeGuard™ to the utility
industry for use in power generation and environmental control applications; to industrial plants for petrochemical,
pharmaceutical and wastewater treatment related uses; to general industry for use in data centers, such as computer
rooms, switching centers and central offices; and to the engineering and construction market for use in highly populated
facilities, such as multi-story buildings, schools, hotels, hospitals, sports centers, airports and mass transit stations.
We introduced our DataGuard® product line in 2006 to service the data and communications wire and cable market.
These expansive and performance driven markets require cables with exacting electrical characteristics. Our
DataGuard® products are premium quality, highly engineered cables specifically designed to meet these demanding
requirements and are used in a broad range of audio, control, instrumentation and computer applications.
Our Houwire® product line has been custom tailored for the sound, security and fire alarm market. Houwire® products
are low-voltage cables that have been value engineered for multiple applications in both industrial plants and
commercial facilities. These competitively priced items have helped to position us for additional penetration into the
broad and expanding sound and security market.
Services
In addition to the broad selection of specialty wire and cable that we distribute, we offer a wide array of value-added
services to our customers to assist them with their wire and cable requirements. These services allow customers to use our
industry expertise to efficiently manage their wire and cable requirements with improved service and minimal waste and
expense.
We believe our inventory depth and breadth, distribution capabilities and value-added services are critical to our
customers' wire and cable procurement needs and significantly reduce their cost by:
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eliminating long lead times typically required by manufacturers;
reducing on-site labor costs;
fulfilling small orders without subjecting customers to purchase order minimums and price premiums;
reducing waste through our cut-to-length service offering;
moderating inventory carrying costs by offering next-day delivery for SKUs which take up substantial warehouse
providing access to restricted and exclusive brands;
offering technical resource capabilities through our product specialists' 24-hours-a-day, seven-days-a-week, 365-days-
a-year service; and
managing large, intermittent product orders through our Cable Management Program.
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Our value-added services include the following:
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Application Engineering Support. Our sales personnel have significant technical knowledge of the specialty wire and
cable we distribute and their applications and specifications. Our sales staff assists customers with selecting the
appropriate wire and cable products based on the intended use, cost and performance specifications.
Standard Same Day Shipment from Our Extensive Inventory. Through our nine distribution centers and two third-party
logistics providers, it is our standard practice to ship product the day it is ordered, and we generally have it delivered by
ground the next business day.
24-Hours, 7-Days-a-Week, 365-Days-a-Year Service Anywhere in the United States. Our sales offices and distribution
centers provide customers with around-the-clock customer support and can deliver customized orders on short notice
from any of our locations.
Custom Color Striping. We provide custom striping services, including color-coding products for circuit design
applications.
Cut-to-Length Capabilities at No Additional Charge. We estimate that approximately 90% of our stock orders are cut-
to-length, which eliminates excess labor costs and remnants for our customers.
Wire & Cable Training Programs. We are actively engaged in wire and cable training both for our distributor
customers and for their end-user customers. Typical training activities include wire schools at both supplier facilities
and our own, plant and site tours at our facilities and our suppliers' facilities and on-site product training with cable
engineers.
Full Extranet Capabilities. We give our customers internet-based, password protected access to select areas of our real-
time ERP system, which allows them to check product availability, obtain pricing, and confirm order status—including
detailed shipping information identifying the carrier used and shipment tracking number.
Cable Management Program. Our Cable Management Program is an inventory management system that pre-allocates
specialty wire and cable for a customer's specific project and includes a custom program designed to manage all of the
wire and cable requirements for the project. The major benefits of our Cable Management Program include guaranteed
availability of materials, plus safety stock; immediate shipment of material upon field release; firm pricing and a
dedicated project manager. As part of the program, wire and cable stock is reserved in our distribution centers and
identified with a unique part number to ensure it is available for sale when requested by the customer. In addition,
customers can review a project's inventory 24 hours a day via a secure internet site and can obtain details on items such
as individual circuit cut history and shipment and order tracking information. Our Cable Management Program allows
customers to better manage their large projects and helps to eliminate job site theft, expenses associated with delayed
shipments of materials and surplus materials.
Cable Selection System. As an added feature of our Cable Management Program, we offer customers our cable
selection system. This is an internet-accessible order release site through our website, that allows customers to self-
manage their cable requirements and initiate cable releases such that the releases arrive just-in-time at the job site. With
our cable selection system, the customer can request the exact circuit lengths to which cable is cut, project inventory
status is available for review at any time, and the project engineer or field manager can submit changes to their orders
Customers
During 2009, we served approximately 3,000 customers, including virtually all of the top 200 U.S. electrical distributors,
representing over 8,700 customer locations nationwide.
Our customers' primary end-markets include the communications, energy, engineering and construction, general
manufacturing, infrastructure, petrochemical, transportation, utility and wastewater treatment industries. While downturns or
cyclicality in the markets our distributor customers serve could affect our business, we believe that the market and geographic
diversity of our end-users helps to mitigate risks associated with regional or sector-specific cycles. No customer represented
10% or more of our 2009 sales.
Suppliers
We obtain products from most of the leading wire and cable suppliers. We believe we have strong relationships with our
top suppliers. Although we believe that alternative sources are available for the majority of our wire and cable products, we
have strategically concentrated our purchases with four leading suppliers in order to maximize product quality, delivery
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dependability, purchasing efficiencies, and vendor rebates. As a result, in 2009 approximately 64% of our annual purchases
came from four suppliers. We do not believe we are dependent on any one supplier for any of our wire and cable products.
Our top four suppliers in 2009 were Belden, General Cable Corp., Nexans Energy USA, Inc and Southwire Company.
Products we purchased from these suppliers each generated more than 10% of our sales in 2009.
We believe that our national distribution presence and value-added services make us an essential partner in the supply
chain for our suppliers. In addition, we believe our role in the supply chain, through our national distribution channel and
value-added services, provides our suppliers cost savings by:
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eliminating the need to maintain their own asset intensive distribution system across the U.S.;
placing large orders, which allow suppliers to have efficient and cost-effective production planning;
reducing their marketing and sales functions and expenses; and
allowing them to rely on our technical specialists to provide technical support to our customers and end-users.
Sales and Marketing
Sales Strategy
The primary objectives of our sales process are (i) to continue to generate market awareness, (ii) to identify profitable
specialty wire and cable markets and (iii) to penetrate targeted markets through cost benefit analyses and customized service
offerings. Our sales force is trained to identify the needs of our customers and develop a single-source wire and cable solution
that meets their needs while creating a competitive advantage for us.
Sales Organization
In order to meet our growth initiatives and manage the corresponding increased contact with customers, we invested
heavily in sales resources (including significantly increasing the size of our field sales force from 2003 to 2008). During 2009,
as market conditions and demand declined, we reduced our field sales force by 8%.
We have expanded our sales channels to support our electrical distributor customers as "channel partners" to penetrate our
targeted markets, including the utility, industrial and infrastructure markets. In cooperation with these distributors, we are
implementing a pull-through sales strategy to increase demand for our products and services among selected end-users.
As of December 31, 2009, our sales and marketing staff consisted of approximately 148 employees, including 48 field
sales personnel and 80 inside sales and technical support personnel. We market our specialty wire and cable through an inside
sales force located throughout our regional offices and a field sales force located in key geographic markets throughout the
U.S. By operating under a decentralized process, regional managers are able to adapt quickly to market-specific occurrences,
allowing us to compete effectively with local competitors. We believe the breadth and depth of our sales force is critical to
serving our fragmented and diverse customer and end-user base.
Our field sales force focuses on developing demand for our products. We have organized our sales organization to service
our customer base effectively and to penetrate new and larger end-markets. Our sales force optimization plan includes:
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driving the specification of our private branded products such as LifeGuard™;
developing targeted account lists within regional sales territories;
adding sales managers in larger regions to assist regional managers;
adding support personnel for the development of our targeted markets;
partnering with leading electrical distributor marketing groups to target Fortune 100 companies;
revising the sales commission plan to motivate and compensate personnel for profitable incremental growth;
adding national account managers to service our largest customers; and
implementing a customer relationship management platform to help target and develop new accounts.
Our inside sales force's primary objective is to maintain, service and develop existing accounts. Our inside sales personnel
assist customers and end-users with selecting the appropriate wire and cable products based on intended use, cost and
performance specifications. With our national presence, the inside sales force also has the ability to designate the distribution
center that will process a customer's order, which helps to reduce freight charges and transportation time. In addition to
assisting customers with proper product selection, our inside sales personnel facilitate the designation of our products in project
specifications, increasing the utilization of our products. Part of our inside sales force consists of our National Service Center
(“NSC”), an outbound call center located in Houston, Texas, that is focused on developing smaller or less active accounts. The
NSC cultivates our customers using a cost effective and consistently applied sales and marketing process.
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Through the NSC, we offer continuous in-depth training for our entry-level sales personnel. In addition to our NSC
training, we offer our sales force extensive training and education, including training on ISO 9001:2008 standard sales-related
procedures, a hands-on multi-department orientation, an in-house wire school facilitated by in-house experts and factory
engineers, and in-depth training at suppliers manufacturing facilities. All sales professionals are educated on our regimented
sales process with defined protocols, requirements and controls.
Marketing
As a result of initiatives we have adopted, we have augmented our marketing activities and functions by:
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creating an executive marketing position responsible for continual strategic analysis of our marketing channels, customers,
products, and brand awareness;
implementing a sales and marketing organizational infrastructure driven by corporate market managers and segmented by
targeted markets;
adding marketing personnel to handle customer-specific marketing programs;
adopting pricing matrices and controls;
developing marketing plans to target new markets and customers; and
developing new private branded products, such as LifeGuard™, DataGuard® and Houwire®.
Our marketing materials include a master catalog, targeted mini-catalogs, product brochures, direct mail and an online
presence that includes an e-catalog, company overview and LifeGuard™ cable informational videos. The extranet access we
provide allows customers to obtain custom pricing, inventory availability and information on shipping and order-tracking. We
also regularly participate in trade shows.
We employ database mining techniques to identify new business development opportunities and customers. We utilize our
own data as well as third-party provided data. Our database contains over 23,000 contacts from over 8,700 accounts at
electrical distributors nationwide. In addition, we have approximately another 23,400 contacts of engineering and procurement
professionals. We believe we possess one of the largest databases of contact information for electrical distributors in the U.S.
We are members of various national marketing groups that represent hundreds of electrical distributors across the U.S. As
a supplier member of these groups, we are recognized as a preferred supplier to these customers. We believe that our
relationships with these groups are strong. We also maintain direct relationships with all of our customers who are distributor
members of these groups.
Operations & Facilities
Purchasing
To maximize purchasing efficiencies, we utilize a centralized purchasing function located at our corporate headquarters in
Houston, Texas, which manages each distribution center’s unique product profile and inventory levels. The purchasing
department is led by the Vice President of Sales and Marketing, who oversees a Director of Supply Chain and Product
Management, senior buyers who are responsible for purchasing specific product groups, length allocation specialists, who are
responsible for efficient reel selection, and a logistics and product analyst, who is responsible for inventory optimization
initiatives. Additionally, the corporate market managers and sales personnel provide feedback on product lines to the Vice
President of Sales and Marketing and the Director of Supply Chain and Product Management. Our ability to consolidate
demand and purchase large quantities of wire and cable provides substantial manufacturing scale for our suppliers and results
in competitive prices including attractive rebate programs.
Our centralized purchasing function is supported by our ERP system, which notifies the senior buyers of required
inventory purchases through the use of a real-time inventory forecasting system. Under this system all inventory items have a
classification based on sales frequency, which is customized for every SKU. Based on a particular item's classification, demand
analysis is developed from usage history, minimum acceptable safety stock and projected manufacturing lead times.
Logistics
Our logistics process is highly automated through an ERP system that integrates our operating functions. We also utilize a
radio frequency bar-coded inventory system in our distribution centers. This bar-coding system has facilitated our length
allocation process, which audits all customers' orders prior to their release into the distribution centers and subsequently directs
personnel to particular reels for cut-to-length orders. This process reduces wire and cable remnants, ensures accuracy and
maintains our real-time inventory system for sales personnel.
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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 and cross-
dock shipments. Freight costs are typically borne by our customers. Due to our shipment volume, we have preferred pricing
relationships with our contract carriers.
Information Systems and Technology
We utilize scalable information systems and technology to provide support for all of our operations. We utilize a
proprietary state-of-the-industry ERP system. Over the years, the system has been upgraded and customized for our operations
and allows for the seamless integration of financial, operational and administrative functions. We augmented our ERP system
with the implementation of a CRM platform for customer relationship and sales force management, which allows for advanced
customer management in a secure environment. Each of our locations is connected to our computer networks through dedicated
data lines. These systems are protected by the support of recognized security systems, and we maintain a disaster recovery
system that provides for the back-up of our data and continued systems operation.
Our automated bar-coded inventory system allows us to track and manage our inventory on a real-time basis. With
approximately 47,000 reels across eleven distribution centers at December 31, 2009, our information technology systems
allows complete traceability of our products through the entire supply chain from our suppliers to delivery to our customers
and provides the total history of activity on each reel. We also developed a proprietary cable management system that allows
our customers to review online the wire and cable products designated for specific projects, release orders for shipment and
review previous shipments.
We have an experienced and dedicated information technology department, including on-site programmers and other
network professionals.
Employees
At December 31, 2009, we had 268 employees, of which approximately 80% were sales and warehouse personnel.
Our employees are not represented by a labor union or covered by a collective bargaining agreement. We believe that our
employee relations are good.
Competition
Like the general U.S. electrical distribution market, the specialty wire and cable market is highly competitive and
fragmented, with over 200 specialty wire and cable distributors serving this market. The product offerings and levels of service
provided by the other specialty wire and cable distributors with whom we compete vary widely. We primarily compete with
other specialty wire and cable distributors on a regional and local basis. Most of our direct competitors are smaller companies
that focus on a specific geographical area or feature a select product offering, such as surplus wire. In addition to the direct
competition with other specialty wire and cable distributors, we also face, on a much more limited basis, competition with the
hundreds of electrical distributors and manufacturers that sell products directly or through multiple distribution channels to
end-users or other resellers. In the markets that we serve, competition is primarily based on product line breadth, quality,
product availability, service capabilities and price.
Website Access
We maintain an internet website at www.houwire.com. We make available, free of charge under the “Investor Relations”
heading on our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
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.
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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 certain of the markets we serve could have a material adverse effect on our
financial condition and results of operations.
The majority of our products are used in the construction, maintenance and operation of facilities, plants and projects in
the communications, energy, engineering and construction, general manufacturing, infrastructure, petrochemical,
transportation, utility and wastewater treatment 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. In addition, certain of the markets we serve are cyclical, which affects capital spending
by end-users in these industries. Until the U.S. economy has recovered from the current downturn, the demand for our products
and services will remain weak, which could have a material adverse effect on our financial condition and results of operations.
We have risks associated with constrained credit.
The current turmoil in global financial markets has not impaired our access to our credit facility to finance our operations.
However, 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 and reduced gross margins for us and, in some cases, higher than
expected bad debt losses. Our suppliers’ ability to deliver products may also be affected by financing constraints caused by
current credit market conditions, which could negatively impact our revenue and cost of products sold, at least until alternate
sources of supply are arranged.
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 meet 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 default 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 and petrochemical products are components of the wire and cable we sell. Fluctuations in the costs of these and
other commodities have historically affected our operating results. 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, as commodity costs increase, our customers
may delay or decrease their purchases of our wire and cable, which could adversely affect the demand for our products. To the
extent commodity prices decline, the net realizable value of our existing inventory could be reduced, and our gross profit could
be adversely affected.
If we are unable to maintain our relationships with our electrical distributor customers, it could have a material adverse
effect on our financial results.
We rely on electrical distributors to purchase our wire and cable. The number, size, business strategy and operations of
these electrical distributors vary widely from market to market. The success of our sales and distribution channels depends
heavily on our successful cooperation with these electrical distributors in each of our various markets.
In 2009, our ten largest customers accounted for approximately 43% of our sales. If we were to lose one or more of our
large electrical distributor customers, or if one or more of our large electrical distributor customers were to significantly reduce
the amount of specialty wire and cable they purchase 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 electrical distributor 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 in a number of national marketing groups and engage in joint promotional sales activities
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with the electrical distributor members of those groups. Any permanent 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.
An inability to obtain the products that we distribute could result in lost revenues and reduced profits and damage our
relationships with customers.
In 2009, we sourced products from approximately 160 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 supplier incentives. As a result, in 2009 approximately 64% of our purchases came from four suppliers. If any
of these suppliers changed its sales strategy to reduce its reliance on distributors, or decided to terminate its business
relationship with us, our sales and earnings would 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, specialty wire and cable suppliers often allocate products among
distributors, 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 Charles Sorrentino, our President and Chief Executive Officer, Nicol
Graham, our Chief Financial Officer, and James Pokluda, our Vice President of Sales and Marketing. Our success will continue
to depend to a significant extent on our executive officers and 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 and 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 market conditions change, suppliers may adversely
change the terms of some or all of these programs. These changes may lower our gross margins on products we sell and may
have an adverse effect on our operating income.
Our private branded products might not gain market acceptance.
An important element of our growth strategy is the continued development and market acceptance of our LifeGuard™ line
of low-smoke, zero-halogen cable and other products sold under our private brands. Our success with our private branded
products, however, depends on our ability to market these products in the appropriate channels and, ultimately, on the
acceptance of these products in the markets we serve. We have been selling LifeGuard™ cable since 2003, and our efforts to
develop and market new private branded products might not be successful. Further, demand for our products could diminish as
a result of a competitor's introduction of higher quality, better performing or lower cost products in the marketplace. In
addition, the low-smoke, zero-halogen properties of our LifeGuard™ line of cable products depend on a highly-engineered
petrochemical material. If there is not an adequate supply of this material, we may be unable to have our LifeGuard™ products
manufactured, or our LifeGuard™ products may be available only at a higher cost or after a long delay. If we cannot sustain
the growth in demand for our LifeGuard™ products, if we cannot have those products manufactured on acceptable terms or if
we do not develop additional private branded products, we will be unable to realize fully our growth strategy.
If we encounter difficulties with our management information systems, we would experience problems managing our
business.
We believe our management information systems are a competitive advantage in maintaining our leadership position in the
specialty wire and cable distribution industry. We rely upon our management information systems to manage and replenish
inventory, 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 specialty
wire and cable. Competition is primarily focused in the local service area and is generally based on product line breadth,
12
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 electrical distributor 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 electrical distributor customers, as well as suppliers, could seek to compete with
us by offering services similar to ours, which could adversely affect our market share and our financial results. In addition,
competitive pressures resulting from the economic downturn and the industry trend toward consolidation could adversely affect
our growth and profit margins.
We may be subject to product liability claims that could be costly and time consuming.
We sell specialty wire and cable that has been manufactured by third parties. As a result, from time to time we have been
named as defendants 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, manufacturers' warranties and indemnities are typically limited in duration and scope and may not cover
all claims that might be asserted. Moreover, our insurance coverage may not be available or may not be adequate to cover
every claim asserted or the entire amount of every claim.
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.
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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Facilities
The following table sets forth information about our facilities and our distribution centers as of December 31, 2009.
Location
Houston, TX
Chicago, IL
Charlotte, NC
Philadelphia, PA
Los Angeles, CA
Atlanta, GA
Tampa, FL
Seattle, WA
Baton Rouge, LA
Total
Total
Space
(Sq Ft)
166,720
86,705
76,159
60,000
52,901
50,733
49,776
30,363
22,200
Distribution
Center
(Sq Ft)
136,720
81,635
68,892
54,500
47,036
47,483
45,374
28,275
19,700
595,557
529,615
Owned/Leased
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
13
We own our Houston, Texas facility, which serves as the national distribution center as well as our corporate headquarters.
Constructed in 1995 on 11.5 acres, the facility houses all centralized and back office functions such as finance, marketing,
purchasing, human resources and information technology, as well as our Houston sales force and the National Service Center.
We believe that our properties are in good operating condition and adequately serve our current business operations.
As a test of potential new markets and to augment our distribution network, we contract with two third party logistics
firms. The location of and services provided by these third party logistics firms are as follows:
(cid:129)
(cid:129)
Denver, Colorado—Inventory and ship pre-packaged and cut-to-order lengths of specialty wire and cable for a monthly
fixed fee plus a per transaction charge; and
San Francisco, California—Inventory and ship pre-packaged and cut-to-order lengths of specialty wire and cable for a
monthly fixed fee plus a per transaction charge.
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. We, along with many other defendants, have been named in a number of lawsuits
in the state courts of Minnesota, North Dakota, New Jersey, and South Dakota alleging that certain wire and cable which may
have contained asbestos caused injury to the plaintiffs who were exposed to this wire and cable. These lawsuits are individual
personal injury suits that seek unspecified amounts of money damages as the sole remedy. It is not clear whether the alleged
injuries occurred as a result of the wire and cable in question or whether we, in fact, distributed the wire and cable alleged to
have caused any injuries. We maintain general liability insurance that has applied to these claims. To date, all costs associated
with these claims have been covered by the applicable insurance policies and all defense of these claims has been handled by
the applicable insurance companies. In addition, we did not manufacture any of the wire and cable at issue, and we would rely
on any warranties from the manufacturers of such cable if it were determined that any of the wire or cable that we distributed
contained asbestos which caused injury to any of these plaintiffs. In connection with ALLTEL's sale of our company in 1997,
ALLTEL provided indemnities with respect to costs and damages associated with these claims that we believe we could
enforce if our insurance coverage proves inadequate.
ITEM 4. RESERVED
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
Name/Office
Charles A. Sorrentino
President and Chief Executive Officer
Served as an
Officer
Since
Business Experience
During Last 5 Years
1998
President and Chief Executive
Officer of the Company.
Age
65
Nicol G. Graham
Chief Financial Officer, Treasurer and Secretary
57
1997
Chief Financial Officer, Treasurer
and Secretary of the Company.
14
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock has been traded on The Nasdaq Global Market under the symbol “HWCC” since June 15, 2006. Prior
to that time, there was no public market for our stock. The following table lists quarterly information on the price range of our
common stock based on the high and low reported sale prices for our common stock as reported by The Nasdaq Global Market
for the periods indicated below.
Year ended December 31, 2009:
First quarter
Second quarter
Third quarter
Fourth quarter
Year ended December 31, 2008:
First quarter
Second quarter
Third quarter
Fourth quarter
High
Low
$
9.34 $
$ 14.76 $
$ 12.66 $
$ 13.49 $
4.70
7.45
8.56
10.51
$ 17.97 $
$ 22.74 $
$ 22.00 $
$ 17.47 $
11.22
15.90
15.63
5.61
There were 14 holders of record of our common stock as of December 31, 2009.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information about our purchases of common stock for the quarter ended December 31, 2009.
For further information regarding our stock repurchase activity, see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Liquidity and Capital Resources.”
Period
October 1 – 31, 2009
November 1 – 30, 2009
December 1 – 31, 2009
Total
Total number of
shares purchased
—
—
—
—
Total number of
shares purchased
as part of publicly
announced plans
or programs (1)
— $
— $
— $
—
Average
price paid
per share
$
$
$
$
—
—
—
—
Maximum
dollar value
that may yet be
used for
purchases
under the plan
19,385,303
19,385,303
19,385,303
___________
(1) The board authorized a stock buyback in the amount of $30 million in August 2007. This amount was increased to $50
million in September 2007 and to $75 million effective January 2008. There were no purchases made under the Company’s
stock repurchase program in the 4th quarter of 2009.
Stock Performance Graph
The following graph compares the total stockholder return on our common stock with the total return on the NASDAQ US
Index and the Russell 2000 Index. We believe the Russell 2000 Index includes companies with capitalization comparable to
ours. Houston Wire & Cable Company has a unique niche in the marketplace and due to the size and scope of our business
platform, we are unable to identify peer issuers as the public companies within our industry are substantially more diversified
than we are.
Total return is based on an initial investment of $100 on June 15, 2006, the date of our IPO and reinvestment of dividends.
15
150
$137.41
$112.65
$112.35
100
$100.00
$100.00
$100.00
$123.70
$109.27
$92.97
HWCC
NASDAQ
Russell
2000
$105.83
$89.21
$78.24
$73.55
$71.24
$61.21
50
Jun-06 Dec-06
Jun-07 Dec-07
Jun-08 Dec-08
Jun-09 Dec-09
Dividend Policy
Since February 1, 2008, we have paid a quarterly cash dividend of $0.085 per share, as approved by our Board of
Directors. In each of 2008 and 2009, the cash dividend was $0.34 per share, resulting in total dividends paid of $6.0 million in
both years.
As a holding company, our only source of funds to pay dividends is distributions from our operating subsidiary. Our credit
facility 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 minimum levels of availability.
Securities Authorized for Issuance under Equity Compensation Plans
The information called for by this item and by Item 12 regarding securities available for issuance is presented under Item
12.
16
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 income data for each of the years ended
December 31, 2009, 2008 and 2007, and the consolidated balance sheet information at December 31, 2009 and December 31,
2008 from our audited financial statements, which are included in this Form 10-K. We have derived the consolidated statement
of income data for each of the years ended December 31, 2006 and December 31, 2005, and the consolidated balance sheet
data at December 31, 2007, 2006 and 2005 from our audited financial statements, which are not included in this Form 10-K.
CONSOLIDATED
STATEMENT OF
INCOME DATA:
Sales
Cost of sales
Gross profit
Operating expenses:
Salaries and commissions
Other operating expenses
Management fee to stockholder (1)
Litigation settlements
Depreciation and amortization
Total operating expenses
Operating income
Interest expense
Income before income taxes
Income tax provision
Net income
Earnings per share (2):
Basic
Diluted
Year Ended December 31,
2009
2008
2007
2006
2005
(Dollars in thousands, except share data)
$
254,819
201,865
$
360,939 $
275,224
359,115 $
266,276
323,467 $
231,128
213,957
158,240
52,954
85,715
92,839
92,339
55,717
20,596
18,023
—
—
563
39,182
13,772
520
13,252
5,220
24,080
20,728
—
—
523
45,331
23,861
18,811
—
—
459
43,131
22,706
15,975
208
—
376
39,265
40,384
1,825
49,708
1,188
53,074
3,075
38,559
14,822
48,520
18,295
49,999
19,325
18,707
14,016
500
(672)
398
32,949
22,768
2,955
19,813
7,299
8,032
$
23,737 $
30,225 $
30,674 $
12,514
0.46
$
1.33 $
1.49 $
1.63 $
0.45
$
1.33 $
1.48 $
1.62 $
0.75
0.75
$
$
$
Weighted average common shares outstanding (2):
Basic
17,648,696
17,789,739 20,328,182 18,875,192 16,606,672
17,665,924
17,838,072 20,406,000 18,984,826 16,757,303
The management fee arrangement was terminated as of the completion of our initial public offering in June 2006.
The 2005 and 2006 share information has been restated for the 1.875-for-1 stock split on May 16, 2006.
Diluted
__________
(1)
(2)
17
CONSOLIDATED
BALANCE SHEET DATA:
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Total assets
Book overdraft (1)
Total debt (2) (3)
Stockholders’ equity (2) (3)
_______
(1)
2009
2008
2006
2005
As of December 31,
2007
(Dollars in thousands)
$
—
46,859
$
$
61,325
$ 122,014
$
907
17,479
$
80,813
$
—
$
50,798
$
$
73,459
$ 134,753
4,933
$
29,808
$
76,595
$
—
$
— $
52,128
$ 58,202 $
$ 69,299 $
56,329
$ 139,091 $ 116,864
1,265
$
3,854 $
12,059
$ 34,507 $
81,674
$ 71,170 $
$
$
$
$
$
$
$
—
41,309
31,306
81,241
2,119
61,406
742
Our book overdraft is funded by our revolving credit facility as soon as the related checks clear our disbursement account.
(2)
(3)
On December 30, 2005, we paid a special dividend of $20.0 million to our common stockholders and funded the payment
by borrowing under our existing credit facility.
A stock repurchase program was approved in 2007. During the years ended December 31, 2008 and 2007, purchases of
stock totaling $14,725 and $40,890, respectively, were made, part of which was funded by debt. No repurchases were
made during the year ended December 31, 2009.
18
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 will not foot due to rounding.
Overview
Since our founding over 30 years ago, we have grown to be one of the largest distributors of specialty wire and cable and
related services to the U.S. electrical distribution market. Today, we serve approximately 3,000 customers, including virtually
all of the top 200 electrical distributors in the U.S. Our specialty wire and cable is primarily used in the repair and replacement
sector, also referred to as maintenance, repair and operations (“MRO”), and related projects and is increasingly purchased for
larger scale projects in the communications, energy, engineering and construction, general manufacturing, infrastructure,
petrochemical, transportation, utility and wastewater treatment industries.
In 2000, we acquired our largest competitor, the Futronix division of Kent Electronics Corporation. Since that time, we
have pursued a number of initiatives designed to improve our operating efficiencies and increase our share of the fragmented
market for specialty wire and cable. We integrated the Futronix business into our own and rationalized inventory, facilities and
low-margin customer relationships. We have made substantial investments in our distribution centers and information systems
in order to enhance our ability to provide customers with comprehensive value-added services, including application
engineering support, inventory management, custom cut capabilities and 24/7/365 customer service, order fulfillment and
shipping. During the years 2001 through 2003, the U.S. electrical distribution market was adversely affected by the general
slowdown of the U.S. economy. In response to these economic conditions, we increased our focus on achieving operating
efficiencies by leveraging our investments in our centralized back-office administration and purchasing, investing in a scalable
information technology platform and implementing automated warehouse operations and electronic product tracking.
From 2003 until the latter part of 2008, the U.S. electrical distribution market experienced increased demand, as large
industrial and commercial companies increased capital spending to “catch-up” on deferred maintenance and upgrade and
expand infrastructure. At the same time as the electrical distribution market began to recover, we implemented a new sales and
marketing strategy that focuses on working in concert with our distributor customers to generate demand from end-users in our
targeted markets and to strengthen relationships with project and specifying engineers to stimulate demand for our specialty
wire and cable. As of December 31, 2009 we had 148 sales and marketing employees. We also introduced our LifeGuard™
line of low-smoke, zero-halogen cable products, which due to their highly engineered specifications and safety benefits,
typically generate higher margins for us than traditional cable products.
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 from
time to time. We believe that our revenue 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 LifeGuard™. The recent economic downturn and reduced commodity prices have adversely impacted sales
and the overall level of demand. This has had and will continue to have an impact on our performance, until economic
conditions improve.
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, 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.
19
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.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts receivable for estimated losses resulting from the inability of our
customers to make required payments. We perform periodic credit evaluations of our customers and typically do not require
collateral. Consistent with industry practices, we require payment from most customers within 30 days of the invoice date. We
have an estimation procedure, based on historical data and recent changes in the aging of the receivables, that we use to record
reserves throughout the year. In the last five years, write-offs against our allowance for doubtful accounts have averaged $0.1
million per year. A 20% change in our estimate at December 31, 2009 would have resulted in a change in income before
income taxes of $0.1 million for the year ended December 31, 2009.
Reserve for Returns and Allowances
We estimate the gross profit impact of returns and allowances for previously recorded sales. This reserve is calculated on
historical and statistical returns and allowances data and adjusted as trends in the variables change. A 20% change in our
estimate at December 31, 2009 would have resulted in a change in income before income taxes of $0.1 million for the year
ended December 31, 2009.
Inventories
Inventories are valued at the lower of cost, using the average cost method, or market. We continually monitor our
inventory levels at each of our distribution centers. Our reserve for inventory obsolescence 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. A 20% change in our estimate at December 31, 2009 would have resulted in a change in income before income
taxes of $0.4 million for the year ended December 31, 2009.
Vendor Rebates
Many of our arrangements with our vendors entitle us to receive a rebate of a specified amount when we achieve any of a
number of measures, generally related to the volume of purchases from the vendor. We account for such rebates as a reduction
of the prices of the vendor’s products and therefore as a reduction of inventory until we sell the product, at which time such
rebates reduce cost of sales. Throughout the year, we estimate the amount of the rebate earned based on our estimate of
purchases to date relative to the purchase levels that mark our progress toward earning the rebates. We continually revise these
estimates to reflect actual rebates earned based on actual purchase levels and all estimated rebate amounts are reconciled. A
20% change in our estimate of total rebates earned during 2009 would have resulted in a change in income before income taxes
of $1.1 million for the year ended December 31, 2009.
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. At December 31, 2009, our goodwill balance was $2.4
million, representing 1.9% of our total assets.
We test goodwill for impairment annually, or more frequently if indications of possible impairment exist, by applying a
fair value-based test. In October 2009, we performed our annual goodwill impairment test and, as a result of this test, we
believe the goodwill on our balance sheet is not impaired. If circumstances change or events occur to indicate that our fair
market value has fallen below book value, we will compare the estimated fair value of the goodwill to its carrying value. If the
carrying value of goodwill exceeds the estimated fair value of goodwill, we will recognize the difference as an impairment loss
in operating income.
20
Adoption of New Accounting Policies
FASB Accounting Standards Codification
In June 2009, the Financial Accounting Standards Board (“FASB”) issued the FASB Accounting Standards Codification
(“ASC” or the “Codification”), the authoritative guidance for GAAP. The Codification, which changes the referencing of
financial standards, became effective for interim and annual periods ended on or after September 15, 2009. The Codification is
now the single official source of authoritative GAAP (other than guidance issued by the Securities and Exchange Commission),
superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force, and related
literature. Only one level of authoritative GAAP now exists. All other literature is considered non-authoritative. The
Codification does not change GAAP. We adopted the Codification during the quarter ended September 30, 2009. The adoption
of the Codification did not have any substantive impact on our consolidated financial statements or related footnotes.
Subsequent Events
In May 2009, the FASB issued authoritative guidance which establishes general standards of accounting for and disclosure
of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.
Specifically, this standard sets forth the period after the balance sheet date during which management of a reporting entity
should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its
financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance
sheet date. The guidance is effective for fiscal years and interim periods ended after June 15, 2009. We adopted this guidance
effective June 15, 2009 and, in connection with the filing of this Form 10-K, we have evaluated subsequent events through
March 15, 2010. We have disclosed these subsequent events in Note 10, to our consolidated financial statements.
Business Combinations
In December 2007, the FASB issued authoritative guidance which establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-
controlling interest in the acquiree and the goodwill acquired. The guidance also requires transaction costs related to the
business combination to be expensed as incurred and establishes disclosure requirements to enable the evaluation of the nature
and financial effects of the business combination. The guidance applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We
adopted the guidance on January 1, 2009. The adoption did not have an impact on our consolidated financial statements.
Sales
We generate most of our sales by providing specialty wire and cable to our customers, as well as billing for freight
charges. We recognize revenue upon shipment of our products to customers from our distribution centers or directly from our
suppliers. Sales incentives earned by customers are accrued in the same month as the shipment is invoiced.
Cost of Sales
Cost of sales consists primarily of the average cost of the specialty wire and cable 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 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 regional 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 other expenses, except for salaries and commissions
and depreciation and amortization. This includes all payroll taxes, health insurance, traveling expenses, public company
21
expenses, advertising, management information system expenses, facility rent and all distribution expenses such as packaging,
reels, and repair and maintenance of equipment and facilities.
Depreciation and Amortization. We incur depreciation and amortization expenses for costs related to the capitalization
of property and equipment on a straight-line basis over the estimated useful lives of the assets, which range from three to
thirty years. We amortize leasehold improvements over the shorter of the lease term or the life of the related asset.
Interest Expense
Interest expense consists primarily of interest we incur on our debt.
Results of Operations
The following discussion compares our results of operations for the years ended December 31, 2009, 2008 and 2007.
The following table shows, for the periods indicated, information derived from our consolidated statements of income,
expressed as a percentage of sales for the period presented.
Sales
Cost of sales
Gross profit
Operating expenses:
Salaries and commissions
Other operating expenses
Depreciation and amortization
Total operating expenses
Operating income
Interest expense
Income before income taxes
Income tax provision
Net income
Year Ended December 31,
2008
100.0%
76.3%
23.7%
2009
100.0%
79.2%
20.8%
2007
100.0%
74.1%
25.9%
8.1%
7.1%
0.2%
15.4%
5.4%
0.2%
5.2%
2.0%
3.2%
6.7%
5.7%
0.1%
12.6%
11.2%
0.5%
10.7%
4.1%
6.6%
5.2%
0.1%
12.0%
13.8%
0.3%
13.5%
5.1%
6.6%
8.4%
Note: Due to rounding, numbers may not add up to total operating expenses, operating income or income before income taxes.
Comparison of Years Ended December 31, 2009 and 2008
Sales
(Dollars in millions)
Sales
Year Ended
December 31,
2009
2008
$ 254.8 $ 360.9 $ (106.1)
Change
(29.4)%
Our sales for 2009 decreased 29.4% to $254.8 million from $360.9 million in 2008. The two primary reasons for this
decrease were continued reduced demand for our products, as our customers sought to conserve capital and minimize
expenditures during a difficult economic environment, and the reduction in the price of copper, which fell on average by
24.9% during 2009. Since copper is a major component in many of our products, a decrease in the market price of copper
reduces the prices at which we can sell those products. We estimate sales in our core Repair and Replacement sector, also
referred to as Maintenance, Repair and Operations (“MRO”), were down as a result of the challenging economy which we
believe lowered overall demand and discretionary spending. Partially offsetting this decrease in MRO sales was the increase in
sales within our five internal growth initiatives encompassing Utility Power Generation, Environmental Compliance,
Engineering & Construction, Industrials, and LifeGuard™ (and other private branded products). Sales within our growth
22
initiatives remained more resilient to the overall market and economy as projects in these areas were already in progress and
had been previously funded. Project bookings and backlog for our growth initiatives in 2009 increased as a result of our
continued penetration into these markets.
Gross Profit
(Dollars in millions)
Gross profit
Gross profit as a percent of sales
Year Ended
December 31,
2008
$ 85.7 $ (32.8)
Change
(38.2)%
2009
$
53.0
20.8 %
23.7%
(2.9)%
Gross profit decreased $32.8 million or 38.2% to $53.0 million in 2009 from $85.7 million in 2008. This decrease was
primarily attributable to lower sales volume. Our gross profit as a percentage of sales (gross margin) decreased to 20.8% in
2009 from 23.7% in 2008. The gross margin compression resulted from competitive pricing pressures throughout the year due
to the prolonged economic slowdown. In addition, the severe drop in copper prices in the fourth quarter of 2008 adversely
impacted gross margin on sales from certain stock products with heavy copper content, primarily in the first two quarters of
2009.
Operating Expenses
(Dollars in millions)
Operating expenses:
Salaries and commissions
Other operating expenses
Depreciation and amortization
Total operating expenses:
Year Ended
December 31,
2008
2009
Change
$
$
20.6
18.0
0.6
39.2
$ 24.1
20.7
0.5
$ 45.3
$ (3.5) (14.5)%
(13.0)%
7.6 %
(13.6)%
(2.7)
0.1
$ (6.1)
Operating expenses as a percent of sales
15.4 %
12.6%
2.8%
Salaries and Commissions. The decrease in salaries and commissions was a result of lower incentive compensation due to
the lower sales levels, gross margin, gross profit levels and other financial metrics used in the various incentive programs and a
lower headcount which reduced salaries.
Other Operating Expenses. Other operating expenses in 2009 decreased primarily due to our cost control initiatives
involving tighter management of discretionary expenses, reduced warehouse supplies due to declining sales and decreased
expenses associated with a lower headcount.
Depreciation and Amortization. Depreciation and amortization increased slightly to $0.6 million in 2009 from $0.5 million
in 2008.
Operating expenses as a percentage of sales increased to 15.4% in 2009 from 12.6% in 2008 due to the deleveraging of
operating expenses from the reduction in sales.
Interest Expense
Interest expense decreased $1.3 million or 71.5% to $0.5 million in 2009 from $1.8 million in 2008. The decrease in
interest expense is due to a lower average effective interest rate in 2009 resulting from market interest rate declines, and lower
debt levels due to the pay down of debt using cash from operations. The average effective interest rate decreased to 1.8% in
2009 from 4.2% in 2008. Average debt was $20.8 million in 2009 compared to $41.5 million in 2008. In addition, during 2009
there were no treasury stock purchases, which we historically have funded through borrowings, while there were $15.4 million
of funded treasury stock purchases in 2008.
Income Tax Expense
Income taxes decreased 64.8% or $9.6 million to $5.2 million in 2009 from $14.8 million in 2008 as our income before
taxes decreased 65.6%. Our effective income tax rate was 39.4% in 2009 compared to 38.4% in 2008. The effective income tax
rate increased due primarily to a deferred tax adjustment recorded in 2009 relating to prior periods and the effect of permanent
differences over a lower pretax income base.
23
Net Income
We achieved net income of $8.0 million in 2009 compared to $23.7 million in 2008, a decrease of 66.2%.
Comparison of Years Ended December 31, 2008 and 2007
Sales
(Dollars in millions)
Sales
Year Ended
December 31,
2008
2007
$ 360.9 $ 359.1
Change
$ 1.8 0.5 %
Our sales for 2008 increased 0.5% to $360.9 million from $359.1 million in fiscal year 2008. The Company estimates that
a major contributor of revenue resulted from project activity in the five internal growth initiatives encompassing Utility Power
Generation, Environmental Compliance, Engineering & Construction, Industrials, and LifeGuard™ (and other private branded
products). Although beginning to slow in the latter half of the year, investment and capital expansion within these initiatives
was generally healthy as previously established funding remained intact. Sales to our core Repair and Replacement or MRO
sector, were slightly down as a result of the challenging economy which we believe lowered discretionary spending.
Gross Profit
(Dollars in millions)
Gross profit
Gross profit as a percent of sales
Year Ended
December 31,
2007
$ 92.8 $ (7.1)
Change
(7.7)%
2008
$
85.7
23.7 %
25.9%
(2.2)%
Gross profit for 2008 decreased 7.7% to $85.7 million in 2008 from $92.8 million in 2007. Gross profit as a percentage of
sales, commonly referred to as gross margin, decreased to 23.7% in 2008 from 25.9% in 2007. The reduction in gross margin
was primarily attributable to competitive pricing pressures resulting from the macro economic environment and the steep and
rapid decline in copper prices in the latter part of the year. Reduced vendor rebates were also a factor in compressing the gross
margin.
Operating Expenses
(Dollars in millions)
Operating expenses:
Salaries and commissions
Other operating expenses
Depreciation and amortization
Total operating expenses:
Year Ended
December 31,
2007
Change
2008
$
$
24.1
20.7
0.5
45.3
$ 23.9
18.8
0.5
$ 43.1
$ 0.2
0.9%
1.9 10.2%
0.0 13.9%
5.1%
$ 2.2
Operating expenses as a percent of sales
12.6 %
12.0%
0.6%
Note: Due to rounding, numbers may not add up to total operating expenses.
Operating expenses were $45.3 million in 2008, an increase of $2.2 million or 5.1%, compared to operating expenses of
$43.1 million in 2007. Operating expenses as a percentage of sales were 12.6% in 2008, which was 60 basis points higher than
the 12.0% in 2007. The reduced sales volume in the fourth quarter created additional operating expense deleveraging for the
year. The increase in operating expenses was attributable to the specific factors discussed below.
Salaries and Commissions. Salaries and commissions increased $0.2 million or 0.9%, to $24.1 million in 2008 from $23.9
million in 2007. The increase in salaries was primarily attributable to additional employees, an increase in stock compensation
expense and annual pay increases. This increase in salaries was partially offset by a $1.2 million reduction in commission
expense resulting from higher 2008 incentive compensation objectives that were not fully met and changes to commission
programs in 2008.
24
Other Operating Expenses. Other operating expenses increased $1.9 million, or 10.2%, to $20.7 million in 2008 from
$18.8 million in 2007. The higher other operating expenses were due to a general increase in business activities including
employee insurance costs and the reserve for bad debts, partially offset by lower public company expenses primarily related to
reduced professional fees for Sarbanes Oxley compliance.
Depreciation and Amortization. Depreciation and amortization remained flat at $0.5 million for 2008 and 2007.
Interest Expense
Interest expense increased $0.6 million, or 53.6% from $1.2 million in 2007 to $1.8 million in 2008 due to a higher
average debt of $41.5 million in 2008 compared to $15.3 million in 2007. The increase in the average debt in 2008 was
primarily related to funded treasury stock purchases of $15.4 million and dividend payments of $6.0 million. The reduction in
the average interest rate, due to a macro interest rate decline, to 4.2% in 2008 from 7.4% in 2007 partially mitigated the impact
of the increase in the average outstanding debt in 2008.
Income Tax Expense
Income taxes decreased $3.5 million or 19.0% as our income before taxes decreased $10.0 million or 20.5%. The effective
income tax rate increased from 37.7% in 2007 to 38.4% in 2008 due to lower federal and state income taxes from over accrual
adjustments in 2007.
Net Income
The Company achieved net income of $23.7 million in 2008 compared to net income of $30.2 million in 2007, a decrease
of $6.5 million or 21.5% due to the factors noted above.
Impact of Inflation and Commodity Prices
Our results of operations are affected by changes in the inflation rate and commodity prices. Moreover, because copper
and petrochemical products are components of the wire and cable we sell, fluctuations in the costs of these and other
commodities have historically affected our operating results. In the second half of 2008, average per pound copper prices
declined precipitously. From a high of $3.77 in July, copper fell to $3.15 in September and to $1.39 in December, significantly
impacting our gross margins in the fourth quarter of 2008 and the first two quarters of 2009. Our average cost price for some of
our products were higher than replacement cost and accordingly our gross margins were adversely impacted until our average
cost prices normalized to market in the latter part of 2009 as new product was received. The impact of declining copper prices
on sales and net income during 2008 cannot be isolated, as weakening economic demand also negatively impacted
performance. To the extent commodity prices further decline, the net realizable value of our existing inventory could also
decline, and our gross profit could be adversely affected because of either reduced selling prices or lower of cost or market
adjustments in the carrying value of our inventory. If we turn our inventory approximately four times a year, the impact of
changes in copper prices in any particular quarter would primarily affect the results of the succeeding calendar quarter. 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, the stock repurchase program, dividend payments and other
general corporate purposes, including acquisitions and capital expenditures. 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;
the ability to attract long-term capital with satisfactory terms;
(cid:2)(cid:3)
(cid:2)(cid:3)
(cid:2)(cid:3) additional stock repurchases;
(cid:2)(cid:3) cash flows generated from operating activities;
(cid:2)(cid:3) payment of dividends;
(cid:2)(cid:3) capital expenditures; and
(cid:2)(cid:3) acquisitions
25
Comparison of Years Ended December 31, 2009 and 2008
Our net cash provided by operating activities was $18.7 million in 2009, a decrease of $7.7 million or 29.1% compared to
cash provided by operating activities of $26.4 million in 2008. Our net income decreased by $15.7 million or 66.2% to $8.0
million in 2009 from $23.7 million in 2008.
Changes in our operating assets and liabilities resulted in cash provided by operating activities of $8.2 million which was
primarily caused by a reduction in inventory of $11.6 million. The inventory decrease more closely aligned inventory levels
with the lower sales activity caused by the economic recession. Accounts receivable decreased $4.0 million due to lower sales
in 2009. In addition, at December 31, 2009, a customer is withholding payment on $4.8 million of accounts receivable in
connection with a dispute. The book overdraft, which is funded by our revolving credit facility as soon as the related vendor
checks clear our disbursement account, decreased $4.0 million. Prepaids increased $2.8 million primarily related to a
prepayment for inventory which was subsequently received in January 2010. Accounts payable increased $1.5 million due in
part to our withholding payment of $4.9 million in connection with the dispute mentioned above. Income taxes payable
decreased $1.4 million due to a $1.2 million dollar federal tax payment that was postponed from December 2008 until January
2009 as allowed by the Internal Revenue Service for businesses in the Hurricane Ike disaster area.
Net cash used in investing activities decreased to $0.4 million in 2009 from $0.6 million in 2008 as the Company enacted a
more stringent policy for capital expenditures due to the slowing economic conditions during 2009.
Net cash used in financing activities decreased $7.6 million or 29.3% to $18.3 million in 2009 from $25.9 million in 2008.
Net repayments on the revolver of $12.3 million and dividend payments of $6.0 million were the main components of
financing activities in 2009.
Comparison of Years Ended December 31, 2008 and 2007
Our net cash provided by operating activities was $26.4 million in 2008, an increase of $6.3 million or 31.6% compared to
cash provided by operating activities of $20.1 million in 2007. Our net income decreased from $30.2 million in 2007 to $23.7
million in 2008. Accounts receivable decreased $7.1 million in 2008 compared to an increase of $5.8 million in 2007.
Accounts receivable decreased in 2008 as sales decreased during the last two months of the year due to the macro economic
environment. Accrued liabilities decreased $4.9 million in 2008. This decrease was primarily due to a reduction in our prepaid
orders as these orders shipped faster than new prepayments were received. Inventories increased $4.2 million in 2008 as the
increase in our cable management inventory increased more than the decrease of our regular stock inventory. Income taxes
were a payable of $1.6 million in 2008 compared to a receivable balance of $2.0 million in 2007.
Net cash used in investing activities of $0.6 million in 2008 was down slightly from $0.7 million in 2007.
Net cash used in financing activities increased $6.5 million or 33.4% to $25.9 million in 2008 from $19.4 million in 2007.
Treasury stock purchases of $15.4 million, dividend payments of $6.0 million and net repayments on the revolver loan of $4.7
million were the main components of financing activities in 2008.
Indebtedness
Our principal source of liquidity at December 31, 2009 was working capital of $89.9 million compared to $98.3 million at
December 31, 2008. We also had available borrowing capacity in the amount of $49.7 million at December 31, 2009 and
$45.2 million at December 31, 2008 under our loan and security agreement.
We believe that we have adequate availability of capital to fund our present operations, meet our commitments on our
existing debt, continue the stock repurchase program, continue to fund our dividend payments, 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 issue additional shares of common or preferred stock to raise funds.
26
Loan and Security Agreement
We have a loan agreement with Bank of America, N.A., as agent and lender, that provides for a $75 million revolving
loan. We amended and restated the loan agreement in September 2009 to extend the maturity through September 21, 2013. The
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 minimum levels of
availability. The lender has a security interest in all of our assets except for the real property in Houston, Texas. The loan bears
interest at the agent’s base interest rate.
Portions of the outstanding loan may be converted to LIBOR loans in minimum amounts of $1.0 million and integral
multiples of $0.1 million. Upon such conversion, interest is payable at LIBOR plus a margin ranging from 1.25% to 1.75%,
depending on our debt-to-EBITDA ratio. We have entered into a series of one-month LIBOR loans, which, upon maturity, are
either rolled back into the revolving loan or renewed under a new LIBOR contract.
Covenants in the loan agreement require us to maintain certain minimum financial ratios and restrict the level of capital
expenditures. Repaid amounts can be re-borrowed subject to the borrowing base. Additionally, we are obligated to pay an
unused facility fee on the unused portion of the loan commitment. As of December 31, 2009, we were in compliance with all
financial covenants. We paid approximately $0.1 million in unused facility fees for the year ended December 31, 2009.
Contractual Obligations
The following table describes our cash commitments to settle contractual obligations as of December 31, 2009.
Total
Less than
1 year
1-3 years 3-5 years
More than
5 years
Loans payable
Operating lease obligations
Non-cancellable purchase obligations (1)
Total
$ 17,479
9,116
27,713
$ 54,308
$
—
2,469
27,713
$ 30,182
$
—
4,152
—
4,152
$ 17,479 $
2,285
—
$ 19,764
$
(In thousands)
$
—
210
—
210
__________
(1)
These obligations reflect purchase orders outstanding with manufacturers as of December 31, 2009. We believe that some of
these obligations may be cancellable upon negotiation with our vendors, but we are treating these as non-cancellable for this
disclosure due to the absence of an express cancellation right.
Capital Expenditures
We made capital expenditures of $0.5 million, $0.6 million and $0.7 million in the years ended December 31, 2009, 2008
and 2007, respectively.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements, other than operating leases.
Share Repurchases
In 2007, the Board of Directors approved a stock repurchase program, where the Company is authorized to purchase up to
$75 million of its outstanding shares of common stock, depending on market conditions, trading activity, business conditions
and other factors. The program was initially scheduled to expire on December 31, 2009 but has been extended through
December 31, 2011. Shares of stock purchased under the program are currently being held as treasury stock and may be used to
satisfy the exercise of options and restricted stock, to fund acquisitions, or for other uses as authorized by the Board of
Directors. There were no shares repurchased during 2009.
Financial Derivatives
We have no financial derivatives.
27
Market Risk Management
We are exposed to market risks arising from changes in market prices, including movements in interest rates and
commodity prices.
Interest Rate Risk
Our variable interest rate debt is sensitive to changes in the general level of interest rates. At December 31, 2009, the
weighted average interest rate on our $17.5 million of variable interest debt was approximately 2.1%.
While our variable rate debt obligations expose us to the risk of rising interest rates, management does not believe that the
potential exposure is material to our overall financial performance or results of operations. Based on December 31, 2009
borrowing levels, a 1.0% increase or decrease in the applicable interest rates would have a $0.2 million effect on our annual
interest expense.
Commodity Risk
We are subject to periodic fluctuations in copper prices as our products have varying levels of copper content in their
construction. Profitability is influenced by these copper fluctuations as prices change between the time we buy and sell our
products.
Foreign Currency Exchange Rate Risk
Our products are purchased and invoiced in U.S. dollars. Accordingly, we do not believe we are exposed to foreign
exchange rate risk.
Climate Risk
Our operations are subject to inclement weather conditions including hurricanes, earthquakes and abnormal weather
events. Our previous experience from these events has had a minimal effect on our operations and results.
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. 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. Any forward looking statements
speak only as of the date of this filing and the Company undertakes no obligation to publicly update such statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures about Market Risk are reported in Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”, under the captions “Market Risk Management”, “Interest Rate
Risk”, “Commodity Risk”, and “Foreign Currency Exchange Rate Risk”.
28
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Houston Wire & Cable Company
Index to consolidated financial statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2009 and 2008
Consolidated Statements of Income for the years ended December 31, 2009, 2008 and 2007
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2009, 2008 and 2007
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007
Notes to Consolidated Financial Statements
Page
30
31
32
33
34
35
29
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Houston Wire & Cable Company
We have audited the accompanying consolidated balance sheets of Houston Wire & Cable Company as of December 31, 2009
and 2008, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in
the period ended December 31, 2009. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial
position of Houston Wire & Cable Company at December 31, 2009 and 2008, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31, 2009, 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),
Houston Wire & Cable Company’s internal control over financial reporting as of December 31, 2009, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 15, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Houston, Texas
March 15, 2010
30
Houston Wire & Cable Company
Consolidated Balance Sheets
Assets
Current assets:
Accounts receivable, net
Inventories, net
Deferred income taxes
Prepaids
Total current assets
Property and equipment, net
Goodwill
Deferred income taxes
Other assets
Total assets
Liabilities and stockholders’ equity
Current liabilities:
Book overdraft
Trade accounts payable
Accrued and other current liabilities
Income taxes
Total current liabilities
Long-term obligations
Stockholders’ equity:
December 31,
2009
2008
(In thousands, except
share data)
$ 46,859
61,325
1,776
3,649
113,609
$ 50,798
73,459
1,591
829
126,677
3,169
3,274
2,362
2,855
19
$ 122,014
2,362
2,353
87
$ 134,753
$
907
11,610
10,924
281
23,722
$
4,933
10,091
11,682
1,644
28,350
17,479
29,808
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:
17,732,737 and 17,642,552 shares outstanding at December 31, 2009 and 2008, respectively
Additional paid-in capital
Retained earnings
Treasury stock
Total stockholders’ equity
—
—
21
56,609
77,571
(53,388)
80,813
21
55,901
75,540
(54,867)
76,595
Total liabilities and stockholders’ equity
$ 122,014
$ 134,753
The accompanying notes are an integral part of these consolidated financial statements.
31
Houston Wire & Cable Company
Consolidated Statements of Income
Year Ended December 31,
2008
(In thousands, except share and per share
2009
2007
Sales
Cost of sales
Gross profit
Operating expenses:
Salaries and commissions
Other operating expenses
Depreciation and amortization
Total operating expenses
Operating income
Interest expense
Income before income taxes
Income tax provision
Net income
Earnings per share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
$
254,819
201,865
52,954
$
360,939
275,224
85,715
$
359,115
266,276
92,839
20,596
18,023
563
39,182
13,772
520
13,252
5,220
8,032
0.46
0.45
$
$
$
24,080
20,728
523
45,331
40,384
1,825
38,559
14,822
23,737
1.33
1.33
$
$
$
23,861
18,811
459
43,131
49,708
1,188
48,520
18,295
30,225
1.49
1.48
$
$
$
17,648,696
17,665,924
17,789,739
17,838,072
20,328,182
20,406,000
Dividends declared per share
$
0.34
$
0.34
$
0.15
The accompanying notes are an integral part of these consolidated financial statements.
32
Houston Wire & Cable Company
Consolidated Statements of Stockholders' Equity
Common Stock
Additional
Paid-In
Amount Capital
Retained
Earnings
Treasury Stock
Shares
Amount
Total
Stockholders'
Equity
(In thousands, except share data)
21
—
—
50,979
—
30,674
30,225
—
—
91
(56)
3,375
—
—
62
81,674
30,225
97
Shares
Balance at
December 31, 2006
Net income
Exercise of stock
20,867,172
—
options
121,780
Balance at
December 31, 2007
20,988,952
Balance at
December 31, 2008
20,988,952
Excess tax benefit
for stock options
Amortization of
unearned stock
compensation
Purchase of
treasury stock,
net
Dividends paid
Net income
Exercise of stock
options
Excess tax benefit
for stock options
Amortization of
unearned stock
compensation
Purchase of
treasury stock,
net
Dividends paid
Net income
Exercise of stock
options
Excess tax benefit
for stock options
Deferred
tax adjustment
related to stock
compensation
Amortization of
unearned stock
compensation
Issuance of
restricted stock
awards
Dividends paid
Balance at
December 31, 2009
—
—
—
—
—
—
—
—
—
—
—
1,235
—
—
—
1,235
—
—
1,826
—
—
—
1,826
—
—
21
—
—
—
— (2,414,600)
(40,890)
(2,997)
—
—
54,131
57,846
(2,411,225)
(40,828)
—
23,737
—
—
—
(628)
—
42,079
686
(40,890)
(2,997)
71,170
23,737
58
264
—
—
264
—
—
—
—
—
—
21
—
—
2,134
—
—
—
2,134
—
—
—
(6,043)
(977,254)
—
(14,725)
—
55,901
75,540
(3,346,400)
(54,867)
—
8,032
—
(145)
13
(53)
2,205
—
—
—
—
10,185
—
—
—
—
167
—
—
—
(1,312)
—
—
(6,001)
80,000
—
1,312
—
(14,725)
(6,043)
76,595
8,032
22
13
(53)
2,205
—
(6,001)
—
—
—
—
—
—
—
—
—
—
20,988,952
$
21 $
56,609
$
77,571
(3,256,215) $
(53,388) $
80,813
The accompanying notes are an integral part of these consolidated financial statements.
33
Houston Wire & Cable Company
Consolidated Statements of Cash Flows
2009
Year Ended December 31,
2008
(In thousands)
2007
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
8,032
$ 23,737
$
30,225
Depreciation and amortization
Amortization of capitalized loan costs
Amortization of unearned stock compensation
Provision for doubtful accounts
Provision for returns and allowances
Provision for inventory obsolescence
(Gain) loss on disposals of property and equipment
Deferred income taxes
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaids
Other assets
Book overdraft
Trade accounts payable
Accrued and other current liabilities
Income taxes
Net cash provided by operating activities
Investing activities
Expenditures for property and equipment
Proceeds from disposals of property and equipment
Net cash used in investing activities
Financing activities
Borrowings on revolver
Payments on revolver
Proceeds from exercise of stock options
Payment of dividends
Excess tax benefit for options
Purchase of treasury stock
Net cash used in financing activities
Net change in cash
Cash at beginning of year
Cash at end of year
Supplemental disclosures
Cash paid during the year for interest
Cash paid during the year for income taxes
563
99
2,205
—
(109 )
529
(15 )
(741 )
4,048
11,606
(2,820 )
(31 )
(4,026 )
1,519
(758 )
(1,363 )
18,738
523
80
2,134
214
70
46
8
(900)
7,120
(4,206)
3
(53)
1,079
(2,206)
(4,861)
3,648
26,436
459
66
1,826
(238)
(37)
55
(15)
(557)
(5,799)
(13,025)
(382)
(45)
2,589
1,309
6,185
(2,524)
20,092
(462 )
19
(443 )
(572)
1
(571)
(728)
23
(705)
255,829
(268,158 )
22
(6,001 )
13
—
(18,295 )
371,915
(376,614)
58
(6,043)
264
(15,445)
(25,865)
397,471
(375,023)
97
(2,997)
1,235
(40,170)
(19,387)
—
—
—
—
— $
— $
—
—
—
514
7,352
$
$
1,920
11,908
$
$
1,119
20,148
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
34
Houston Wire & Cable Company
Notes to Consolidated Financial Statements
(in thousands, except share data)
1. Organization and Summary of Significant Accounting Policies
Description of Business
Houston Wire & Cable Company (the “Company”), through its wholly owned subsidiaries, HWC Wire & Cable
Company, Advantage Wire & Cable and Cable Management Services Inc., distributes specialty electrical wire and cable to the
U.S. electrical distribution market through eleven locations in ten 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.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation. The purchase
accounting entries made at the time of the Company’s acquisition of the Futronix division of Kent Electronics Corporation in
2000 improperly omitted the $634 deferred tax asset associated with the Company’s book and tax basis differences in the net
assets acquired. That omission was corrected in 2009 by reducing goodwill in the amount of $634 with an offsetting adjustment
to deferred income taxes. The accounting for deferred income taxes associated with subsequent reductions in the initial basis
difference has been properly recorded. At December 31, 2008, subsequent to the recording of this adjustment, the deferred tax
asset associated with the remaining basis difference is properly stated at $61.
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 inventory obsolescence reserve, the reserve for returns
and allowances, and vendor rebates. These estimates are continually reviewed and adjusted as necessary, but actual results
could differ from those estimates.
Earnings per Share
Basic earnings per share is calculated by dividing net income by the weighted average number of common shares
outstanding. Diluted earnings per share include the dilutive effects of stock option and restricted stock awards.
The following reconciles the denominator used in the calculation of earnings per share:
Denominator:
Weighted average common shares for basic earnings per share
Effect of dilutive securities
Denominator for diluted earnings per share
17,648,696
17,228
17,665,924
17,789,739
48,333
17,838,072
20,328,182
77,818
20,406,000
Year Ended December 31,
2009
2008
2007
Options to purchase 1,042,795, 829,822 and 586,075 shares of common stock were not included in the diluted net income per
share calculation for 2009, 2008 and 2007, respectively, as their inclusion would have been anti-dilutive.
35
Accounts Receivable
Accounts receivable consists primarily of receivables from customers, less an allowance for doubtful accounts of $282
and $262, and a reserve for returns and allowances of $604 and $713 at December 31, 2009 and 2008, respectively. Consistent
with industry practices, the Company normally requires payment from its customers within 30 days. The Company has no
contractual repurchase arrangements with its customers. Credit losses have been within management’s expectations.
The following table summarizes the changes in the allowance for doubtful accounts for the past three years:
Balance at beginning of year
Bad debt expense
Write-offs, net of recoveries
Balance at end of year
Inventories
2009
2008
2007
$
$
262 $
—
20
282
$
130 $
214
(82)
262 $
490
(238)
(122)
130
Inventories are carried at the lower of cost, using the average cost method, or market 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. The inventory reserve was $2,228 and $1,838 at December 31, 2009 and 2008, respectively.
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 income. Throughout the year, the Company estimates the amount of the rebates
earned based on its estimate of purchases to date relative to the purchase levels that mark its progress toward earning the
rebates. The Company continually revises these estimates to reflect actual rebates earned based on actual purchase levels.
Property and Equipment
The Company provides for depreciation on a straight-line method over the following estimated useful lives:
Buildings
Machinery and equipment
30 years
3 to 5 years
Leasehold improvements are depreciated over their estimated life or the term of the lease, whichever is shorter.
Depreciation expense was approximately $563, $523, and $459 for the years ended December 31, 2009, 2008 and 2007,
respectively.
Goodwill
Goodwill is not amortized but is reviewed annually for impairment, or more frequently if indications of possible
impairment exist, by applying a fair value-based test. The Company completes the required annual assessment as of October 1
of each year. The Company has performed the requisite impairment tests for goodwill and has determined that goodwill was
not impaired.
Other Assets
Other assets include deferred financing costs of $1,791. The capitalized loan costs are amortized on a straight-line basis
over the contractual life of the related debt agreement, which approximates the effective interest method, and such amortization
expense is included in interest expense in the accompanying consolidated statements of income. Accumulated amortization at
December 31, 2009 and 2008 was approximately $1,779 and $1,715, respectively.
Estimated future amortization expense for capitalized loan costs through the maturity of the agreement is $12 and $0 for
the years 2010 and 2011, respectively.
36
Self Insurance
The Company retains certain self-insurance risks for both health benefits and property and casualty insurance programs.
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 reporting segment, sales of specialty wire and cable.
Revenue Recognition, Returns & Allowances
The Company recognizes revenue when the following four basic criteria have been met:
1. Persuasive evidence of an arrangement exists;
2. Delivery has occurred or services have been rendered;
3. The seller’s price to the buyer is fixed or determinable; and
4. Collectibility is reasonably assured.
The Company records revenue when customers take delivery of products. Customers may pick up products at any
distribution center location, or products may be delivered via third party carriers. Products shipped via third party carriers are
considered delivered based on the shipping terms, which are generally FOB shipping point. Normal payment terms are net 30
days. Customers are permitted to return product only on a case-by-case basis. Product exchanges are handled as a credit, with
any replacement items being re-invoiced to the customer. Customer returns are recorded as an adjustment to net sales. In the
past, customer returns have not been material. The Company has no installation obligations.
The Company may offer volume rebates, which are accrued monthly as an adjustment to net 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
The Company’s customers are located primarily throughout the United States. No one customer accounted for 10% or
more of the Company’s sales in 2009 or 2008. In 2007, 12% of the Company’s sales were generated from one customer. The
Company performs periodic credit evaluations of its customers and generally does not require collateral.
Advertising Costs
Advertising costs are expensed when incurred. Advertising expenses were $94, $722, and $947 for the years ended
December 31, 2009, 2008, and 2007, respectively.
Financial Instruments
The carrying values of the accounts receivable, trade accounts payable and accrued and other current liabilities
approximate fair value, due to the short maturity of these instruments. The carrying amount of long term debt approximates fair
value as it bears interest at variable rates.
Stock-Based Compensation
Stock options issued under the Company’s stock plan have an exercise price equal to the fair value of the Company’s
stock on the grant date. Restricted stock is issued at the closing price of the Company’s stock on the grant date. The Company
recognizes compensation expense ratably over the vesting period. The Company’s compensation expense is included in salaries
and commissions expense in the accompanying consolidated statements of income.
37
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 financing 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.
New Accounting Pronouncements
FASB Accounting Standards Codification
In June 2009, the Financial Accounting Standards Board (“FASB”) issued the FASB Accounting Standards Codification
(“ASC” or the “Codification”), the authoritative guidance for GAAP. The Codification, which changes the referencing of
financial standards, became effective for interim and annual periods ended on or after September 15, 2009. The Codification is
now the single official source of authoritative GAAP (other than guidance issued by the SEC), superseding existing FASB,
American Institute of Certified Public Accountants, Emerging Issues Task Force (“EITF”), and related literature. Only one
level of authoritative GAAP now exists. All other literature is considered non-authoritative. The Codification does not change
GAAP. The Company adopted the Codification during the quarter ended September 30, 2009. The adoption of the Codification
did not have any substantive impact on the consolidated financial statements or related footnotes.
Subsequent Events
In May 2009, the FASB issued authoritative guidance which establishes general standards of accounting for and disclosure
of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.
Specifically, this standard sets forth the period after the balance sheet date during which management of a reporting entity
should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its
financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance
sheet date. The guidance is effective for fiscal years and interim periods ended after June 15, 2009. The Company adopted this
guidance effective June 15, 2009 and in connection with the filing of this Form 10-K the Company has evaluated subsequent
events through March 15, 2010. The Company has disclosed these subsequent events in Note 10, to the consolidated financial
statements.
Business Combinations
In December 2007, the FASB issued authoritative guidance which establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-
controlling interest in the acquiree and the goodwill acquired. The guidance also requires transaction costs related to the
business combination to be expensed as incurred and establishes disclosure requirements to enable the evaluation of the nature
and financial effects of the business combination. The guidance applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The
Company adopted the guidance on January 1, 2009. The adoption did not have an impact on the consolidated financial
statements.
38
2. Detail of Selected Balance Sheet Accounts
Property and Equipment
Property and equipment are stated at cost and consist of:
Land
Buildings
Machinery and equipment
Less accumulated depreciation
Accrued and Other Current Liabilities
Accrued and other current liabilities consist of:
Customer advances
Customer rebates
Payroll, commissions, and bonuses
Accrued inventory purchases
Other
3. Long-Term Obligations
$
617 $
At December 31,
2008
2009
617
2,166
6,049
8,832
5,558
$ 3,274
2,209
6,109
8,935
5,766
$ 3,169
At December 31,
2008
2009
$
$
3,756
1,791
1,271
1,205
2,901
$ 10,924
$
2,080
3,304
1,659
2,093
2,546
11,682
On September 21, 2009, the Company as guarantor and HWC Wire & Cable Company as borrower, entered into the
Second Amended and Restated Loan and Security Agreement (“Loan Agreement”), with Bank of America, N.A., as agent and
lender. The Loan Agreement provides for a $75,000 revolving loan at the agent’s base interest rate and matures on September
21, 2013. The lender has a security interest in all of the assets of the Company with the exception of the real estate in Houston,
Texas. Availability under the Loan Agreement is calculated as a percentage of qualifying accounts receivable and inventory.
Portions of the outstanding loan may be converted to LIBOR loans in minimum amounts of $1,000 and integral multiples
of $100. Upon such conversion, interest is payable at LIBOR plus a margin ranging from 1.25% to 1.75%, depending on the
Company’s debt-to-EBITDA ratio. The Company has entered into a series of one-month LIBOR loans, which, upon maturity,
are either rolled back into the revolving loan or renewed under a new LIBOR contract.
The Loan Agreement includes, among other things, covenants that require the Company to maintain certain minimum
financial ratios. Additionally, the Loan Agreement allows for the unlimited payment of dividends and repurchases of stock,
subject to the absence of events of default, maintaining defined levels of fixed charge coverage and minimum levels of
availability. At December 31, 2009, the Company was in compliance with the financial covenants governing its indebtedness.
The Company’s borrowings at December 31, 2009 and 2008 were $17,479 and $29,808, respectively. The weighted
average interest rates on outstanding borrowings were 2.1% and 2.3% at December 31, 2009 and 2008, respectively.
During 2009, the Company had an average available borrowing capacity of approximately $51,677. This average was
computed from the monthly borrowing base certificates prepared for the lender. At December 31, 2009, the Company had
available borrowing capacity of $49,706 under the terms of the Loan Agreement. Under the Loan Agreement, the Company is
obligated to pay an unused facility fee of 0.2% computed on a daily basis. During the years ended December 31, 2009, 2008
and 2007, the Company paid $107, $68, and $77, respectively, for the unused facility.
39
Principal repayment obligations for succeeding fiscal years are as follows:
2010
2011
2012
2013
Total
4. Income Taxes
The provision (benefit) for income taxes consists of:
$
$
—
—
—
17,479
17,479
Year Ended December 31,
2008
2007
2009
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Total
$ 5,307
654
5,961
$ 14,022
1,700
15,722
$ 16,607
2,245
18,852
(674)
(67)
(741)
(819)
(81)
(900)
(511)
(46)
(557)
$ 5,220
$ 14,822
$ 18,295
A reconciliation of the U.S. Federal statutory tax rate to the effective tax rate on income before taxes is as follows:
Federal statutory rate
State taxes, net of federal benefit
Non-deductible items
Other
Total effective tax rate
Year Ended December 31,
2009
2008
2007
35.0 %
2.8
0.9
0.7
39.4 %
35.0 %
2.7
0.5
0.2
38.4 %
35.0 %
2.9
0.3
(0.5 )
37.7 %
Significant components of the Company’s deferred tax assets were as follows:
Deferred tax assets:
Property and equipment
Goodwill
Uniform capitalization adjustment
Inventory reserve
Allowance for doubtful accounts
Stock compensation expense
Other
Total deferred tax assets
Year Ended
December 31,
2009
2008
$
$
386
148
634
858
109
2,397
99
4,631
$
$
391
339
543
854
101
1,622
94
3,944
In 2006, new accounting principles were issued which clarified the accounting for uncertainty in income taxes recognized.
The Company adopted these principles on January 1, 2007, as required. The Company recorded the cumulative effect of
adopting these principles in retained earnings and other accounts as applicable.
40
The Company recognizes interest on any tax issue as a component of interest expense and any related penalties in other
operating expenses. As of December 31, 2009, 2008 and 2007, the Company made no provisions for interest or penalties
related to uncertain tax positions. The tax years 2005 through 2009 remain open to examination by the major taxing
jurisdictions to which the Company is subject.
5. Stockholders’ Equity
In 2007, the Board of Directors approved a stock repurchase program, where the Company is authorized to purchase up to
$75,000 of its outstanding shares of common stock, depending on market conditions, trading activity, business conditions and
other factors. The program was initially scheduled to expire on December 31, 2009 but has been extended through December
31, 2011. Shares of stock purchased under the program are currently being held as treasury stock and may be used to satisfy the
exercise of options and the issuance of restricted stock, to fund acquisitions, or for other uses as authorized by the Board of
Directors. During the year ended December 31, 2009, the Company did not repurchase any of its stock. During the year ended
December 31, 2008, the Company repurchased 977,254 shares for a total cost of $14,725. As of December 31, 2009, the
Company had total repurchases of 3,391,854 shares for a total cost of $55,615.
The December 31, 2007 statement of cash flows has been adjusted to exclude accrued shares purchases totaling $720 at
December 31, 2007, funded during the first quarter of 2008.
On August 1, 2007, the Board of Directors approved an initial cash dividend of $0.075 per share payable to stockholders
of record on August 15, 2007. This quarterly dividend was paid at the same rate per share for the final quarter of 2007,
resulting in aggregate 2007 dividends of $2,997. On February 1, 2008, the Board of Directors approved an increase in the
quarterly dividend to $0.085 per share. Since February 2008, the Company has paid a quarterly cash dividend of $0.085 per
share, resulting in aggregate dividends in 2009 and 2008 of $6,001 and $6,043, respectively.
On May 18, 2009, the Company’s Board of Directors adopted a stockholder rights plan and declared a dividend of one
preferred stock purchase right (a “Right”) for each share of the Company’s common stock outstanding at the close of business
on May 28, 2009. The Rights become exercisable (and separate from the common stock) ten business days after (i) the
acquisition of 20% or more of the common stock by any person or group (an “Acquiring Person”) or (ii) the commencement of
a tender or exchange offer for 20% or more of the common stock.
In the event that an Acquiring Person acquires 20% or more of the common stock, or if the Company is the surviving
corporation in a merger involving an Acquiring Person, each Right (other than Rights owned by an Acquiring Person) will
entitle the holder to purchase for $40 (or the then-current purchase price) a number of shares of the Company’s common stock
having a market value of $80 (or twice the then-current purchase price). Similarly, if the Company is acquired in a merger or
sells substantially all of its assets, each Right (other than Rights owned by an Acquiring Person) will entitle the holder to
purchase for the then-current purchase price a number of shares of the surviving company’s stock having a market value of
twice the then-current purchase price.
The Rights do not entitle the holder to vote or to receive dividends and may be redeemed at the option of the Company for
$0.001 per Right at any time before an Acquiring Person acquires 20% or more of the common stock. At any time an
Acquiring Person owns between 20% and 50% of the common stock, the Board of Directors may exchange all or part of the
Rights (other than Rights owned by the Acquiring Person) for shares of common stock on a one-for-one basis. Unless
previously exchanged or redeemed, the Rights will expire on May 18, 2012. The Board of Directors will submit the
stockholder rights plan for ratification by the Company’s stockholders at the annual meeting to be held on May 7, 2010.
The Company is authorized to issue 5,000,000 shares of preferred stock, par value $.001 per share. The Board of Directors
is authorized to fix the particular preferences, rights, qualifications and restrictions of each series of preferred stock. In
connection with the adoption of the stockholder rights plan, the Board of Directors designated 100,000 shares as Series A
Junior Participating Preferred Stock. No shares of preferred stock have been issued.
6. Related-Party Transactions
In March 2007, the Company registered an offering for its then largest stockholder, Code, Hennessy & Simmons II, L.P.
and other selling stockholders, who sold approximately 7,500,000 common shares at $25 per share. All the shares were sold by
selling stockholders, including approximately 6,900,000 common shares by Code, Hennessy & Simmons II, L.P., thus there
was no dilution to earnings per share or any proceeds to the Company. After the offering, Code, Hennessy & Simmons II,
L.P.’s ownership was reduced from 38% to 8%. Code Hennessy & Simmons II, L.P. subsequently distributed all of the
remaining shares to its partners and no longer holds any shares of common stock.
41
7. Employee Benefit Plans
The Company maintains a combination profit-sharing plan and salary deferral plan (the “Plan”) for the benefit of its
employees. Employees who are eligible to participate in the Plan can contribute a percentage of their base compensation, up to
the maximum percentage allowable not to exceed the limits of Internal Revenue Code (“Code”) Sections 401(k), 404, and 415,
subject to the IRS-imposed dollar limit. Employee contributions are invested in certain equity and fixed-income securities,
based on employee elections. The Company has adopted the Safe Harbor provisions of the Code, whereby contributions up to
the first 3% of an employee’s compensation are matched 100% by the Company and the next 2% are matched 50% by the
Company. The Company’s match for the years ended December 31, 2009, 2008 and 2007 was $537, $623, and $619
respectively.
8. Incentive Plans
On March 23, 2006, the Company adopted and on May 1, 2006, the stockholders approved the 2006 Stock Plan (the
“2006 Plan”) to provide incentives for certain key employees and directors through awards and the exercise of options. The
2006 Plan provides for options to be granted at the fair market value of the Company’s common stock at the date of grant and
may be either nonqualified stock options or incentive stock options as defined by Section 422 of the Code. Under the 2006 Plan
a maximum of 1,800,000 shares may be issued to designated participants. The maximum number of shares available to any one
participant in any one calendar year is 500,000.
Stock Option Awards
The Company also has options outstanding under a stock option plan adopted in 2000 (the “2000 Plan”). The 2000 Plan
provided for options to be granted at the fair market value of the Company’s common stock at the date of the grant, which
options could be either nonqualified stock options or incentive stock options as defined by Section 422 of the Code. In
connection with the adoption of the 2006 Stock Plan, the Board of Directors resolved that no further options would be granted
under the 2000 Plan.
The Company has granted options to purchase its common stock to employees and directors of the Company under the two
stock option plans at no less than the fair market value of the underlying stock on the date of grant. These options are granted
for a term not exceeding ten years and may be forfeited in the event the employee or director terminates, other than by
retirement, his or her employment or relationship with the Company. Options granted to employees generally vest over three to
five years, and options granted to directors generally vest one year after the date of grant. Shares issued to satisfy the exercise
of options may be newly issued shares or treasury shares. Both option plans contain anti-dilutive provisions that permit an
adjustment of the number of shares of the Company’s common stock represented by each option for any change in
capitalization. Compensation cost for options granted is charged to expense on a straight line basis over the term of the option.
On December 17, 2008, the Company granted options to purchase 65,000 shares of its common stock to the Company’s
chief executive officer with the exercise price equal to the fair market value of the Company’s stock at the close of trading on
December 17, 2008. On January 9, 2008, the Company granted options to purchase 65,000 shares of its common stock to the
Company’s chief executive officer with an exercise price equal to the fair market value of the Company’s stock at the close of
trading on January 9, 2008. In each case, the options have a contractual life of ten years and vest 50% on March 9, 2011 and
the remaining 50% on March 9, 2012, provided that in the event of the chief executive officer’s death or permanent disability,
such options would vest ratably based on the days served from the date of grant.
On May 8, 2009, at the Annual Meeting of Stockholders, the Company issued options to purchase 5,000 shares of its
common stock to each non-employee director who was re-elected (other than the Chairman of the Board, who received an
option to purchase 10,000 shares of the Company’s common stock), for an aggregate of 35,000 shares. Each option has an
exercise price equal to the fair market value of the Company’s common stock at the close of trading on May 8, 2009, has a
contractual life of ten years and vests one year after the date of grant.
The fair value of each option awarded is estimated on the date of grant using a Black-Scholes option-pricing model.
Expected volatilities are based on historical volatility of the Company’s stock and the historical volatility of the stock of similar
companies, and other factors. The Company uses historical data to estimate option exercises and employee terminations within
the valuation model. The expected life of options granted represents the period of time that options granted are expected to be
outstanding. The risk-free rate for periods within the life of the option is based on the U.S. Treasury yield curve in effect at the
time of grant. For options issued, the following weighted average assumptions were used:
42
Risk-free interest rate
Expected dividend yield
Weighted average expected life
Expected volatility
Year Ended
December 31,
2008
2.51%
3.21%
2009
1.00%
3.29%
2007
4.53%
0.25%
2 years
5.5 years
5.5 years
81%
55%
45%
During the years ended December 31, 2009, 2008 and 2007, tax benefits of $13, $264 and $1,235, respectively, were
reflected in financing cash flows.
The total intrinsic value of options exercised during the years ended December 31, 2009, 2008 and 2007 was $77, $738
and $3,200, respectively.
The following summarizes stock option activity and related information:
2009
Options
(in 000’s)
1,178
Weighted
Average
Exercise Price
$
Aggregate
Intrinsic
Value
465
$
$
$
1,146
456
18.99
4.04
2.20
(17.51)
—
18.93
7.16
Outstanding—Beginning of year
Granted
Exercised
Forfeitures
Expired
Outstanding—End of year
Exercisable—End of year
Weighted average fair value of options granted
during 2009
Weighted average fair value of options granted
during 2008
Weighted average fair value of options granted
during 2007
35
(10)
(8)
—
1,195 $
$
300
4.04
5.24
11.53
$
$
$
Vesting dates range from May 8, 2010 to December 17, 2013, and expiration dates range from June 26, 2010 to May 8,
2019 at exercise prices and average contractual lives as follows:
Exercise Prices
$0.53
$2.67
$9.27
$10.32
$11.99
$13.00
$15.40
$16.98
$17.36
$17.98
$21.73
$26.19
$30.25
Weighted
Average
Remaining
Contractual
Life
Exercisable
as of 12/31/09
(in 000’s)
2.02
6.00
8.96
9.35
8.02
6.47
7.96
6.55
8.35
6.61
6.97
7.19
7.33
7.57
9
30
30
—
—
15
28
30
45
15
78
—
20
300
Outstanding
as of
12/31/09
(in 000’s)
9
46
215
35
65
15
70
30
45
15
130
500
20
1,195
43
Weighted
Average
Remaining
Contractual
Life
2.02
6.00
8.96
—
—
6.47
7.96
6.55
8.35
6.61
6.97
—
7.33
7.16
The total fair value of options vested during the years ended December 31, 2009, 2008 and 2007 was $1,013, $773 and
$885, respectively.
Restricted Stock Awards
On December 15, 2009, the Company granted 80,000 voting shares of Restricted Stock under the 2006 Stock Plan. These
shares vest in one third increments, on the third, fourth and fifth anniversary of the grant. Any dividends declared will be
accrued and paid to the recipient on the vesting date as long as the recipient is still employed by the Company.
Restricted common shares, under fixed plan accounting, are measured at fair value on the date of grant based on the
number of shares granted, estimated forfeitures and the quoted price of the common stock. Such value is recognized as
compensation expense over the corresponding vesting period of five years.
The following summarizes restricted stock awards as of December 31, 2009:
Non-vested —Beginning of year
Granted
Vested
Cancelled/Forfeitures
Non-vested —End of year
2009
Weighted Average
Market Value at
Grant Date
Shares
(in 000’s)
— $
80
—
—
80 $
—
12.20
—
—
12.20
Total stock-based compensation cost was $2,205, $2,134 and $1,826 for the years ended December 31, 2009, 2008 and
2007, respectively. Total income tax benefit recognized for stock-based compensation arrangements was $869, $820 and $689
for the years ended December 31, 2009, 2008 and 2007, respectively.
As of December 31, 2009, there was $5,238 of total unrecognized compensation cost related to nonvested share-based
compensation arrangements. The cost is expected to be recognized over a weighted average period of approximately thirty-
three months. There were 579,500 shares available for future grants under the 2006 Plan at December 31, 2009.
9. Commitments and Contingencies
The Company has entered into operating leases, primarily for distribution centers and office facilities. These operating
leases frequently include renewal options at the fair rental value at the time of renewal. For leases with step rent provisions,
whereby the rental payments increase incrementally over the life of the lease, the Company recognizes the total minimum lease
payments on a straight line basis over the minimum lease term. Facility rent expense was approximately $2,161 in 2009,
$1,999 in 2008 and $1,931 in 2007.
Future minimum lease payments under non-cancelable operating leases with initial terms of one year or more consisted of
the following at December 31, 2009:
2010
2011
2012
2013
2014
Thereafter
Total minimum lease payments
$ 2,469
2,332
1,820
1,332
953
210
$ 9,116
The Company had aggregate purchase commitments for fixed inventory quantities of approximately $27,713 at
December 31, 2009.
The Company, along with many other defendants, has been named in a number of lawsuits in the state courts of
Minnesota, North Dakota, New Jersey, and South Dakota alleging that certain wire and cable which may have contained
asbestos caused injury to the plaintiffs who were exposed to this wire and cable. These lawsuits are individual personal injury
suits that seek unspecified amounts of money damages as the sole remedy. It is not clear whether the alleged injuries occurred
44
as a result of the wire and cable in question or whether the Company, in fact, distributed the wire and cable alleged to have
caused any injuries. The Company maintains general liability insurance that has applied to these claims. To date, all costs
associated with these claims have been covered by the applicable insurance policies and all defense of these claims has been
handled by the applicable insurance companies. In addition, the Company did not manufacture any of the wire and cable at
issue, and the Company would rely on any warranties from the manufacturers of such cable if it were determined that any of
the wire or cable that the Company distributed contained asbestos which caused injury to any of these plaintiffs. In connection
with ALLTEL’s sale of the Company in 1997, ALLTEL provided indemnities with respect to costs and damages associated
with these claims that the Company believes it could enforce if its insurance coverage proves inadequate.
The Company has a past due accounts receivable of $4,800 for wire installed in certain facilities. In February 2010, the
Company gave notice to the owner of the facilities that the Company intends to file for a lien. The Company believes it has
legal rights to the recovery of amounts due, either from the Company’s customer or the owner of the facilities, and as such, no
reserve has been recorded against the receivable balance at December 31, 2009.
There are no legal proceedings pending against or involving the Company that, in management’s opinion, based on the
current known facts and circumstances, are expected to have a material adverse effect on the Company’s consolidated financial
position, cash flows, or results from operations.
10. Subsequent Events
On February 9, 2010, the Board of Directors approved a quarterly dividend of $0.085 per share payable to stockholders of
record on February 19, 2010. This dividend totaling $1,500 was paid on February 26, 2010.
11. Select Quarterly Financial Data (unaudited)
The following table presents the Company’s unaudited quarterly results of operations for each of the last eight quarters
ended December 31, 2009. The unaudited information has been prepared on the same basis as the audited consolidated
financial statements.
Sales
Gross profit
Operating income
Net income
Earnings per share:
Basic
Diluted
Sales
Gross profit
Operating income
Net income
Earnings per share:
Basic
Diluted
Year Ended December 31, 2009
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
(in thousands, except per share data)
$ 63,526
$ 12,707
3,355
$
1,882
$
$
$
0.11
0.11
$
$
$
$
$
$
63,579
13,462
3,786
2,241
0.13
0.13
$
$
$
$
$
$
61,882
12,972
3,118
1,845
0.10
0.10
$
$
$
$
$
$
65,832
13,813
3,513
2,064
0.12
0.12
Year Ended December 31, 2008
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
(in thousands, except per share data)
$
$
$
$
$
$
75,260
16,177
4,855
2,680
0.15
0.15
$
$
$
$
$
$
98,854
22,640
11,043
6,575
0.37
0.37
$
$
$
$
$
$
97,384
24,231
13,006
7,745
$ 89,441
$ 22,667
$ 11,480
6,737
$
0.44
0.44
$
$
0.37
0.37
45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In accordance with Exchange Act Rules 13a-15 and 15a-15, we carried out an evaluation, under the supervision and with
the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of
December 31, 2009.
Design and Evaluation of Internal Control over Financial Reporting
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we included a report of management’s assessment of the design
and effectiveness of our internal controls as part of this Annual Report on Form 10-K for the fiscal year ended December 31,
2009. Ernst & Young, LLP, our independent registered public accounting firm, also attested to our internal control over
financial reporting. Management’s report and the independent registered accounting firm’s attestation report are included on
pages 48 and 49 under the captions entitled “Management’s Report on Internal Control Over Financial Reporting” and “Report
of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting,” and are incorporated herein
by reference.
There has been no change in our internal controls over financial reporting that occurred during the year ended December 31,
2009 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
46
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company has assessed the effectiveness of its internal control over financial reporting as of December 31, 2009 based
on criteria established by Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (“COSO Framework”). The Company’s management is responsible for establishing and
maintaining adequate internal controls over financial reporting. The Company’s independent registered public accountants that
audited the Company’s financial statements as of December 31, 2009 have issued an attestation report on management’s
assessment of the effectiveness of the Company’s internal control over financial reporting, which appears on page 49.
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. Internal control over financial reporting includes those policies and procedures that: (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements. Because of the inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies and procedures may deteriorate.
The Company’s assessment of the effectiveness of its internal control over financial reporting included testing and
evaluating the design and operating effectiveness of its internal controls. In management’s opinion, the Company has
maintained effective internal control over financial reporting as of December 31, 2009, based on criteria established in the
COSO Framework.
/s/ Charles A. Sorrentino
Charles A. Sorrentino
President and Chief Executive Officer
/s/ Nicol G. Graham
Nicol G. Graham
Chief Financial Officer, Treasurer
and Secretary (Chief Accounting Officer)
47
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
The Board of Directors and Stockholders of Houston Wire & Cable Company
We have audited Houston Wire & Cable Company’s internal control over financial reporting as of December 31, 2009, based
on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Houston Wire & Cable Company’s management is responsible for maintaining
effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Houston Wire & Cable Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of Houston Wire & Cable Company as of December 31, 2009 and 2008, and the related
consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2009 of Houston Wire & Cable Company and our report dated March 15, 2010, expressed an unqualified
opinion thereon.
/s/ Ernst & Young LLP
Houston, Texas
March 15, 2010
48
ITEM 9B. OTHER INFORMATION
We have no information to report pursuant to Item 9B.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information called for by Item 10 relating to directors and nominees for election to the Board of Directors is
incorporated herein by reference to the “Election of Directors” section of the registrant’s definitive Proxy Statement relating to
the Annual Meeting of Stockholders to be held on May 7, 2010. The information called for by Item 10 relating to executive
officers and certain significant employees is set forth in Part I of this Annual Report on Form 10-K.
The information called for by Item 10 relating to disclosure of delinquent Form 3, 4 or 5 filers is incorporated herein by
reference to the “Stock Ownership of Certain Beneficial Owners and Management” section of the registrant’s definitive Proxy
Statement relating to the Annual Meeting of Stockholders to be held on May 7, 2010.
The information called for by Item 10 relating to the code of ethics is incorporated herein by reference to the “Corporate
Governance and Board Committees – Code of Business Practices” section of the registrant’s definitive Proxy Statement
relating to the Annual Meeting of Stockholders to be held on May 7, 2010.
The information called for by Item 10 relating to the procedures by which security holders may recommend nominees to the
Board of Directors is incorporated herein by reference to the “Corporate Governance and Board Committees – Stockholder
Recommendations for Director Nominations” section of the registrant’s definitive Proxy Statement relating to the Annual
Meeting of Stockholders to be held on May 7, 2010.
The information called for by Item 10 relating to the audit committee and the audit committee financial expert is
incorporated herein by reference to the “Corporate Governance and Board Committees – Committees Established by the Board
– Audit Committee” section of the registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders to be
held on May 7, 2010.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated herein by reference to the “Report of the Compensation Committee,”
“Compensation Committee Interlocks and Insider Participation,” “Executive Compensation” and “Director Compensation”
sections of the registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 7,
2010.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information called for by Item 12 is incorporated herein by reference to the “Stock Ownership of Certain Beneficial
Owners and Management” and “Equity Compensation Plan Information” sections of the registrant’s definitive Proxy
Statement relating to the Annual Meeting of Stockholders to be held on May 7, 2010.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information called for by Item 13 is incorporated herein by reference to the “Corporate Governance and Board
Committees – Are a Majority of the Directors Independent?” and “Certain Relationships and Related Transactions” sections of
the registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 7, 2010.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information called for by Item 14 is incorporated herein by reference to the “Principal Independent Accountant Fees
and Services” section of the registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders to be held
on May 7, 2010.
49
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a)
The following financial statements of our Company and Report of the Independent Registered Public Accounting Firm are
included in Part II:
(cid:2)(cid:3) Report of Independent Registered Public Accounting Firm
(cid:2)(cid:3) Consolidated Balance Sheets as of December 31, 2009 and 2008
(cid:2)(cid:3) Consolidated Statements of Income for the years ended December 31, 2009, 2008 and 2007
(cid:2)(cid:3) Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2009, 2008 and 2007
(cid:2)(cid:3) Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007
(cid:2)(cid:3) Notes to Consolidated Financial Statements
(b) Financial Statement Schedules:
Financial statement schedules have been omitted because they are either not applicable or the required information has been
disclosed in the financial statements or notes thereto.
(c) Exhibits
Exhibits are set forth on the attached exhibit index
50
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
HOUSTON WIRE & CABLE COMPANY
(Registrant)
Date: March 15, 2010
By:
/s/ NICOL G. GRAHAM
Nicol G. Graham
Chief Financial Officer, Treasurer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE
TITLE
DATE
/s/ CHARLES A. SORRENTINO
Charles A. Sorrentino
Director
President, Chief Executive Officer and
March 15, 2010
/s/ NICOL G. GRAHAM
Nicol G. Graham
/s/ PETER M. GOTSCH
Peter M. Gotsch
Chief Financial Officer, Treasurer and
Secretary (Chief Accounting Officer)
March 15, 2010
Director
March 15, 2010
/s/ IAN STEWART FARWELL
Ian Stewart Farwell
Director
/s/ WILLIAM H. SHEFFIELD
William H. Sheffield
Director
/s/ SCOTT L. THOMPSON
Scott L. Thompson
Director
/s/ WILSON B. SEXTON
Wilson B. Sexton
Director
/s/ MICHAEL T. CAMPBELL
Michael T. Campbell
Director
March 15, 2010
March 15, 2010
March 15, 2010
March 15, 2010
March 15, 2010
51
EXHIBIT
NUMBER
INDEX TO EXHIBITS
EXHIBIT
3.1
Amended and Restated Certificate of Incorporation of Houston Wire & Cable Company (incorporated herein by
reference to Exhibit 3.1 to Houston Wire & Cable Company’s Registration Statement on Form S-1 (Registration No.
333-132703))
3.2
By-Laws of Houston Wire & Cable Company (incorporated herein by reference to Exhibit 3.2 to Houston Wire & Cable
Company’s Registration Current Report on Form 8-K filed August 6, 2007)
4.1
Rights Agreement dated as of May 18, 2009, between Houston Wire & Cable Company and American Stock Tranfer &
Trust Company, LLC (incorporated herein by reference to Exhibit 4.1 to Houston Wire & Cable Company’s Current
Report on Form 8-K filed on May 19, 2009)
10.1
Houston Wire & Cable Company 2000 Stock Plan (incorporated herein by reference to Exhibit 10.2 to Houston Wire &
Cable Company’s Registration Statement on Form S-1 (Registration No. 333-132703))
10.2
Houston Wire & Cable Company 2006 Stock Plan (incorporated herein by reference to Exhibit 10.3 to Houston Wire &
Cable Company’s Registration Statement on Form S-1 (Registration No. 333-132703))
10.18
Employment Agreement, dated as of April 26, 2006, by and between Charles A. Sorrentino and Houston Wire & Cable
Company (incorporated herein by reference to Exhibit 10.14 to Houston Wire & Cable Company’s Registration
Statement on Form S-1 (Registration No. 333-132703))
10.23
10.24
Form of Employee Stock Option Agreement under Houston Wire & Cable Company’s 2006 Stock Plan (incorporated
herein by reference to Exhibit 10.17 to Houston Wire & Cable Company’s Annual Report on Form 10-K for the year
ended December 31, 2007)
Form of Director Stock Option Agreement under Houston Wire & Cable Company’s 2006 Stock Plan (incorporated
herein by reference to Exhibit 10.17 to Houston Wire & Cable Company’s Annual Report on Form 10-K for the year
ended December 31, 2007)
10.25
Description of Senior Management Bonus Program (incorporated herein by reference to Exhibit 10.3 to Houston Wire
& Cable Company’s Current Report on Form 8-K filed December 27, 2006)
10.26
Form of Director/Officer Indemnification Agreement by and between Houston Wire & Cable Company and a director,
member of a committee of the Board of Directors or officer of Houston Wire & Cable Company (incorporated herein by
reference to Exhibit 10.24 to Houston Wire & Cable Company’s Annual Report on Form 10-K for the year ended
December 31, 2006)
10.27
Second Amended and Restated Loan and Security Agreement, dated as of September 21, 2009 (incorporated herein by
reference to Exhibit 10.1 to Houston Wire & Cable Company’s Current Report on Form 8-K filed September 24, 2009)
21.1
Subsidiaries of Houston Wire & Cable Company (incorporated herein by reference to Exhibit 21.1 to Houston Wire &
Cable Company’s Registration Statement on Form S-1 (Registration No. 333-132703))
23.1*
Consent of Ernst & Young, LLP
31.1*
Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
Certifications of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
* Filed herewith
52
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-135777) pertaining to the
Houston Wire & Cable Company 2000 Stock Plan and the Houston Wire & Cable Company 2006 Stock Plan of our report
dated March 15, 2010, with respect to the consolidated financial statements of Houston Wire & Cable Company, and the
effectiveness of internal control over financial reporting of Houston Wire & Cable Company included in this Annual Report
(Form 10-K) for the year ended December 31, 2009.
/s/Ernst & Young LLP
Exhibit 23.1
Houston, Texas
March 15, 2010
53
Exhibit 31.1
Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Charles A. Sorrentino, certify that:
1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2009 of Houston Wire & Cable
Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: March 15, 2010
/s/ Charles A. Sorrentino
Charles A. Sorrentino
Chief Executive Officer
54
Exhibit 31.2
Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Nicol G. Graham, certify that:
1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2009 of Houston Wire & Cable
Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: March 15, 2010
/s/ Nicol G. Graham
Nicol G. Graham
Chief Financial Officer
55
Exhibit 32.1
Certifications of CEO and CFO Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Houston Wire & Cable Company (the “Corporation”) on Form 10-K for the fiscal
year ended December 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”),
Charles A. Sorrentino, as Chief Executive Officer of the Corporation, and Nicol G. Graham, as Chief Financial Officer of the
Corporation, each hereby certifies, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-
Oxley Act of 2002, to the best of their knowledge, that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Corporation.
Date: March 15, 2010
Date: March 15, 2010
/s/ Charles A. Sorrentino
Charles A. Sorrentino
Chief Executive Officer
/s/ Nicol G. Graham
Nicol G. Graham
Chief Financial Officer
This certification accompanies the Report pursuant to section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed
filed by Houston Wire & Cable Company for purposes of section 18 of the Securities Exchange Act of 1934, as amended.
56
c o r p o r a t e i n f o r m a t i o n
Directors
Michael T. Campbell
Independent Director
I. Stewart Farwell
Independent Director
Peter M. Gotsch
Ellipse Capital, LLC
Partner
Wilson B. Sexton
Independent Director
William H. Sheffield
Independent Director
Charles A. Sorrentino
Houston Wire & Cable Company
President & CEO
Scott L. Thompson
Chairman of the Board and
Dollar Thrifty Automotive Group
President & CEO
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Houston Wire & Cable Company
10201 North Loop East
Houston, Texas 77029-1415
Telephone 713.609.2200
annual Meeting
The Annual Meeting of Shareholders will be
held May 7, 2010 at 8:30 a.m. CDT, at the
Company’s Corporate Headquarters in
Houston, Texas.
coMMon stock listing
Ticker Symbol: HWCC
Nasdaq Stock Exchange
transfer agent
American Stock Transfer & Trust Company
59 Maiden Lane
New York, New York 10038
Ernst & Young, LLP
1401 McKinney Street, Ste. 1200
Houston, Texas 77010
legal counsel
Schiff Hardin, LLP
233 South Wacker Drive
6600 Willis Tower
Chicago, Illinois 60606
investor relations
A complimentary copy of this report can
be found online at www.houwire.com or
by sending a written request to our
Corporate Headquarters address,
contacting investor.relations@houwire.com
or calling 713.609.2110.
11 strategically located Distribution centers
atlanta / baton rouge / charlotte / chicago / Denver / Houston (Headquarters)
los angeles / philadelphia / san Francisco / seattle / tampa
H o u s t o n W i r e & c a b l e c o m p a n y
10201 north loop east, Houston, texas 77029-1415 / p: 713.609.2200 / 1.800.HouWire