ELECTRICAL AND MECHANICAL
FOR INDUSTRY
AND INFRASTRUCTURE
2011 ANNUAL REPORT
Houston Wire & Cable Company
was founded in 1975 and is one of
the largest providers of electrical
and mechanical wire and cable and
related services in the U.S. market.
(in millions)
QUARTERLY
SALES
$ 120
100
80
60
40
20
0
1
1
/
9
1
1
/
6
1
1
/
3
1
1
/
2
1
0
1
/
9
0
1
/
6
0
1
/
3
0
1
/
2
1
9
0
/
9
9
0
/
6
9
0
/
3
9
0
/
2
1
8
0
/
9
8
0
/
6
8
0
/
3
8
0
/
2
1
7
0
/
9
7
0
/
6
7
0
/
3
7
0
/
2
1
(dollars in thousands except per share data)
FINANCIAL
HIGHLIGHTS
2011
2010
2009
2008
2007
NET SALES
SALES PER EMPLOYEE
OPERATING INCOME
OPERATING MARGIN
NET INCOME
DILUTED EARNINGS PER SHARE
TOTAL ASSETS
LONG-TERM OBLIGATIONS
STOCKHOLDERS’ EQUITY
$396,410
$308,522
$254,819
$360,939
$359,115
1,010
955
907
33,377
15,006
13,772
8.42%
19,677
1.11
4.86%
8,619
0.49
5.40%
8,032
0.45
1,168
40,384
1,201
49,708
11.19%
13.84%
23,737
30,225
1.33
1.48
179,153
185,490
122,014
134,753
139,091
50,345
55,911
97,338
85,720
17,479
80,813
29,808
76,595
34,507
71,170
POWER
GENERATION
ENVIRONMENTAL
COMPLIANCE
Fossil Fuel
Wind
Solar
Hydro
Co-Generation
Flue Gas Desulfurization
Selective Catalytic Reduction
Mercury Capture Systems
Baghouse Installation
and Optimization
ELECTRICAL. MECHANICAL. CRITICAL.
In the middle of industrial applications, within the plant, on the shop fl oor, beneath the ground
and high above, are the results that began right here – with Houston Wire & Cable Company providing
the right product, at the right place, at the right time – time after time.
INDUSTRIALS
INFRASTRUCTURE
Oil & Gas
Mining & Minerals
Steel
Petrochemical
Pharmaceutical
Food Processing
General Manufacturing
Material Handling
Wastewater
Security
Telecommunications
Facilities
Transportation
Marine
Cranes
Mooring
1
DEAR
SHAREHOLDERS,
2011 WAS A GREAT YEAR FOR HOUSTON
WIRE & CABLE COMPANY (HWCC) AS OUR
SALES, FINANCIAL PERFORMANCE AND
CUSTOMER SERVICE METRICS WERE ALL
OUTSTANDING. Guided by our growth
plan, the company continued to experience
increases in market share, new customers,
sales and net income.
Diluted EPS of $1.11, increased 126.5 percent
from $0.49 per share;
Dividends declared of $0.355 cents per share, an increase
of 4.4 percent from $0.34 cents per share in 2010; and
Debt reduced to $48.0 million at December 31, 2011
from $54.8 million a year earlier.
In addition, we are well positioned for 2012:
Solid capital structure with a debt-to-equity ratio
of less than 50 percent;
Strong balance sheet including a new loan agreement
that provides a $100 million line of credit to support working
capital requirements for future growth;
Steady cap-ex trend at less than 0.5 percent of sales; and
Larger, better equipped sales and marketing team.
01
SHAREHOLDER LETTER
JAMES L. POKLUDA III
Net income was up 128 percent over prior year, and the balance
sheet and liquidity remained strong with interest coverage
at 23.4 times and debt reduced by $6.9 million to $48.0 million.
Based on our estimates, HWCC’s organic sales grew at a rate that
was almost twice the industry average, and last year was the
fourth consecutive year of quarterly dividends for our shareholders.
Equally gratifying was our ability to deliver these results while
once again achieving record operating performance metrics –
both order accuracy and on-time performance topped 99 percent,
truly exceptional results. I am honored by the opportunity
to lead such a great company, and being selected as the successor
to Chuck Sorrentino, an extraordinary leader during his 13-year
tenure, is especially gratifying.
STRATEGICALLY SOUND, FINANCIALLY STRONG
We are very pleased that our long-term growth initiatives
continued to drive share growth in our targeted end markets.
Increased sales and reduced expenses resulted in signifi cant
operating leverage that has materially benefi tted net income
and earnings per share (EPS).
Highlights for the year include:
Record sales of $396 million, increased 28.5 percent
from $309 million in 2010;
Gross margin at 22.4 percent, increased 210 basis points
from 20.3 percent in the previous year;
Net income of $19.7 million, increased 128.3 percent
from $8.6 million;
2
LONG-TERM GROWTH:
OUR PLAN
IN ACTION
Within HWCC’s long-term
growth plan are internal
initiatives that leverage our
superior service, product
inventory, sales and logistic
platform and external
initiatives involving strategic
acquisitions. Our pursuit of
these initiatives has delivered
signifi cant results, doubling the
size of our company since the
plan’s implementation in 2003.
GROWTH INITIATIVES
Utility Power Generation
Environmental Compliance
Devices
Industrials
Engineering & Construction
LifeGuard™ Low-Smoke
Zero-Halogen Cable
Geographic Expansion
of Mechanical Wire
ACQUISITIVE GROWTH
CHARACTERISTICS
Common End Markets
Organic Growth Potential
Experienced Management/
Sales Team
Customer Brand Equity
Synergistic Expense/
Capital Opportunities
Future Favorable Impact
to Return on Capital
3
For several years, HWCC’s growth plan has provided the framework
necessary to lead strategic business development opportunities
with new customers in high-potential markets. The growth plan
targets six key areas, including:
Utility Power Generation;
Environmental Compliance Devices;
Industrials;
Engineering & Construction;
LifeGuard™ Low-Smoke Zero-Halogen Cable; and
Geographic Expansion of Mechanical Wire.
UTILITY POWER GENERATION AND
ENVIRONMENTAL COMPLIANCE DEVICES
In 2011, HWCC’s project business in the utility space was robust.
Fossil fuel power generation and environmental compliance project
backlog was substantial, and we were successful with several new
renewable fuel capital projects.
As the U.S. energy generation portfolio continues to evolve,
gradually transitioning from coal to natural gas and renewable
energy technologies, HWCC remains focused on sales, marketing
and inventory investments to support new power plant
construction and customer demand. We work closely with owners,
design engineers and distribution partners to assist in product
specifi cation, application engineering and material logistics
required for these highly complex and time-sensitive projects.
Business activity involving the design and engineering of
equipment required for environmental compliance devices also
increased in 2011, and the outlook for continued investment
in new power plant construction, to support demographic and
manufacturing demand and cleaner, more effi cient generation,
is expected to continue for several years.
In 2011, the United States Environmental Protection Agency
announced new standards designed to further reduce emissions
in new and existing oil-fi red electric utility steam generating
units and new coal- and oil-fi red power plants. Increasing demand,
the need to upgrade ineffi cient and aging facilities, environmental
regulatory requirements and quickly changing technologies
combine to create an operating environment that requires
the specialty wire and cable and very high levels of customer
service supplied by our company.
INDUSTRIALS
Our company provides a wide array of products that serve industrial
markets such as oil and gas, metals and minerals, petrochemical,
pharmaceutical, food processing and general manufacturing.
In 2011, maintenance, repair and operations (MRO) sales activity
increased signifi cantly due to backlog demand from work that was
delayed during the recession. We were also active in several
small- to medium-sized projects associated with plant expansion,
plant automation, equipment upgrade and process improvement.
HWCC’s products are used in multiple applications to support
growth and infrastructure investment in the oil and gas market.
The exploration and production segment of this market,
complemented by increased drilling activity in the domestic shale
plays, drove increased sales. Upstream oil and gas activity also
favorably impacted new investment in midstream infrastructure
including pipelines, compressor stations, substations, metering
stations and storage. Downstream activity in the refi ning space
increased as plants were upgraded and capacity expanded in
order to process a growing supply of recovered natural resources.
ENGINEERING & CONSTRUCTION
HWCC’s activity in the engineering and construction market
in 2011 helped drive an estimated 30 percent increase in year-
over-year sales due to the combination of new orders in the oil
and gas and industrials space, and existing backlog demand from
previously booked project business. Engineering and construction
fi rms play an integral role in capital project planning and
construction as their expertise involves the design and construction
of major industrial and infrastructure projects. HWCC’s service
offerings, which include application engineering, guaranteed
product availability, just-in-time inventory management and expert
fi eld sales support, assist in managing project complexity, enabling
customers to complete projects on time and within budget.
4
LIFEGUARD™ LOW-SMOKE ZERO-HALOGEN CABLE
As the developer and exclusive supplier of LifeGuard™ low-smoke
zero-halogen cable, HWCC is continuing to reach new customers
in the targeted growth plan markets. We are successfully
transitioning our customers from older, less sophisticated cable
constructions to this superior construction technology.
LifeGuard™ cables are made with highly engineered exterior
sheaths that are very durable, fl ame retardant and virtually
smoke-free under combustion. The compounds used in sheath
construction contain no halogens and, therefore, do not produce
dangerous halogenated acid gases when burned. The result is
a cable construction that aids in protecting expensive machinery
and equipment that could be damaged due to acid-gas
exposure. LifeGuard™ cable is an ideal product for use where
the protection of expensive equipment and safety concerns
are prime decision factors.
GEOGRAPHIC EXPANSION OF MECHANICAL WIRE
The acquisition of Southwest Wire Rope and Southern Wire
complemented and fueled our growth plan by further expanding
HWCC’s reach into key industrial and infrastructure MRO markets.
In addition to the electrical cable HWCC sells, these markets also
require the products and services supplied by Southwest Wire Rope
and Southern Wire, including mechanical wire and cable, related
hardware and custom fabricated products.
The acquisition allows us to provide a national distribution
platform for the mechanical wire and cable products and services.
Since the acquisition, we have expanded new product offerings
to our Chicago, Illinois; Houston, Texas; Los Angeles, California;
Philadelphia, Pennsylvania; and Tampa, Florida locations.
We will continue to expand as we further integrate our businesses.
5
OPERATIONAL
EXCELLENCE
HWCC measures and reports
performance to the hundredths,
reinforcing our commitment
to accuracy and to the daily pursuit
of outstanding customer service.
Our team’s support of our all-
encompassing operational excellence
program has resulted in improved
operational effi ciencies, operating
margins, customer retention and
the following best-in-class metrics:
ORDER ACCURACY
99.94%
99.99%
ON-TIME PERFORMANCE
Financial, product and service
Finan
strengths safeguard our customers’
streng
projects, schedules and budgets.
projec
HWCC has proven itself an experienced,
HWCC
knowledgeable and reliable partner.
know
LONG-TERM
RELATIONSHIPS
SPECIALIZED WORK FORCE
24/7/365 SERVICE
STRONG BALANCE SHEET
ACQUISITION INTEGRATION UPDATE
During the year, we reached a number of signifi cant internal
and external milestones marking the successful integration
of Southwest Wire Rope and Southern Wire. Today, those business
teams and products are an integral part of the HWCC family,
and we are stronger and more competitive as a result of their
combined experience and product offering.
Following the June 2010 acquisition, we have made signifi cant
investments in inventory, personnel and systems, including:
Increasing our distribution footprint by expanding
Southern Wire’s product offering to Chicago, Houston,
Los Angeles, Philadelphia and Tampa;
Executing aggressive branding directed
by a comprehensive marketing plan; and
Completing major technology upgrades, moving
Southwest Wire Rope and Southern Wire to HWCC’s
enterprise resource platform (ERP) system.
Throughout the integration, we have capitalized on opportunities
for process improvements. On the technology front, collaboration
between sales, production and management led to software
enhancements, data standardization and upgraded processes
that are improving effi ciency. We completed phase one ERP system
enhancements even as we counted physical inventories, closed
monthly fi nancials and continued ongoing sales and shipments
to customers.
Hiring additional inside sales, outside sales
and management resources;
We expect continued, concerted effort in all areas highlighted
above to yield additional results.
Reorganizing and realigning departments for greater
efficiency, including transferring Southwest Wire Rope
and Southern Wire administrative and financial teams
to HWCC’s headquarters;
Improving facilities’ capacities, throughputs and efficiencies;
6
NATIONAL PLATFORM
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Seattle, WA
San Francisco, CA
Los Angeles, CA
Denver, CO
Kansas City, MO
Houston, TX (4)
Lake Charles, LA
New Iberia, LA
Baton Rouge, LA
Olive Branch, MS
Chicago, IL
Atlanta, GA
Tampa, FL
Charlotte, NC
Philadelphia, PA
WIRE AND CABLE
COAST TO
COAST
HWCC continues to invest in improving
and expanding our distribution
platform through the addition of new
products and services. Strategically
located sales and distribution centers,
around-the-clock service and $100
million of available bar-coded inventory
in approximately 760,000 square
feet of warehouse space ensure our
customers receive the right products,
at the right place, at the right time.
RESTRICTED LINES
BROAD AND DEEP INVENTORY
7
CAPABLE,
COMMITTED
The tenure of the HWCC team is
exceptional by any standard, with
more than 12 percent of our team
members dedicating twenty years
or longer to building our business.
The growth rate of our team is equally
exceptional, with 20 percent joining
us within the last two years.
YEARS OF SERVICE
16+ YRS
11–15 YRS
6–10 YRS
0–5 YRS
0
0
5
0
0
1
0
5
1
0
0
2
TEAM MEMBERS
MORE THAN TENURE, TENACITY
More than 43 percent of our team members have served the
company longer than 10 years, and 12 percent have been with us
more than 20 years. Our team’s commitment to HWCC and to each
other extends to our customers, and our passion to do the right
thing all day, every day has resulted in industry-leading customer
service metrics, year after year.
In 2011, our team’s legendary customer service led to improved
operational effi ciencies, operating margins, customer retention
and very high performance metrics, including: 99.94 percent order
accuracy and 99.99 percent on-time performance.
Exceptional service leads to customer retention which drives
business growth and the opportunity to attract additional
talent to our organization. In the last fi ve years, we have added
approximately 150 new members to our team, who now have
embraced the culture that we have worked so hard to develop
through the years. HWCC is a remarkable confl uence of tenure,
expertise, vision and innovation working together, building
momentum to provide value to our shareholders.
We want to thank our customers, team members, suppliers
and shareholders for their support. We are grateful to our directors
and advisors for their continued guidance and direction. Last year
was an outstanding year, and all of us at Houston Wire & Cable
Company look forward to building on its successes. Thank you
for your confi dence in our company.
JAMES L. POKLUDA III
PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR
NEW BEGINNINGS
would step down as
In 2011, we announced that I would step down as
President and CEO after 13 years with the company.
I am very pleased that our Board of Directors followed
my recommendation and chose Jim Pokluda to
be our new President and CEO. I have had the pleasure
of working closely with Jim over the years, and the
company is fortunate to have him as its new leader.
For several years, the Board and I worked together to
assure a smooth succession process for the company.
I do not think it could have worked any better
than what we accomplished, as the transition has
been seamless with Jim as the new steward of our
great company.
In nearly 25 years of service, Jim has launched several
major initiatives, including HOUWIRE®, LifeGuard™
and DataGuard®; co-led HWCC’s IPO and secondary
stock offerings; co-led the Southwest Wire Rope and
Southern Wire acquisitions and provided invaluable
behind-the-scenes strategic leadership. He has grown
professionally from a top-performing salesperson
to Region Manager and, as Vice President of Sales
and Marketing, has led HWCC to record sales and
profi tability. Jim has been instrumental to all of our
strategic planning, and he initiated the growth plan
we follow today – a plan that has doubled HWCC’s
organic revenues in just a few short years.
Jim has dedicated his entire career to HWCC and
demonstrates a commitment to growing our
company and providing opportunities for personal
and professional growth for our team members.
He, like so many of our team members, exemplifi es
the leadership and tenacity that resulted in
2011’s achievements and will continue to drive
HWCC’s success.
8
CHARLES A. SORRENTINO
RETIRED CHIEF EXECUTIVE OFFICER
FORM 10-K
02 2011 FINANCIAL REPORT
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 2011
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-52046
Delaware
(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 NO
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES NO
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
YES NO
Indicate by check mark 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.
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
Accelerated Filer
Non-Accelerated Filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES NO
The aggregate market value of the voting stock (common stock) held by non-affiliates of the registrant as of June 30, 2011 was $252,162,221.
At March 1, 2012, there were 17,820,440 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 8, 2012.
HOUSTON WIRE & CABLE COMPANY
Form 10-K
For the Fiscal Year Ended December 31, 2011
INDEX
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
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 Accounting Fees and Services
Exhibits and Financial Statement Schedules
2
5
8
8
8
8
8
9
11
13
22
23
41
41
44
44
44
44
44
44
45
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.
1
ITEM 1. BUSINESS
Overview
PART I
We are one of the largest providers of wire and cable and related services to the U.S. market. The June 25, 2010 purchase of
Southwest Wire Rope LP (“SWWR”), its general partner Southwest Wire Rope GP LLC (“GP”) and SWWR’s wholly owned
subsidiary, Southern Wire LLC (“SW”) (collectively “the acquired businesses” or “the acquisition”), allowed the Company to expand its
product offerings to include mechanical wire and cable and related hardware. We provide our customers with a single-source solution for
wire and cable, hardware and related services by offering a large selection of in-stock items, exceptional customer service and high
levels of product expertise.
Our wide product selection and specialized services support our position in the supply chain between wire and cable manufacturers
and the customer. The breadth and depth of wire and cable and related hardware that we offer, require significant warehousing resources
and a large number of SKU’s (stock-keeping units). While manufacturers may have the space and capabilities to maintain a large supply
of inventory, we do not believe that any single manufacturer has the breadth and depth of product that we offer. More importantly,
manufacturers historically have not offered the services that our customers need, such as complimentary custom cutting and same day
shipment, and do not have multiple distribution centers across the nation.
Our Cable Management Program addresses our customers’ growing requirement for sophisticated and efficient just-in-time product
management for large capital projects. This program entails purchasing and storing dedicated inventory, so our customers have
immediate product availability for the duration of their project. Some advantages of this program include extra pre-allocated safety
stock, firm pricing, zero cable surplus and just-in-time delivery. Used on large construction and capital expansion projects, our Cable
Management Program combines the expertise of our cable specialists with dedicated project inventory and superior logistics to allow
complex projects to be completed on time, within budget and with minimal residual waste.
History
We were founded in 1975 and have a long history of exceptional customer service, broad product selection and high levels of
product expertise. In 1987, we completed our first initial public offering and were subsequently purchased in 1989 by ALLTEL
Corporation. In 1997, we were purchased by investment funds affiliated with Code, Hennessy & Simmons LLC. In June 2006, we
completed our second initial public offering.
Products
We offer products in most categories of wire and cable, including: continuous and interlocked armor cable; control and power cable;
electronic wire and cable; flexible and portable cords; instrumentation and thermocouple cable; lead and high temperature cable;
medium voltage cable; premise and category wire and cable, wire rope and wire rope slings, as well as nylon slings, chain, shackles and
other related hardware. We also offer private branded products, including our proprietary brand LifeGuard™, a low-smoke,
zero-halogen cable. Our products are used in Repair and Replacement, also referred to as Maintenance, Repair and Operations ("MRO"),
and related projects, larger-scale projects in the utility, industrial and infrastructure markets and a diverse range of industrial applications
including communications, energy, engineering and construction, general manufacturing, mining, construction, oilfield services,
infrastructure, petrochemical, transportation, utility, wastewater treatment, marine construction and marine transportation.
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 sales and marketing initiatives.
Utility Market. The utility market includes large investor-owned utilities, rural cooperatives and municipal power authorities.
According to Industrial Information Resources’ (“IIR’s”) 2012 Global Industrial Outlook, the spending on the power market in 2012
within the United States is expected to be $63 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 supply the wire and cable required in 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
2
from existing power generation units. These projects require the specialty instrumentation, power and control wire and cable that we
distribute.
Industrial Market. The industrial market is one of the largest segments of the U.S. economy and is comprised of a diverse base of
manufacturing and production companies. According to IIR’s 2012 Global Industrial Outlook, the 2012 projected total industrial
spending within the United States is expected to be $195 billion. We 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.
Infrastructure Market. We believe that significant infrastructure improvements will be needed over the next several years and
include market opportunities within the transportation, water management, waste management, education and health care
industries. The government’s stimulus packages are designed to help these industries over a number of years, and we remain focused on
following the funded opportunities. At the same time, federal production tax credits (PTCs) continue to be available for the renewable
energy markets, such as wind power, through the end of 2012. We have the right products for these markets and are positioned to benefit
from the capital project investments. In turn, we are assisting our customers by working closely with engineering and construction
engineers to drive the 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
within 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.
Distribution Logistics
We believe that our national distribution presence and value-added services make us an essential partner in the supply chain for our
suppliers. We have successfully expanded our business from one original location in Houston, Texas to eighteen locations nationwide,
which includes two third-party logistics providers. Our standard practice is to process customers' orders the same day they are received.
Our strategically located distribution centers generally allow for ground delivery nationwide within 24 hours of shipment. Orders are
delivered through a variety of distribution methods, including less-than-truck-load, truck-load, air or parcel service providers, direct
from supplier 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.
Customers
During 2011, we served approximately 6,000 customers, shipping approximately 36,000 SKU’s to over 10,000 customer locations
nationwide. No customer represented 10% or more of our 2011 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 of wire and cable with four leading suppliers in order to maximize product quality, delivery
dependability, purchasing efficiencies, and vendor rebates. As a result, in 2011 approximately 52% 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 and related hardware.
Our top four suppliers in 2011 were Belden, General Cable Corp, Nexans Energy USA, Inc and Southwire Company.
Sales
We market our wire and cable and related services through an inside sales force situated in our regional offices and a field sales force
focused on key geographic markets throughout the U.S. By operating under a decentralized process, region 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.
3
Competition
The wire and cable market is highly competitive and fragmented, with several hundred wire and cable competitors serving this
market. The product offerings and levels of service from the other wire and cable providers with whom we compete vary widely. We
compete with many wire and cable providers 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 wire and cable providers, we also face, on a much more limited basis, competition with 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.
Employees
At December 31, 2011, we had 410 employees. Our sales and marketing staff accounted for 172 employees, including 50 field sales
personnel and 94 inside sales and technical support 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.
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 if applicable,
amendments to those reports, as well as proxy and information statements, as soon as reasonably practicable after such documents are
electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”). Information contained on our website is
not part of, and should not be construed as being incorporated by reference into, this Annual Report on Form 10-K.
Government Regulation
We are subject to regulation by various federal, state and local agencies. We believe we are in compliance in all material respects
with existing applicable statutes and regulations affecting environmental issues and our employment, workplace health and workplace
safety practices.
4
ITEM 1A. RISK FACTORS
In addition to other information in this Annual Report on Form 10-K, the following risk factors should be carefully considered in
evaluating our business, because such factors may have a significant impact on our business, operating results, cash flows and financial
condition. As a result of the risks set forth below and elsewhere in this Annual Report, actual results could differ materially from those
projected in any forward-looking statements.
Downturns in capital spending and cyclicality in 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, repair and operation of facilities, plants and projects in the
communications, energy, engineering and construction, general manufacturing, infrastructure, petrochemical, mining, oilfield services,
transportation, utility, wastewater treatment, marine construction and marine transportation 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.
We have risks associated with our customers’ access to credit.
The current turmoil in global financial markets has not impaired access to our credit facility for financing 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 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 fulfill customer orders. Failure to do so could adversely affect our sales and earnings. However, if our inventory
levels are too high, we are at risk that unexpected changes in circumstances, such as a shift in market demand, drop in prices or 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, steel 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.
Our sales of wire rope and related hardware are impacted by the level of oil and gas offshore drilling activity.
The 2010 oil spill in the Gulf of Mexico resulted in tighter drilling and permitting qualifications by the U.S. Government. Until
drilling companies meet these qualifications or they are eased, oil and gas drilling activity will remain at low levels, limiting the demand
for the products we sell to this market.
If we are unable to maintain our relationships with our customers, it could have a material adverse effect on our financial results.
We rely on customers to purchase our wire and cable and related hardware. The number, size, business strategy and operations of
these customers vary widely from market to market. Our success depends heavily on our ability to identify and respond to our
customers’ needs.
In 2011, our ten largest customers accounted for approximately 33% of our sales. If we were to lose one or more of our large
customers, or if one or more of our large customers were to significantly reduce the amount of wire and cable and related hardware 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 customers failed or were unable to pay, we could experience a write-off or write-down of
5
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 with the 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 2011, we sourced products from approximately 256 suppliers. However, we have adopted a strategy to concentrate our purchases
of wire and cable with a small number of suppliers in order to maximize product quality, delivery dependability, purchasing efficiencies
and vendor rebates. As a result, in 2011 approximately 52% of our purchases came from four suppliers. If any of these suppliers changes
its sales strategy or decides 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, wire and cable suppliers often allocate products among their customers, and
our allocations might not be adequate to meet our customers' needs.
Loss of key personnel or our inability to attract and retain new qualified personnel could hurt our ability to operate and grow
successfully.
Our success is highly dependent upon the services of James Pokluda III, our President and Chief Executive Officer, Nicol Graham,
our Chief Financial Officer, and Chris McLeod, our Senior Vice President - Operations. 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 suppliers adversely change the terms of some or all of these
programs, the changes may lower our gross margins on products we sell and may have an adverse effect on our operating results.
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 manufacturing delay. If we cannot sustain the growth in demand for our LifeGuard™ products, or 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 wire and
cable 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.
6
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 wire and cable and
related hardware. Competition is primarily focused in the local service area and is generally based on product line breadth, product
availability, service capabilities and price. Some of our existing competitors have, and new market entrants may have, greater financial
and marketing resources than we do. To the extent existing or future competitors seek to gain or retain market share by reducing prices,
we may be required to lower our prices, thereby adversely affecting our financial results. Existing or future competitors also may seek to
compete with us for acquisitions, which could have the effect of increasing the price and reducing the number of suitable acquisitions.
Other companies, including our current customers, could seek to compete directly with our private branded products, which could
adversely affect our sales of those products and ultimately our financial results. Our existing customers, as well as suppliers, could seek
to compete with us by offering services similar to ours, 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 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.
The Company is anticipating significant growth in the recently acquired businesses and if this growth is not achieved, a goodwill
impairment may result.
We may be subject to product liability claims that could be costly and time consuming.
We sell wire and cable and related hardware. 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.
7
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Facilities
We operate out of eighteen distribution centers strategically located throughout the continental United States with approximately
760,000 sq ft of distribution space. Two facilities in Houston, TX, are owned (one of which houses all centralized and back office
functions such as finance, marketing, purchasing, human resources and information technology) as are two facilities in Louisiana. All of
the other facilities are leased. Fourteen of the facilities, in addition to containing inventory for re-sale, house knowledgeable sales staff.
We believe that our properties are in good operating condition and adequately serve our current business operations.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in lawsuits that are brought against us in the normal course of business. We are not currently a
party to any legal proceedings that we expect, either individually or in the aggregate, to have a material adverse effect on our business or
financial condition. We, along with many other defendants, have been named in a number of lawsuits in the state courts of Illinois,
Minnesota, North Dakota, 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, to
date, has covered the defense of and all costs associated with these claims. 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. MINE SAFETY DISCLOSURES
Not applicable.
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
Name/Office
James L. Pokluda III
President and Chief Executive Officer
Nicol G. Graham
Chief Financial Officer, Treasurer and Secretary
Christopher R. McLeod
Senior Vice President - Operations
Served
as an
Officer
Since
2011
Age
47
Business Experience
During Last 5 Years
Chief Executive Officer since
January 2012 and President
since May 2011. Prior thereto,
Vice President Sales &
Marketing from April 2007 until
May 2011.
59
1997
Chief Financial Officer,
Treasurer and Secretary since
1997.
50
2011
Senior Vice President,
Operations since May 2011.
Prior thereto, Vice President,
Logistics from 2001 until May
2011.
8
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our common stock is listed on The NASDAQ Global Market under the symbol “HWCC”. 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, 2011:
First quarter
Second quarter
Third quarter
Fourth quarter
Year ended December 31, 2010:
First quarter
Second quarter
Third quarter
Fourth quarter
High
Low
$
$
$
$
$
$
$
$
15.00 $
18.00 $
17.15 $
14.54 $
14.68 $
14.53 $
13.17 $
13.64 $
11.56
13.30
11.21
10.01
11.31
9.66
8.64
9.61
There were 16 holders of record of our common stock as of December 31, 2011.
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, 2011. 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.”
Total number of
shares purchased
Average
price paid
per share
— $
— $
28,833 $
28,833 $
—
—
14.32
—
Total number of
shares purchased
as part of publicly
announced plans
or programs (1)
Maximum
dollar value
that may yet be
used for
purchases
under the plan
19,385,303
19,385,303
19,385,303
— $
— $
— $
—
Period
October 1 – 31, 2011
November 1 – 30, 2011
December 1 – 31, 2011(2)
Total
__________
(1)
(2)
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 2011.
These shares were surrendered in connection with the exercise of a stock option to pay the exercise price and withholding
taxes in accordance with the terms of our 2006 Stock Plan and accordingly were not shares acquired under the publicly
announced plan.
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, due to the size and scope of our business platform, and 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 January 1, 2007, and reinvestment of dividends.
9
$150
HWCC
NASDAQ
Russell
2000
100.00
$100
109.46
107.72
97.28
96.58
93.64
109.48
104.24
99.52
107.51
106.13
94.09
83.70
79.42
65.08
63.43
$50
Dividend Policy
Holders of our common stock are entitled to receive dividends when, as and if declared by our Board of Directors. We have paid a
quarterly cash dividend since August 2007. From February 2008 through February 2011, our quarterly cash dividend was $0.085 per
share, as approved by our Board of Directors. Beginning in May 2011, the Board of Directors has approved a quarterly cash dividend of
$0.09 per share. During 2011 and 2010, the cash dividend was $0.355 and $0.34 per share, resulting in total dividends paid of $6.3
million and $6.0 million, respectively.
As a holding company, our only source of funds to pay dividends is distributions from our operating subsidiary. Our loan agreement
does not limit the amount of dividends we may pay or stock we may repurchase, as long as we are not in default under the loan agreement
and we maintain defined levels of fixed charge coverage and 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.
10
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, 2011, 2010 and 2009,
and the consolidated balance sheet data at December 31, 2011 and 2010, 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, 2008 and 2007,
and the consolidated balance sheet data at December 31, 2009, 2008 and 2007 from our audited financial statements, which are not
included in this Form 10-K.
Year Ended December 31,
2011
2010
2008
(Dollars in thousands, except share data)
2009
2007
CONSOLIDATED STATEMENT OF
INCOME DATA:
Sales
Cost of sales
Gross profit
Operating expenses:
Salaries and commissions
Other operating expenses
Depreciation and amortization
Total operating expenses
Operating income
Interest expense
$
396,410 $
307,515
308,522 $
245,932
254,819 $
201,865
360,939 $
275,224
359,115
266,276
88,895
62,590
52,954
85,715
92,839
28,053
24,513
2,952
55,518
25,281
20,565
1,738
47,584
20,596
18,023
563
39,182
24,080
20,728
523
45,331
33,377
1,424
15,006
844
13,772
520
40,384
1,825
23,861
18,811
459
43,131
49,708
1,188
48,520
18,295
Income before income taxes
Income tax provision
31,953
12,276
14,162
5,543
13,252
5,220
38,559
14,822
Net income
$
19,677 $
8,619 $
8,032 $
23,737 $
30,225
Earnings per share:
Basic
Diluted
Weighted average common shares
outstanding :
Basic
Diluted
$
$
1.11 $
0.49 $
0.46 $
1.33 $
1.49
1.11 $
0.49 $
0.45 $
1.33 $
1.48
17,679,524 17,657,682 17,648,696 17,789,739 20,328,182
17,801,134 17,710,123 17,665,924 17,838,072 20,406,000
11
2011
As of December 31,
2010
2009
(Dollars in thousands)
2008
2007
$
$
$
$
$
$
$
— $
59,731 $
69,517 $
179,153 $
2,270 $
47,967 $
97,338 $
— $
— $
46,859 $
67,838 $
61,325 $
67,503 $
185,490 $ 122,014 $
907 $
17,479 $
80,813 $
3,055 $
54,825 $
85,720 $
—
— $
58,202
50,798 $
69,299
73,459 $
134,753 $ 139,091
3,854
34,507
71,170
4,933 $
29,808 $
76,595 $
CONSOLIDATED BALANCE
SHEET DATA:
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Total assets
Book overdraft (1)
Total debt (2) (3)
Stockholders’ equity (3)
_______
(1)
(2)
(3)
Our book overdraft is funded by our revolving credit facility as soon as the related checks clear our disbursement account.
On June 25, 2010, we completed the purchase of the acquired businesses for a total purchase price of $51.5 million of which
$51.2 million was paid in 2010 and was funded from our loan agreement.
A stock repurchase program was approved in 2007 and has been extended through 2012. 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 under the stock repurchase program were made during the years ended December 31, 2011, 2010 and
2009. In 2011, we repurchased common stock totaling $413 in connection with the exercise of stock options.
12
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion in conjunction with our consolidated financial statements and related notes appearing
elsewhere in this Form 10-K. In addition to historical information, this discussion contains forward-looking statements that involve
risks, uncertainties and assumptions that could cause actual results to differ materially from our expectations. Factors that could cause
such differences include those described in “Risk Factors” and elsewhere in this Form 10-K. Certain tabular information may not foot
due to rounding.
Overview
Since our founding over 36 years ago, we have grown to be one of the largest providers of wire and cable and related services to the
U.S. market. Today, we serve approximately 6,000 customers. Our products are used in MRO activities and related projects, as well as
for larger-scale projects in the utility, industrial and infrastructure markets and a diverse range of industrial applications
including communications, energy, engineering and construction, general manufacturing, mining, construction, oilfield services,
infrastructure, petrochemical, transportation, utility, wastewater treatment, marine construction and marine transportation.
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 uncertainty and volatility in commodity prices have impacted sales and the level of demand. This has had and will
continue to have an impact on our performance, until economic conditions stabilize.
Our direct costs will continue to be influenced significantly by the prices we pay our suppliers to procure the products we distribute
to our customers. Changes in these costs may result, for example, from increases or decreases in raw material costs, changes in our
relationships with suppliers or changes in vendor rebates. Our operating expenses will continue to be affected by our investment in sales,
marketing and customer support personnel and commissions paid to our sales force for revenue and profit generated. Some of our
operating expenses are related to our fixed infrastructure, including rent, utilities, administrative salaries, maintenance, insurance and
supplies. To meet our customers’ needs for an extensive product offering and short delivery times, we will need to continue to maintain
adequate inventory levels. Our ability to obtain this inventory will depend, in part, on our relationships with suppliers.
Critical Accounting Policies and Estimates
Critical accounting policies are those that both are important to the accurate portrayal of a company’s financial condition and results
of operations, and require subjective or complex judgments, often as a result of the need to make estimates about the effect of matters
that are inherently uncertain.
In order to prepare financial statements that conform to accounting principles generally accepted in the United States, commonly
referred to as GAAP, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying
notes. Certain estimates are particularly sensitive due to their significance to the financial statements and the possibility that future
events may be significantly different from our expectations.
We have identified the following accounting policies as those that require us to make the most subjective or complex judgments in
order to fairly present our consolidated financial position and results of operations. Actual results in these areas could differ materially
from management’s estimates under different assumptions and conditions.
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, current economic conditions and recent changes in the aging of the receivables, which 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, 2011 would have resulted in a change in income before income taxes of less than $0.1
million.
13
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,
2011 would have resulted in a change in income before income taxes of $0.1 million.
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, 2011 would have resulted in a change in income before income taxes of $0.6 million.
Intangible Assets
The Company’s intangible assets, excluding goodwill, represent purchased trade names, customer relationships, and non-compete
agreements. Trade names are not being amortized and are treated as indefinite lived assets. Trade names are tested for recoverability on
an annual basis in October of each year. This test was performed in October 2011 and no impairment was deemed necessary. The
Company assigns useful lives to its intangible assets based on the periods over which it expects the assets to contribute directly or
indirectly to the future cash flows of the Company. Customer relationships are amortized over 6 or 7 year useful lives and non-compete
agreements are amortized over a 1 year useful life. If events or circumstances were to indicate that any of the Company’s definite-lived
intangible assets might be impaired, the Company would assess recoverability based on the estimated undiscounted future cash flows to
be generated from the applicable intangible asset.
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 rebates earned based on purchases to date relative to the total purchase levels
expected to be achieved during the rebate period. We continually revise these estimates to reflect rebates expected to be earned based on
actual purchase levels and forecasted purchase volumes for the remainder of the rebate period. A 20% change in our estimate of total
rebates earned during 2011 would have resulted in a change in income before income taxes of $1.5 million for the year ended
December 31, 2011.
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, 2011, our goodwill balance was $25.1 million,
representing 14.0% 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. Our goodwill impairment test is performed annually in October. Based on our 2011 goodwill impairment 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.
The Company is anticipating significant growth in the recently acquired businesses and if this growth is not achieved, a goodwill
impairment may result.
Sales
We generate most of our sales by providing wire and cable and related hardware 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 and are accounted for as a reduction in
sales.
14
Cost of Sales
Cost of sales consists primarily of the average cost of the wire and cable and related hardware that we sell. We also incur shipping
and handling costs in the normal course of business. Cost of sales also reflects cash discounts for prompt payment to vendors and vendor
rebates generally related to annual purchase targets, as well as inventory obsolescence charges.
Operating Expenses
Operating expenses include all expenses, excluding freight, incurred to receive, sell and ship product and administer the operations
of the Company.
Salaries and Commissions. Salary expense includes the base compensation, and any overtime earned by hourly personnel, for all
sales, administrative and warehouse employees and stock compensation expense for options and restricted stock granted to employees.
Commission expense is earned by inside sales personnel based on gross profit dollars generated, by field sales personnel from generating
sales and meeting various objectives, by sales, national and marketing managers for driving the sales process, by region managers based
on the profitability of their branches and by corporate managers based primarily on our profitability and also on other operating metrics.
Other Operating Expenses. Other operating expenses include all other expenses, except for salaries and commissions and
depreciation and amortization. This includes all payroll taxes, health insurance, traveling expenses, public company expenses,
advertising, management information system expenses, facility rent and all distribution expenses such as packaging, reels, and repair
and maintenance of equipment and facilities.
Depreciation and Amortization. We incur depreciation expense 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 incur amortization
expense on leasehold improvements over the shorter of the lease term or the life of the related asset and on intangible assets over the
estimated life of the asset.
Interest Expense
Interest expense consists primarily of interest we incur on our debt.
Results of Operations
The following discussion compares our results of operations for the years ended December 31, 2011, 2010 and 2009.
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,
2010
2011
2009
100.0 %
77.6 %
22.4 %
100.0 %
79.7 %
20.3 %
100.0 %
79.2 %
20.8 %
7.1 %
6.2 %
0.7 %
14.0 %
8.4 %
0.4 %
8.1 %
3.1 %
8.2 %
6.7 %
0.6 %
15.4 %
4.9 %
0.3 %
4.6 %
1.8 %
5.0 %
2.8 %
8.1 %
7.1 %
0.2 %
15.4 %
5.4 %
0.2 %
5.2 %
2.0 %
3.2 %
Note: Due to rounding, numbers may not add up to total operating expenses, operating income or income before income taxes.
15
Comparison of Years Ended December 31, 2011 and 2010
Sales
(Dollars in millions)
Sales
Year Ended
December 31,
2011
2010
$
396.4 $
308.5 $
Change
87.9
28.5 %
Our sales for 2011 increased 28.5% to $396.4 million from $308.5 million in the fiscal year 2010. The primary reasons for
this increase were the contribution from the acquired businesses, improved demand for our products due to recovering economic
conditions and the increase in the price of copper, a component in our products, which rose approximately 17% during 2011. We
estimate sales in our core Repair and Replacement sector, also referred to as Maintenance, Repair and Operations (“MRO”),
increased approximately 8%-10% as a result of improved economic conditions. Sales within our five internal growth initiatives
encompassing Emission Controls, Engineering & Construction, Industrials, LifeGuard™ (and other private branded products) and
Utility Power Generation increased approximately 30% as project activity in these areas remained strong due to ongoing market
penetration and previously booked backlog.
Gross Profit
(Dollars in millions)
Gross profit
Gross profit as a percent of sales
$
2011
88.9 $
22.4 %
Year Ended
December 31,
2010
62.6 $
20.3 %
Change
26.3
2.1 %
42.0 %
Gross profit increased 42.0% to $88.9 million in 2011 from $62.6 million in 2010. The increase in gross profit was attributed to an
increase in our legacy business and the contribution from the acquired businesses. Gross profit as a percentage of sales (gross margin)
increased to 22.4% in 2011 from 20.3% in 2010 due to a better macroeconomic business environment which allowed a higher gross
margin on our products and higher margins from the acquired businesses.
Operating Expenses
(Dollars in millions)
Operating expenses:
Salaries and commissions
Other operating expenses
Depreciation and amortization
Total operating expenses
Year Ended
December 31,
2011
2010
Change
$
$
28.1
24.5
3.0
55.5
$
$
25.3
20.6
1.7
47.6
$
$
2.8
3.9
1.2
7.9
11.0 %
19.2 %
69.9 %
16.7 %
Operating expenses as a percent of sales
14.0 %
15.4 %
(1.4) %
Note: Due to rounding, numbers may not add up to total operating expenses.
Salaries and Commissions. Salaries and commissions increased primarily due to the additional personnel from the acquisition and
increases in commissions from our legacy business associated with higher organic sales volumes and related profitability. This increase
was partially offset by a $1.7 million onetime reversal in 2011 of salary expense recorded prior to January 1, 2011 attributed to the
change in the estimated forfeiture rate from 0% to 100% for non-vested options previously awarded to the Chief Executive Officer, who
left the Company effective December 31, 2011.
Other Operating Expenses. Other operating expenses increased primarily due to the additional operations of the acquired businesses
and increased expenses associated with higher sales.
Depreciation and Amortization. The depreciation and amortization increase is primarily attributable to the assets from the
acquisition.
16
Operating expenses as a percentage of sales decreased to 14.0% in 2011 from 15.4% in 2010. This decrease is attributed to the
reversal of salary expense, ongoing cost control initiatives and operating leverage from our legacy business, partially offset by the
acquired businesses.
Interest Expense
Interest expense increased 68.7% to $1.4 million in 2011 from $0.8 million in 2010 due to higher debt levels resulting from
borrowings to fund the entire purchase price of the acquisition and an increase in working capital. Average debt was $58.5 million in
2011 compared to $33.5 million in 2010. The average effective interest rate increased slightly to 2.3% in 2011 from 2.2% in 2010.
Income Tax Expense
Income tax expense increased 121.5% to $12.3 million in 2011 from $5.5 million in 2010 as our income before income taxes
increased 125.6%. The effective income tax rate decreased to 38.4% in 2011 from 39.1% in 2010 primarily due to the impact of
non-deductible acquisition and other expenses incurred in 2010.
Net Income
We achieved net income of $19.7 million in 2011 compared to $8.6 million in 2010, an increase of 128.3%.
Comparison of Years Ended December 31, 2010 and 2009
Sales
(Dollars in millions)
Sales
Year Ended
December 31,
2010
2009
$
308.5 $
254.8 $
Change
53.7
21.1 %
Our sales for 2010 increased 21.1% to $308.5 million from $254.8 million in the fiscal year 2009. The primary reasons for
this increase were the acquisitions, which generated sales of $37.6 million, improved demand for our products due to
recovering economic conditions and the increase in the average price of copper, a component in certain of our products,
which rose 45.5% over 2009 levels during 2010. We estimate sales in our core MRO sector were up slightly as a result of
improved economic conditions in the fourth quarter of 2010. Sales within the areas that we have identified as our legacy growth
initiatives - Environmental Compliance, Engineering & Construction, Industrials, LifeGuard™ (and other private branded products) and
Utility Power Generation - increased at a greater rate than MRO sales, as sales within our growth initiatives remained more resilient
to difficult early year economic conditions as projects in these areas were already in progress and had been previously funded. Project
bookings and backlog for our growth initiatives in 2010 remained strong as a result of our continued penetration into these markets.
Gross Profit
(Dollars in millions)
Gross profit
Gross profit as a percent of sales
$
2010
62.6 $
20.3 %
Year Ended
December 31,
2009
53.0 $
20.8 %
Change
9.6
(0.5 )%
18.2 %
Gross profit increased 18.2% to $62.6 million in 2010 from $53.0 million in 2009. The increase in gross profit was attributed to the
acquisition as the contribution from the HWC legacy business remained flat due to more customers earning rebates and increased freight
expenses. Gross profit as a percentage of sales (gross margin) decreased due to the competitive market place, sales mix and increased
customer rebates and freight expenses.
17
Operating Expenses
(Dollars in millions)
Operating expenses:
Salaries and commissions
Other operating expenses
Depreciation and amortization
Total operating expenses
Year Ended
December 31,
2010
2009
$
$
25.3
20.6
1.7
47.6
$
$
20.6
18.0
0.6
39.2
$
$
Change
4.7
2.5
1.2
8.4
22.7 %
14.1 %
208.7 %
21.4 %
Operating expenses as a percent of sales
15.4 %
15.4 %
–
Note: Due to rounding, numbers may not add up to total operating expenses.
Salaries and Commissions. Salaries and commissions increased primarily due to the additional personnel from the acquisition.
Other Operating Expenses. Other operating expenses increased due to the additional operations of the acquired businesses and
acquisition costs of $0.9 million, which the Company did not incur in 2009. These additional expenses were partially offset by ongoing
cost control initiatives from HWC’s legacy business.
Depreciation and Amortization. The depreciation and amortization increase is attributable to the assets acquired in the acquisition.
Operating expenses as a percentage of sales remained flat at 15.4% in 2010 and 2009.
Interest Expense
Interest expense increased 62.3%, or $0.3 million, to $0.8 million in 2010 from $0.5 million in 2009 due to higher debt levels as the
acquisition was funded entirely from the Company’s loan agreement. Average debt was $33.5 million in 2010 compared to $20.8 million
in 2009. The average effective interest rate increased to 2.2% in 2010 from 1.8% in 2009. This increase was primarily due to the higher
base spreads over LIBOR under a September 2009 amendment to our loan agreement and an increase in the applicable LIBOR spread as
a result of the higher debt-to-EBITDA ratio caused by the acquisition.
Income Tax Expense
Income tax expense increased $0.3 million, or 6.2%, to $5.5 million in 2010 as our income before income taxes increased 6.9%. The
effective income tax rate decreased to 39.1% in 2010 from 39.4% in 2009. The effective income tax rate was lower in 2010 due to 2009
reflecting a deferred tax adjustment relating to prior periods which increased the effective income tax rate in 2009. This decrease was
partially offset by the effect of nondeductible expenses incurred in 2010 associated with the acquisition.
Net Income
We achieved net income of $8.6 million in 2010 compared to $8.0 million in 2009, an increase of 7.3%.
Impact of Inflation and Commodity Prices
Our results of operations are affected by changes in the inflation rate and commodity prices. Moreover, because copper,
petrochemical and steel products are components of the wire and cable and related hardware we sell, fluctuations in the costs of these and
other commodities have historically affected our operating results. Copper prices have decreased from an average price per pound of
$4.39 in the first quarter of 2011 to a low of $3.40 per pound in the fourth quarter of 2011. The impact of decreasing copper prices on our
sales and net income during 2011 cannot be isolated, as product mix changes and volatile economic demand also impacted performance.
To the extent commodity prices decline, the net realizable value of our existing inventory could also decline, and our gross profit could
be adversely affected because of either reduced selling prices or lower of cost or market adjustments in the carrying value of our
inventory. If we turn our inventory approximately four times a year, the impact of changes in copper and steel 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.
18
Liquidity and Capital Resources
Our primary capital needs are for working capital obligations, capital expenditures, dividend payments and other general corporate
purposes, including acquisitions and the stock repurchase program. 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;
cash flows generated from operating activities;
capital expenditures;
payment of dividends;
acquisitions; and
additional stock repurchases
Comparison of Years Ended December 31, 2011 and 2010
Our net cash provided by operating activities was $14.3 million in 2011 compared to $19.3 million in 2010. Our net income
increased by $11.1 million or 128.3% to $19.7 in 2011 million from $8.6 million in 2010.
Changes in our operating assets and liabilities resulted in cash used in operating activities of $8.8 million in 2011. Trade accounts
payable decreased $9.9 million primarily due to payment in early 2011 of $4.9 million of vendor invoices under dispute at December 31,
2010 and a planned slow down of inventory purchases for our legacy business in December 2011. Inventory increased $2.8 million as a
result of the acquired businesses. This additional inventory included products needed to support projected sales, consignment inventory
that was converted to regular stock and the addition of new stocking sites. Income taxes decreased $2.8 million due to federal and state
tax payments. Offsetting these uses of cash was a decrease in accounts receivable of $8.1 million due to lower sales in December 2011
compared to December 2010 and the receipt in 2011 of an amount outstanding since 2009 due to a product dispute.
Net cash used in investing activities was $1.2 million in 2011 compared to $50.7 million in 2010. Cash paid for the acquisition
decreased from $51.2 million in 2010 to the $0.3 million final payment made in 2011. Expenditures for property and equipment
increased from $0.5 million in 2010 to $1.3 million in 2011 primarily due to expenditures made for the acquired businesses.
Net cash used in financing activities was $13.1 million in 2011 compared to cash provided by financing activities of $31.4 million in
2010. Net payments on the revolver of $6.9 million and dividends of $6.3 million were the main components of financing activities in
2011.
Comparison of Years Ended December 31, 2010 and 2009
Our net cash provided by operating activities was $19.3 million in 2010, an increase of $0.5 million or 2.9% compared to cash
provided by operating activities of $18.7 million in 2009. Our net income increased by $0.6 million or 7.3% to $8.6 million in 2010 from
$8.0 million in 2009.
Changes in our operating assets and liabilities resulted in cash provided by operating activities of $7.5 million in 2010. Accrued and
other liabilities increased $5.5 million primarily due to higher accruals for volume rebates to our customers, additional payroll related
accruals and increased accrued wire purchases. Accounts payable increased $5.0 million due to additional inventory received in
December 2010 compared to December 2009 in response to increased sales. Prepaids decreased $3.0 million primarily related to a
prepayment for inventory at December 31, 2009, which was subsequently received in January 2010. The book overdraft, which is funded
by our revolving credit facility as soon as the related vendor checks clear our disbursement account, increased $1.7 million. Offsetting
these sources of cash was an increase in accounts receivable of $9.8 million due to higher sales.
Net cash used in investing activities was $50.7 million in 2010 compared to $0.4 million in 2009. The increase was attributable to
the Company paying $51.2 million for the acquisition in 2010.
Net cash provided by financing activities was $31.4 million in 2010 compared to cash used in financing activities of $18.3 million in
2009. Net borrowings on the revolver of $37.3 million and dividend payments of $6.0 million were the main components of financing
activities in 2010.
19
Indebtedness
Our principal source of liquidity at December 31, 2011 was working capital of $102.6 million compared to $94.6 million at
December 31, 2010. We also had available borrowing capacity in the amount of $35.0 million at December 31, 2011 and $20.2 million
at December 31, 2010 under our loan agreement.
We believe that we will have adequate availability of capital to fund our present operations, meet our commitments on our existing
debt, 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 further suitable acquisition opportunities or working capital needs arise that would require
additional financing, we believe that our financial position and earnings history provide a solid base for obtaining additional financing
resources at competitive rates and terms. Additionally, based on market conditions, we may decide to issue additional shares of common
or preferred stock to raise funds.
Loan and Security Agreement
On September 30, 2011, we entered into a Third Amended and Restated Loan and Security Agreement (the “2011 Loan
Agreement”) with certain lenders and Bank of America, N.A., as agent. The 2011 Loan Agreement provides for a $100 million revolving
credit facility and expires on September 30, 2016. Availability under the 2011 Loan Agreement is limited to a borrowing base equal to
85% of the value of eligible accounts receivable, plus 65% of the value of eligible inventory, less certain reserves. The 2011 Loan
Agreement is secured by a lien on substantially all our property, other than real estate.
Portions of the loan under the 2011 Loan Agreement may be converted to LIBOR loans in minimum amounts of $1.0 million and
integral multiples of $0.1 million. LIBOR loans bear interest at the British Bankers Association LIBOR Rate plus 125 to 200 basis points
based on availability, and loans not converted to LIBOR loans bear interest at a fluctuating rate equal to the greatest of the agent’s prime
rate, the federal funds rate plus 50 basis points, or 30-day LIBOR plus 150 basis points. Additionally, we are obligated to pay an unused
facility fee on the unused portion of the loan commitment. Unused commitment fees are 25 or 30 basis points, depending on the amount
of the unused commitment.
Covenants in the 2011 Loan Agreement require us to maintain certain minimum financial ratios and availability levels. Repaid
amounts can be re-borrowed subject to the borrowing base. As of December 31, 2011, we were in compliance with all financial
covenants.
Contractual Obligations
The following table describes our cash commitments to settle contractual obligations as of December 31, 2011.
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
__________
(1)
47,967 $
8,113
38,949
95,029 $
(In thousands)
— $
2,831
38,949
41,780 $
— $
3,589
—
3,589 $
47,967 $
1,226
—
49,193 $
—
467
—
467
These obligations reflect purchase orders outstanding with manufacturers as of December 31, 2011. 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 $1.3 million in the year ended December 31, 2011 and $0.5 million in each of the years ended
December 31, 2010 and 2009.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements, other than operating leases.
20
Share Repurchase Program
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 scheduled to expire on December 31, 2009 but was initially extended through December 31, 2011 and on
November 4, 2011 was further extended through December 31, 2012. Shares of stock purchased under the program are currently being
held as treasury stock and may be issued upon the exercise of options, as restricted stock, to fund acquisitions, or for other uses as
authorized by the Board of Directors. There were no shares repurchased during 2011 and 2010 under the stock repurchase program.
Financial Derivatives
We have no financial derivatives.
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
Borrowings under our 2011 Loan Agreement bear interest at variable interest rates and therefore are sensitive to changes in the
general level of interest rates. At December 31, 2011, the weighted average interest rate on our $48.0 million of variable interest debt
was approximately 2.29%.
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, 2011 borrowing levels, a 1.0%
increase or decrease in the applicable interest rates would have a $0.5 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.
In addition, varying steel prices also impact certain products we purchase. Profitability is influenced by these 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 and speak only as of the date of this filing. Except as
required under federal securities laws and the rules and regulations of the SEC, we do not have any intention, and do not undertake, to
update any forward-looking statements to reflect events or circumstances arising after the date of this Form 10-K.
21
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”.
22
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, 2011 and 2010
Consolidated Statements of Income for the years ended December 31, 2011, 2010 and 2009
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2011, 2010 and 2009
Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009
Notes to Consolidated Financial Statements
Page
24
25
26
27
28
29
23
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders of Houston Wire & Cable Company
We have audited the accompanying consolidated balance sheets of Houston Wire & Cable Company (the Company) as of
December 31, 2011 and 2010, and the related consolidated statements of income, cash flows, and stockholders’ equity for each of the
three years in the period ended December 31, 2011. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Houston Wire & Cable Company at December 31, 2011 and 2010, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting
principles.
We have also 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, 2011, 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, 2012 expressed an unqualified opinion thereon.
Houston, Texas
March 15, 2012
/s/ ERNST & YOUNG LLP
24
Houston Wire & Cable Company
Consolidated Balance Sheets
December 31,
2011
(In thousands, except
share data)
2010
$
$
$
59,731 $
69,517
2,268
1,693
828
134,037
6,029
13,700
25,082
305
179,153 $
2,270 $
10,099
19,101
—
31,470
47,967
128
2,250
81,815
67,838
67,503
2,399
—
763
138,503
6,255
15,557
25,082
93
185,490
3,055
19,987
19,781
1,036
43,859
54,825
141
945
99,770
Assets
Current assets:
Accounts receivable, net
Inventories, net
Deferred income taxes
Income taxes
Prepaids
Total current assets
Property and equipment, net
Intangible assets, net
Goodwill
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
Debt
Other long-term obligations
Deferred income taxes
Total liabilities
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized, none issued and
outstanding
Common stock, $0.001 par value; 100,000,000 shares authorized: 20,988,952 shares
issued: 17,811,806 and 17,748,487 shares outstanding at December 31, 2011 and
2010, respectively
Additional paid-in capital
Retained earnings
Treasury stock
Total stockholders’ equity
—
—
21
55,760
93,588
(52,031 )
97,338
21
58,642
80,187
(53,130 )
85,720
Total liabilities and stockholders’ equity
$
179,153 $
185,490
The accompanying notes are an integral part of these consolidated financial statements.
25
Houston Wire & Cable Company
Consolidated Statements of Income
Year Ended December 31,
2009
2010
(In thousands, except share and per share data)
2011
$
396,410 $
307,515
88,895
308,522 $
245,932
62,590
254,819
201,865
52,954
28,053
24,513
2,952
55,518
33,377
1,424
31,953
12,276
19,677 $
25,281
20,565
1,738
47,584
15,006
844
14,162
5,543
8,619 $
20,596
18,023
563
39,182
13,772
520
13,252
5,220
8,032
1.11 $
1.11 $
0.49 $
0.49 $
0.46
0.45
$
$
$
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
17,679,524
17,801,134
17,657,682
17,710,123
17,648,696
17,665,924
Dividends declared per share
$
0.355 $
0.34 $
0.34
The accompanying notes are an integral part of these consolidated financial statements.
26
Houston Wire & Cable Company
Consolidated Statements of Stockholders' Equity
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Retained
Earnings
Treasury Stock
Shares
Amount
Total
Stockholders'
Equity
(In thousands, except share data)
Balance at December 31, 2008
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
Net income
Exercise of stock options
Excess tax benefit for stock
options
Amortization of unearned
stock compensation
Impact of forfeited vested options
Impact of forfeited restricted stock
awards
Issuance of restricted stock awards
Dividends paid
Balance at December 31, 2010
Net income
Exercise of stock options, net
Excess tax benefit for stock
options
Excess tax deficiency for stock
options
Amortization of unearned
stock compensation
Impact of forfeited vested options
Impact of forfeited restricted stock
awards
Issuance of restricted stock awards
Impact of surrendered equity
awards to satisfy taxes
Dividends paid
Balance at December 31, 2011
20,988,952
—
—
20,988,952
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
20,988,952
—
—
—
—
20,988,952 $
21
—
—
—
—
—
—
—
21
—
—
—
—
—
—
—
—
21
—
—
—
—
—
—
—
—
55,901
—
(145 )
75,540
8,032
—
(3,346,400 )
—
10,185
(54,867 )
—
167
13
(53 )
2,205
(1,312 )
—
56,609
—
(134 )
7
2,260
(18 )
238
(320 )
—
—
—
—
—
—
—
(6,001 )
—
80,000
—
—
—
—
1,312
—
77,571
8,619
—
(3,256,215 )
—
10,750
(53,388 )
—
176
—
—
—
—
—
—
—
—
(6,003 )
(14,500 )
19,500
—
—
—
—
(238 )
320
—
58,642
—
(383 )
80,187
19,677
—
(3,240,465 )
—
26,899
(53,130 )
—
497
37
(48 )
(707 )
(1,153 )
82
(710 )
—
—
—
—
—
—
—
—
—
—
(5,000 )
43,251
—
—
—
—
(82 )
710
—
—
21 $
—
—
55,760 $
—
(6,276 )
93,588
(1,831 )
—
(3,177,146 ) $
(26 )
—
(52,031 ) $
76,595
8,032
22
13
(53 )
2,205
—
(6,001 )
80,813
8,619
42
7
2,260
(18 )
—
(6,003 )
85,720
19,677
114
37
(48)
(707 )
(1,153 )
—
—
(26 )
(6,276 )
97,338
The accompanying notes are an integral part of these consolidated financial statements.
27
Houston Wire & Cable Company
Consolidated Statements of Cash Flows
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
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
Long term liabilities
Income taxes
Net cash provided by operating activities
Investing activities
Expenditures for property and equipment
Proceeds from disposals of property and equipment
Cash paid for acquisition
Net cash used in investing activities
Financing activities
Borrowings on revolver
Payments on revolver
Deferred loan cost
Proceeds from exercise of stock options
Payment of dividends
Excess tax benefit for options
Purchase of treasury stock
Net cash provided by (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
2011
Year Ended December 31,
2010
(In thousands)
2009
$
19,677
$
8,619
$
8,032
2,952
14
(707 )
(9 )
66
826
(2 )
283
8,050
(2,840 )
(65 )
(126 )
(785 )
(9,888 )
(337 )
(13 )
(2,777 )
14,319
(1,319 )
452
(343 )
(1,210 )
405,741
(412,599 )
(100 )
114
(6,276 )
37
(26 )
(13,109 )
—
—
1,738
46
2,260
93
(118 )
734
26
(1,603 )
(9,785 )
1,059
2,954
354
1,668
5,010
5,466
(3 )
755
19,273
(459 )
956
(51,162 )
(50,665 )
352,276
(314,930 )
—
42
(6,003 )
7
—
31,392
—
—
—
$
—
$
563
99
2,205
—
(109 )
529
(15 )
(741 )
4,048
11,606
(2,820 )
(31 )
(4,026 )
1,519
(758 )
—
(1,363 )
18,738
(462 )
19
—
(443 )
255,829
(268,158 )
—
22
(6,001 )
13
—
(18,295 )
—
—
—
1,445
$
743
$
514
14,732
$
6,191
$
7,352
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
28
Houston Wire & Cable Company
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per 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., provides wire and cable and related services to the U.S. market through
eighteen locations in twelve states throughout the United States. On June 25, 2010, the Company purchased Southwest Wire Rope LP
(“SWWR”), its general partner Southwest Wire Rope GP LLC (“GP”) and SWWR’s wholly owned subsidiary, Southern Wire (“SW”)
(collectively “the acquired businesses”, or “the acquisition”). On January 1, 2011, the acquired businesses were merged into HWC Wire
& Cable Company. The Company has no other business activity.
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries and have been prepared following
accounting principles generally accepted in the United States (“GAAP”) and the requirements of the Securities and Exchange
Commission (“SEC”). The financial statements include all normal and recurring adjustments that are necessary for a fair presentation of
the Company’s financial position and operating results. All significant inter-company balances and transactions have been eliminated.
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes. The most significant estimates are those relating to the
allowance for doubtful accounts, the inventory obsolescence reserve, the reserve for returns and allowances, vendor rebates, and asset
impairments. Actual results could differ materially from the estimates and assumptions used for the preparation of the financial
statements.
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
Year Ended December 31,
2010
2011
2009
17,679,524
121,610
17,801,134
17,657,682
52,441
17,710,123
17,648,696
17,228
17,665,924
Options to purchase 811,939, 882,455 and 1,042,795 shares of common stock were not included in the diluted net income per share
calculation for 2011, 2010 and 2009, respectively, as their inclusion would have been anti-dilutive. The 2011 amount includes 490,385
options held by the former CEO who retired effective December 31, 2011.
Accounts Receivable
Accounts receivable consists primarily of receivables from customers, less an allowance for doubtful accounts of $211 and $358,
and a reserve for returns and allowances of $552 and $486 at December 31, 2011 and 2010, 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.
29
The following table summarizes the changes in the allowance for doubtful accounts for the past three years:
Balance at beginning of year
Acquisition
Bad debt expense
Write-offs, net of recoveries
Balance at end of year
Inventories
2011
2010
2009
$
$
$
358
—
(9)
(138 )
$
211
282 $
173
93
(190 )
358 $
262
—
—
20
282
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 $2,975 and $3,036 at December 31, 2011 and 2010, 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 purchases to date relative
to the total purchase levels expected to be achieved during the rebate period. The Company continually revises these estimates to reflect
rebates expected to be earned based on actual purchase levels and forecasted purchase volumes for the remainder of the rebate period.
Property and Equipment
The Company provides for depreciation on a straight-line method over the following estimated useful lives:
Buildings
Machinery and equipment
25 to 30 years
3 to 5 years
Leasehold improvements are depreciated over their estimated life or the term of the lease, whichever is shorter. Total depreciation
expense was approximately $1,095, $805, and $563 for the years ended December 31, 2011, 2010 and 2009, respectively.
Goodwill
Goodwill represents excess cost over the net tangible and intangible assets of acquired businesses. 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 as of October 1, 2011. The Company is anticipating
significant growth in the recently acquired businesses and if this growth is not achieved, a goodwill impairment may result.
Other Assets
Other assets include deferred financing costs on the current loan agreement of $100. The deferred financing costs are amortized on
a straight-line basis over the contractual life of the related loan 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, 2011 and 2010 was approximately $14 and $4, respectively.
Estimated future amortization expense for capitalized loan costs through the maturity of the loan agreement are $18 for each of the
years 2012 through 2015 and $14 in 2016.
30
Intangibles
Intangible assets, from the acquisition, consist of customer relationships, trade names, and non-compete agreements. The customer
relationships are amortized over 6 or 7 year useful lives and non-compete agreements were amortized over a 1 year useful life. If events
or circumstances were to indicate that any of the Company’s definite-lived intangible assets might be impaired, the Company would
assess recoverability based on the estimated undiscounted future cash flows to be generated from the applicable intangible asset. Trade
names are not being amortized and are tested for impairment on an annual basis.
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 wire and cable and related services to the U.S. market.
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 sales. In the past, customer returns have not been material. The
Company has no installation obligations.
The Company may offer sales incentives, which are accrued monthly as an adjustment to sales.
Shipping and Handling
The Company incurs shipping and handling costs in the normal course of business. Freight amounts invoiced to customers are
included as sales and freight charges are included as a component of cost of sales.
Credit Risk
The Company’s customers are located primarily throughout the United States. No single customer accounted for 10% or more of the
Company’s sales in 2011, 2010 or 2009. 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 $212, $163, and $94 for the years ended December 31,
2011, 2010, and 2009, respectively.
31
Financial Instruments
The carrying values of accounts receivable, trade accounts payable and accrued and other current liabilities approximate fair value,
due to the short maturity of these instruments. 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 valued 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.
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.
2. Business Combination
On June 25, 2010, the Company completed the acquisition of SWWR, its general partner Southwest Wire Rope GP LLC and
SWWR’s subsidiary, SW, from Teleflex Incorporated. The acquisition was accounted for in accordance with Accounting Standards
Codification (“ASC”) Topic 805, Business Combinations. Accordingly, the total purchase price was allocated to the assets acquired and
liabilities assumed based on their fair values as of the acquisition date. The SWWR and SW businesses provide mechanical wire rope
and related hardware to the industrial market; GP’s sole activity was to serve as the general partner of SWWR. Under the terms of the
acquisition agreement, the purchase price was $50 million, subject to an adjustment based on the net working capital of the acquired
companies as of the date of closing. The adjustment was $1.5 million, making the total purchase price $51.5 million, of which $51.2
million was paid in 2010 and the balance in 2011. The Company has elected to treat the acquisition as a stock purchase for tax purposes.
The amount of goodwill deductible for tax purposes is $5,993. The acquisition was funded from the Company’s loan agreement. This
acquisition expanded the Company’s product offerings to the industrial marketplace that purchases its electrical wire and cable products.
The following table summarizes the fair value of the acquired assets and assumed liabilities recorded as of the date of acquisition.
Accounts receivable
Inventories
Deferred income taxes
Prepaids
Property and equipment
Intangibles
Goodwill
Other assets
Total assets acquired
Book overdraft
Trade accounts payable
Accrued and other current liabilities
Deferred income taxes
Long term obligations
Total liabilities assumed
Net assets purchased
At June 25, 2010
11,169
$
7,971
117
68
4,413
16,490
22,720
475
63,423
480
3,367
3,053
4,879
144
11,923
51,500
$
32
The fair values of the assets acquired and liabilities assumed were determined using the market, income and cost approaches. The
market approach used by the Company included prices at which comparable assets are purchased under similar circumstances. The
income approach indicates value for a subject asset based on the present value of cash flows projected to be generated by the asset over
its useful life. Projected cash flows are discounted at a market rate of return that reflects the relative risk associated with the asset and the
time value of money. The cost approach estimates value by determining the current cost of replacing an asset with another of equivalent
economic utility. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the asset, less an allowance
for loss in value due to depreciation.
Intangible assets, from the acquisition, consist of customer relationships - $11,630, trade names - $4,610, and non-compete
agreements - $250. Customer relationships are being amortized over 6 or 7 year useful lives and non-compete agreements were
amortized over a 1 year useful life. The weighted average amortization period for intangible assets is 6.6 years. Trade names are not
amortized. As of December 31, 2011, accumulated amortization on the acquired intangible assets was $2,790, and amortization expense
was $1,857 and $933 for the year ended December 31, 2011 and from the date of acquisition through December 31, 2010, respectively.
Future amortization expense to be recognized on the acquired intangible assets is expected to be as follows:
2012
2013
2014
2015
2016
2017
$
Annual
Amortization
Expense
1,733
1,733
1,733
1,733
1,512
646
Goodwill represents the future economic benefits arising from other assets acquired that could not be individually identified and
separately recognized. The goodwill arising from the acquisition consists primarily of sales and operational synergies that the Company
expects to achieve by expanding the regionally based operations of the acquired companies to the Company’s national platform.
Under ASC Topic 805-10, acquisition-related costs (e.g. legal, valuation and advisory) are not included as a component of
consideration paid, but are accounted for as expenses in the periods in which the costs are incurred. For the year ended December 31,
2010, the Company incurred $860 of acquisition-related costs. In the year ended December 31, 2011, no acquisition-related costs were
incurred.
3. 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
Total
At December 31,
2011
2010
$
$
1,187 $
3,411
8,810
13,408
7,379
6,029 $
1,436
3,599
7,628
12,663
6,408
6,255
33
Intangibles assets
Intangibles assets consist of:
Trade names
Customer relationships
Non-compete agreements
Less accumulated amortization
Trade names
Customer relationships
Non-compete agreements
Total
Goodwill
Changes in goodwill were as follows:
Balance at beginning of year
Current year acquisitions
Balance at end of year
Accrued and Other Current Liabilities
Accrued and other current liabilities consist of:
Customer advances
Customer rebates
Payroll, commissions, and bonuses
Accrued inventory purchases
Other
Total
4. Debt
At December 31,
2011
2010
4,610 $
11,630
250
16,490
—
2,540
250
2,790
13,700 $
4,610
11,630
250
16,490
—
808
125
933
15,557
$
$
At December 31,
2011
2010
$
$
25,082 $
—
25,082 $
2,362
22,720
25,082
At December 31,
2011
2010
2,539 $
5,112
3,760
4,324
3,366
19,101 $
3,844
4,402
3,326
4,303
3,906
19,781
$
$
On September 30, 2011, HWC Wire & Cable Company, as borrower, entered into the Third Amended and Restated Loan and
Security Agreement (“2011 Loan Agreement”), with certain lenders and Bank of America, N.A., as agent, and the Company, as
guarantor, executed a Second Amended and Restated Guaranty of the borrower’s obligations thereunder. The 2011 Loan Agreement
provides for a $100 million revolving credit facility, bears interest at the agent’s base rate, with a LIBOR rate option and expires on
September 30, 2016. The 2011 Loan Agreement is secured by a lien on substantially all the property of the Company, other than real
estate. Availability under the 2011 Loan Agreement is limited to a borrowing base equal to 85% of the value of eligible accounts
receivable, plus 65% of the value of eligible inventory, less certain reserves.
Portions of the loan may be converted to LIBOR loans in minimum amounts of $1,000 and integral multiples of $100. LIBOR loans
bear interest at the British Bankers Association LIBOR Rate plus 125 to 200 basis points based on availability, and loans not converted
to LIBOR loans bear interest at a fluctuating rate equal to the greatest of the agent’s prime rate, the federal funds rate plus 50 basis points,
or 30-day LIBOR plus 150 basis points. Unused commitment fees are 25 or 30 basis points, depending on the amount of the unused
commitment.
The 2011 Loan Agreement includes, among other things, covenants that require the Company to maintain a specified minimum
fixed charge coverage ratio and availability levels. Additionally, the 2011 Loan Agreement allows for the unlimited payment of
dividends and repurchases of stock, subject to the absence of events of default and maintenance of a fixed charge coverage ratio and
34
minimum level of availability. The 2011 Loan Agreement contains certain provisions that may cause the debt to be classified as a current
liability, in accordance with GAAP, if availability falls below certain thresholds, even though the ultimate maturity date under the loan
agreement remains as September 30, 2016. Availability has remained above these thresholds. At December 31, 2011, the Company was
in compliance with the financial covenants governing its indebtedness.
The Company’s borrowings at December 31, 2011 and 2010 were $47,967 and $54,825, respectively. The weighted average interest
rates on outstanding borrowings were 2.3% and 2.2% at December 31, 2011 and 2010, respectively.
During 2011, the Company had an average available borrowing capacity of approximately $25,965. This average was computed
from the monthly borrowing base certificates prepared for the lender. At December 31, 2011, the Company had available borrowing
capacity of $34,956 under the terms of the 2011 Loan Agreement. During the years ended December 31, 2011, 2010 and 2009, the
Company paid $71, $108, and $107, respectively, for the unused facility.
Principal repayment obligations for succeeding fiscal years are as follows:
2012
2013
2014
2015
2016
Total
5. Income Taxes
The provision (benefit) for income taxes consists of:
$
$
—
—
—
—
47,967
47,967
Year Ended December 31,
2010
2011
2009
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Total
$
10,612 $
1,381
11,993
6,392 $
754
7,146
5,307
654
5,961
258
25
283
(1,457 )
(146 )
(1,603 )
(674 )
(67 )
(741 )
$
12,276 $
5,543 $
5,220
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,
2011
2010
2009
35.0 %
2.8
0.6
—
38.4 %
35.0 %
2.8
0.6
0.7
39.1 %
35.0 %
2.8
0.9
0.7
39.4 %
35
Significant components of the Company’s deferred taxes were as follows:
Deferred tax assets:
Uniform capitalization adjustment
Inventory reserve
Allowance for doubtful accounts
Stock compensation expense
Other
Total deferred tax assets
Deferred tax liabilities
Property and equipment
Goodwill
Intangibles
Total deferred tax liabilities
Net deferred tax assets
Year Ended
December 31,
2011
2010
$
$
875 $
1,146
81
1,685
31
3,818
14
613
3,173
3,800
18 $
933
1,169
138
3,227
137
5,604
173
393
3,584
4,150
1,454
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, 2011, 2010 and 2009, the Company made no provisions for interest or penalties related to uncertain tax
positions. The tax years 2007 through 2011 remain open to examination by the major taxing jurisdictions to which the Company is
subject.
6. 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 scheduled to expire on December 31, 2009 but was initially extended through December 31, 2011 and on November 4,
2011 was further extended through December 31, 2012. Shares of stock purchased under the program are currently being held as
treasury stock and may be used to satisfy the exercise of options, as restricted stock, to fund acquisitions, or for other uses as authorized
by the Board of Directors. During the years ended December 31, 2011 and 2010, the Company did not repurchase any of its stock under
the stock repurchase program. As of December 31, 2011, the Company had total repurchases under the stock repurchase program of
3,391,854 shares for a total cost of $55,615. Under the terms of the 2006 Stock Plan, the Company did repurchase 29,043 shares that
were surrendered by the holders to fund the exercise of the related awards and to pay withholding taxes.
The Company has paid a quarterly cash dividend since August 2007, resulting in aggregate dividends in 2011, 2010 and 2009 of
$6,276, $6,003 and $6,001, respectively.
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 a stockholder rights plan, which was subsequently terminated, the Board of Directors designated 100,000 shares as Series A
Junior Participating Preferred Stock. No shares of preferred stock have been issued.
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, 2011, 2010 and 2009 was $727, $599, and $537, 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 of restricted stock and 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
36
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.
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
Plan, the Board of Directors resolved that no further options would be granted under the 2000 Plan.
Stock Option Awards
The Company has granted options to purchase its common stock to employees and directors of the Company under the two stock
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 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 20, 2011, the Company granted options to purchase 64,330 shares and 8,580 shares of its common stock to the
Company’s President (as part of his overall compensation plan commensurate upon assuming the Chief Executive Officer role effective
January 1, 2012) with the exercise price equal to the fair market value of the Company’s stock at the close of trading on December 20,
2011. The first option grant has a contractual life of ten years and vests 50% on December 31, 2016 and the remaining 50% on December
31, 2017. The second grant also has a contractual life of ten years and vests at the rate of 20% per year commencing December 20, 2012
through December 20, 2016. Both grants provide 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 December 20, 2011, the Company granted options to purchase 97,500 shares of its common stock to its managers with the
exercise price equal to the fair market value of the Company’s stock at the close of business on December 20, 2011. This grant has a
contractual life of ten years and vest at the rate of 20% per year commencing December 20, 2012 through December 20, 2016.
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:
Year Ended
December 31,
2010
2011
1.01 %
2.55 %
1.86 %
2.80 %
5.5 years
4.5 years
65 %
64 %
2009
1.00 %
3.29 %
2 years
81 %
Risk-free interest rate
Expected dividend yield
Weighted average expected life
Expected volatility
37
Vesting dates range from December 17, 2012 to December 31, 2017, and expiration dates range from January 1, 2012
to December 20, 2021. The following summarizes stock option activity and related information:
2011
Options
(in 000’s)
Outstanding—Beginning of year
Granted
Exercised
Forfeited
Expired
Outstanding—End of year
Exercisable—End of year
Weighted average fair value of options granted during 2011 $
Weighted average fair value of options granted during 2010 $
Weighted average fair value of options granted during 2009 $
1,291 $
170
(54 )
(570 )
—
837 $
529 $
6.55
5.04
4.04
Weighted
Average
Exercise Price
18.49
14.11
9.30
24.29
—
14.25
15.09
Weighted
Average
Remaining
Contractual Life
(in years)
Aggregate
Intrinsic
Value
$
1,705
$
$
1,430
1,048
6.79
5.98
During the years ended December 31, 2011, 2010 and 2009, tax benefits of $37, $7 and $13, respectively, were reflected in
financing cash flows.
The total intrinsic value of options exercised during the years ended December 31, 2011, 2010 and 2009 was $277, $77 and $77,
respectively.
The total fair value of options vested during the years ended December 31, 2011, 2010 and 2009 was $3,890, $703 and $1,013,
respectively. The December 31, 2011 amount includes vested options of the retired former chief executive officer in the amount of
$2,993. These options expired upon his departure.
Restricted Stock Awards and Restricted Stock Units
On December 20, 2011, the Company granted two restricted stock awards to the Company’s President (as part of his overall
compensation plan commensurate upon assuming the Chief Executive Officer role effective January 1, 2012) in the amounts of 26,576
shares and 14,175 shares. The first grant vests in two equal amounts on December 31, 2016 and December 31, 2017. The second grant is
performance based on achieving at least 85% of a cumulative operating income target for the three year period commencing January 1,
2012 and ending December 31, 2014. The award will vest at the 100% level by achieving 100% or more of the cumulative operating
income target and on a sliding scale down to 0% vesting if less than 85% of the target cumulative operating income is attained. Vesting
is dependent upon the recipient being employed and any dividends declared will be accrued and paid to the recipient when the related
shares vest.
Following the Annual Meeting of Stockholders on May 3, 2011, the Company awarded restricted stock units with a value of
$50,000 to each non-employee director who was re-elected, for an aggregate of 18,204 restricted stock units. Each award of restricted
stock units vests at the date of the 2012 Annual Meeting of Stockholders. Upon vesting, the non-employee directors are entitled to
receive an equal number of shares of the Company's common stock, together with dividend equivalents from the date of grant, at such
time as the director’s service on the Board of Directors terminates for any reason.
On March 11, 2011, the Company granted 2,500 voting shares of restricted stock under the 2006 Plan to a recently promoted
member of the management team. These shares vest equally over five years on the anniversary of the date of grant, as long as the
recipient is then employed by the Company. Any dividends declared will be accrued and paid to the recipient when the related shares
vest.
On June 28, 2010, the Company granted 19,500 voting shares of restricted stock under the 2006 Plan to new members of the
management team, who joined the Company as part of the acquisition. These shares vest in one-third increments, on the first, second and
third anniversaries of the date of grant, as long as the recipient is then employed by the Company. Any dividends declared will be
accrued and paid to the recipient when the related shares vest.
38
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 which ranges from one to five years.
The following summarizes restricted stock activity for the year ended December 31, 2011:
Awards
Units
2011
Shares
(in 000’s)
Weighted
Average
Market
Value at
Grant Date
12.14
13.98
11.62
11.62
12.82
Weighted
Average
Market
Value at
Grant Date
—
$
16.48
—
—
16.48
$
Shares
(in 000’s)
—
18
—
—
18
85 $
43
(1 )
(5 )
122 $
Non-vested —Beginning of year
Granted
Vested
Cancelled/Forfeited
Non-vested —End of year
Total stock-based compensation (benefit)/cost was $(707), $2,260 and $2,205 for the years ended December 31, 2011, 2010 and
2009, respectively. Total income tax (expense)/benefit recognized for stock-based compensation arrangements was $(274), $885 and
$869 for the years ended December 31, 2011, 2010 and 2009, respectively. The credit for share-based compensation for the year ended
December 31, 2011 is due to the reversal of $1.7 million of compensation expense which was recorded prior to January 1, 2011. This
reversal resulted from a change in the estimated forfeiture rate from 0% to 100% of non-vested options previously awarded to the Chief
Executive Officer, who retired from the Company effective December 31, 2011.
As of December 31, 2011, there was $2,811 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 50 months. There
were 553,010 shares available for future grants under the 2006 Plan at December 31, 2011.
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 $2,809 in 2011, $2,602 in 2010 and $2,161 in 2009.
Future minimum lease payments under non-cancelable operating leases with initial terms of one year or more consisted of the
following at December 31, 2011:
2012
2013
2014
2015
2016
Thereafter
Total minimum lease payments
$
$
2,831
2,067
1,522
712
514
467
8,113
The Company had aggregate purchase commitments for fixed inventory quantities of approximately $38,949 at December 31, 2011.
As part of the acquisition, the Company assumed the liability for the post-remediation monitoring of the water quality at one of the
acquired facilities in Louisiana. The expected liability of $128 at December 31, 2011 relates to the cost of the monitoring, which the
Company estimates will be incurred over approximately the next 5 years and also the cost to plug the wells. Remediation work was
completed prior to the acquisition in accordance with the requirements of the Louisiana Department of Environmental Quality.
The Company, along with many other defendants, has been named in a number of lawsuits in the state courts of Illinois,
Minnesota, North Dakota, 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
39
whether the Company, in fact, distributed the wire and cable alleged to have caused any injuries. The Company maintains general
liability insurance that, to date, has covered the defense of and all costs associated with these claims. 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.
As of December 31, 2010, the Company had a past due account receivable of $4,800. The customer had withheld payment due to a
product dispute. That dispute has been resolved, and the Company received payment of the account receivable in the first quarter of
2011.
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 10, 2012, the Board of Directors approved a quarterly dividend of $0.09 per share payable to shareholders of record on
February 20, 2012. This dividend totaling $1,593 was paid on February 29, 2012.
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 in the period
ended December 31, 2011. 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, 2011
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
(in thousands, except per share data)
$
$
$
$
$
$
87,481 $
19,917 $
5,306 $
3,052 $
105,782 $
23,006 $
8,386 $
4,965 $
103,420 $
23,720 $
11,527 $
6,842 $
99,727
22,252
8,158
4,818
0.17 $
0.17 $
0.28 $
0.28 $
0.39 $
0.38 $
0.27
0.27
Year Ended December 31, 2010
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
(in thousands, except per share data)
$
$
$
$
$
$
93,549 $
19,756 $
5,088 $
2,904 $
90,536 $
17,574 $
4,063 $
2,233 $
63,269 $
12,753 $
3,004 $
1,777 $
61,168
12,507
2,851
1,705
0.16 $
0.16 $
0.13 $
0.13 $
0.10 $
0.10 $
0.10
0.10
40
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, 2011.
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, 2011. 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 42 and 43 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, 2011
that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
41
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, 2011 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, 2011 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 43.
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, 2011, based on criteria established in the COSO Framework.
/s/ James L. Pokluda III
James L. Pokluda III
President and Chief Executive Officer
/s/ Nicol G. Graham
Nicol G. Graham
Chief Financial Officer, Treasurer
and Secretary (Chief Accounting Officer)
42
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
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, 2011, 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, 2011, 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, 2011 and 2010, and the related consolidated
statements of income, cash flows, and stockholders’ equity for each of the three years in the period ended December 31, 2011 of Houston
Wire & Cable Company and our report dated March 15, 2012 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Houston, Texas
March 15, 2012
43
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 8, 2012. 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 8, 2012.
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 8, 2012.
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 8, 2012.
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 8, 2012.
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 8, 2012.
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 8, 2012.
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 8, 2012.
ITEM 14. PRINCIPAL ACCOUNTING 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 8,
2012.
44
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:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2011 and 2010
Consolidated Statements of Income for the years ended December 31, 2011, 2010 and 2009
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2011, 2010 and 2009
Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009
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
45
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
Date: March 15, 2012
HOUSTON WIRE & CABLE COMPANY
(Registrant)
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/ JAMES L. POKLUDA III
James L. Pokluda III
/s/ NICOL G. GRAHAM
Nicol G. Graham
/s/ MICHAEL T. CAMPBELL
Michael T. Campbell
/s/ IAN STEWART FARWELL
Ian Stewart Farwell
/s/ PETER M. GOTSCH
Peter M. Gotsch
/s/ WILSON B. SEXTON
Wilson B. Sexton
/s/ WILLIAM H. SHEFFIELD
William H. Sheffield
/s/ SCOTT L. THOMPSON
Scott L. Thompson
President, Chief Executive Officer and Director
March 15, 2012
Chief Financial Officer, Treasurer and
Secretary (Principal Accounting Officer)
March 15, 2012
March 15, 2012
March 15, 2012
March 15, 2012
March 15, 2012
March 15, 2012
March 15, 2012
Director
Director
Director
Director
Director
Director
46
EXHIBIT
NUMBER
INDEX TO EXHIBITS
EXHIBIT
3.1
3.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.13
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))
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)
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))
Houston Wire & Cable Company 2006 Stock Plan, as amended (incorporated herein by reference to (i) Exhibit 10.3 to
Houston Wire & Cable Company’s Registration Statement on Form S-1 (Registration No. 333-132703) and (ii)
Exhibit 10.1 to Houston Wire & Cable Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,
2011, as amended)
Executive Employment Agreement dated as of January 1, 2012 between James L. Pokluda, III and Houston Wire &
Cable Company
Form of Employee Stock Option Agreement under Houston Wire & Cable Company’s 2006 Stock Plan (incorporated
herein by reference to Exhibit 10.23 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 10.24 to Houston Wire & Cable Company’s Annual Report on Form 10-K for the year
ended December 31, 2007)
Form of Employee Stock Award Agreement under Houston Wire & Cable Company’s 2006 Stock Plan
Form of Restricted Stock Unit Award Agreement for Non-Employee Directors under Houston Wire & Cable
Company’s 2006 Stock Plan (incorporated herein by reference to Exhibit 10.2 to Houston Wire & Cable Company’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, as amended)
Description of Senior Management Bonus Program
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)
Third Amended and Restated Loan and Security Agreement, dated as of September 30, 2011, among HWC Wire &
Cable Company, as borrower, Houston Wire & Cable Company, as Guarantor, certain financial institutions, as
lenders, and Bank of America, N.A., as agent (incorporated herein by reference to Exhibit 10.1 to Houston Wire &
Cable Company’s Current Report on Form 8-K filed October 5, 2011)
Second Amended and Restated Guaranty dated as of September 30, 2011, by Houston Wire & Cable Company, as
guarantor, in favor of Bank of America, N.A., as agent (incorporated herein by reference to Exhibit 10.2 to Houston
Wire & Cable Company’s Current Report on Form 8-K filed October 5, 2011)
Equity Interest Purchase Agreement between Houston Wire & Cable Company and Teleflex Incorporated dated May
26, 2010 (incorporated herein by reference to Exhibit 10.1 to Houston Wire & Cable Company’s Current Report on
Form 8-K filed May 28, 2010)
47
21.1
23.1*
31.1*
31.2*
32.1*
* Filed herewith
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))
Consent of Ernst & Young, LLP
Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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
48
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
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 reports dated March 15, 2012,
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,
2011.
/s/ ERNST & YOUNG LLP
Houston, Texas
March 15, 2012
49
Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, James L. Pokluda III, certify that:
Exhibit 31.1
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K for the year ended December 31, 2011 of Houston Wire & Cable Company;
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;
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;
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)
(b)
(c)
(d)
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;
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;
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
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)
(b)
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
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, 2012
/s/ James L. Pokluda III
James L. Pokluda III
Chief Executive Officer
50
Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Nicol G. Graham, certify that:
Exhibit 31.2
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K for the year ended December 31, 2011 of Houston Wire & Cable Company;
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;
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;
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)
(b)
(c)
(d)
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;
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;
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
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)
(b)
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
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, 2012
/s/ Nicol G. Graham
Nicol G. Graham
Chief Financial Officer
51
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
Exhibit 32.1
In connection with the Annual Report of Houston Wire & Cable Company (the “Corporation”) on Form 10-K for the fiscal year
ended December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), James L. Pokluda
III, 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)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
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, 2012
Date:
March 15, 2012
/s/ James L. Pokluda III
James L. Pokluda III
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.
52
DIRECTORS
Michael T. Campbell 1
Independent Director
Ian Stewart Farwell 2
Independent Director
Peter M. Gotsch 3
Managing Director
of Svoboda Capital Partners LLC
James L. Pokluda III 4
President & Chief Executive Offi cer
of Houston Wire & Cable Company
Wilson B. Sexton 5
Chairman of the Board of POOLCORP
William H. Sheffi eld 6
Chairman of the Board
of Houston Wire & Cable Company
Scott L. Thompson 7
President, Chief Executive Offi cer
& Chairman of the Board of
Dollar Thrifty Automotive Group, Inc.
CORPORATE HEADQUARTERS
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 8, 2012 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
INDEPENDENT AUDITORS
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, calling (713) 609-2110 or contacting
investor.relations@houwire.com.
WEBSITE
www.houwire.com
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10201 NORTH LOOP EAST
HOUSTON, TEXAS 77029-1415
(713) 609-2200 / 1.800.HOUWIRE
WWW.HOUWIRE.COM