Wire and Cable
for Industry and
Infrastructure
2013 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.
Financial Highlights
(Dollars in thousands except per share data)
2013*
2012
2011
2010
2009
Net Sales
$ 383,292 $ 393,036 $ 396,410 $ 308,522 $ 254,819
Sales per Employee
908
954
1,010
955
907
Operating Income
24,667
28,926
33,377
15,006
13,772
Operating Margin
6.44%
7.36%
8.42%
4.86%
5.40%
Net Income
14,594
17,039
19,677
8,619
8,032
Diluted Earnings
Per Share
0.82
0.96
1.11
0.49
0.45
Total Assets
196,175
197,155
179,153
185,490
122,014
Long-term
Obligations
48,478
60,361
50,345
55,911
17,479
Stockholders’ Equity
110,694
109,080
97,338
85,720
80,813
* Non-GAAP excludes the impact of the goodwill impairment charge of $7,562. See notes 3 and 11 to the
consolidated financial statements. 2013 results as reported were operating income of $17,105, net income
of $7,902, and diluted earnings per share of $0.44.
DEAR SHAREHOLDERS
James L. Pokluda III
President, CEO and Director
Overall economic conditions remained a challenge in
Our strategy to counter reduced revenue from large
2013. While Houston Wire & Cable Company (NASDAQ:
project opportunities was multi-faceted and included
HWCC) saw positive growth in certain regions, as a
an expedited shift to more robust markets which were
whole our revenue fell approximately 2% versus the
creating opportunity, such as oil and natural gas. We
prior year. Although areas of the country performed
increased our product offering, including value-added
well, business activity in other regions remained below
services; and we added two new distribution centers
pre-recession levels. Despite these regional inconsist-
and a third in early 2014. With our downstream oil and
encies, HWCC continued to strengthen its overall market
gas segment continuing to grow in 2013, we allocated
position through multiple strategic business development
capital and business development resources into this
initiatives including further investment in growing
market. The fundamental opportunity drivers in this
market segments, additional investments in inventory
space are solidly intact, and we believe they will remain
to support strong oil and gas markets, an expanded
so for the next several years as the U.S. continues in its
distribution platform, new products and services, and
development of hydrocarbon-rich shale plays. We also
additional sales and marketing resources. This discipline
expanded our value-added services throughout the
of ongoing channel investment, combined with superior
year, improved our inventory position and added wire
execution of operational excellence controls, which once
striping and pulling eye capability to support market
again posted near-perfect results, further positioned
demand. These investments, combined with an
HWCC for long-term growth throughout the recovery
exceptional sales team, led to a metals adjusted
of the business cycle.
While 2013 saw growth in some markets, we did not
experience the broad economic recovery many had
7% increase in Maintenance, Repair and Operation
(MRO) sales, which is our largest revenue stream and
one of our key market share benchmarks.
predicted. Market strength and performance displayed
Our team’s dedication to servicing customer demands
substantial variance from region to region. We believe
is at the core of Houston Wire & Cable Company.
customers in recession damaged regions, unsure if a
We reduce customer shipping cost through multiple
market recovery was sustainable, showed continued
strategically placed and regionally profiled distribution
caution with respect to large capital spending. This led
centers, and improve end-customer productivity by
to a 16% drop in HWCC’s project business as companies
supplying the products they require with 99.9%
cancelled or delayed large investments across our six
on-time performance and 99.9% order accuracy. By
business development initiatives encompassing Power
early 2014, we will have opened three additional
Generation, Environmental Compliance, Engineering
distribution centers. Minneapolis, Minnesota opened in
and Construction, Industrials, Mechanical Wire Rope,
April 2013 in order to support the Minneapolis/St. Paul
and LifeGuard™ low-smoke zero-halogen cable.
2013 Annual Report 01
In 2013, HWCC grew Maintenance, Repair and
Operations (MRO) sales, one of our largest revenue
streams and a key market share benchmark, by
7%, metals adjusted.
market, and to serve as a distribution point for the
construction in 2013. Uncertainties remain moving
Bakken shale region in North Dakota. In December 2013,
into 2014, but indicators show a return toward an
we opened in Anchorage, Alaska which we believe was
upward trend. The U.S. power industry’s spending
also a region underserved in industrial wire and cable
outlook is forecasting $68.7 billion in 2014, an
and an opportunity for growth in oil, natural gas and
8.3% increase over 2013. Power generated from
mining. Increased investment in Alaska’s North Slope,
natural gas, renewable energy, wind and to a lesser
spurred by Alaska’s 2013 tax relief for oil investment,
degree coal, will continue to drive capital spend in
is expected to drive growth in the region for several
2014, as will ongoing investments in environmental
years. Finally, we opened the Odessa, Texas distribution
compliance, greenfields, upgrades and retrofits. There
center in February 2014. This facility will provide
is an estimated 24.9 gigawatts of natural gas power
same-day product availability and world-class
generation development planned for 2014 with
service to the oil and natural gas-rich Permian Basin
15.7 gigawatts currently under construction. The
and surrounding region.
Houston Wire & Cable Company generated $20.7 million
in cash from operations, our best cash flow since 2008.
overall outlook is showing signs of improvement,
and the opportunities align with HWCC’s strategic
sales and marketing growth initiatives.
Our debt level decreased by $10.6 million, while our
Engineering and Construction
debt-to-equity ratio fell to 43.3% from 53.7%. We
continued to reward our shareholders with dividend
payments totaling $0.42 in 2013 and a current rate of
$0.11 per quarter, and we authorized a $25 million
stock repurchase in March of 2014. With a strong
balance sheet, continued asset optimization, focused
expense management, and $50.7 million in available
credit, HWCC is financially well positioned to support
future growth from a market recovery.
Power Generation and
Environmental Compliance
The utility sector had a difficult year in 2013 with
project spending significantly down. Governmental
regulation, such as Mercury and Air Toxic Standards
(MATS) and EPA’s proposed CO2 standards for new and
existing power plants, questions about renewal of
wind energy subsidies in 2013, and increased natural
gas prices had many utilities delaying new plant
While large capital project activity was down in the
broad market, we did successfully participate in several
projects within our engineering and construction
initiative; including pulp and paper mill processing,
industrial manufacturing, wastewater improvements,
and telecommunications infrastructure. Overall,
however, this space was negatively impacted by the
soft project market. Despite the sluggish performance,
various construction outlooks point toward slow, steady
growth moving forward. Our project pipeline continues
to improve as more engineering and design work
develops. According to FMI Research Services Group, in
2014, non-residential building construction is estimated
to grow 5%. Construction for non-building structures,
encompassing the power and wastewater market
segments, is forecasted to grow 4%. Additionally, the
2014 Dodge Construction Outlook forecasts total U.S.
construction starts for 2014 to rise 9% to $555 billion.
While down in 2013, the engineering and construction
initiative is primed for a stronger year in 2014.
02 Houston Wire & Cable Company
Various construction
outlooks point toward
slow, steady growth
moving forward.
+9%
growth, total
construction starts
+5%
growth, non-residential
building construction
+4%
growth, non-building
structures
POWER GENERATION
» Fossil Fuel
» Wind
» Solar
» Hydro
» Co-Generation
» Biomass
ENVIRONMENTAL
COMPLIANCE
» Flue Gas
Desulfurization
» Selective Catalytic
Reduction
» Mercury Capture
Systems
» Baghouse
Installation
and Optimization
INFRASTRUCTURE
» Wastewater
» Security
» Telecommunications
» Facilities
» Transportation
» Marine
» Cranes
» Mooring
2013 Annual Report 03
INDUSTRIALS
» Oil and Gas
» Mining and Minerals
» Steel
» Petrochemical
» Pharmaceutical
» Food Processing
» General
Manufacturing
» Material Handling
04 Houston Wire & Cable Company
The oil and gas market including upstream,
midstream, and downstream segments has
experienced substantial growth and is expected
to remain highly active for several years.
For almost 40 years,
Industrials
HWCC has serviced the
industrial market with
wire and cable; and is
a trusted supplier to
the industry’s most
demanding customers.
HWCC’s products and services are ideally suited and
used in many applications in the industrial market,
Mechanical Wire Rope
one of our largest and most diverse target markets.
Major industries represented in this space include oil
and natural gas, manufacturing, infrastructure, mining,
experienced substantial growth and is expected
to remain highly active for several years.
We know how important
agriculture, and communications. In 2013, market
it is to have the right
product, at the right
place, at the right time.®
strength varied substantially in these industries.
While industrial sectors including oil and natural
gas performed well, and infrastructure markets
continued to recover, other segments such as industrial
manufacturing and mining remained risk adverse and
avoided large capital spend. Our industrials sector
benefited the most from our increase in MRO business,
as many in the industrial sector did make the neces-
sary investments in operations and small capital
improvements to support improving market demand.
The oil and natural gas market for HWCC encompasses
upstream, midstream, and downstream opportunities.
Recent advancements in horizontal drilling and
fracturing technology have been highly effective in
releasing substantial quantities of oil and natural gas
in formerly unproductive or cost-prohibitive geological
formations. Upstream opportunities involve the work
associated in extracting the hydrocarbon from its
source within the earth. The midstream segment is
the infrastructure component that transports the
hydrocarbon via depot station or pipeline to the
downstream refining process. HWCC supplies the
products used across all three of these segments,
including drilling rig cable at the well head; power,
control and substation cable for mud tanks, compressor,
pumping and metering stations; and thousands of
unique product constructions used in downstream
petrochemical refining. Each of these segments has
HWCC’s mechanical wire rope initiative continued
to drive internal quality metrics and robust process
controls to improve responsiveness to recovering
market demand. We are encouraged by this market
trend and as such will be consolidating the four Houston
operations of Southwest Wire Rope into one location in
2014 in order to provide increased customer service
and improve operating efficiencies. With oil output from
the deepest portions of the Gulf of Mexico expected
to increase 15% in 2014 to 1.5 million barrels of oil
per day, our mechanical wire rope facilities in Houston,
Texas and Louisiana are well positioned for growth
throughout the recovery.
LifeGuard™
LifeGuard™ low-smoke zero-halogen jacketed cable
remains an important initiative for HWCC. As the
exclusive supplier of this product, LifeGuard™ provides
many advantages over traditional cable constructions,
including near-zero smoke and no acid gas production
while under combustion. LifeGuard™ continues to be
a leading industry specification for high-demand
environments where superior electrical and mechanical
characteristics, outstanding flame resistance, low smoke
production, and reduced toxicity are required. These
advantages make it an ideal candidate for use in harsh
environments for power, control and lighting circuits
in a broad range of applications and markets including
new power plant construction, environmental upgrades
for utilities, industrial plants, data centers and highly
populated facilities. LifeGuard™ remains a great
opportunity for the market place and our Company.
2013 Annual Report 05
1
3
2
4
LOCATIONS
1 Anchorage, AK
2 Seattle, WA
3 San Francisco, CA
4 Los Angeles, CA
5 Denver, CO
6 Odessa, TX
7 Houston, TX (5)
8 Sulphur, LA
9 New Iberia, LA
10 Houma, LA
11 Baton Rouge, LA
12 Kansas City, MO
13 Memphis, TN
14 Chicago, IL
15 Minneapolis, MN
16 Atlanta, GA
17 Tampa, FL
18 Charlotte, NC
19 Philadelphia, PA
5
15
12
13
14
19
18
16
6
11
9 10
8
7
17
Five locations
With 99%+ on-time
performance and 99%+
Operational Excellence
order accuracy, HWCC has
HWCC’s ability to consistently provide customers with
positioned itself to earn
new customer business,
fortify existing customer
trust, and create strong
customer partnerships.
exceptional levels of customer service, high ship-from-
stock fill rates, and superior order accuracy and on-time
performance, are just a few examples of the several key
performance metrics measured daily in our initiative
called Operational Excellence.
product, right place, right time®, originates from the
fantastic group of people which I am proud to work
with here at Houston Wire & Cable Company. From our
most experienced managers to our newest trainees,
every team member understands the need to profitably
grow the Company while successfully satisfying the
needs of the customer.
The Operational Excellence program has its roots in our
desire to continually improve our quality and service
to levels significantly beyond industry standards and
customers’ expectations. All HWCC distribution centers
are operated by experienced personnel in accordance
with our ISO certified procedures and are located
strategically across the country with the ability to
ship 24/7/365. With 99%+ on-time performance and
99%+ order accuracy, HWCC has positioned itself to
earn new customer business, fortify existing customer
trust, and create strong customer partnerships. When
our customers need their order shipped today and
As we move further into 2014, our outstanding
customer relationships, superior value proposition,
strategic inventory investment, strong balance sheet,
and world-class Operational Excellence well position
HWCC for growth. Equally important, our management
team will remain mindful that major capital investments
and economic optimism remains inconsistent from
region to region. As such, our responsibility to drive
rigorous expense management and asset optimization
continues to be a top priority. I am confident that our
business plan is solid and will perform well in 2014,
and I look forward to the opportunities ahead.
delivered tomorrow, we say “Bring It On!” We know
On behalf of the Board of Directors, I would like to
how important it is to have the right product, at the
thank our valued team members for all their continued
right place, at the right time.®
Our culture, one which is built around driving customer
and channel value, and ensuring that we are doing
all the right things to deliver on our promise of right
hard work and commitment to the Company and its
customers, as well as our investors for the confidence
and support you have placed in our Company.
James L. Pokluda III
President, CEO and Director
06 Houston Wire & Cable Company
Wire and Cable
for Industry and
Infrastructure
10-K FINANCIAL REPORT
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
For the Fiscal Year ended December 31, 2013
or
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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)
(713) 609-2100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
77029
(Zip Code)
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, 2013 was $244,135,081.
At March 1, 2014, there were 17,954,032 shares of the registrant’s common stock, $.001 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this report incorporates by reference specific portions of the registrant’s definitive Proxy Statement relating to the Annual Meeting of
Stockholders to be held on May 6, 2014.
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. 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, requires 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, cable coiling, custom slings and harnesses,
paralleling, bundling, striping 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. Advantages of this program include extra pre-allocated safety stock, firm pricing, zero
cable surplus and just-in-time delivery. Used on large construction and capital expansion projects, our Cable Management Program combines
the expertise of our cable specialists with dedicated project inventory and superior logistics to allow complex projects to be completed on time,
within budget and with minimal residual waste.
History
We were founded in 1975 and have a long history of exceptional customer service, broad product selection and high levels of product
expertise. In 1987, we completed our first initial public offering and were subsequently purchased in 1989 by ALLTEL Corporation and in 1997
by investment funds affiliated with Code, Hennessy & Simmons LLC. In June 2006, we completed our second initial public offering. On June
25, 2010, the Company purchased Southwest Wire Rope LP (“SWWR”), its general partner Southwest Wire Rope GP LLC and SWWR’s
wholly owned subsidiary, Southern Wire (“SW”) (collectively “the acquired businesses”, or “the 2010 acquisition”). On January 1, 2011, the
acquired businesses were merged into our operating subsidiary. The Company has no other business activity.
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, primary and secondary aluminum distribution 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 work, also referred to as Maintenance, Repair
and Operations ("MRO"), and related projects, larger-scale projects in the utility, industrial and infrastructure markets and a diverse range of
industrial applications including communications, energy, engineering and construction, general manufacturing, marine construction and
marine transportation, mining, construction, infrastructure, oilfield services, petrochemical, transportation, utility, and wastewater treatment.
Targeted Markets
Our business is driven, in part, by the strength, growth prospects and activity in the end-markets in which our products are used, which are
primarily in the continental United States. 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 Info Resources’ (“IIR’s”) 2014 Global Industrial Outlook, 2014 spending within the United States power market is expected to be
$68.7 billion, up over 8% from 2013 estimates. While we are not a significant distributor of 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 from existing power generation units. These
projects require the specialty instrumentation, power and control wire and cable that we distribute.
2
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 2014 Global Industrial Outlook, the 2014 projected total industrial spending
within the United States is expected to be $217.6 billion, up 11% over 2013 spend. We provide a wide variety of products specifically designed
for the chemical processing, manufacturing, metal/mineral, and petroleum refining industries where there may be significant exposure to caustic
materials or extreme temperatures. We are well positioned to take advantage of the expansion of land based petroleum and natural gas
exploration and production driven by hydrocarbon rich shale geographies.
Infrastructure Market. Investments in the development, construction and maintenance of infrastructure markets including education and
health care institutions; air, ground and rail transportation; telecommunications, and wastewater are expected to continue to improve from
post-recession lows that resulted from public funding shortfalls and budget constraints. Certain segments such as transportation, rail and
telecommunications have been identified as prime candidates for growth in 2014 and beyond. According to the American Road &
Transportation Builders Association (ARTBA), the overall U.S. transportation infrastructure construction market is estimated to grow
approximately 5% from $129 billion in 2013 to $135 billion in 2014. Furthermore, health care and educational institutions are expecting
construction spending to increase in 2014 by 6% and 4% respectfully, according to FMI’s Research Services Group. With ongoing
advancements in telecommunications technology and growing U.S. demand for greater bandwidth, FMI is also forecasting a 4% increase in the
communications market. The infrastructure growth projections are opportunities for HWCC’s product and service offering.
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 twenty-three locations nationwide,
which includes five 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 2013, we served approximately 6,200 customers, shipping approximately 44,000 SKU’s to over 10,000 customer locations
nationwide. No customer represented 10% or more of our 2013 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 five leading suppliers in order to maximize product quality, delivery dependability, purchasing
efficiencies, and vendor rebates. As a result, in 2013 approximately 55% of our annual purchases came from five 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 five suppliers in 2013 were Belden Inc, General Cable Corp, Lake Cable LLC, 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 knowledge, experience and tenure of
our sales force is critical to serving our fragmented and diverse customer and end-user base.
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 national, 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 varying 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.
3
Employees
At December 31, 2013, we had 403 employees. Our sales and marketing staff accounted for 180 employees, including 52 field sales
personnel and 93 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” tab on our
website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and if applicable, amendments to those
reports, as well as proxy and information statements, as soon as reasonably practicable after such documents are electronically filed with or
furnished to the Securities and Exchange Commission (the “SEC”). Information contained on our website is not part of, and should not be
construed as being incorporated by reference into, this Annual Report on Form 10-K.
Government Regulation
We are subject to regulation by various federal, state and local agencies. We believe we are in compliance in all material respects with
existing applicable statutes and regulations affecting environmental issues and our employment, workplace health and workplace safety
practices.
4
ITEM 1A. RISK FACTORS
In addition to other information in this Annual Report on Form 10-K, the following risk factors should be carefully considered in
evaluating our business, because such factors may have a significant impact on our business, operating results, cash flows and financial
condition. As a result of the risks set forth below and elsewhere in this Annual Report, actual results could differ materially from those projected
in any forward-looking statements.
Downturns in capital spending and cyclicality in 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, marine construction, marine
transportation, mining, oilfield services, transportation, utility, and wastewater treatment industries. The demand for our products and services
depends to a large degree on the capital spending levels of end-users in these markets. Many of these end-users defer capital expenditures or
cancel projects during economic downturns or periods of uncertainty. In addition, certain of the markets we serve are cyclical, which affects
capital spending by end-users in these industries.
We have risks associated with our customers’ access to credit.
The continuing uncertainty in global financial markets has not impaired our access to credit to finance our operations. However, poor credit
market conditions may adversely impact the availability of construction and other project financing, upon which many of our customers depend,
resulting in project cancellations or delays. Our utility and industrial customers may also face limitations when trying to access the credit
markets to fund ongoing operations or capital projects. Credit constraints experienced by our customers may result in lost revenues and reduced
gross margins for us and, in some cases, higher than expected bad debt losses.
We have risks associated with inventory.
Our business requires us to maintain substantial levels of inventory. We must identify the right mix and quantity of products to keep in our
inventory to fulfill customer orders. Failure to do so could adversely affect our sales and earnings. However, if our inventory levels are too high,
we are at risk that unexpected changes in circumstances, such as a shift in market demand, drop in prices or loss of a customer, could have a
material adverse impact on the net realizable value of our inventory.
Our operating results are affected by fluctuations in commodity prices.
Copper, steel, aluminum 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 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 the qualifications are eased, oil and gas drilling activity will remain at lower than historical 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 2013, our ten largest customers accounted for approximately 40% 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 the related receivables, which could
adversely affect our earnings. We participate with national marketing groups and engage in joint promotional sales activities with the members
of those groups. Any 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.
5
An inability to obtain the products that we distribute could result in lost revenues and reduced profits and damage our relationships with
customers.
In 2013, we sourced products from approximately 290 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 2013 approximately 55% of our purchases came from five suppliers. If any of these suppliers changes its sales strategy or
decides to terminate its business relationship with us, our sales and earnings 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 L. Pokluda III, our President and Chief Executive Officer and Nicol G.
Graham, our Chief Financial Officer. 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.
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.
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
6
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 growth in the acquired businesses. However, the investment in the SW reporting unit had a goodwill
impairment during 2013 because it did not meet its financial objectives to date. Future goodwill impairments may result, should the acquired
businesses not achieve their growth targets.
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 twenty-three distribution centers strategically located throughout the continental United States with approximately
785,000 square feet of distribution space. We own three facilities in Houston, Texas (one of which houses all centralized and back office
functions such as finance, marketing, purchasing, human resources and information technology) and two facilities in Louisiana. One of the
Houston facilities was purchased in December 2013, which after extensive building modifications, will be used to consolidate the four existing
Houston operations of SWWR. This building should be operational by the third quarter of 2014. All of the other facilities are leased, including
five from third-party logistics providers. Fifteen 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
Age
49
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.
Nicol G. Graham
Chief Financial Officer, Treasurer and Secretary
61
Chief Financial Officer, Treasurer and
Secretary since 1997.
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, 2013:
First quarter
Second quarter
Third quarter
Fourth quarter
Year ended December 31, 2012:
First quarter
Second quarter
Third quarter
Fourth quarter
High
Low
$
$
$
$
$
$
$
$
12.97
14.82
15.07
14.49
15.33
14.12
12.29
12.29
$
$
$
$
$
$
$
$
10.89
12.70
12.25
12.42
12.91
10.60
10.58
10.32
There were 20 holders of record of our common stock as of December 31, 2013.
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, 2013. For further
information regarding our stock repurchase activity, see Note 6 to our Consolidated Financial Statements.
Period
October 1 – 31, 2013
November 1 – 30, 2013
December 1 – 31, 2013 (1)
Total
Total number of
shares purchased
—
—
4,516
4,516
Average
price paid
per share
$ —
$ —
$ 12.79
$ 12.79
Total number of shares
purchased as part of
publicly announced
plans or programs
Maximum number (or
approximate dollar
value) of shares that
may yet be purchased
under the plans or
programs (2)
—
—
—
—
—
—
—
—
(1) 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.
(2) The Company had no stock repurchase plan in effect during 2013. For information regarding the adoption of a new repurchase plan
in March 2014, see Note 10 to our Consolidated Financial Statements.
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.
9
Total return is based on an initial investment of $100 on January 1, 2009, and reinvestment of dividends.
$300
$250
$200
$150
$100
$50
HWCC
NASDAQ
Russell 2000
255.89
201.28
147.36
162.53
159.61
148.02
126.16
152.20
117.72
185.00
135.13
139.15
139.02
131.06
94.88
Jan 09
Dec 09
Dec 10
Dec 11
Dec 12
Dec 13
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, and from May
2011 through February 2013 was $0.09 per share. Beginning in May 2013, the Board of Directors approved a quarterly cash dividend of $0.11
per share. During 2013 and 2012, cash dividends were $0.42 and $0.36 per share, resulting in total dividends paid of $7.5 million and $6.4
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 regarding securities available for issuance is provided in response to 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, 2013, 2012 and 2011, and the consolidated
balance sheet data at December 31, 2013 and 2012, 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, 2010 and 2009, and the consolidated balance sheet
data at December 31, 2011, 2010 and 2009 from our audited financial statements, which are not included in this Form 10-K.
Year Ended December 31,
2013
2012
2010
(Dollars in thousands, except share data)
2011
2009
CONSOLIDATED STATEMENT OF
INCOME DATA:
Sales
Cost of sales
$
383,292
298,633
$
393,036 $
306,017
396,410 $
307,515
308,522 $
245,932
254,819
201,865
Gross profit
Operating expenses:
Salaries and commissions
Other operating expenses
Depreciation and amortization
Impairment of goodwill
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
84,659
30,946
26,068
2,978
7,562
67,554
17,105
992
16,113
8,211
87,019
88,895
62,590
52,954
30,013
25,139
2,941
—
58,093
28,053
24,513
2,952
—
55,518
25,281
20,565
1,738
—
47,584
28,926
1,252
33,377
1,424
15,006
844
27,674
10,635
31,953
12,276
14,162
5,543
20,596
18,023
563
—
39,182
13,772
520
13,252
5,220
$
7,902 (1)
$
17,039 $
19,677 $
8,619 $
8,032
$
$
0.44
$
0.96 $
1.11 $
0.49 $
0.46
0.44
$
0.96 $
1.11 $
0.49 $
0.45
17,805,464
17,900,372
17,723,277 17,679,524 17,657,682 17,648,696
17,815,401 17,801,134 17,710,123 17,665,924
(1)
2013 net income excluding the after tax impact of the impairment of goodwill was $14,594, and basic and fully diluted earnings per
share were each $0.82.
11
As of December 31,
2013
2012
2011
2010
2009
(Dollars in thousands)
CONSOLIDATED BALANCE SHEET
DATA:
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Total assets
Book overdraft (1)
Total debt (2)
Stockholders’ equity
$
$
$
$
$
$
$
— $
60,408 $
96,107 $
196,175 $
4,594 $
47,952 $
110,694 $
274 $
65,892 $
84,662 $
197,155 $
— $
58,588 $
109,080 $
— $
59,731 $
69,517 $
179,153 $
2,270 $
47,967 $
97,338 $
— $
67,838 $
67,503 $
185,490 $
3,055 $
54,825 $
85,720 $
—
46,859
61,325
122,014
907
17,479
80,813
(1)
(2)
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.
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 38 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 6,200 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 continuing 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, 2013 would have resulted in a change in income before income taxes of less than $0.1 million.
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, 2013
would have resulted in a change in income before income taxes of $0.1 million.
13
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 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, 2013 would have
resulted in a change in income before income taxes of $0.8 million.
Intangible Assets
The Company’s intangible assets, excluding goodwill, represent purchased trade names and customer relationships. 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.
The annual test showed no indication of impairment. If this test had indicated that an impairment had occurred, we would have recognized the
loss in operating income. 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. 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 2013 would have resulted
in a change in income before income taxes of $1.4 million for the year ended December 31, 2013.
Goodwill
Goodwill represents the excess of the amount we paid to acquire businesses over the estimated fair value of tangible assets and identifiable
intangible assets acquired, less liabilities assumed. Determining the fair value of assets acquired and liabilities assumed requires management’s
judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash flows, discount
rates and asset lives among other items. At December 31, 2013, our goodwill balance was $17.5 million, representing 8.9% of our total assets.
The Company reviews goodwill for impairment annually, or more frequently if indications of possible impairment exist, using a three-step
process. The first step is a qualitative evaluation as to whether it is more likely than not that the fair value of any of the reporting units is less than
its carrying value using an assessment of relevant events and circumstances. Examples of such events and circumstances include financial
performance, industry and market conditions, macroeconomic conditions, reporting unit-specific events, historical results of goodwill
impairment testing and the timing of the last performance of a quantitative assessment. If the Company concludes that the goodwill associated
with any reporting units is more likely than not impaired, a second step is performed for that reporting unit. This second step, used to
quantitatively screen for potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. The
third step, employed for any reporting unit that fails the second step, is used to measure the amount of any potential impairment and compares
the implied fair value of the reporting unit’s goodwill with the carrying amount of goodwill.
The second and third steps that we use to evaluate goodwill for impairment involve the determination of the fair value of our reporting
units. Inherent in such fair value determinations are certain judgments and estimates relating to future cash flows, including our interpretation of
current economic indicators and market valuations, and assumptions about our strategic plans. In developing fair values for our reporting units,
we may employ a market multiple or a discounted cash flow methodology, or a combination thereof. The market multiple methodology
compares us to similar companies on the basis of risk characteristics to determine our risk profile relative to the comparable companies as a
group. This analysis generally focuses on quantitative considerations, which include financial performance and other quantifiable data, and
qualitative considerations, which include any factors which are expected to impact future financial performance. The most significant
assumptions affecting the market multiple methodology are the market multiples and control premium. A control premium represents the value
an investor would pay above noncontrolling interest transaction prices in order to obtain a controlling interest in the respective company.
The discounted cash flow methodology establishes fair value by estimating the present value of the projected future cash flows to be
generated from the reporting unit. The discount rate applied to the projected future cash flows to arrive at the present value is intended to reflect
all risks of ownership and the associated risks of realizing the stream of projected future cash flows. The discounted cash flow methodology uses
our projections of financial performance. The most significant assumptions used in the discounted cash flow methodology are the discount rate,
the customer attrition rate and expected future revenue and operating margins, which vary among reporting units. If actual results are not
consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be exposed to future
impairment losses that could be material to our results of operations.
14
During the third quarter of 2013 and prior to the annual impairment test of goodwill at October 1, 2013, the Company concluded that
impairment indicators existed at the SW reporting unit, due to a decline in the overall financial performance and overall market demand. The
carrying value of the SW reporting unit’s goodwill was $20.1 million and its implied fair value resulting from the impairment test was less than
the carrying value. As a result, the Company recorded a non-cash goodwill impairment charge of $7.6 million during the year ended December
31, 2013.
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.
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 on costs related to capitalized property and equipment on a straight-line
basis over the estimated useful lives of the assets, which range from three to thirty years. We incur amortization expense on leasehold
improvements over the shorter of the lease term or the life of the related asset and on intangible assets over the estimated life of the asset.
Interest Expense
Interest expense consists primarily of interest we incur on our debt.
15
Results of Operations
The following discussion compares our results of operations for the years ended December 31, 2013, 2012 and 2011.
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
Impairment of goodwill
Total operating expenses
Operating income
Interest expense
Income before income taxes
Income tax provision
Net income
Year Ended December 31,
2012
2013
2011
100.0 %
77.9 %
22.1 %
100.0 %
77.9 %
22.1 %
100.0 %
77.6 %
22.4 %
8.1 %
6.8 %
0.8 %
2.0 %
17.6 %
4.5 %
0.3 %
4.2 %
2.1 %
2.1 %
7.6 %
6.4 %
0.7 %
— %
14.8 %
7.4 %
0.3 %
7.0 %
2.7 %
4.3 %
7.1 %
6.2 %
0.7 %
— %
14.0 %
8.4 %
0.4 %
8.1 %
3.1 %
5.0 %
Note: Due to rounding, numbers may not add up to total operating expenses, operating income or income before income taxes.
Comparison of Years Ended December 31, 2013 and 2012
Sales
(Dollars in millions)
Sales
Year Ended
December 31,
2012
Change
2013
$
383.3 $
393.0 $
(9.7 ) (2.5 )%
Our sales in 2013 decreased 2.5% to $383.3 million from $393.0 million in 2012. When adjusted for the fluctuation in metals prices,
revenues for the 2013 fiscal year were unchanged compared to 2012 sales. Our project business, especially across our key growth initiatives –
Environmental Compliance, Engineering & Construction, Industrials, LifeGuard™, Utility Power Generation, and Mechanical wire rope, was
down approximately 16% , or 14% metals adjusted, primarily due to delays in project starts and market uncertainty. Maintenance, repair, and
operations (MRO) business grew approximately 5%, or 7% metals adjusted, for the year.
Gross Profit
(Dollars in millions)
Gross profit
Gross profit as a percent of sales
2013
$
84.7 $
22.1 %
Year Ended
December 31,
2012
87.0
$
22.1 %
Change
(2.4 )
(0.0 )%
(2.7 )%
Gross profit decreased 2.7% to $84.7 million in 2013 from $87.0 million in 2012. The decrease in gross profit was primarily attributed to
the decrease in sales. The gross margin (gross profit as a percentage of sales) remained consistent at 22.1% between the periods.
16
Operating Expenses
(Dollars in millions)
Operating expenses:
Salaries and commissions
Other operating expenses
Depreciation and amortization
Impairment of goodwill
Total operating expenses
2013
Year Ended
December 31,
2012
Change
$
$
30.9 $
26.1
3.0
7.6
67.6 $
30.0 $
25.1
2.9
—
58.1 $
0.9
0.9
0.0
7.6
9.5 16.3 %
3.1 %
3.7 %
1.3 %
n/a
Operating expenses as a percent of sales
17.6 %
14.8 %
2.8 %
Note: Due to rounding, numbers may not add up to total operating expenses.
Salaries and Commissions. Salaries and commissions increased 3.1% to $30.9 million in 2013 from $30.0 million in 2012. This increase
was due to additional headcount primarily in operations and sales/marketing which was partially offset by lower commissions.
Other Operating Expenses. Other operating expenses increased 3.7% to $26.1 million in 2013 from $25.1 million in 2012. This increase is
primarily related to higher operations expenses related to additional facilities and higher inventory. Additional headcount also contributed to the
increase.
Depreciation and Amortization. Depreciation and amortization increased slightly between the periods.
Impairment of Goodwill. The Company recorded a non-cash goodwill impairment charge in 2013 with respect to its SW reporting unit.
(See Note 3)
Operating expenses as a percentage of sales increased to 17.6% in 2013 from 14.8% in 2012. This increase primarily relates to the
impairment of goodwill, as well as higher operations cost and personnel costs.
Interest Expense
Interest expense decreased 20.8% to $1.0 million in 2013 from $1.3 million in 2012 due to lower average interest rates, lower average debt
and a higher percentage of the debt in London Interbank Offered Rate (“LIBOR”) borrowings. Average debt was $47.8 million in 2013
compared to $58.0 million in 2012. The average effective interest rate decreased to 1.9% in 2013 from 2.1% in 2012. This decrease was
primarily due to a lower applicable LIBOR spread as a result of the higher availability under the loan agreement in 2013.
Income Tax Expense
Income tax expense decreased 22.8% to $8.2 million in 2013 compared to $10.6 million in 2012. This percentage decrease was lower than
the percentage decrease in operating income due to the non-deductible portion of the goodwill impairment.
Net Income
Our net income in 2013 was $7.9 million compared to $17.0 million in 2012, a decrease of 53.6%.
Comparison of Years Ended December 31, 2012 and 2011
Sales
(Dollars in millions)
Sales
2012
Year Ended
December 31,
2011
Change
$
393.0 $
396.4 $
(3.4 )
(0.9 )%
Our sales in 2012 decreased 0.9% to $393.0 million from $396.4 million in 2011. When adjusted for fluctuation in metals prices, revenues
in 2012 were up approximately 3% over 2011 sales. While mega projects which occurred in 2011 did not repeat, our overall project business
remained flat in 2012, buoyed by large and medium size projects in our key growth initiatives – Environmental Compliance, Engineering &
Construction, Industrials, LifeGuard™ (and other private branded products), Power Generation, and Mechanical Wire Rope. MRO business
ended the year down approximately 3% or roughly flat when adjusted for metals prices.
17
Gross Profit
(Dollars in millions)
Gross profit
Gross profit as a percent of sales
2012
$
$
87.0
22.1 %
Year Ended
December 31,
2011
88.9 $
22.4 %
Change
(1.9 )
(0.3 )%
(2.1 )%
Gross profit decreased 2.1% to $87.0 million in 2012 from $88.9 million in 2011. The decrease in gross profit was primarily attributed to
the reduction in sales and gross margin decreasing to 22.1% in 2012 from 22.4% in 2011. This decrease was primarily attributed to a change in
product mix, competitive pricing and some large, direct-ship, low margin orders invoiced in the fourth quarter of 2012.
Operating Expenses
(Dollars in millions)
Operating expenses:
Salaries and commissions
Other operating expenses
Depreciation and amortization
Total operating expenses
Year Ended
December 31,
2011
Change
2012
$
$
30.0 $
25.1
2.9
58.1 $
28.1 $
24.5
3.0
55.5 $
2.0 7.0 %
0.6 2.6 %
0.0 (0.4 )%
2.6 4.6 %
Operating expenses as a percent of sales
14.8 %
14.0 %
0.8 %
Note: Due to rounding, numbers may not add up to total operating expenses.
Salaries and Commissions. Salaries and commissions increased 7.0% to $30.0 million in 2012 from $28.1 million in 2011. The increase
was primarily due to a onetime reversal during 2011 relating to $1.7 million of salary expense recognized 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 our former chief executive officer and
to additional headcount in 2012. This was offset by a decrease in commissions in 2012 due to the lower level of profitability.
Other Operating Expenses. Other operating expenses increased slightly primarily due to costs associated with the higher headcount and an
increase in consulting and professional fees during the 2012 period.
Depreciation and Amortization. Depreciation and amortization decreased slightly between the periods.
Operating expenses as a percentage of sales increased to 14.8% in 2012 from 14.0% in 2011. More than half of this increase resulted from
the onetime reversal during 2011 relating to $1.7 million of salary expense recognized 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 our former chief executive officer.
Interest Expense
Interest expense decreased 12.1% to $1.3 million in 2012 from $1.4 million in 2011 due to lower LIBOR interest rates and a higher
percentage of the debt in LIBOR borrowings. Average debt was $58.0 million in 2012 compared to $58.5 million in 2011. The average effective
interest rate decreased to 2.1% in 2012 from 2.3% in 2011. This decrease was primarily due to a lower applicable LIBOR spread as a result of
the higher availability under the loan agreement in 2012.
Income Tax Expense
Income tax expense decreased $1.6 million or 13.4% to $10.6 million in 2012 compared to $12.3 million in 2011, as pretax income
decreased by 13.4% year over year. The effective income tax rate remained the same for both periods at 38.4%.
Net Income
Our net income in 2012 was $17.0 million compared to $19.7 million in 2011, a decrease of 13.4%.
18
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,
aluminum 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. We estimate decreasing metal prices negatively impacted sales by approximately
3% in 2013. To the extent commodity prices decline, the net realizable value of our existing inventory could also decline, and our gross profit
can be adversely affected because of either reduced selling prices or lower of cost or market adjustments in the carrying value of our inventory.
If we turn our inventory approximately four times a year, the impact of changes in commodity prices in any particular quarter would primarily
affect the results of the succeeding calendar quarter. If we are unable to pass on to our customers future cost increases due to inflation or rising
commodity prices, our operating results could be adversely affected.
Liquidity and Capital Resources
Our primary capital needs are for working capital obligations, capital expenditures, dividend payments, stock repurchases and other general
corporate purposes, including acquisitions. Our primary sources of working capital are cash from operations supplemented by bank borrowings.
Liquidity is defined as the ability to generate adequate amounts of cash to meet the current need for cash. We assess our liquidity in terms
of our ability to generate cash to fund our operating activities. Significant factors which could affect liquidity include the following:
the adequacy of available bank lines of credit;
cash flows generated from operating activities;
capital expenditures;
payment of dividends;
acquisitions; and
the ability to attract long-term capital with satisfactory terms
Comparison of Years Ended December 31, 2013 and 2012
Our net cash provided by operating activities was $20.7 million in 2013 compared to net cash used in operating activities of $3.0 million in
2012. Although our net income decreased by $9.1 million or 53.6% to $7.9 million in 2013 from $17.0 million in 2012, this was primarily due
to the $7.6 million goodwill impairment charge, which was a non-cash item.
Changes in our operating assets and liabilities resulted in cash provided by operating activities of $2.3 million in 2013. Accounts receivable
were lower by $5.5 million due to decreased sales in the fourth quarter. Book overdraft, which is funded by our revolving credit facility as soon
as the related vendor checks clear our disbursement account, increased $4.6 million. Accrued and other current liabilities increased $3.3 million
due primarily to higher accrued purchases and volume rebates to our customers. Trade accounts payable increased $1.3 million due to higher
inventory purchases.
Partially offsetting these sources of cash was the $12.0 million increase in inventory. The increase in inventory resulted from the Company
taking advantage of lower pricing and increased rebates from manufacturers in the fourth quarter, geographic expansion, the addition of new
product lines and expanding certain other product lines.
Net cash used in investing activities was $3.4 million in 2013 compared to $1.0 million in 2012. The increase was primarily attributable to
the purchase of a new building in December 2013 which will be used to consolidate four existing SWWR locations in 2014.
Net cash used in financing activities was $17.6 million in 2013 compared to net cash provided by financing activities of $4.3 million in
2012. Net payments on the revolver of $10.6 million and the payment of dividends of $7.5 million were the main components of financing
activities in 2013.
Comparison of Years Ended December 31, 2012 and 2011
Our net cash used in operating activities was $3.0 million in 2012 compared to cash provided by operations of $14.3 million in 2011. Our
net income decreased by $2.6 million or 13.4% to $17.0 million in 2012 from $19.7 million in 2011.
Changes in our operating assets and liabilities accounted for $24.0 million of cash used in operating activities in 2012. Inventories
increased $16.0 million to support anticipated sales activity, the geographic expansion of product lines and the addition of new products. The
increase in accounts receivable of $6.1 million is due to higher sales in the last two months of 2012 compared to the prior year period. Accrued
and other current liabilities decreased $3.7 million due to lower prepayments on cable management orders as these projects shipped in 2012 and
lower commissions due to lower profitability.
Net cash used in investing activities was $1.0 million in 2012 compared to $1.2 million in 2011. The decrease was primarily due to the cash
paid for acquisition of $0.3 million in 2011.
19
Net cash provided by financing activities was $4.3 million in 2012 compared to net cash used in financing activities of $13.1 million in
2011. Net borrowings of $10.6 million and the payment of dividends of $6.4 million were the main components of financing activities in 2012.
Indebtedness
Our principal source of liquidity at December 31, 2013 was working capital of $123.5 million compared to $126.4 million at December 31,
2012. We also had available borrowing capacity under our loan agreement in the amount of $50.7 million at December 31, 2013 and
$41.4 million at December 31, 2012.
We believe that we will have adequate availability of capital to fund our present operations, meet our commitments on our existing debt,
continue to fund our dividend payments, and fund anticipated growth over the next twelve months, including expansion in existing and targeted
market areas. We continually seek potential acquisitions and from time to time hold discussions with acquisition candidates. If suitable
acquisition opportunities or working capital needs arise that would require additional financing, we believe that our financial position and
earnings history provide a solid base for obtaining additional financing resources at competitive rates and terms. Additionally, based on market
conditions, we may 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, 2013, 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, 2013.
Total
Less than
1 year
1-3 years
(In thousands)
Loans payable
Operating lease obligations
Non-cancellable purchase obligations (1)
$
Total
$
47,952 $
6,801
44,288
99,041 $
— $
2,772
44,288
47,060 $
47,952 $
2,961
—
50,913 $
3-5 years
More than
5 years
— $
1,068
—
1,068 $
—
—
—
—
(1) These obligations reflect purchase orders outstanding with manufacturers as of December 31, 2013. 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 $3.4 million, $1.0 million and $1.3 million in the years ended December 31, 2013, 2012 and 2011,
respectively. The increase in 2013 was primarily due to the $2.5 million purchase of a facility which will be used to consolidate the SWWR
operations in Houston.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements, other than operating leases.
20
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, 2013, the weighted average interest rate on our $48.0 million of variable interest debt was
approximately 2.0%.
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, 2013 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, aluminum and petrochemical 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.
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”.
21
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, 2013 and 2012
Consolidated Statements of Income for the years ended December 31, 2013, 2012 and 2011
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2013, 2012 and 2011
Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011
Notes to Consolidated Financial Statements
Page
23
24
25
26
27
28
22
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Houston Wire & Cable Company
We have audited the accompanying consolidated balance sheets of Houston Wire & Cable Company (the Company) as of December 31,
2013 and 2012, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2013. These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
Houston Wire & Cable Company at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Houston Wire
& Cable Company’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our
report dated March 13, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Houston, Texas
March 13, 2014
23
Houston Wire & Cable Company
Consolidated Balance Sheets
$
$
$
Assets
Current assets:
Cash
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:
17,954,032 and 17,899,499 shares outstanding at December 31, 2013 and 2012, respectively
Additional paid-in capital
Retained earnings
Treasury stock
Total stockholders’ equity
December 31,
2013
2012
(In thousands, except
share data)
— $
60,408
96,107
2,591
420
762
160,288
7,974
10,234
17,520
159
196,175 $
4,594 $
13,637
18,772
—
37,003
47,952
97
429
85,481
274
65,892
84,662
2,455
—
841
154,124
5,824
11,967
25,082
158
197,155
—
12,330
15,379
5
27,714
58,588
103
1,670
88,075
—
—
21
55,642
104,607
(49,576 )
110,694
21
55,291
104,252
(50,484 )
109,080
Total liabilities and stockholders’ equity
$
196,175 $
197,155
The accompanying notes are an integral part of these consolidated financial statements.
24
Houston Wire & Cable Company
Consolidated Statements of Income
Year Ended December 31,
2013
2011
2012
(In thousands, except share and per share data)
$
$
383,292
298,633
84,659
$
393,036
306,017
87,019
396,410
307,515
88,895
30,946
26,068
2,978
7,562
67,554
17,105
992
16,113
8,211
7,902
$
30,013
25,139
2,941
—
58,093
28,926
1,252
27,674
10,635
17,039
$
28,053
24,513
2,952
—
55,518
33,377
1,424
31,953
12,276
19,677
0.44
0.44
$
$
0.96
0.96
$
$
1.11
1.11
$
$
$
Sales
Cost of sales
Gross profit
Operating expenses:
Salaries and commissions
Other operating expenses
Depreciation and amortization
Impairment of goodwill
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
17,805,464
17,900,372
17,723,277
17,815,401
17,679,524
17,801,134
Dividends declared per share
$
0.42
$
0.36
$
0.355
The accompanying notes are an integral part of these consolidated financial statements.
25
Balance at December 31, 2011
Net income
Exercise of stock options, net
Excess tax benefit for stock
20,988,952
—
—
Houston Wire & Cable Company
Consolidated Statements of Stockholders' Equity
Common Stock
Additional
Paid-In
Amount Capital
Retained
Earnings
Shares
Treasury Stock
Stockholders'
Shares
Amount
Equity
Total
(In thousands, except share data)
20,988,952 $
—
—
21 $
—
—
58,642
$
—
(383 )
80,187
19,677
—
(3,240,465 )
—
26,899
$ (53,130 ) $
—
497
—
—
37
—
—
(48 )
—
—
(707 )
—
—
—
—
—
—
—
—
—
85,720
19,677
114
37
(48 )
(707 )
—
—
(1,153 )
—
—
—
(1,153 )
—
—
82
—
—
(710 )
—
—
(5,000 )
(82 )
43,251
710
—
—
—
—
21
—
—
—
—
—
(6,276 )
(1,831 )
—
(26 )
—
55,760
—
(395 )
93,588
17,039
—
(3,177,146 )
—
27,977
(52,031 )
—
532
—
—
35
—
—
(13 )
—
—
—
—
—
—
—
—
1,040
—
—
—
1,040
—
—
—
—
(6 )
82
—
—
—
—
(5,000 )
(82 )
—
—
(1,212 )
—
74,203
1,212
—
—
20,988,952
—
—
—
—
21
—
—
—
—
55,291
—
(526 )
—
(6,375 )
104,252
7,902
—
(9,487 )
—
(3,089,453 )
—
62,312
(115 )
—
(50,484 )
—
1,018
—
—
49
—
—
(10 )
—
—
900
—
—
(108 )
—
—
232
—
—
(186 )
—
—
—
—
—
—
—
—
—
—
—
—
—
(7,466 )
(81 )
55,642 $ 104,607
—
—
—
—
—
—
—
—
(14,165 )
(232 )
11,338
186
(4,952 )
—
(64 )
—
3,034,920 $ 49,576 $
—
—
(26 )
(6,276 )
97,338
17,039
137
35
(13 )
(6 )
—
—
(115 )
(6,375 )
109,080
7,902
492
49
(10 )
900
(108 )
—
—
(64 )
(7,466 )
(81 )
110,694
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
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, 2012
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
Dividends accrued
Balance at December 31, 2013
20,988,952 $
21 $
The accompanying notes are an integral part of these consolidated financial statements.
26
Houston Wire & Cable Company
Consolidated Statements of Cash Flows
2013
Year Ended December 31,
2012
(In thousands)
2011
$
7,902 $
17,039 $
19,677
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
7,562
2,978
18
900
(59 )
27
559
(1 )
(1,485 )
Impairment of goodwill
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:
—
2,941
18
1,040
(19 )
(61 )
815
(7 )
(773 )
(6,081 )
(15,960 )
(13 )
129
(2,270 )
2,231
(3,722 )
(25 )
1,685
(3,033 )
(1,005 )
9
—
(996 )
—
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 )
5,516
(12,004 )
79
(19 )
4,594
1,307
3,312
(6 )
(435 )
20,745
(3,396 )
2
—
(3,394 )
396,724
(407,360 )
—
492
(7,466 )
49
(64 )
(17,625 )
402,231
(391,610 )
—
137
(6,375 )
35
(115 )
4,303
(274 )
274
274
—
— $
274 $
405,741
(412,599 )
(100 )
114
(6,276 )
37
(26 )
(13,109 )
—
—
—
998 $
1,231 $
1,445
10,236 $
9,762 $
14,732
$
$
$
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 (used in) 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 (used in) provided by 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
The accompanying notes are an integral part of these consolidated financial statements.
27
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, hardware and related services to the U.S. market through
twenty-three locations in fourteen 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 and SWWR’s wholly owned subsidiary, Southern Wire (“SW”) (collectively
“the acquired businesses”, or “the 2010 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 reserve for returns and allowances, the inventory obsolescence reserve, 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 unvested restricted stock awards and units.
The following reconciles the denominator used in the calculation of diluted 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,
2012
2013
2011
17,805,464
94,908
17,900,372
17,723,277
92,124
17,815,401
17,679,524
121,610
17,801,134
Options to purchase 478,458, 525,846 and 811,939 shares of common stock were not included in the diluted net income per share
calculation for 2013, 2012 and 2011, 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 $148 and $213, and a
reserve for returns and allowances of $518 and $491 at December 31, 2013 and 2012, respectively. Consistent with industry practices, the
Company normally requires payment from most customers within 30 days. The Company has no contractual repurchase arrangements with its
customers. Credit losses have been within management’s expectations.
The following table summarizes the changes in the allowance for doubtful accounts for the past three years:
Balance at beginning of year
Bad debt expense
Write-offs, net of recoveries
Balance at end of year
2013
2012
2011
$
$
213 $
(59 )
(6 )
148 $
211 $
(19 )
21
213 $
358
(9 )
(138 )
211
28
Inventories
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 $3,934 and $3,746 at
December 31, 2013 and 2012, 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 $1,245, $1,208, and $1,095 for the years ended December 31, 2013, 2012 and 2011,
respectively.
Goodwill
Goodwill represents the excess of the amount we paid to acquire businesses over the estimated fair value of tangible assets and identifiable
intangible assets acquired, less liabilities assumed. Determining the fair value of assets acquired and liabilities assumed requires management’s
judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash flows, discount
rates and asset lives among other items. At December 31, 2013, our goodwill balance was $17.5 million, representing 8.9% of our total assets.
The Company reviews goodwill for impairment annually, or more frequently if indications of possible impairment exist, using a three-step
process. The first step is a qualitative evaluation as to whether it is more likely than not that the fair value of any of the reporting units is less than
its carrying value using an assessment of relevant events and circumstances. Examples of such events and circumstances include financial
performance, industry and market conditions, macroeconomic conditions, reporting unit-specific events, historical results of goodwill
impairment testing and the timing of the last performance of a quantitative assessment. If the Company concludes that the goodwill associated
with any reporting units is more likely than not impaired, a second step is performed for that reporting unit. This second step, used to
quantitatively screen for potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. The
third step, employed for any reporting unit that fails the second step, is used to measure the amount of any potential impairment and compares
the implied fair value of the reporting unit’s goodwill with the carrying amount of goodwill.
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, 2013 and 2012 was approximately $50 and $32, respectively.
Estimated future amortization expense for capitalized loan costs through the maturity of the loan agreement are $18 for each of 2014 and
2015 and $14 in 2016.
Intangibles
Intangible assets, from the 2010 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
29
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, hardware 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. Collectability 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 2013, 2012 or 2011. 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 $333, $314, and $212 for the years ended December 31, 2013,
2012, and 2011, respectively.
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 awards and units are 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.
30
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. 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,
2013
2012
2,476 $
4,717
10,354
17,547
9,573
7,974 $
1,187
3,466
9,646
14,299
8,475
5,824
$
$
The purchase price of the new building in December 2013 has been preliminarily allocated $1,290 to land and $1,217 to buildings.
Intangibles assets
Intangibles assets consist of:
Trade names
Customer relationships
Non-compete agreements
Less accumulated amortization:
Trade names
Customer relationships
Non-compete agreements
Total
At December 31,
2013
2012
4,610 $
11,630
250
16,490
—
6,006
250
6,256
10,234 $
4,610
11,630
250
16,490
—
4,273
250
4,523
11,967
$
$
Intangible assets include customer relationships which are being amortized over 6 or 7 year useful lives and non-compete agreements
which 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; however, they are tested annually for impairment. As of December 31, 2013, accumulated amortization on the acquired intangible
assets was $6,256, and amortization expense was $1,733 for each of the years ended December 31, 2013 and 2012 and $1,857 for the year ended
December 31, 2011. Future amortization expense to be recognized on the acquired intangible assets is expected to be as follows:
2014
2015
2016
2017
Annual
Amortization
Expense
$
1,733
1,733
1,512
646
31
Goodwill
Changes in goodwill were as follows:
Balance at beginning of year
Impairment of goodwill
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
3.
Impairment of Goodwill
At December 31,
2013
2012
$
$
25,082 $
(7,562 )
17,520 $
25,082
—
25,082
At December 31,
2013
2012
$
$
522 $
4,952
2,226
8,161
2,911
18,772 $
429
4,383
2,553
5,107
2,907
15,379
During the third quarter of 2013 and prior to the annual impairment test of goodwill in October, the Company concluded that impairment
indicators existed at the SW reporting unit, due to a decline in the overall financial performance and overall market demand.
The Company performed step two of the impairment test and concluded that the fair value of the SW reporting unit was less than its
carrying value; therefore, the Company performed step three of the impairment analysis.
Step three of the impairment analysis measures the impairment charge by allocating the reporting unit’s fair value to all of the assets and
liabilities of the reporting unit in a hypothetical analysis that calculates implied fair value of goodwill in the same manner as if the reporting unit
was being acquired in a business combination and recording the deferred tax impact. Any excess of the carrying value of the reporting unit’s
goodwill over the implied fair value of the reporting unit’s goodwill is recorded as an impairment loss.
The fair value of the SW reporting unit was estimated using a discounted cash flow model combined with a market approach, with a
weighting of 50% to the discounted cash flow analysis and 50% to the market approach. The material assumptions used for the income approach
included a weighted average cost of capital of 13% and a long-term growth rate of 3-4%. The carrying value of the SW reporting unit’s goodwill
was $ 20.1 million and its implied fair value resulting from step two of the impairment test was less than the carrying value. As a result, the
Company has recorded a non-cash goodwill impairment charge of $7.6 million during the year ended December 31, 2013.
4. Debt
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 London Interbank Offered Rate (“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 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, 2013, the Company was in compliance with the
financial covenants governing its indebtedness.
32
The Company’s borrowings at December 31, 2013 and 2012 were $47,952 and $58,588, respectively. The weighted average interest rates
on outstanding borrowings were 2.0% and 1.8% at December 31, 2013 and 2012, respectively.
During 2013, the Company had an average available borrowing capacity of approximately $52,091. This average was computed from the
monthly borrowing base certificates prepared for the lender. At December 31, 2013, the Company had available borrowing capacity of $50,680
under the terms of the 2011 Loan Agreement. During the years ended December 31, 2013, 2012 and 2011, the Company paid $130, $101, and
$71, respectively, for the unused facility.
Principal repayment obligations for succeeding fiscal years are as follows:
2014
2015
2016
2017
Total
5.
Income Taxes
The provision (benefit) for income taxes consists of:
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Total
$
$
—
—
47,952
—
47,952
Year Ended December 31,
2012
2013
2011
$
8,675 $
1,021
9,696
10,129 $
1,279
11,408
10,612
1,381
11,993
(1,290 )
(195 )
(1,485 )
(703 )
(70 )
(773 )
258
25
283
$
8,211 $
10,635 $
12,276
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,
2012
2013
2011
35.0 %
3.9
12.6
(0.6 )
50.9 %
35.0 %
2.8
0.6
—
38.4 %
35.0 %
2.8
0.6
—
38.4 %
The non-deductible items in 2013 include the impact of the $5.3 million non-deductible portion of the $7.6 million impairment charge.
33
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
Property and equipment
Other
Total deferred tax assets
Deferred tax liabilities
Goodwill
Intangibles
Other
Total deferred tax liabilities
Net deferred tax assets
Year Ended
December 31,
2013
2012
$
$
1,009 $
1,514
57
2,064
102
—
4,746
185
2,303
96
2,584
2,162 $
796
1,442
82
1,928
43
29
4,320
834
2,701
—
3,535
785
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, 2013, 2012 and 2011, the Company made no provisions for interest or penalties related to uncertain tax positions. The tax
years 2009 through 2013 remain open to examination by the major taxing jurisdictions to which the Company is subject.
6. Stockholders’ Equity
Under the terms of the 2006 Stock Plan, the Company repurchased 4,952 shares that were surrendered by the holders to fund the exercise of
the related awards and to pay withholding taxes in 2013.
The Company has paid a quarterly cash dividend since August 2007, resulting in aggregate dividends in 2013, 2012 and 2011 of $7,466,
$6,375 and $6,276, 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 now
terminated stockholder rights plan, the Board of Directors designated 100,000 shares as Series A Junior Participating Preferred Stock. No shares
of preferred stock have been issued.
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. Through 2013, the Company adopted the
Safe Harbor provisions of the Code, whereby contributions up to the first 3% of an employee’s compensation were matched 100% by the
Company and the next 2% were matched 50% by the Company. The Company’s match for the years ended December 31, 2013, 2012 and 2011
was $803, $735, and $727, respectively. Effective January 1, 2014, the Company adjusted its match and will now match 100% of the first 1% of
the employee’s contribution. Accordingly, the Company is no longer adopting the Safe Harbor provisions of the Code.
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 stock options and restricted stock awards and units. The 2006 Plan
provides for incentives to be granted at the fair market value of the Company’s common stock at the date of grant and options may be either
nonqualified stock options or incentive stock options as defined by Section 422 of the Code. Under the 2006 Plan a maximum of
1,800,000 shares may be issued to designated participants. The maximum number of shares available to any one participant in any one calendar
year is 500,000.
34
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 May 8, 2012, the Company granted options under the 2006 Stock Plan to purchase 10,000 shares of its common stock with an exercise
price equal to the fair market value of the Company’s stock at the close of trading on May 8, 2012 to new members of the management team.
These options have a contractual life of ten years and vest in five equal annual installments on the first five anniversaries of the date of the grant
assuming continued employment.
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 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. There were no options granted in 2013. For prior year options granted, the following weighted average assumptions were used:
Year Ended
December 31,
Risk-free interest rate
Expected dividend yield
Weighted average expected life
Expected volatility
2012
2011
0.89 %
3.01 %
5.5 years
64 %
1.01 %
2.55 %
5.5 years
65 %
Vesting dates range from May 8, 2014 to December 31, 2017, and expiration dates range from December 30, 2015 to May 8, 2022. The
following summarizes stock option activity and related information:
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 2013 $
Weighted average fair value of options granted during 2012 $
Weighted average fair value of options granted during 2011 $
778 $
—
(62 )
(61 )
—
655 $
505 $
—
5.29
6.55
2013
Weighted
Average
Remaining
Contractual Life
(in years)
Aggregate
Intrinsic
Value
$
656
$
$
563
521
5.22
4.45
Weighted
Average
Exercise Price
14.67
—
7.90
14.53
—
15.33
15.82
During the years ended December 31, 2013, 2012 and 2011, excess tax benefits of $49, $35 and $37, respectively, were reflected in
financing cash flows.
The total intrinsic value of options exercised during the years ended December 31, 2013, 2012 and 2011 was $366, $258 and $277,
respectively.
35
The total fair value of options vested during the years ended December 31, 2013, 2012 and 2011 was $271, $404 and $3,890, 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
Following the Annual Meeting of Stockholders on May 7, 2013, the Company awarded restricted stock units with a grant date value of $50
to each non-employee director who was re-elected, for an aggregate of 21,006 restricted stock units. Each award of restricted stock units vests at
the date of the 2014 Annual Meeting of Stockholders. Each non-employee director is entitled to receive a number of shares of the Company's
common stock equal to the number of vested restricted stock units, together with dividend equivalents from the date of grant, at such time as the
director’s service on the board terminates for any reason.
On December 17, 2012, the Company granted 56,250 voting shares of restricted stock under the 2006 Plan to management. These shares
vest in one third increments, on the third, fourth and fifth anniversaries of the date of grant. Any dividends declared will be accrued and paid to
the recipient if and when the related shares vest as long as the recipient is still employed by the Company.
Following the Annual Meeting of Stockholders on May 8, 2012, the Company awarded restricted stock units with a grant date value of $50
to each non-employee director who was re-elected, for an aggregate of 25,044 restricted stock units. Each award of restricted stock units vested
at the date of the 2013 Annual Meeting of Stockholders. Each non-employee director is entitled to receive a number of shares of the Company's
common stock equal to the number of restricted stock units, together with dividend equivalents from the date of grant, at such time as the
director’s service on the board terminates for any reason.
The Company also granted performance based restricted stock awards to the Company’s President on December 17, 2012 and December
20, 2013 in the amount of 17,953 shares and 11,338 shares respectively. These awards are based on the Company achieving at least 85% of a
cumulative operating income target for the three year period commencing January 1, 2013 and ending December 31, 2015 for the 2012 grant
and the three year period commencing January 1, 2014 and ending December 31, 2016 for the 2013 grant. Each award will vest after the end of
the applicable three year performance period at the 100% level if the Company achieves 100% or more of the cumulative operating income
target and on a sliding scale down to 0% vesting if the Company achieves less than 85% of the cumulative operating income target. 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.
Restricted common shares are measured at fair value on the date of grant based on 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, based on the number of awards
that vest.
The following summarizes restricted stock activity for the year ended December 31, 2013:
Awards
Units
2013
Weighted
Average
Market
Value at
Grant Date
Shares
(in 000’s)
Weighted
Average
Market
Value at
Grant Date
Shares
(in 000’s)
166 $
11
(22 )
(14 )
141 $
12.19
13.23
12.18
11.64
12.33
25 $
21
(25 )
—
21 $
11.98
14.28
11.98
—
14.28
Non-vested —Beginning of year
Granted
Vested
Cancelled/Forfeited
Non-vested —End of year
Total stock-based compensation cost/(benefit) was $900, $1,040 and $(707) for the years ended December 31, 2013, 2012 and 2011,
respectively. Total income tax benefit/(expense) recognized for stock-based compensation arrangements was $459, $400 and $(274) for the
years ended December 31, 2013, 2012 and 2011, 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 former chief executive officer, who retired
from the Company effective December 31, 2011.
As of December 31, 2013, there was $1,671 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 37 months. There were 509,839 shares
available for future grants under the 2006 Plan at December 31, 2013.
36
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 $2,697 in 2013, $2,671 in 2012 and $2,809 in 2011.
Future minimum lease payments under non-cancelable operating leases with initial terms of one year or more consisted of the following at
December 31, 2013:
2014
2015
2016
2017
2018
Thereafter
Total minimum lease payments
$
$
2,772
1,706
1,255
818
250
—
6,801
The Company had aggregate purchase commitments for fixed inventory quantities of approximately $44,288 at December 31, 2013.
As part of the 2010 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 $97 at December 31, 2013 relates to the cost of the monitoring, which the Company
estimates will be incurred over approximately the next 3 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 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.
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, 2014, the Board of Directors approved a quarterly dividend of $0.11 per share payable to shareholders of record on
February 20, 2014. This dividend totaling $1,959 was paid on February 28, 2014.
On March 7, 2014, the Board of Directors adopted a new stock repurchase program under which the Company is authorized to purchase up
to $25 million of its outstanding shares of common stock from time to time, depending on market conditions, trading activity, business
conditions and other factors. Shares of stock purchased under the program will be held as treasury shares 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.
37
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, 2013. The unaudited information has been prepared on the same basis as the audited consolidated financial statements.
Sales
Gross profit
Operating (loss) income
Net income (loss)
Earnings (loss) per share:
Basic
Diluted
Year Ended December 31, 2013
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
(in thousands, except per share data)
$
$
$
$
$
$
94,442 $
20,633 $
5,408 $
3,149 $
95,214 $
20,922 $
(1,556 )
$
(3,162 ) (1) $
99,332 $
21,725 $
6,867 $
4,053 $
0.18 $
0.18 $
(0.18 ) $
(0.18 ) $
0.23 $
0.23 $
94,304
21,379
6,386
3,862
0.22
0.22
(1) During the third quarter of 2013, we recorded a non-cash goodwill impairment charge of $7,562, related to the SW reporting unit. See
Note 3 for additional information.
Sales
Gross profit
Operating income
Net income
Earnings per share:
Basic
Diluted
Year Ended December 31, 2012
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
(in thousands, except per share data)
$
$
$
$
$
$
104,379 $
22,017 $
7,438 $
4,370 $
96,113 $
21,612 $
7,156 $
4,232 $
98,082 $
22,252 $
7,530 $
4,421 $
0.25 $
0.25 $
0.24 $
0.24 $
0.25 $
0.25 $
94,462
21,138
6,802
4,016
0.23
0.23
38
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, 2013.
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, 2013. 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 40 and 41 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.”
There has been no change in our internal controls over financial reporting that occurred during the year ended December 31, 2013 that has
materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
39
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, 2013 based on criteria
established by Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(1992 framework) (“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, 2013 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 41.
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, 2013, 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)
40
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Houston Wire & Cable Company
We have audited Houston Wire & Cable Company’s internal control over financial reporting as of December 31, 2013, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(1992 framework) (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, 2013, 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, 2013 and 2012, and the related consolidated statements of
income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013 of Houston Wire & Cable
Company and our report dated March 13, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Houston, Texas
March 13, 2014
41
ITEM 9B. OTHER INFORMATION
We have no information to report pursuant to Item 9B.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
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 6, 2014. 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
“General – Section 16 (a) Beneficial Ownership Reporting Compliance” section of the registrant’s definitive Proxy Statement relating to the
Annual Meeting of Stockholders to be held on May 6, 2014.
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 Conduct” section of the registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders to
be held on May 6, 2014.
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
6, 2014.
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 6, 2014.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated herein by reference to the “Compensation Committee Report,” “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 6, 2014.
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 6, 2014.
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 – Director
Independence” and “Related Party Transaction Policy” sections of the registrant’s definitive Proxy Statement relating to the Annual Meeting
of Stockholders to be held on May 6, 2014.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information called for by Item 14 is incorporated herein by reference to the “Principal Independent Accountant Fees and Services”
section of the registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 6, 2014.
42
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, 2013 and 2012
Consolidated Statements of Income for the years ended December 31, 2013, 2012 and 2011
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2013, 2012 and 2011
Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011
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
43
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 13, 2014
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 13, 2014
Chief Financial Officer, Treasurer and
Secretary (Principal Accounting Officer)
March 13, 2014
March 13, 2014
March 13, 2014
March 13, 2014
March 13, 2014
March 13, 2014
March 13, 2014
Director
Director
Director
Director
Director
Director
44
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*
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))
Amended and Restated 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 May 11, 2012)
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 (incorporated herein by reference to Exhibit 10.3 to Houston Wire & Cable Company’s Annual Report on Form 10-K
for the year ended December 31, 2011)
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 (incorporated herein by
reference to Exhibit 10.6 to Houston Wire & Cable Company’s Annual Report on Form 10-K for the year ended December 31,
2011)
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 (incorporated herein by reference to Exhibit 10.8 to Houston Wire & Cable
Company’s Annual Report on Form 10-K for the year ended December 31, 2011)
Form of Director/Officer Indemnification Agreement by and between Houston Wire & Cable Company and a director, member
of a committee of the Board of Directors or officer of Houston Wire & Cable Company (incorporated herein by reference to
Exhibit 10.24 to Houston Wire & Cable Company’s Annual Report on Form 10-K for the year ended December 31, 2006)
10.10
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)
10.11
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)
10.12*
Second Amendment to the Houston Wire & Cable Company’s 2006 Stock Plan **
21.1
23.1
31.1
Subsidiaries of Houston Wire & Cable Company (incorporated herein by reference to Exhibit 21.1 to Houston Wire & Cable
Company’s Registration Statement on Form S-1 (Registration No. 333-132703))
Consent of Ernst & Young, LLP **
Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 **
45
31.2
32.1
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 **
* Management contract or compensatory plan or arrangement
** Filed herewith
46
SECOND AMENDMENT TO THE
HOUSTON WIRE & CABLE COMPANY
2006 STOCK PLAN
Exhibit 10.12
WHEREAS, Houston Wire & Cable Company, a Delaware corporation (the “Company”), maintains the Houston Wire & Cable
Company 2006 Stock Plan, as amended (the “Plan”); and
WHEREAS, the Company has reserved the authority to amend the Plan and now deems it appropriate to do so.
NOW THEREFORE, the Plan is hereby amended, effective as of February 10, 2014, as follows:
1.
Section 6.2(e) of the Plan is hereby amended to read in its entirety as follows:
(e)
Subject to the provisions of subsection (b) hereof and the restrictions set forth in the related Stock Award
Agreement, the Participant receiving a grant of or purchasing Common Stock shall thereupon be a stockholder with respect to
all of the shares represented by such certificate or certificates and shall have the rights of a stockholder with respect to such
shares, including the right to vote such shares and to receive dividends and other distributions paid with respect to such shares.
Notwithstanding the preceding sentence, in the case of a Stock Award that provides for the right to receive dividends or
distributions: (i) if such Stock Award is subject to performance-based restrictions as described in Section 6.2(c), the Company
shall accumulate and hold such dividends or distributions, and (ii) in the case of all other such Stock Awards, the Board shall
have the discretion to cause the Company to accumulate and hold such dividends or distributions. In either such case, the
accumulated dividends or other distributions shall be paid to the Participant only upon the lapse of the restrictions to which
the Stock Award is subject, and any such dividends or distributions attributable to the portion of a Stock Award for which the
restrictions do not lapse shall be forfeited.
2.
Section 8.1 of the Plan is hereby amended to read in its entirety as follows:
8.1
Effect of Change in Control. In addition to the Committee’s authority set forth in Section 3, upon a
Change in Control of HWC, the Committee is authorized, and has sole discretion, as to any Award, either at the time such
Award is granted hereunder or any time thereafter, to take any one or more of the following actions: (i) provide that (A) all
outstanding Awards shall become fully vested and exercisable, and (B) all restrictions applicable to all Awards shall
terminate or lapse; (ii) provide for the purchase of any outstanding Stock Option, for an amount of cash equal to the difference
between the exercise price and the then Fair Market Value of the Common Stock covered thereby had such Stock Option been
currently exercisable; (iii) make such adjustment to any such Award then outstanding as the Committee deems appropriate to
reflect such Change in Control; and (iv) cause any such Award then outstanding to be assumed, by the acquiring or surviving
corporation, after such Change in Control.
IN WITNESS WHEREOF, this Second Amendment has been executed on this 10th day of February, 2014.
HOUSTON WIRE & CABLE COMPANY
By:
Nicol G. Graham
Chief Financial Officer, Treasurer and Secretary
47
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-00000) pertaining to the Houston Wire &
Cable Company 2000 Stock Plan and the Houston Wire & Cable Company 2006 Stock Plan of our reports dated March 13, 2014, 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, 2013.
Exhibit 23.1
/s/ Ernst & Young LLP
Houston, Texas
March 13, 2014
48
Exhibit 31.1
Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, James L. Pokluda III, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K for the year ended December 31, 2013 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 13, 2014
/s/ James L. Pokluda III
James L. Pokluda III
Chief Executive Officer
49
Exhibit 31.2
Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Nicol G. Graham, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K for the year ended December 31, 2013 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 13, 2014
/s/ Nicol G. Graham
Nicol G. Graham
Chief Financial Officer
50
Exhibit 32.1
Certifications of CEO and CFO Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Houston Wire & Cable Company (the “Corporation”) on Form 10-K for the fiscal year ended
December 31, 2013 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 13, 2014
Date: March 13, 2014
/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.
51
1
2
3
4
5
6
7
CORPORATE HEADQUARTERS
Houston Wire & Cable Company
10201 North Loop East
Houston, Texas 77029-1415
Telephone (713) 609-2100
DIRECTORS
1. Wilson B. Sexton
Chairman of the Board of
POOLCORP
ANNUAL MEETING
The Annual Meeting of Shareholders will
be held May 6, 2014 at 8:30 a.m. CDT, at
the Company’s corporate headquarters in
Houston, Texas.
COMMON STOCK LISTING
Ticker Symbol: HWCC
Nasdaq Stock Exchange
2. William H. Sheffield
Chairman of the Board of
Houston Wire & Cable Company
3. James L. Pokluda III
President & Chief Executive Officer
of Houston Wire & Cable Company
4. Ian Stewart Farwell
Independent Director
TRANSFER AGENT
American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, New York 11219
5. Peter M. Gotsch
Managing Director of
Svoboda Capital Partners LLC
6. Scott L. Thompson
Former President, Chief Executive Officer
& Chairman of the Board of
Dollar Thrifty Automotive Group, Inc.
7. Michael T. Campbell
Independent Director
INDEPENDENT AUDITORS
Ernst & Young, LLP
1401 McKinney Street, Suite 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 obtained 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
X
T
,
N
O
T
S
U
O
H
,
S
D
N
A
R
B
E
G
A
V
A
S
:
I
N
G
S
E
D
Right Product, Right Place, Right Time.®
10201 North Loop East
Houston, Texas 77029-1415
(713) 609-2100
1.800.HOUWIRE
WWW.HOUWIRE.COM