HOUSTON WIRE & CABLE COMPANY
2016 ANNUAL REPORT
ELECTRICAL AND MECHANICAL WIRE & CABLE AND FASTENERS FOR INDUSTRY AND INFRASTRUCTURE
FINANCIAL HIGHLIGHTS
(Dollars in thousands except per share data)
2016*
2015**
2014
2013***
2012
Net Sales
$ 261,644
$ 308,133
$ 390,011
$ 383,292
$ 393,036
Sales Per Employee
733
856
1,017
908
954
Operating Income (loss)
(3,290)
9,435
25,423
24,667
28,926
Operating Margin
Net Income (loss)
(1.26)%
3.06%
6.52%
6.44%
7.36%
(3,308)
5,171
14,972
14,594
17,039
Diluted Earnings (loss) Per Share
(0.21)
0.30
0.85
0.82
0.96
Total Assets
175,870
159,113
189,813
196,175
197,155
Long-term Obligations
60,904
39,463
54,121
48,478
60,361
Stockholders’ Equity
90,131
100,001
111,307
110,694
109,080
* Non-GAAP excludes the impact of the impairment charge of $2,384 and acquisition expenses related to Vertex of $861. See notes 2, 4 and 12 to the consolidated
financial statements. 2016 results as reported were an operating loss of $(6,535), net loss of $(6,006) and diluted loss per share of $(0.37).
** Non-GAAP excludes the impact of the impairment charge of $3,417. See notes 3 and 11 to the consolidated financial statements. 2015 results as reported were
operating income of $6,018, net income of $2,044 and diluted earnings per share of $0.12.
*** Non-GAAP excludes the impact of the 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.
James L. Pokluda III
President, CEO and Director
Dear Shareholders
In 2016, underperforming industrial end markets significantly reduced demand for Houston Wire & Cable
Company’s (HWCC) products and services. Although we did begin to experience signs of stabilization in
certain industrial segments and geographic regions, overall industrial activity remained severely depressed
due to a myriad of reasons, including the reduction in the price of oil, deflation in the price of metals including
copper, steel and aluminum, and the strength of the US dollar, which pressured domestic manufacturing.
These multiple market headwinds, led by significantly reduced activity in oil and gas end markets, which
represent approximately 30% of HWCC’s annual revenues, drove disappointing financial results.
Despite 2016’s challenges, HWCC did perform well in many key areas of the business, including continued
success with the launch of new products and services, world-class operational excellence, very high levels of
customer satisfaction, reduced inventory investment and strong cash flow. We also completed the acquisition
of Vertex Distribution, a leading master distributor of specialty fasteners.
END MARKETS
INDUSTRIALS The industrial market is one of the largest segments
of the US economy and comprises a diverse base of manufacturing
and production businesses. The largest driver of our success in this
market is the level of US investment in upstream, midstream and
downstream oil and gas exploration, transportation and production,
where our wire and cable products are used extensively.
Product demand in upstream and midstream markets is largely
dependent on land-based drilling activity, which troughed in
May 2016. We believe our sales in these markets will improve
throughout 2017 as activity in this space has begun to recover
from the May low level.
Activity in downstream markets encompasses work for ongoing
plant Maintenance, Repair and Operations (MRO) and new
project construction for hydrocarbon refining. Unlike large capital
projects, MRO investments tend to be less cyclical and were only
slightly negative in 2016, while capital project work remained
highly competitive and sales to this market were down significantly
year-over-year.
As we move further into 2017, the United States continues to
experience signs of an oil and gas market recovery. We are certainly
encouraged by these developments as our business has historically
performed well when these markets are fulsome. We look forward
to and anticipate improved financial performance results as the
strength of these markets continues to improve.
UTILITY POWER GENERATION &
ENVIRONMENTAL COMPLIANCE CONSTRUCTION
As a whole, this market segment continues to experience
weakness as indicated by the year-over-year declines in the
Utilities Capacity Utilization Rate beginning in 2015. Although
we had several project wins throughout the year, we under-
performed the prior year’s results as the nation’s investments
have shifted from coal-fired power plants to natural gas-fired
plants and those that operate from alternative or renewable
energy sources. Although these investments require less of our
traditional industrial wire and cable products than coal-fired
plants, we expect that multiple macro drivers, including
significant infrastructure and US manufacturing investments,
will slowly transition US electrical demand to positive growth
over the next several years. Given HWCC’s outstanding geographic
footprint, product portfolio and service mix, we believe we are
ideally positioned to benefit from this emerging opportunity.
INFRASTRUCTURE The infrastructure market, which includes
wastewater, telecommunications, transportation, housing and
nonresidential construction, experienced year-over-year sales
decline due to minimal transportation and wastewater projects,
and nascent MRO activity. Although this was a challenging year
for several of our infrastructure end markets, new product sales
to commercial, residential and nonresidential construction
markets grew year-over-year.
Present broad market indicators for the infrastructure segment
are improving and activity is expected to slowly recover throughout
2017 as widespread demand for public works investments grows
and projects are approved and funded.
HEAVY LIFT Although the heavy lift markets were also affected by
the reduction of US industrial activity, the impact was minimal on
our wholesale heavy lift division, which has a nationwide customer
base and tends to be less dependent on any single industry or
region than our retail heavy lift division.
In wholesale we saw a slight increase in tonnage sold, making
this the second largest tonnage total in the last four years. We
believe our slowly improving performance in wholesale is the
result of steady steel price appreciation throughout 2016, recent
improvement in oil and gas and infrastructure markets, and
HWCC’s multiple investments in increased products and services.
Our heavy lift division also services retail customers along the
Gulf Coast of Texas and Louisiana where, thanks to our investments
in personnel, equipment and services, we are now a registered
engineering firm. This certification gives us the ability to design
and engineer lifting plans for the fabrication of intricate lifting
devices that are used in large plant modifications or expansions.
We have also broadened our product line to include rental of
rigging and lifting components, testing and certification, load
cells and fall protection, and we have significantly increased
our online internet presence. The Houston facility consolidation
completed in 2015 has resulted in greater operational efficiencies,
LEAN manufacturing and reduced expenses. The addition of key
management, new products and services, and the focus on
broadening customer opportunities outside the oil and gas
industry are setting the foundation for growth and stability as
we move further into 2017.
FASTENERS On October 3, 2016, HWCC completed the acquisition
of Vertex Distribution, a leading master distributor of industrial
fasteners specializing in corrosion-resistant and specialty alloy
inch and metric threaded fasteners, rivets and hose clamps. This
acquisition leverages HWCC’s core strengths in master distribution
and its national distribution platform into new product categories,
and it provides a great example of how our distribution model can
be used to further penetrate industrial end markets.
to complete the integration quickly and smoothly. To date, we
have consolidated four Vertex facilities into larger HWCC facilities
and we will complete the final three consolidations before the end
of 2017. This acquisition also allows us to use Vertex facilities to
stock traditional wire and cable products in regional markets
where HWCC formerly had no local inventory presence.
OPERATIONS Today we operate out of 20 facilities in 14 states
with over 1 million square feet of distribution, fabricating and
manufacturing space across the US. All HWCC facilities strive
to be operationally excellent through continuous improvement
and compliance with rigorous company quality procedures. In
2016, including Vertex in the fourth quarter, these facilities
shipped our customers approximately 73 million pounds of
product representing over 172,000 orders with world-class
levels of on-time performance and order accuracy.
FINANCIAL The Vertex acquisition increased debt levels, and the
debt-to-equity ratio increased from 31% at September 2016 to
67% at year end. We are comfortable operating at this higher
leverage level and will use future operating cash flows, as
available, to reduce debt. Despite an underperforming year,
operations generated cash of $17.5 million.
We will continue to look for additional cost savings opportunities.
The completed and planned facility consolidations following the
Vertex acquisition have allowed and will allow us to cut the level
of operating expenses. Prudent cost management remains an
important element of our business model.
CONCLUSION 2016 was a difficult year for our Company as the
reduction in the price of oil and gas, and metals deflation drove
significantly reduced demand for our products and services. Despite
these challenges, we are encouraged to see that thus far into 2017
our major markets are beginning to show signs of recovery. Sales,
invoice counts and gross margins have started to improve compared
to the levels experienced towards the end of 2016, which we believe
marked the bottom for several of our end markets.
During 2016 we also continued to invest in our business through
new products and services, drove superior operational excellence,
released cash from the balance sheet and completed the strategic
acquisition of Vertex Distribution.
As we progress through 2017, extreme focus will be placed on
prudent capital and expense management, gross margin
optimization and new business development, to drive improved
financial performance for the benefit of our valued shareholders.
On behalf of our Board of Directors, and all my Houston Wire &
Cable coworkers, I thank you all for your continued support and
confidence you have placed in our Company.
The integration of Vertex has gone well. We are ahead of plan and
all teams, including Human Resources, Information Technology,
Accounting, Operations and Sales & Marketing, are working hard
James Pokluda III
President, CEO and Director
HOUSTON WIRE & CABLE COMPANY
FORM 10-K 2016
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 2016
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-52046
Delaware
(State or other jurisdiction of incorporation or organization)
36-4151663
(I.R.S. Employer Identification No.)
10201 North Loop East
Houston, Texas
(Address of principal executive offices)
77029
(Zip Code)
(713) 609-2100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Class
Common stock, par value $0.001 per share
Name of Each Exchange on Which Registered
The NASDAQ Stock Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES NO
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES NO
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. YES NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). YES NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K (§ 229.405 of this chapter) 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, 2016 was $85,365,877.
At March 1, 2017, there were 16,506,525 shares of the registrant’s common stock, $.001 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this report incorporates by reference specific portions of the registrant’s definitive Proxy Statement relating to the Annual Meeting of
Stockholders to be held on May 5, 2017.
HOUSTON WIRE & CABLE COMPANY
Form 10-K
For the Fiscal Year Ended December 31, 2016
INDEX
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Supplemental Item. Executive Officers of the Registrant
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Consolidated Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
PART I.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV.
Item 15.
Item 16.
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1
ITEM 1. BUSINESS
Overview
PART I
We are a provider of industrial products including electrical and mechanical wire and cable, industrial fasteners, hardware and
related services to the U.S. market. We sell electrical products through wholesale electrical distributors, steel wire rope products through
rigging wholesalers, fastener products through industrial distributors, and fabricated steel wire rope lifting and hardware products to end
users. We provide our customers with a single-source solution by offering a large selection of in-stock items, exceptional customer
service and high levels of product expertise.
Our wide product selection and specialized services support our position in the supply chain between manufacturers and the
customer. The breadth and depth of wire and cable, fasteners 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 manufactured slings and harnesses, paralleling, bundling, striping, cable management for large capital projects,
and same day shipment, and do not have multiple distribution centers across the nation.
Our Cable Management Program addresses our customers’ requirement for sophisticated and efficient just-in-time product
management for large capital projects. This program entails purchasing and storing dedicated inventory so our customers have
immediate product availability for the duration of their 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 2006, we completed our second initial
public offering. In 2010, we purchased Southwest Wire Rope LP (“Southwest”), its general partner Southwest Wire Rope GP LLC and
its wholly owned subsidiary, Southern Wire (“Southern”), and subsequently merged the acquired businesses into our operating
subsidiary. On October 3, 2016 we completed the acquisition of Vertex Corporate Holdings, Inc., and its subsidiaries (“Vertex”) from
DXP Enterprises. Vertex is a master distributor of industrial fasteners and this acquisition expands our product offerings to the industrial
marketplace that purchases our wire and cable products.
Products
We offer products in most categories of wire and cable, including: continuous and interlocked armor cable; control and power cable;
electronic wire and cable; flexible and portable cord; instrumentation and thermocouple cable; lead and high temperature cable; medium
voltage cable; premise and category wire and cable, primary and secondary aluminum distribution cable, steel wire rope and wire rope
slings, as well as synthetic fiber rope slings, chain, shackles, related hardware and corrosion resistant products including inch and metric
bolts, screws, nuts, washers, rivets and hose clamps. We also offer private branded products, including our proprietary brand
LifeGuard™, a low-smoke, zero-halogen cable. Our products are used in repair and replacement work, also referred to as Maintenance,
Repair and Operations ("MRO"), and related projects, larger-scale projects in the utility, industrial and infrastructure markets and a
diverse range of industrial applications including communications, energy, engineering and construction, general manufacturing,
marine construction and marine transportation, mining, infrastructure, oilfield services, petrochemical, transportation, utility,
wastewater treatment and food and beverage.
Targeted Markets
Our business is driven, in part, by the strength, growth prospects and activity in the end-markets in which our products are used,
which are primarily in the continental United States, where we target the utility, industrial and infrastructure markets.
Utility Market. The utility market includes large investor-owned utilities, rural cooperatives and municipal power authorities.
While we are not a significant distributor of power lines used for the transmission of electricity today, we have added products to our
portfolio that are used in this sector. We continue to sell our core products for the construction of power plants and the related pollution
control equipment used to comply with environmental standards as well as plant modernizations implemented to extend the life of power
generation facilities. Our customers utilize our cable management services to supply the wire and cable required in the construction of
2
new power plants and upgrading of existing power plants. The extension of federal tax credits and production credits into the renewable
sectors of solar and wind will also provide expanded opportunities for products we supply.
Industrial Market. The industrial market is one of the largest segments of the U.S. economy and is comprised of a diverse base of
manufacturing and production companies. The largest driver of our success in this market results from the level of US investment in
upstream, midstream and downstream oil and gas exploration, transportation and production. We provide a wide variety of products
specifically designed for use in manufacturing, metal/mineral, and oil and gas upstream, midstream and downstream markets.
Infrastructure Market. Investments in the development, construction and maintenance of infrastructure markets including
education and health care; air, ground and rail transportation; telecommunications, and wastewater are opportunities for our product and
service offerings.
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 the original location in Houston, Texas to twenty-two locations nationwide,
which includes three 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 2016, we served approximately 8,000 customers, shipping approximately 47,000 SKU’s to approximately 12,000 customer
locations nationwide. No customer represented 10% or more of our 2016 sales.
Suppliers
We obtain products from leading suppliers and believe we have strong relationships with our top suppliers. We source a growing
portion of our products from offshore. While alternative sources are available for the majority of our products, we have strategically
concentrated our purchases with our top suppliers in order to maximize product quality, delivery dependability, purchasing efficiencies,
and vendor rebates. As a result, in 2016, approximately 45% of our purchases came from five suppliers. We do not believe we are
dependent on any one supplier for any of the industrial products that we sell.
Our top five suppliers in 2016 were Belden Inc., General Cable Corporation, Lake Cable LLC, Nexans Energy USA, Inc. and
Southwire Company.
Sales
We market our industrial products and related services through an inside sales force situated in our regional offices, a field sales
force focused on key geographic markets and regional sales agencies. By operating under a decentralized 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 are critical to serving our fragmented and diverse customer and end-user base.
Competition
The industrial products market remains very competitive and fragmented, with several hundred electrical wire and cable, steel wire
rope, and fastener competitors serving this market. The product offerings and levels of service from the other providers of product with
whom we compete vary widely at the national, regional or local levels. 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
product providers, we also face, on a varying basis, competitors that sell products directly or through multiple distribution channels to
end-users or other resellers.
In the markets that we sell our industrial products, competition is primarily based on product line breadth, quality, product
availability, service capabilities and price.
Employees
At December 31, 2016, we had 403 employees. Our sales and marketing staff accounted for 169 employees, including 34 field sales
personnel, 16 sales agencies, and 100 inside sales and technical support personnel.
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Fourteen warehouse employees at our Attleboro, Massachusetts location are represented by a labor union. 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.
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ITEM 1A. RISK FACTORS
In addition to other information in this Annual Report on Form 10-K, the following risk factors should be carefully considered in
evaluating our business, because such factors may have a significant impact on our business, operating results, cash flows and financial
condition. As a result of the risks set forth below and elsewhere in this Annual Report, actual results could differ materially from those
projected in any forward-looking statements.
Downturns in capital spending and cyclicality in the markets we serve have had and could continue to have a material adverse effect
on our financial condition and results of operations.
The majority of our products are used in the construction, maintenance, repair and operation of facilities, plants and projects in the
communications, energy, engineering and construction, general manufacturing, infrastructure, oil and gas, marine construction, marine
transportation, mining, oilfield services, transportation, utility, wastewater treatment and food and beverage industries. The demand for
our products and services depends to a large degree on the capital spending levels of end-users in these markets. Many of these end-users
defer capital expenditures or cancel projects during economic downturns or periods of uncertainty. In addition, certain of the markets we
serve are cyclical, which affects capital spending by end-users in these industries.
We have risks associated with our customers’ access to credit.
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, reduced gross margins for us and, in some cases, higher than expected bad debt losses.
We have risks associated with inventory.
Our business requires us to maintain substantial levels of inventory. We must identify the right mix and quantity of products to keep
in our inventory to fulfill customer orders. Failure to do so could adversely affect our sales and earnings. However, if our inventory
levels are too high, we are at risk that unexpected changes in circumstances, such as a shift in market demand, drop in prices or loss of a
customer, could have a material adverse impact on the net realizable value of our inventory.
Our operating results are affected by fluctuations in commodity prices.
Copper, steel, aluminum, nickel and petrochemical products are components of the products we sell. Fluctuations in the costs of
these and other commodities have historically affected our operating results. If commodity prices decline, the net realizable value of our
existing inventory could be reduced, and our gross profit could be adversely affected. To the extent higher commodity prices result in
increases in the costs we pay for our products, we attempt to reflect the increase in the prices we charge our customers. While we
historically have been able to pass most of these cost increases on to our customers, to the extent we are unable to do so in the future, it
could have a material adverse effect on our operating results. In addition, if commodity costs increase, our customers may delay or
decrease their purchases of our products.
Our sales are impacted by the level of oil and gas drilling activity.
We estimate that approximately one-third of our sales depend upon the level of capital and operating expenditures in the oil and gas
industry, including capital and other expenditures in connection with exploration, drilling, production, gathering, transportation, refining
and processing operations. Demand for the products we distribute is sensitive to the level of exploration, development and production
activity of, and the corresponding capital and other expenditures by, oil and gas companies. A material decline in oil or gas prices,
inability to access capital, and consolidation within the industry could all depress levels of exploration, development and production
activity and, therefore, could lead to a decrease in our sales due to curtailed capital and MRO expenditures.
If we are unable to maintain our relationships with our customers, it could have a material adverse effect on our financial results.
We rely on customers to purchase our industrial products. The number, size, business strategy and operations of these customers
vary widely from market to market. Our success depends heavily on our ability to identify and respond to our customers’ needs.
In 2016, our ten largest customers accounted for approximately 39% of our sales. If we were to lose one or more of our large
customers, or if one or more of our large customers were to significantly reduce their purchases from us, and we were unable to replace
the lost sales on similar terms, we could experience a significant loss of revenue and profits. In addition, if one or more of our key
customers failed or were unable to pay, we could experience a write-off or write-down of the related receivables, which could adversely
5
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.
An inability to obtain the products that we distribute could result in lost revenues and reduced profits and damage our
relationships with customers.
In 2016, we sourced products from approximately 282 suppliers. However, we have adopted a strategy to concentrate our purchases
with a small number of suppliers in order to maximize product quality, delivery dependability, purchasing efficiencies and vendor
rebates. As a result, in 2016 approximately 45% of our purchases came from five suppliers. If any of these suppliers changes its sales
strategy or decides to terminate its business relationship with us, our sales and earnings could be adversely affected unless and until we
were able to establish relationships with suppliers of comparable products. In addition, if we are not able to obtain the products we
distribute from either our current suppliers or other competitive sources, we could experience a loss of revenue, reduction in profits and
damage to our relationships with our customers. Supply shortages may occur as a result of unanticipated demand or production cutbacks,
shortages of raw materials, labor disputes or weather conditions affecting products or shipments, transportation disruptions or other
reasons beyond our control. When shortages occur, suppliers often allocate products among their customers, and our allocations might
not be adequate to meet our customers' needs.
Loss of key personnel or our inability to attract and retain new qualified personnel could hurt our ability to operate and grow
successfully.
Our success is highly dependent upon the services of James L. Pokluda III, our President and Chief Executive Officer, and Nicol G.
Graham, our Chief Financial Officer. Our success will continue to depend to a significant extent on our executive officers, key
management and sales personnel. We do not have key man life insurance covering any of our executive officers. We may not be able to
retain our executive officers, key personnel or attract additional qualified management and sales personnel. The loss of any of our
executive officers or our other key management and sales personnel or our inability to recruit and retain qualified personnel could hurt
our ability to operate and make it difficult to maintain our market share and to execute our growth strategies.
A change in vendor rebate programs could adversely affect our gross margins and results of operations.
The terms on which we purchase products from many of our suppliers entitle us to receive a rebate based on the volume of our
purchases. These rebates effectively reduce our costs for products. If suppliers adversely change the terms of some or all of these
programs, the changes may lower our gross margins on products we sell and may have an adverse effect on our operating results.
If we encounter difficulties with our management information systems, including cyber-attacks, we would experience problems
managing our business.
We believe our management information systems are a competitive advantage in maintaining a leadership position in the industrial
supply industry. We rely upon our management information systems to manage and replenish inventory, determine pricing, fill and ship
orders on a timely basis and coordinate our sales and marketing activities. If we experience problems with our management information
systems, we could experience product shortages, diminished inventory control or an increase in accounts receivable. Any failure by us to
maintain our management information systems could adversely impact our ability to attract and serve customers and would cause us to
incur higher operating costs and experience reduced profitability.
An increase in competition could decrease sales or earnings.
We operate in a highly competitive industry. We compete directly with national, regional and local providers of industrial products.
Competition is primarily focused in the local service area and is generally based on product line breadth, 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 economic conditions and the industry trend toward consolidation could adversely affect our growth
and profit margins.
6
We may not be able to successfully identify acquisition candidates, effectively integrate newly acquired businesses into our
operations or achieve expected profitability from our acquisitions.
To supplement our growth, we intend to selectively pursue acquisition opportunities. If we are not successful in finding attractive
acquisition candidates that we can acquire on satisfactory terms, or if we cannot complete those acquisitions that we identify, we will not
be able to realize the benefit of this growth strategy.
Acquisitions involve numerous possible risks, including unforeseen difficulties in integrating operations, technologies, services,
accounting and personnel; the diversion of financial and management resources from existing operations; unforeseen difficulties related
to entering geographic regions or target markets where we do not have prior experience; the potential loss of key employees; and the
inability to generate sufficient profits to offset acquisition or investment-related expenses. If we finance acquisitions by issuing equity
securities or securities convertible into equity securities, our existing stockholders could be diluted, which, in turn, could adversely affect
the market price of our stock. If we finance an acquisition with debt, it could result in higher leverage and interest costs. As a result, if we
fail to evaluate and execute acquisitions properly, we might not achieve the anticipated benefits of these acquisitions, and we may incur
costs in excess of what we anticipate, and goodwill impairments may result.
We are anticipating growth in the businesses we acquired in 2010 and in 2016. However, the investments in the Southern (in 2013
and 2016) and Southwest (in 2015) reporting units have had goodwill and intangible impairment charges as they did not meet their
financial objectives. Future goodwill and tradename impairments may result, should the acquired businesses not achieve their currently
forecasted growth or profitability targets.
We may be subject to product liability claims that could be costly and time consuming.
We sell industrial products. As a result, from time to time we have been named as 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, if manufacturers' warranties and indemnities and our insurance
coverage are not available or inadequate to cover every claim, it could have an adverse effect on our operating results.
Changes to the U.S. tax, tariff and import/export regulations may have a negative effect on our results of operations.
We import a relatively small but growing percentage of our wire and cable products, as well as a significant portion of our hardware
products, from foreign manufacturers. Some recent U.S. tax reform proposals could, if enacted, increase the amount of tax paid on
imported goods. In addition, the recent presidential and congressional elections have created uncertainty about future trade policies,
treaties, government regulations and tariffs. Adoption of some of the proposed tax reforms, or changes in import tariffs or other trade
regulations, could have a negative impact on our tax expense and cash flow, require us to change our sourcing and supply chain
strategies, and adversely affect our profitability.
7
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Facilities
We operate out of twenty-two distribution centers strategically located throughout the United States with approximately 1,034,000
square feet of distribution space. We own three facilities in Houston, Texas, including our corporate headquarters, and two facilities in
Louisiana. All of the other facilities are leased, including three from third-party logistics providers. Nineteen of the facilities, in addition
to containing inventory for re-sale, house knowledgeable sales staff. We believe that our properties are in good operating condition and
adequately serve our current business operations.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in lawsuits that are brought against us in the normal course of business. We are not currently a
party to any legal proceedings that we expect, either individually or in the aggregate, to have a material adverse effect on our business or
financial condition. We, along with many other defendants, have been named in a number of lawsuits in the state courts of Minnesota,
North Dakota, and South Dakota alleging that certain wire and cable which may have contained asbestos caused injury to the plaintiffs
who were exposed to this wire and cable. These lawsuits are individual personal injury suits that seek unspecified amounts of money
damages as the sole remedy. It is not clear whether the alleged injuries occurred as a result of the wire and cable in question or whether
we, in fact, distributed the wire and cable alleged to have caused any injuries. We maintain general liability insurance that, to date, has
covered the defense of and all costs associated with these claims. In addition, we did not manufacture any of the wire and cable at issue,
and we would rely on any warranties from the manufacturers of such cable if it were determined that any of the wire or cable that we
distributed contained asbestos which caused injury to any of these plaintiffs. In connection with ALLTEL's sale of our company in 1997,
ALLTEL provided indemnities with respect to costs and damages associated with these claims that we believe we could enforce if our
insurance coverage proves inadequate.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
Name/Office
James L. Pokluda III
President and Chief Executive Officer
Nicol G. Graham
Chief Financial Officer, Treasurer and Secretary
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.
Chief Financial Officer, Treasurer and Secretary since
1997.
Age
52
64
8
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our common stock is listed on The NASDAQ Global Market under the symbol “HWCC”. As of December 31, 2016, there were
2,217 holders of record, including participants in security position listings. This figure does not include those beneficial holders whose
shares may be held of record by brokerage firms and clearing agencies. The following table lists quarterly information on the price range
of our common stock based on the high and low reported average sale prices for our common stock as reported by The NASDAQ Global
Market for the periods indicated below.
Year ended December 31, 2016:
First quarter
Second quarter
Third quarter
Fourth quarter
Year ended December 31, 2015:
First quarter
Second quarter
Third quarter
Fourth quarter
High
Low
$
$
$
$
$
$
$
$
5.91 $
6.23 $
5.86 $
6.18 $
12.21 $
10.55 $
10.15 $
7.60 $
5.65
6.00
5.67
5.90
9.29
8.80
6.12
5.08
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, 2016. For
further information regarding our stock repurchase activity, see Note 7 to our Consolidated Financial Statements.
Total number
of
shares
purchased
Average
price paid
per share
Total number of shares
purchased as part of
publicly announced
plans or programs (1)
Maximum number (or
approximate dollar
value) of shares that
may yet be purchased
under the plans or
programs (1)
40,200 $
6,703 $
— $
46,903 $
5.93
5.30
—
5.84
40,200 $
6,703 $
— $
46,903
9,202,422
9,166,906
9,166,906
Period
October 1 – 31, 2016
November 1 – 30, 2016
December 1 – 31, 2016
Total
(1) The board authorized a stock repurchase program of $25 million in March 2014. The program has no expiration date. Purchases
under the stock repurchase program were suspended in November 2016.
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 market 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, 2012, and reinvestment of dividends.
$225
$200
$175
$150
$125
$100
$75
$50
$25
178.81
160.14
157.68
154.68
189.05
150.99
203.23
180.40
114.00
112.90
90.96
99.18
88.58
HWCC
NASDAQ
Russell 2000
39.14
48.18
Jan 12
Dec 12
Dec 13
Dec 14
Dec 15
Dec 16
Dividend Policy
Holders of our common stock are entitled to receive dividends when, as and if declared by our Board of Directors. We paid a
quarterly cash dividend from August 2007 until August 2016. Our quarterly cash dividend from May 2013 through February 2014 was
$0.11 per share, from May 2014 through August 2015 was $0.12 per share and from November 2015 through May 2016 was $0.06 per
share. We paid a cash dividend of $0.03 per share in August 2016. The Board of Directors determined to suspend the regular dividend in
November 2016, to redeploy funds for other purposes, including the Vertex acquisition. For the years ended December 31, 2016 and
2015, cash dividends were $0.15 and $0.42 per share, resulting in total dividends paid of $2.5 million and $7.2 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/or availability.
Securities Authorized for Issuance under Equity Compensation Plans
The information called for by this Item regarding securities available for issuance is provided in response to Item 12.
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 operations data for each of the years ended December 31, 2016, 2015 and
2014, and the consolidated balance sheet data at December 31, 2016 and 2015, from our audited financial statements, which are included
in this Form 10-K. We have derived the consolidated statement of operations data for each of the years ended December 31, 2013 and
2012, and the consolidated balance sheet data at December 31, 2014, 2013 and 2012 from our audited financial statements, which are not
included in this Form 10-K.
Year Ended December 31,
2016
2015
(Dollars in thousands, except share data)
2014
2013
2012
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Sales
Cost of sales
Gross profit
$
Operating expenses:
Salaries and commissions
Other operating expenses
Depreciation and amortization
Impairment charge
Total operating expenses
Operating income (loss)
Interest expense
Income (loss) before income taxes
Income tax expense (benefit)
$
261,644
208,694
52,950
308,133 $
242,223
65,910
$
390,011
304,073
85,938
383,292 $
298,633
84,659
393,036
306,017
87,019
29,369
24,714
3,018
2,384
59,485
(6,535 )
845
(7,380 )
(1,374 )
28,537
25,023
2,915
3,417
59,892
6,018
901
5,117
3,073
31,196
26,400
2,919
—
60,515
25,423
1,168
24,255
9,283
30,946
26,068
2,978
7,562
67,554
17,105
992
16,113
8,211
30,013
25,139
2,941
—
58,093
28,926
1,252
27,674
10,635
Net income (loss)
$
(6,006 ) (1) $
2,044 (2) $
14,972
$
7,902 (3) $
17,039
Earnings (loss) per share:
Basic
Diluted
Weighted average common shares
outstanding :
Basic
Diluted
$
$
(0.37 ) (1) $
(0.37 ) (1) $
0.12 (2) $
0.12 (2) $
0.85
0.85
$
$
0.44 (3) $
0.44 (3) $
0.96
0.96
16,345,679
16,345,679
17,012,560
17,067,593
17,605,290
17,683,931
17,805,464
17,723,277
17,900,372
17,815,401
(1)
(2)
(3)
2016 net loss excluding the after tax impact of the impairment charge was $4,013, and basic and fully diluted loss per share
were each $0.25.
2015 net income excluding the after tax impact of the impairment charge was $5,171, and basic and fully diluted earnings
per share were each $0.30.
2013 net income excluding the after tax impact of the impairment charge was $14,594, and basic and fully diluted earnings
per share were each $0.82.
11
CONSOLIDATED BALANCE
SHEET DATA:
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Total assets
Book overdraft (1)
Total debt
Stockholders’ equity
2016
2015
2014
2013
2012
(Dollars in thousands)
As of December 31,
$
$
$
$
$
$
$
— $
44,677 $
79,783 $
175,870 $
3,181 $
60,388 $
90,131 $
— $
46,250 $
75,777 $
159,113 $
3,701 $
39,188 $
100,001 $
— $
61,599 $
88,958 $
189,813 $
3,113 $
53,847 $
111,307 $
— $
60,408 $
96,107 $
196,175 $
4,594 $
47,952 $
110,694 $
274
65,892
84,662
197,155
—
58,588
109,080
(1)
Our book overdraft is funded by our revolving credit facility as soon as the related checks clear our disbursement accounts.
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 41 years ago, we have grown to be a large provider of industrial products to the U.S. market. Today, we serve
approximately 8,000 customers. Our products are used in MRO activities and related projects, as well as for larger-scale projects in the
utility, industrial and infrastructure markets and a diverse range of industrial applications including communications, energy,
engineering and construction, general manufacturing, mining, marine construction and marine transportation, infrastructure, oilfield
services, petrochemical, transportation, utility, wastewater treatment and food and beverage. Activity in the MRO market has been
inconsistent, while the level of competition has increased.
Our revenue is driven in part by the level of capital spending within the end-markets we serve. Because many of these end-markets
defer capital expenditures during periods of economic downturns, our business has experienced cyclicality. Our revenue has been and
will continue to be impacted by fluctuations in capital spending and by our ability to drive demand through our sales and marketing
initiatives and the continued development and marketing of our private branded products, such as LifeGuard™. The recent diminished
level of economic activity and fluctuating 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 activity and demand improves.
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.
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, 2016 would
have resulted in a change in loss before income taxes of $1.3 million.
Intangible Assets
The Company’s intangible assets, excluding goodwill, represent purchased tradenames and customer relationships. Tradenames are
not being amortized and are treated as indefinite-lived assets. Tradenames are tested for recoverability on an annual basis in October of
13
each year, or when there is a triggering event. The annual test for 2016 combined with the interim test showed an impairment of certain
of the tradenames at Southern, and we recorded a pre-tax charge of less than $0.1 million. 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 to 9 year useful lives. If events or circumstances were to indicate that any of the
Company’s definite-lived intangible assets might be impaired, the Company would assess recoverability based on the estimated
undiscounted future cash flows to be generated from the applicable intangible asset.
When performing quantitative assessments for impairment, we use various assumptions in determining the current fair value of
these indefinite-lived intangible assets, including future expected cash flows and discount rates, as well as other fair value measures. If
actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may
be exposed to future impairment charges that could be material to our results of operations.
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 2016 would have resulted in a change in loss before income taxes of $0.8 million for the year ended December 31,
2016.
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, 2016, our goodwill balance was $22.8
million, representing 12.9% 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 is
unable to conclude that the goodwill associated with any reporting unit 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 non-controlling interest transaction prices in order to
obtain a controlling interest in the respective unit.
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 second quarter of 2016 we concluded that impairment indicators existed at the Houston Wire & Cable (“HWC”)
reporting unit due to a decline in the overall financial performance and overall market demand. The carrying value of the HWC reporting
unit’s goodwill was $2.4 million and its implied fair value resulting from the impairment test was zero.
During the second quarter of 2015, we concluded that impairment indicators existed at the Southwest reporting unit, due to a decline
in the overall financial performance and overall market demand. The carrying value of the Southwest reporting unit’s goodwill was $2.6
million and its implied fair value resulting from the impairment test was zero.
The annual goodwill impairment qualitative test was performed as of October 1, 2016, related to the Southern reporting unit, the one
reporting unit with goodwill at that date. This qualitative test, which compared current year to date performance to plan, indicated that it
was more likely that the goodwill was not impaired. If there are further reductions in our market capitalization and market multiples, or
the projected performance is not achieved, this remaining reporting unit could be at risk of failing the second step in the future.
Sales
We generate most of our sales by providing industrial products 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 industrial products that we sell. We also incur shipping and handling costs
in the normal course of business. Cost of sales also reflects cash discounts for prompt payment to vendors and vendor rebates generally
related to annual purchase targets, as well as inventory obsolescence charges.
Operating Expenses
Operating expenses include all expenses, excluding freight, incurred to receive, sell and ship product and administer the operations
of the Company.
Salaries and Commissions. Salary expense includes the base compensation, and any overtime earned by hourly personnel, for all
sales, administrative and warehouse employees and stock compensation expense for options and restricted stock granted to employees.
Commission expense is earned by inside sales personnel based on gross profit dollars generated, by field sales personnel from generating
sales and meeting various objectives, by sales, national and marketing managers for driving the sales process, by region managers based
on the profitability of their branches and by corporate managers based primarily on our profitability and also on other operating metrics.
Other Operating Expenses. Other operating expenses include all other expenses, except for salaries and commissions and
depreciation and amortization. This includes all payroll taxes, health insurance, travel expenses, public company expenses, advertising,
management information system expenses, facility rent and all distribution expenses such as packaging, reels, and repair and
maintenance of equipment and facilities.
Depreciation and Amortization. We incur depreciation expense on costs related to capitalized property and equipment on a
straight-line basis over the estimated useful lives of the assets, which range from three to thirty years. We incur amortization expense on
leasehold improvements and capital leases over the shorter of the lease term or the life of the related asset and on intangible assets over
the estimated life of the asset.
Interest Expense
Interest expense consists primarily of interest we incur on our debt.
15
Results of Operations
The following discussion compares our results of operations for the years ended December 31, 2016, 2015 and 2014.
The following table shows, for the periods indicated, information derived from our consolidated statements of operations, expressed
as a percentage of sales for the period presented.
Sales
Cost of sales
Gross profit
Operating expenses:
Salaries and commissions
Other operating expenses
Depreciation and amortization
Impairment charge
Total operating expenses
Operating income (loss)
Interest expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Year Ended December 31,
2016
2015
2014
100.0 %
79.8 %
20.2 %
100.0 %
78.6 %
21.4 %
100.0 %
78.0 %
22.0 %
11.2 %
9.4 %
1.2 %
0.9 %
22.7 %
(2.5 )%
0.3 %
(2.8 )%
(0.5 )%
(2.3 )%
9.3 %
8.1 %
0.9 %
1.1 %
19.4 %
2.0 %
0.3 %
1.7 %
1.0 %
0.7 %
8.0 %
6.8 %
0.7 %
— %
15.5 %
6.5 %
0.3 %
6.2 %
2.4 %
3.8 %
Note: Due to rounding, percentages may not add up to total operating expenses, operating income (loss), income (loss) before income
taxes or net income (loss).
Comparison of Years Ended December 31, 2016 and 2015
Sales
(Dollars in millions)
Sales
2016
Year Ended
December 31,
2015
$
261.6 $
308.1 $
Change
(46.5 )
(15.1 )%
Our sales in 2016 (including $7.0 million from Vertex) decreased 15.1% to $261.6 million from $308.1 million in 2015. When
adjusted for the fluctuation in metal prices, revenues for the 2016 fiscal year decreased approximately 8% compared to 2015 sales.
Excluding the impact of Vertex’s sales, we estimate that our project business, which targets end markets and encompassing
Environmental Compliance, Engineering & Construction, Industrials, LifeGuard™, Utility Power Generation, and Mechanical Wire
Rope, was down approximately 34% on a metals-adjusted basis, from 2015, while Maintenance, Repair, and Operations (MRO) sales
fell approximately 1% on a metals-adjusted basis.
Gross Profit
(Dollars in millions)
Gross profit
Gross profit as a percent of sales
2016
$
Year Ended
December 31,
2015
53.0
$
20.2 %
65.9
$
21.4 %
Change
(13.0)
(19.7 )%
Gross profit decreased 19.7% to $53.0 million in 2016 from $65.9 million in 2015. The decrease in gross profit was primarily
attributable to the decrease in sales. Gross margin (gross profit as a percentage of sales) decreased to 20.2% in 2016 from 21.4% in 2015
primarily due to continued competitive market conditions.
16
Operating Expenses
(Dollars in millions)
Operating expenses:
Salaries and commissions
Other operating expenses
Depreciation and amortization
Impairment charge
Total operating expenses
2016
$
$
29.4 $
24.7
3.0
2.4
59.5 $
Year Ended
December 31,
2015
Change
28.5
25.0
2.9
3.4
59.9
$
$
0.8
(0.3 )
0.1
(1.0 )
(0.4 )
2.9 %
(1.2 )%
3.5 %
(30.2 )%
(0.7 )%
Operating expenses as a percent of sales
22.7 %
19.4 %
Note: Due to rounding, numbers may not add up to total operating expenses.
Salaries and Commissions. Salaries and commissions increased 2.9% to $29.4 million in 2016 from $28.5 million in 2015. The
increase was primarily due to Vertex’s salaries.
Other Operating Expenses. Other operating expenses decreased 1.2% to $24.7 million in 2016 from $25.0 million in 2015 primarily
due to the decrease in sales volume and the related decrease in warehouse expenses and lower health insurance claims. These decreases
were partially offset by the operating expenses of Vertex. In addition operating expenses include approximately $0.9 million related to
the Vertex acquisition.
Depreciation and Amortization. Depreciation and amortization increased slightly to $3.0 million in 2016 from $2.9 million in 2015.
Impairment Charge. The Company recorded a non-cash impairment charge in 2016 with respect to its HWC reporting unit and
tradenames at its Southern Wire reporting unit. The Company recorded a non-cash impairment charge in 2015 with respect to its
Southwest reporting unit and in respect of tradenames at its Southern and Southwest reporting units. (See Note 4 to our Consolidated
Financial Statements)
Operating expenses as a percentage of sales increased to 22.7% in 2016 from 19.4% in 2015. This increase primarily relates to the
decrease in sales which fell at a higher rate than total operating expenses.
Interest Expense
Interest expense decreased 6.2% to $0.8 million in 2016 from $0.9 million in 2015 due to lower average debt in the first nine months
of the year, offset by higher debt in the last quarter due to the Vertex acquisition. Average debt was $40.0 million in 2016 compared to
$43.9 million in 2015. The average effective interest rate increased slightly to 2.0% in 2016 from 1.9% in 2015.
Income Tax Expense
We recorded an income tax benefit of $1.4 million in 2016, due to the pre-tax loss, compared to income tax expense of $3.1 million
in 2015. The effective income tax rate decreased to 18.6% in 2016 from 60.1% in 2015. In 2015, the non-deductible portion of the
impairment charge increased the rate by 20.0% and the impact of the share-based compensation deficit increased the rate by 3.7%. The
Company has exhausted the excess tax benefits arising from stock-based compensation transactions (APIC pool), therefore any future
net deficits will result in incremental income tax expense.
Net Income (Loss)
We sustained a net loss of $6.0 million in 2016 compared to net income of $2.0 million in 2015, primarily due to the lower level of
sales activity.
17
Comparison of Years Ended December 31, 2015 and 2014
Sales
(Dollars in millions)
Sales
2015
$
308.1 $
Year Ended
December 31,
2014
390.0 $
Change
(81.9 )
(21.0 )%
Our sales in 2015 decreased 21.0% to $308.1 million from $390.0 million in 2014. When adjusted for the fluctuation in metal prices,
revenues for the 2015 fiscal year decreased approximately 14% compared to 2014 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 19% on a metals-adjusted basis. MRO business fell approximately 11% on a
metals-adjusted basis.
Gross Profit
(Dollars in millions)
Gross profit
Gross profit as a percent of sales
2015
$
Year Ended
December 31,
2014
65.9 $
21.4 %
85.9
$
22.0 %
Change
(20.0 )
(0.6 )%
(23.3 )%
Gross profit decreased 23.3% to $65.9 million in 2015 from $85.9 million in 2014. The decrease in gross profit was primarily
attributed to the decrease in sales. Gross margin (gross profit as a percentage of sales) decreased to 21.4% in 2015 from 22.0% in 2014.
Operating Expenses
(Dollars in millions)
Operating expenses:
Salaries and commissions
Other operating expenses
Depreciation and amortization
Impairment charge
Total operating expenses
2015
Year Ended
December 31,
2014
Change
$
$
28.5 $
25.0
2.9
3.4
59.9 $
31.2
26.4
2.9
—
60.5
$
$
(2.7 )
(1.4 )
0.0
3.4
(0.6 )
(8.5 )%
(5.2 )%
(0.1 )%
n/a
(1.0 )%
Operating expenses as a percent of sales
19.4 %
15.5 %
3.9 %
Note: Due to rounding, numbers may not add up to total operating expenses.
Salaries and Commissions. Salaries and commissions decreased 8.5% to $28.5 million in 2015 from $31.2 million in 2014.
Commissions decreased $1.4 million as sales and gross profit decreased. Salaries decreased $1.3 million primarily due to a headcount
reduction as part of our cost savings initiative.
Other Operating Expenses. Other operating expenses decreased 5.2% to $25.0 million in 2015 from $26.4 million in 2014 primarily
due to the decrease in sales volume and the related decrease in warehouse expenses, the decrease in facility expenses due to the
Southwest consolidation, lower benefits and employee related expenses as the full-time employee headcount decreased, offset by facility
moving costs.
Depreciation and Amortization. Depreciation and amortization was flat in both years at $2.9 million.
Impairment Charge. The Company recorded a non-cash impairment charge in 2015 with respect to its Southwest reporting unit and
in respect of tradenames at its Southern and Southwest reporting units. (See Note 4 to our Consolidated Financial Statements)
Operating expenses as a percentage of sales increased to 19.4% in 2015 from 15.5%. This increase primarily relates to the
impairment of goodwill offset by the savings in salaries and commissions and other operating expenses.
18
Interest Expense
Interest expense decreased 22.9% to $0.9 million in 2015 from $1.2 million in 2014 due to lower average debt and a higher effective
interest rate. Average debt was $43.9 million in 2015 compared to $55.6 million in 2014. The average effective interest rate decreased to
1.9% in 2015 from 2.1% in 2014. This decrease was primarily due to the lower interest rates associated with the new Loan and Security
Agreement.
Income Tax Expense
Income tax expense decreased 66.9% to $3.1 million in 2015 compared to $9.3 million in 2014. The effective income tax rate
increased to 60.1% in 2015 from 38.3% in 2014, primarily due to the non-deductible portion of the impairment charge in 2015, which
increased the rate by 20.0% and the impact of the share-based compensation deficit of 3.7%. The Company has exhausted the excess tax
benefits arising from stock-based compensation transactions (APIC pool), therefore any future net deficits will result in incremental
income tax expense.
Net Income
We achieved net income of $2.0 million in 2015 compared to $15.0 million in 2014, a decrease of 86.3%, primarily due to the lower
level of activity and the non-cash impairment charge in 2015.
Impact of Inflation and Commodity Prices
Our results of operations are affected by changes in the inflation rate and commodity prices. Moreover, because copper, steel,
aluminum, nickel and petrochemical products are components of the industrial products we sell, fluctuations in the costs of these and
other commodities have historically affected our operating results. We estimate decreasing metal prices negatively impacted sales by
approximately 8% in 2016. 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 three times a year, the impact of changes in commodity prices in
any particular quarter would primarily affect the results of the succeeding two calendar quarters. If we are unable to pass on to our
customers future cost increases due to inflation or rising commodity prices, our operating results could be adversely affected.
Liquidity and Capital Resources
Our primary capital needs are for working capital obligations, capital expenditures, and other general corporate purposes, including
acquisitions. We have currently suspended purchases under our stock repurchase program. Our primary sources of working capital are
cash from operations supplemented by bank borrowings.
Liquidity is defined as the ability to generate adequate amounts of cash to meet the current need for cash. We assess our liquidity in
terms of our ability to generate cash to fund our operating activities. Significant factors which could affect liquidity include the
following:
•
•
•
•
•
the adequacy of available bank lines of credit;
cash flows generated from operating activities;
capital expenditures;
acquisitions; and
the ability to attract long-term capital with satisfactory terms
Comparison of Years Ended December 31, 2016 and 2015
Our net cash provided by operating activities was $17.2 million in 2016 compared to $31.8 million in 2015. We had a net loss of
$6.0 million in 2016 compared to net income of $2.0 million in 2015.
Changes in our operating assets and liabilities resulted in cash provided by operating activities of $16.7 million in 2016. Excluding
the operating assets and liabilities acquired as part of the Vertex acquisition, inventories decreased $10.5 million as we continued to
improve inventory profiles. Accounts receivable decreased $4.0 million, primarily due to decreased sales in 2016. Accrued and other
current liabilities increased $2.6 million primarily due to increased inventory purchases in the latter part of the year.
Net cash used in investing activities was $33.7 million in 2016 compared to $3.1 million in 2015. The increase was primarily
attributable to the Vertex acquisition in October 2016.
19
Net cash provided by financing activities was $16.4 million in 2016 compared to net cash used in financing activities of $28.7
million in 2015. Net borrowings under our revolver of $21.2 million due to the impact of funding the Vertex acquisition, the payment of
dividends of $2.5 million and the purchase of treasury stock of $2.3 million were the main components of financing activities in 2016.
Comparison of Years Ended December 31, 2015 and 2014
Our net cash provided by operating activities was $31.8 million in 2015 compared to $11.3 million in 2014. Our net income
decreased by $12.9 million or 86.3% to $2.0 million in 2015 from $15.0 million in 2014.
Changes in our operating assets and liabilities resulted in cash provided by operating activities of $22.6 million in 2015. Accounts
receivable decreased $15.4 million, primarily due to decreased sales in 2015. Inventories decreased $12.8 million to align with the
reduction in sales volume. Partially offsetting these sources of cash was the decrease in trade accounts payable of $1.6 million primarily
due to lower inventory. Accrued and other current liabilities decreased $3.6 million primarily due to lower accrued wire purchases.
Net cash used in investing activities was $3.1 million in 2015 compared to $2.2 million in 2014. The increase was primarily
attributable to renovations related to the purchase of a building in December 2013 used to consolidate the four existing Southwest
Houston locations.
Net cash used in financing activities was $28.7 million in 2015 compared to $9.1 million in 2014. Net payments on the revolver of
$14.7 million, the payment of dividends of $7.2 million and the purchase of treasury stock of $6.9 million were the main components of
financing activities in 2015.
Indebtedness
Our principal source of liquidity at December 31, 2016 was working capital of $102.1 million compared to $104.0 million at
December 31, 2015. We also had available borrowing capacity under our loan agreement in the amount of $25.6 million at
December 31, 2016 and $41.5 million at December 31, 2015. The decrease in availability is primarily due to borrowings to pay for the
Vertex acquisition.
We believe that we will have adequate availability of capital to fund our present operations, meet our commitments on our existing
debt, and fund anticipated growth over the next twelve months, including expansion in existing and targeted market areas. We
continually seek potential acquisitions and from time to time hold discussions with acquisition candidates. If suitable acquisition
opportunities or working capital needs arise that would require additional financing, we believe that our financial position and earnings
history provide a solid base for obtaining additional financing resources at competitive rates and terms. Additionally, based on market
conditions, we may decide to issue additional shares of common or preferred stock to raise funds.
Loan and Security Agreement
On October 3, 2016, in connection with the Vertex acquisition, we entered into a First Amendment to our existing Fourth Amended
and Restated Loan and Security Agreement with Bank of America, N.A. as agent and lender (the “2015 Loan Agreement”) to add Vertex
as borrower (and lien grantor) and include Vertex’s eligible accounts receivable and eligible inventory in the borrowing base. The
amendment also expanded the 2015 Loan Agreement to include incremental availability on eligible accounts receivable and inventory
up to $5 million, which will be amortized quarterly, starting April 1, 2017, over two and a half years. The 2015 Loan Agreement
provides a $100 million revolving credit facility and expires on September 30, 2020. Under certain circumstances the Company may
request an increase in the commitment by an additional $50 million. Borrowings under the 2015 Loan Agreement bear interest at the
British Bankers Association LIBOR Rate plus 100 to 150 basis points based on availability, if a LIBOR loan, or at a fluctuating rate
equal to the greatest of the agent’s prime rate, the federal funds rate plus 50 basis points, or LIBOR for a 30-day interest period plus 150
basis points, if a base rate loan. The unused commitment fee is 25 basis points. Availability under the 2015 Loan Agreement is limited to
a borrowing base equal to 85% of the value of eligible accounts receivable, plus the lesser of 70% of the value of eligible inventory or
90% of the net orderly liquidation value percentage of the value of eligible inventory, in each case less certain reserves. The 2015 Loan
Agreement is secured by substantially all of the property of the Company, other than real estate.
Covenants in the 2015 Loan Agreement require us to maintain certain minimum financial ratios and/or availability levels. Repaid
amounts can be re-borrowed subject to the borrowing base. As of December 31, 2016, we met the availability-based covenant.
20
Contractual Obligations
The following table describes our cash commitments to settle contractual obligations as of December 31, 2016.
Total
Less than
1 year
1-3 years
(In thousands)
Loans payable
Operating lease obligations
Non-cancellable purchase obligations (1)
Total
$
$
60,388 $
12,978
33,991
107,357 $
— $
3,567
33,991
37,558 $
— $
4,925
—
4,925 $
3-5 years
More than
5 years
60,388 $
4,046
—
64,434 $
—
440
—
440
(1) These obligations reflect purchase orders outstanding with manufacturers as of December 31, 2016. We believe that some of these
obligations may be cancellable upon negotiation with our vendors, but we are treating these as non-cancellable for this disclosure
due to the absence of an express cancellation right.
Capital Expenditures
We made capital expenditures of $1.3 million, $3.1 million and $2.2 million in the years ended December 31, 2016, 2015 and 2014,
respectively. The 2015 and 2014 expenditures included amounts of $1.9 million and $1.0 million, respectively, to complete the
renovation and build out of the facility purchased in 2013 which was used to consolidate the Southwest operations in Houston in 2015.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements, other than operating leases.
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 2015 Loan Agreement bear interest at variable interest rates and therefore are sensitive to changes in the
general level of interest rates. At December 31, 2016, the weighted average interest rate on our $60.4 million of variable interest debt
was approximately 2.4%.
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, 2016 borrowing levels, a 1.0%
change in the applicable interest rates would have a $0.6 million effect on our annual interest expense.
Commodity Risk
We are subject to periodic fluctuations in metals prices, as our products have varying levels of metals content including copper,
steel, aluminum and nickel, in their construction. In addition, 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 and in Euros. We believe we have minimal exposure to foreign exchange
rate risk.
21
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.
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.
22
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”.
23
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, 2016 and 2015
Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
Page
F-1
F-2
F-3
F-4
F-5
F-6
24
Report of Independent Registered Public Accounting Firm
The 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, 2016 and 2015, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the
three years in the period ended December 31, 2016. 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, 2016 and 2015, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 2016, 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, 2016, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) and our report dated March 24, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Houston, Texas
March 24, 2017
F-1
Houston Wire & Cable Company
Consolidated Balance Sheets
$
$
$
Assets
Current assets:
Accounts receivable, net
Inventories, net
Income taxes
Prepaids
Total current assets
Property and equipment, net
Intangible assets, net
Goodwill
Deferred income taxes
Other assets
Total assets
Liabilities and stockholders’ equity
Current liabilities:
Book overdraft
Trade accounts payable
Accrued and other current liabilities
Total current liabilities
Debt
Other long-term obligations
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:
16,457,525 and 16,712,626 shares outstanding at December 31, 2016 and 2015, respectively
Additional paid-in capital
Retained earnings
Treasury stock
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2016
(In thousands, except
share data)
2015
44,677 $
79,783
1,948
570
126,978
11,261
13,378
22,770
892
591
175,870 $
3,181 $
8,406
13,248
24,835
60,388
516
85,739
46,250
75,777
932
648
123,607
10,899
5,984
14,866
3,338
419
159,113
3,701
6,380
9,568
19,649
39,188
275
59,112
—
—
21
53,824
97,550
(61,264 )
90,131
21
54,621
106,048
(60,689 )
100,001
$
175,870 $
159,113
The accompanying notes are an integral part of these consolidated financial statements.
F-2
Houston Wire & Cable Company
Consolidated Statements of Operations
2016
Year Ended December 31,
2015
2014
(In thousands, except share and per share data)
$
$
261,644
208,694
52,950
$
308,133
242,223
65,910
390,011
304,073
85,938
29,369
24,714
3,018
2,384
59,485
(6,535 )
845
(7,380 )
(1,374 )
(6,006 ) $
28,537
25,023
2,915
3,417
59,892
6,018
901
5,117
3,073
2,044
$
31,196
26,400
2,919
—
60,515
25,423
1,168
24,255
9,283
14,972
(0.37 ) $
(0.37 ) $
0.12
0.12
$
$
0.85
0.85
$
$
$
Sales
Cost of sales
Gross profit
Operating expenses:
Salaries and commissions
Other operating expenses
Depreciation and amortization
Impairment charge
Total operating expenses
Operating income (loss)
Interest expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Earnings (loss) per share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
16,345,679
16,345,679
17,012,560
17,067,593
17,605,290
17,683,931
Dividends declared per share
$
0.15
$
0.42
$
0.47
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Houston Wire & Cable Company
Consolidated Statements of Stockholders' Equity
Common Stock
Shares
Additional
Paid-In
Amount Capital
Retained
Earnings
Treasury Stock
Shares
Amount
Total
Stockholders'
Equity
Balance at December 31, 2013 20,988,952 $
—
—
Net income
Exercise of stock options, net
Repurchase of treasury
21 $
—
—
(In thousands, except share data)
55,642 $ 104,607 (3,034,920 ) $ (49,576 ) $
—
297
14,972
—
—
18,500
—
(116 )
110,694
14,972
181
shares
Excess tax benefit
(deficiency)
Amortization of unearned
stock compensation
Impact of forfeited awards
Issuance of restricted stock
awards
Impact of surrendered equity
awards to satisfy taxes
Dividends on common stock
—
—
—
—
(555,008 )
(6,980 )
(6,980 )
—
—
(10 )
—
—
—
—
868
114
—
—
—
—
—
—
(11,666 )
—
(186 )
—
—
(172 )
10,709
172
(10 )
868
(72 )
—
—
—
—
—
(1,455 )
—
—
(8,346 )
91,448
—
1,455
—
—
(8,346 )
Balance at December 31, 2014 20,988,952
—
—
Net income
Exercise of stock options, net
Repurchase of treasury
21
—
—
54,871 111,233 (3,480,937 )
—
2,044
4,125
—
—
(48 )
(54,818 )
—
59
111,307
2,044
11
shares
Excess tax benefit
(deficiency)
Amortization of unearned
stock compensation
Impact of forfeited awards
Impact of released vested
restricted stock units
Issuance of restricted stock
awards
Dividends on common stock
—
—
—
—
(865,922 )
(6,858 )
(6,858 )
—
—
(40 )
—
—
—
—
886
664
—
—
—
—
—
—
(52,128 )
—
(784 )
—
—
(224 )
—
14,946
224
(40 )
886
(120 )
—
—
—
—
—
(1,488 )
—
—
(7,229 )
103,590
—
1,488
—
—
(7,229 )
Balance at December 31, 2015 20,988,952
—
Net loss
Repurchase of treasury
21
—
54,621
—
106,048 (4,276,326 )
—
(6,006 )
(60,689 )
—
shares
Amortization of unearned
stock compensation
Impact of forfeited awards
Impact of released vested
restricted stock units
Issuance of restricted stock
—
—
—
—
—
—
—
856
387
—
—
(284 )
—
—
—
—
(376,860 )
(2,228 )
—
(28,295 )
—
(387 )
20,416
284
awards
—
—
Balance at December 31, 2016 20,988,952 $
Dividends on common stock
—
—
21 $
(1,756 )
—
53,824 $
—
(2,492 )
97,550 (4,531,427 ) $ (61,264 ) $
129,638
—
1,756
—
100,001
(6,006 )
(2,228 )
856
—
—
—
(2,492 )
90,131
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Houston Wire & Cable Company
Consolidated Statements of Cash Flows
Operating activities
Net income (loss)
Adjustments to reconcile net income to net cash provided by operating activities:
Impairment charge
Depreciation and amortization
Amortization of unearned stock compensation
Provision for doubtful accounts
Provision for inventory obsolescence
Deferred income taxes
Other non-cash items
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Book overdraft
Trade accounts payable
Accrued and other current liabilities
Income taxes
Other operating activities
Net cash provided by operating activities
Investing activities
Expenditures for property and equipment
Proceeds from disposals of property and equipment
Cash paid for acquisition
Net cash used in investing activities
Financing activities
Borrowings on revolver
Payments on revolver
Proceeds from exercise of stock options
Payment of dividends
Excess tax benefit for options
Purchase of treasury stock
Net cash provided by (used in) financing activities
Net change in cash
Cash at beginning of year
Cash at end of year
Supplemental disclosures
Cash paid during the year for interest
Cash paid during the year for income taxes
Year Ended December 31,
2016
2015
(In thousands)
2014
$
(6,006 ) $
2,044 $
14,972
2,384
3,018
856
285
93
6
(116 )
4,019
10,483
(517 )
896
2,587
(1,016 )
271
17,243
3,417
2,915
886
97
397
(485 )
(59 )
15,352
12,784
588
(1,613 )
(3,557 )
(713 )
(224 )
31,829
—
2,919
868
50
1,002
(923 )
(93 )
(1,144 )
6,147
(1,481 )
(5,644 )
(5,794 )
184
206
11,269
(1,319 )
5
(32,370 )
(33,684 )
(3,123 )
8
—
(3,115 )
(2,177 )
25
—
(2,152 )
302,898
(281,698 )
—
(2,495 )
—
(2,264 )
16,441
310,366
(325,025 )
11
(7,172 )
—
(6,894 )
(28,714 )
405,884
(399,989 )
181
(8,293 )
7
(6,907 )
(9,117 )
—
—
—
—
— $
— $
—
—
—
728 $
233 $
900 $
4,278 $
1,160
10,029
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Houston Wire & Cable Company
Notes to Consolidated Financial Statements
1. Organization and Summary of Significant Accounting Policies
Description of Business
Houston Wire & Cable Company (the “Company”), through its wholly owned subsidiaries, HWC Wire & Cable Company,
Advantage Wire & Cable and Cable Management Services Inc., provides industrial products to the U.S. market through twenty-two
locations in fourteen states throughout the United States. In 2010, the Company purchased Southwest Wire Rope LP (“Southwest”), its
general partner Southwest Wire Rope GP LLC and its wholly owned subsidiary, Southern Wire (“Southern”) and subsequently merged
them into the Company’s operating subsidiary. On October 3, 2016, the Company purchased Vertex Corporate Holdings, Inc. and its
subsidiaries (“Vertex”). 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 (loss) per Share
Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares
outstanding. Diluted earnings (loss) per share include the dilutive effects of option and unvested restricted stock awards and units.
The following reconciles the denominator used in the calculation of diluted earnings (loss) per share:
Year Ended December 31,
2016
2015
2014
Denominator:
Weighted average common shares for basic earnings per share
Effect of dilutive securities
Denominator for diluted earnings per share
16,345,679 17,012,560 17,605,290
78,641
16,345,679 17,067,593 17,683,931
55,033
—
Stock awards to purchase 685,054, 643,738 and 476,473 shares of common stock were not included in the diluted net income (loss)
per share calculation for 2016, 2015 and 2014, respectively, as their inclusion would have been anti-dilutive.
Accounts Receivable
Accounts receivable consists primarily of receivables from customers, less an allowance for doubtful accounts of $0.2 million and
$0.1 million, and a reserve for returns and allowances of $0.2 million and $0.3 million at December 31, 2016 and 2015, respectively. The
Company has no contractual repurchase arrangements with its customers. Credit losses have been within management’s expectations.
F-6
The following table summarizes the changes in the allowance for doubtful accounts for the past three years:
Balance at beginning of year
Bad debt expense
Write-offs, net of recoveries
Balance at end of year
Inventories
$
$
2016
2015
(In thousands)
132 $
285
(266 )
151 $
139 $
97
(104 )
132 $
2014
148
50
(59 )
139
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 $4.4 million and $4.8 million at December 31, 2016 and 2015, 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 operations. Throughout the year, the Company estimates the amount of the rebates earned based on purchases to date
relative to the total purchase levels expected to be achieved during the rebate period. 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 10 years
Leasehold improvements are depreciated over their estimated life or the term of the lease, whichever is shorter.
Total depreciation expense was approximately $1.3 million for the year ended December 31, 2016 and $1.2 million for each of the
years ended December 31, 2015 and 2014.
Goodwill
Goodwill represents the excess of the amount paid to acquire businesses over the estimated fair value of tangible assets and
identifiable intangible assets acquired, less liabilities assumed. Determining the fair value of assets acquired and liabilities assumed
requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with
respect to future cash flows, discount rates and asset lives among other items. At December 31, 2016, the goodwill balance was $22.8
million, representing 12.9% of the Company’s 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 is
unable to conclude that the goodwill associated with any reporting unit is 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.
F-7
Intangibles
Intangible assets, from the acquisition of Southwest and Southern in 2010 and the recent acquisition of Vertex in October 2016,
consist of customer relationships and tradenames. The customer relationships are amortized over 6 to 9 year useful lives. If events or
circumstances were to indicate that any of the Company’s definite-lived intangible assets might be impaired, the Company would assess
recoverability based on the estimated undiscounted future cash flows to be generated from the applicable intangible asset. If the
undiscounted cash flows were less than the carrying value, then the intangible assets would be written down to their fair value.
Tradenames have an indefinite life and are not being amortized and are tested for impairment on an annual basis.
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 industrial products, including electrical and mechanical
wire and cable, industrial fasteners, 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. Customers are permitted to return product only on a case-by-case
basis. Product exchanges are handled as a credit, with any replacement item being re-invoiced to the customer. Customer returns are
recorded as 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 and are included as a component of cost of sales.
Credit Risk
No single customer accounted for 10% or more of the Company’s sales in 2016, 2015 or 2014. 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 $0.4 million for each of the years ended December 31,
2016 and 2015 and $0.3 million for the year ended December 31, 2014.
F-8
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.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) is the sole source of
authoritative GAAP other than SEC issued rules and regulations that apply only to SEC registrants. The FASB issues an Accounting
Standard Update ("ASU") to communicate changes to the codification. The Company considers the applicability and impact of all
ASUs. The following are those ASUs that are relevant to the Company.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment.” The amendment in this ASU provides final guidance that simplifies the accounting for goodwill impairment for
all entities by requiring impairment charges to be based on the first step in today’s two-step impairment test under ASC 350. ASU No.
2017-04 is effective for annual and interim impairment test performed in periods beginning after December 15, 2019. Early adoption is
permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company is currently evaluating the
impact of adopting as well as the timing of when it will adopt this ASU.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash
Receipts and Cash Payments.” The amendments in this ASU address eight cash flow issues with the intention of reducing current
diversity in practice among business entities. The Company will evaluate the eight issues in the amendment and determine if any
changes are necessary for compliance. ASU No. 2016-15 is effective for annual and interim periods beginning after December 15, 2017;
early adoption is permitted and should be applied retrospectively where practical. The Company will determine the date of adoption,
once the Company has evaluated the impact of this ASU.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting.” The new guidance addresses several aspects of the accounting for share-based payment award
transactions, including: (a) the recognition of the income tax effects of awards in the income statement when the awards vest, forfeit, or
are settled, thus eliminating additional paid-in-capital pools, (b) classification of awards as either equity or liabilities, and (c)
classification on the statement of cash flows. This update is effective for public companies for fiscal years beginning after December 15,
2016 with early adoption permitted. The Company is currently evaluating the elections the Company may make and therefore the full
effects of the adoption of the standard are not yet known. However, as the Company does not have an APIC pool, upon adoption, the
change in the recognition of income tax effects will not have an impact on the Company. Additionally, the awards the Company
currently has outstanding will remain classified in equity. The Company will adopt this ASU in the first quarter of 2017.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. Under the new guidance, a lessee will be required to
recognize assets and liabilities for leases greater than 1 year, both capital and operating leases. This update is effective for public
companies for fiscal years beginning after December 15, 2018 with early adoption permitted. The Company is currently evaluating the
impacts of adopting as well as the timing of when it will adopt this ASU.
In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740) — Balance Sheet Classification of Deferred
Taxes.” ASU No. 2015-17 eliminates the requirement to classify deferred tax assets and liabilities as current or long-term based on how
the related assets or liabilities are classified. All deferred taxes are now required to be classified as long-term including any associated
valuation allowances. The Company adopted this guidance in the third quarter of 2016 and has applied it retrospectively. It did not have
a material impact on the consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory” (Topic 330), which changes
guidance for subsequent measurement of inventory within the scope of the update from the lower of cost or market to the lower of cost
and net realizable value. This update is effective for annual and interim periods beginning after December 15, 2016 and early adoption is
permitted. The Company does not believe there will be any material impact upon the adoption of this guidance on the Company’s
consolidated financial statements and will adopt this ASU in the first quarter of 2017.
In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs (Subtopic 835-30).” The
amendments in this ASU require debt issuance costs to be presented on the balance sheet as a direct reduction from the carrying amount
of the related debt liability. However, the guidance in this ASU did not address the presentation or subsequent measurement of debt
issuance costs related to line-of-credit arrangements. As a result, in August 2015 the FASB issued ASU No. 2015-15
“Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with
Line-of-Credit Agreements,” to clarify that, with respect to a line-of-credit agreement, the SEC staff would not object to an entity
F-9
deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the
term of the line-of-credit arrangement. The Company adopted this guidance in the first quarter of 2016 and is continuing to treat debt
issuance costs associated with its revolving credit facility as a deferred asset and amortizing the deferred asset over the term of the credit
agreement. Therefore, the adoption did not have any impact on the Company’s financial position or results of operations.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606), which supersedes the
revenue recognition requirements in ASC Topic 605, “Revenue Recognition,” and most industry-specific guidance. This ASU is based
on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional
disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including
significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The
amendments in the ASU must be applied using one of two retrospective methods and are effective for annual and interim periods
beginning after December 15, 2017. As the Company recognizes revenue only once product has shipped, it does not believe this ASU
will have a significant impact on its revenue recognition policy. The Company will adopt this ASU effective January 1, 2018 and is still
evaluating its impact on its financial position and results of operations and which implementation method the Company will use.
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 operations.
The Company receives a tax deduction for certain stock option exercises in the period in which the options are exercised, generally
for the excess of the market price on the date of exercise over the exercise price of the options. The Company reports excess tax benefits
from the award of equity instruments as financing cash flows. Excess tax benefits result when a deduction reported for tax return
purposes for an award of equity instruments exceeds the cumulative compensation cost for the instruments recognized for financial
reporting purposes.
Income Taxes
Deferred tax assets and liabilities are determined based on differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse.
2. Business Combination
On October 3, 2016, the Company completed the acquisition of Vertex from DXP Enterprises. The acquisition has been accounted
for in accordance with ASC Topic 805, Business Combinations. Accordingly, the total purchase price has been allocated to the assets
acquired and liabilities assumed based on their fair values as of the acquisition date. Vertex is a master distributor of industrial fasteners,
specializing in corrosion resistant and specialty alloy inch and metric threaded fasteners, rivets, and hose clamps, to the industrial
market. Under the terms of the acquisition agreement, the purchase price was $32.3 million, subject to an adjustment based on the net
working capital of Vertex as of the date of closing. The current working capital adjustment (which is still subject to change) is $0.1
million, making the total purchase price $32.4 million. The Company has elected to treat the acquisition as a stock purchase for tax
purposes. The amount of goodwill deductible for tax purposes is $1.0 million. The acquisition was funded by borrowing under the
Company’s loan agreement. This acquisition expands the Company’s product offerings to the industrial marketplace that purchases its
wire and cable products.
F-10
The following table summarizes the current estimated fair value of the acquired assets and assumed liabilities recorded as of the date
of acquisition. The fair value of all assets acquired and liabilities assumed are preliminary and subject to the completion of incremental
analysis of the fair values of the assets acquired and liabilities assumed:
At October 3, 2016
(In thousands)
Cash
Accounts receivable
Inventories
Prepaids
Property and equipment
Intangibles
Goodwill
Other assets
Total assets acquired
Trade accounts payable
Accrued and other current liabilities
Deferred income taxes
Total liabilities assumed
Net assets purchased
$
$
3
2,626
14,582
46
59
9,161
10,266
116
36,859
1,130
919
2,440
4,489
32,370
The preliminary fair values of the assets acquired and liabilities assumed were determined using the market, income and cost
approaches. The market approach used by the Company included prices at which comparable assets were purchased under similar
circumstances. The income approach indicated value for the subject net assets based on the present value of cash flows projected to be
generated by the net assets over their useful life. Projected cash flows were discounted at a market rate of return that reflects the relative
risk associated with the asset and the time value of money. The cost approach estimated value by determining the current cost of
replacing the asset with another of equivalent economic utility. The cost to replace a given asset reflected the estimated reproduction or
replacement cost for the asset, less an allowance for loss in value due to depreciation
Intangible asset acquired, consist of customer relationships - $7.0 million and trade names - $2.1 million. Trade names are not being
amortized, while customer relationships are being amortized over a 9 year useful life. As of December 31, 2016, accumulated
amortization and amortization expense recognized on the acquired intangible assets was $0.2 million. Amortization expense to be
recognized on the acquired intangible assets is expected to be $0.8 million per year in 2017 through 2024 and $0.6 million in 2025.
Goodwill represents the future economic benefits arising from other assets acquired that could not be individually identified and
separately recognized. The goodwill arising from the acquisition consists primarily of sales and operational synergies that will be
achieved by consolidating certain of Vertex’s locations into existing Company locations and expanding Vertex’s product offerings
throughout the balance of the Company’s national platform.
Under ASC Topic 805-10, acquisition-related costs (e.g. legal, valuation and advisory) are not included as a component of
consideration paid, but are accounted for as operating expenses in the periods in which the costs are incurred. For the year ended
December 31, 2016, the Company incurred $0.9 million of acquisition-related costs, which were recorded in other operating expenses on
the statement of operations.
The amount of revenue and net income of Vertex included in the Company’s consolidated statement of operations from October 3,
2016 through December 31, 2016 was $7.0 million and $0.2 million, respectively.
F-11
The results of operations of Vertex are included in the consolidated statement of operations from October 3, 2016 through
December 31, 2016. The unaudited pro forma combined historical results of the Company, giving effect to the acquisition assuming the
transaction was consummated on January 1, 2015, are as follows:
Year ended December 31,
2015
2016
Sales
Net income (loss)
Basic earnings (loss) per share
Diluted earnings (loss) per share
$
(unaudited)
(In thousands)
284,310
(5,466 )
(0.33 )
(0.33 )
$ 342,129
3,560
0.21
0.21
The unaudited pro forma combined historical results do not reflect any cost savings or other synergies that might result from the
transaction. They are provided for informational purposes only and are not necessarily indicative of the results of operations for future
periods or the results that actually would have been realized had the acquisition occurred as of January 1, 2015.
3. Detail of Selected Balance Sheet Accounts
Property and Equipment
Property and equipment are stated at cost and consist of:
Land
Buildings
Machinery and equipment
Less accumulated depreciation
Total
Intangible assets
Intangible assets consist of:
Tradenames
Customer relationships
Less accumulated amortization:
Tradenames
Customer relationships
Total
At December 31,
2016
2015
(In thousands)
2,476 $
8,105
12,934
23,515
12,254
11,261 $
2,476
7,706
11,885
22,067
11,168
10,899
At December 31,
2016
2015
(In thousands)
5,996 $
18,620
24,616
3,846
11,630
15,476
—
11,238
11,238
13,378 $
—
9,492
9,492
5,984
$
$
$
$
Intangible assets include customer relationships which are being amortized over 6 to 9 year useful lives. The weighted average
amortization period for intangible assets is 8.8 years. Tradenames are not amortized; however, they are tested annually for impairment.
As of December 31, 2016, accumulated amortization on the acquired intangible assets, was $11.2 million and amortization expense was
$1.7 million in the year ended December 31, 2016, $1.8 million in the year ended December 31, 2015 and $1.7 million in the year ended
December 31, 2014. Future amortization expense to be recognized on the acquired intangible assets is expected to be as follows:
F-12
2017
2018
2019
2020
2021
2022
2023
2024
2025
Goodwill
Goodwill
Current year acquisitions
Less accumulated impairment losses
Net balance
Accrued and Other Current Liabilities
Accrued and other current liabilities consist of:
Customer advances
Customer rebates
Payroll, commissions, and bonuses
Accrued inventory purchases
Other
Total
4.
Impairment of Goodwill and Intangibles
$
Annual
Amortization
Expense
(In thousands)
1,362
777
777
777
777
777
777
777
583
At December 31,
2016
2015
(In thousands)
25,082 $
10,266
35,348
12,578
22,770 $
25,082
—
25,082
10,216
14,866
At December 31,
2016
2015
(In thousands)
— $
3,343
1,783
4,268
3,854
13,248 $
169
3,166
1,148
1,800
3,285
9,568
$
$
$
$
The annual goodwill impairment qualitative test was performed as of October 1, 2016 related to the Southern reporting unit, the one
reporting unit with goodwill at that date. This qualitative test, which compared current year to date performance to plan, indicated that it
was more likely that the goodwill was not impaired. If there are further reductions in our market capitalization and market multiples, or
the projected performance is not achieved, this reporting unit could be at risk of failing the second step in the future.
During the second quarter of 2016 and prior to the annual impairment test of goodwill in October, the Company concluded that
impairment indicators existed at the Houston Wire & Cable (“HWC”) reporting unit, due to a decline in its overall financial
performance, decrease in the market capitalization and overall market demand. In the second quarter, the Company also concluded that
there were impairment indicators for certain of the Company’s tradenames related to the Southern reporting unit.
The Company performed step one of the impairment test and concluded that the fair value of the HWC reporting unit was less than
its carrying value. Therefore, the Company performed step two of the impairment analysis. The step one test also indicated that one of
the tradenames at Southern was impaired, and the Company recorded a non-cash charge of less than $0.1 million against the tradenames
during the quarter ended June 30, 2016.
Step two of the impairment analysis measures the impairment charge by allocating the HWC 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
F-13
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 HWC reporting unit was estimated using a discounted cash flow model (income approach) and a guideline
public company method, giving 50% weight to each. The material assumptions used included a weighted average cost of capital of
11.0% and a long-term growth rate of 3-7% for the income approach and an adjusted invested capital multiple of 0.2 times revenue and
a control premium of 10.0% for the guideline public company method. The carrying value of the HWC reporting unit’s goodwill was
$2.4 million and its implied fair value resulting from step two of the impairment test was zero. As a result, the Company recorded a
non-cash goodwill impairment charge of $2.4 million during the quarter ended June 30, 2016.
The fair value for goodwill and tradenames (indefinite-lived intangible assets) were both determined using a Level 3 measurement
approach. The Level 3 value of all of the Company’s tradenames at June 30, 2016 was $4.5 million.
During the second quarter of 2015 and prior to the annual impairment test of goodwill in October, the Company concluded that
impairment indicators existed at the Southwest reporting unit, due to a decline in the overall financial performance and overall market
demand. Impairment indicators also existed for certain of the Company’s tradenames related to the Southwest and Southern reporting
units.
After performing the necessary analysis the Company recorded, during the quarter ended June 30, 2015, a non-cash charge of $0.8
million against the tradenames and a non-cash goodwill impairment charge of $2.6 million.
The Company is still anticipating significant growth in the businesses acquired in 2010 and in 2016, but if this growth is not
achieved, further goodwill impairments may result.
5. Debt
On October 3, 2016, in connection with the Vertex acquisition, HWC Wire & Cable Company , the Company, Vertex, and Bank of
America, N.A., as agent and lender, entered into a First Amendment (“the Loan Agreement Amendment”) amending the Fourth
Amended and Restated Loan and Security Agreement (the “2015 Loan Agreement”). The Loan Agreement Amendment adds Vertex as
borrower (and lien grantor) and provides the terms for inclusion of Vertex’s eligible accounts receivable and eligible inventory in the
borrowing base for the 2015 Loan Agreement. The 2015 Loan Agreement was expanded to include incremental availability on eligible
accounts receivable and inventory up to $5 million, which will be amortized quarterly, starting April 1, 2017, over two and a half years.
The 2015 Loan Agreement provides a $100 million revolving credit facility and expires on September 30, 2020. Under certain
circumstances the Company may request an increase in the commitment by an additional $50 million.
Portions of the loan may be converted to LIBOR loans in minimum amounts of $1.0 million and integral multiples of $0.1 million.
LIBOR loans bear interest at the British Bankers Association LIBOR Rate plus 100 to 150 basis points based on availability, and loans
not converted to LIBOR loans bear interest at a fluctuating rate equal to the greatest of the agent’s prime rate, the federal funds rate plus
50 basis points, or 30-day LIBOR plus 150 basis points. The unused commitment fee is 25 basis points.
Availability under the 2015 Loan Agreement is limited to a borrowing base equal to 85% of the value of eligible accounts
receivable, plus the lesser of 70% of the value of eligible inventory or 90% of the net orderly liquidation value percentage of the value of
eligible inventory, in each case less certain reserves. The 2015 Loan Agreement is secured by substantially all of the property of the
Company, other than real estate.
The 2015 Loan Agreement includes, among other things, covenants that require the Company to maintain a specified minimum
fixed charge coverage ratio, unless certain availability levels exist. Additionally, the 2015 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 2015 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, 2020. At December 31, 2016, the Company was in compliance with the availability-based
covenants governing its indebtedness.
The Company’s borrowings at December 31, 2016 and 2015 were $60.4 million and $39.2 million, respectively. The weighted
average interest rates on outstanding borrowings were 2.4% and 1.7% at December 31, 2016 and 2015, respectively.
During 2016, the Company had an average available borrowing capacity of approximately $38.7 million. This average was
computed from the monthly borrowing base certificates prepared for the lender. At December 31, 2016, the Company had available
borrowing capacity of $25.6 million under the terms of the 2015 Loan Agreement. During the years ended December 31, 2016 and 2015,
the Company paid $0.2 million each year and for the year ended December 31, 2014, paid $0.1 million, for the unused facility.
F-14
Principal repayment obligations for succeeding fiscal years are as follows:
2017
2018
2019
2020
Total
6. Income Taxes
The provision (benefit) for income taxes consists of:
$
(In thousands)
—
—
—
60,388
60,388
$
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Total
Year Ended December 31,
2016
2015
(In thousands)
2014
$
(1,285 ) $
(95 )
(1,380 )
3,166 $
392
3,558
9,123
1,083
10,206
13
(7 )
6
(436 )
(49 )
(485 )
$
(1,374 ) $
3,073 $
(794 )
(129 )
(923 )
9,283
A reconciliation of the U.S. Federal statutory tax rate to the effective tax rate on income (loss) before taxes is as follows:
Federal statutory rate
State taxes, net of federal benefit
Impairment, non-deductible portion
Share-based compensation deficit
Non-deductible items
Other
Total effective tax rate
Year Ended December 31,
2016
2015
2014
35.0 %
1.7
(6.6 )
(9.0 )
(3.9 )
1.4
18.6 %
35.0 %
4.1
20.0
3.7
3.0
(5.7 )
60.1 %
35.0 %
2.7
—
—
0.7
(0.1 )
38.3 %
The share-based compensation deficit resulted in incremental income tax expense, because the grant date fair value of share-based
payments exceeded the actual tax deductions realized, either upon exercise or vesting or due to forfeitures. Any future net deficits arising
from stock-based compensation transactions will result in incremental income tax expense, and will likely negatively impact the
effective tax rate. In 2015, the other credit includes the impact of over accruals of both federal and state taxes in earlier years.
F-15
Significant components of the Company’s deferred taxes were as follows:
Deferred tax assets:
Uniform capitalization adjustment
Inventory valuation
Accounts receivable valuation
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,
2016
2015
(In thousands)
$
$
1,420 $
2,496
159
1,368
145
96
5,684
393
4,211
188
4,792
892 $
1,240
1,835
50
1,900
109
77
5,211
601
1,148
124
1,873
3,338
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, 2016, 2015 and 2014, the Company recorded no provision for interest or penalties related to uncertain tax
positions. The tax years 2012 through 2016 remain open to examination by the major taxing jurisdictions to which the Company is
subject.
7. Stockholders’ Equity
On March 7, 2014, the Board of Directors adopted a 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 are held as treasury shares and may be used to satisfy
the exercise of options, issuance of restricted stock, to fund acquisitions or for other uses as authorized by the Board of Directors. In
November 2016, the Board of Directors suspended purchases under the stock repurchase program. During 2016, the Company made
repurchases under the stock repurchase program of 366,820 shares for a total cost of $2.2 million. During 2015, the Company made
repurchases under the stock repurchase program of 858,628 shares for a total cost of $6.8 million.
Under the terms of the 2006 Stock Plan, the Company acquired 10,040 shares and 7,294 shares that were surrendered by the holders
to pay withholding taxes in 2016 and 2015, respectively.
The Company paid a quarterly cash dividend from August 2007 until August 2016, resulting in aggregate dividends in 2016, 2015
and 2014 of $2.5 million, $7.2 million and $8.3 million, 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.
8. Retirement-related Benefits
Defined Contribution Plan
The Company maintains a combination profit-sharing plan and salary deferral plan for the benefit of its employees-not covered by a
collective bargaining agreement. Employees who are eligible to participate in the plan can contribute a percentage of their base
compensation, up to the maximum percentage allowable not to exceed the limits of Internal Revenue Code (“Code”) Sections 401(k),
404, and 415, subject to the IRS-imposed dollar limit. Employee contributions are invested in certain equity and fixed-income securities,
based on employee elections. The Company matches 100% of the first 1% of the employee’s contribution. The Company’s match for the
years ended December 31, 2016, 2015 and 2014 was $0.2 million each year.
F-16
Defined Benefit Plan
The Company’s Vertex reporting unit has a non-contributory defined benefit pension plan for those current and former employees at
its Attleboro, Massachusetts location who are subject to a collective bargaining agreement under the PFI Union. At this time there are
fourteen active employees, fourteen retired and eight terminated employees, covered by the plan.
The benefit provisions to participants of the defined benefit plan are calculated based on the number of years of service and an
annual negotiated plan benefit per year of service. Annual compensation (or future compensation increases) is not used in calculating the
benefit or future plan contributions.
It is the Company’s policy to fund amounts for pensions sufficient to meet the minimum funding requirements set forth in applicable
employee benefit laws, which currently approximates the benefit payments made each year. A total contribution of approximately
$6,000 was made subsequent to the acquisition.
The acquired projected benefit obligation on the date of the acquisition was $1.0 million. At that time, the fair value of the plan
assets was $0.9 million resulting in an acquired liability of $0.1 million, which was recorded in accrued and other liabilities. The
discount rate used to determine the projected benefit obligation was 3.62%. During the fourth quarter of 2016, these balances did not
materially change.
The Company’s investment policy is to maximize the expected return for an acceptable level of risk. Our expected long-term rate of
return on plan assets, which was 5%, is based on a target allocation of assets, which is based on the goal of earning the highest rate of
return while maintaining risk at acceptable levels. As of December 31, 2016, the target asset allocations for the defined benefit plan were
67% equity securities and 33% debt securities.
The fair value of the assets of the defined benefit plan as of December 31, 2016 was $0.9 million, which consisted of $0.6 million of
equity mutual funds and $0.3 million of fixed income – corporate bonds. The plan assets are all classified as Level 1 and as such have
readily observable prices and therefore a reliable fair market value.
The Company expects to contribute approximately $0.1 million to the defined benefit plan in 2017 and expects the annual benefit
payments to be less than $0.3 million per year.
9.
Incentive Plans
On March 23, 2006, the Company adopted and on May 1, 2007, 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 granted to designated participants. No single participant may receive, in any calendar year, stock
options with respect to more than 500,000 shares or performance-based stock awards and units with respect to more than 150,000 shares.
Stock Option Awards
The Company has granted options to purchase its common stock to employees and directors of the Company under the 2006 Plan 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. The plan contains
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.
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 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 2016 or 2015.
F-17
The remaining unvested option grant will vest on December 31, 2017, with an expiration date of December 20, 2021. The following
summarizes stock option activity and related information:
2016
Options
(in 000’s)
Weighted
Average
Exercise Price
Aggregate
Intrinsic
Value
Weighted
Average
Remaining
Contractual Life
(in years)
Outstanding—Beginning of year
Granted
Exercised
Forfeited
Expired
Outstanding—End of year
Exercisable—End of year
Weighted average fair value of options granted during 2016 $
Weighted average fair value of options granted during 2015 $
Weighted average fair value of options granted during 2014 $
493
—
—
(54 )
(125 )
314
282
—
—
—
15.60 $
—
—
16.31
19.66
13.85 $
13.83 $
—
3.26
—
—
3.28
3.08
There was no excess tax benefit for the years ended December 31, 2016 and 2015. During the years ended December 31, 2014,
excess tax benefits of less than $0.1 million was reflected in financing cash flows.
There were no options exercised in the year ended December 31, 2016. The total intrinsic value of options exercised during the
years ended December 31, 2015 and 2014 was less than $0.1 million in each year. There is no intrinsic value of options outstanding and
exercisable as of December 31, 2016 as the closing stock price at the end of 2016 creates a negative intrinsic value.
The total grant-date fair value of options vested during the years ended December 31, 2016, 2015 and 2014 was $0.3 million, $0.1
million and $0.2 million, respectively.
Restricted Stock Awards and Restricted Stock Units
On November 4, 2016 and December 19, 2016, the Company granted 30,000 and 22,388, respectively, voting shares of restricted
stock to the Company’s President and CEO. The shares granted in November vest on December 31, 2017, and the shares granted in
December vest in one third increments on the first, second and third anniversaries of the date of grant as long as the recipient is then
employed by the Company. Any dividends declared will be accrued and paid to the recipient when the related shares vest.
The Company also granted 49,250 voting shares of restricted stock under the 2006 Plan to members of management on December
12, 2016. Of the 49,250 shares granted, 5,000 shares vest in one third increments, on the first, second and third anniversaries of the date
of grant and the remaining 44,250 shares vest in one third increments, on the third, fourth and fifth anniversaries of the date of grant, in
each case as long as the recipient is then employed by the Company. Any dividends declared will be accrued and paid to the recipient if
and when the related shares vest.
On October 3, 2016, the Company granted 21,000 voting shares of restricted stock to new members of the management team, who
joined the Company as part of the Vertex acquisition. Of the 21,000 shares granted, 4,000 shares vest, on the third anniversary of the date
of grant and the remaining 17,000 shares vest in one third increments, on the third, fourth and fifth anniversaries of the date of grant in
each case, as long as the recipient is then employed by the Company. Any dividends declared will be accrued and paid to the recipient if
and when the related shares vest.
On August 4, 2016, the Company granted 7,000 shares of restricted stock to a new member of the management team. These shares
vest in one third increments, on the third, fourth and fifth anniversaries of the date of grant as long as the recipient is then employed by
the Company. Any dividends declared will be accrued and paid to the recipient if and when the related shares vest.
Following the Annual Meeting of Stockholders on May 3, 2016, the Company awarded restricted stock units with a value of
$50,000 to each non-employee director who was elected or re-elected, for an aggregate of 35,515 restricted stock units. Each award of
restricted stock units vests at the date of the 2017 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.
F-18
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, 2016:
Awards
Units
2016
Weighted
Average
Market
Value at
Grant Date
Shares
(in 000’s)
Shares
(in 000’s)
234 $
129
(36 )
(17 )
(11 )
299 $
9.57
6.35
10.86
9.50
13.23
7.88
Weighted
Average
Market
Value at
Grant Date
33 $
36
(33 )
—
—
36 $
9.14
7.04
9.14
—
—
7.04
Non-vested —Beginning of year
Granted
Vested
Cancelled/Forfeited
Expired
Non-vested —End of year
Total stock-based compensation cost was $0.9 million for each of the years ended December 31, 2016, 2015 and 2014. Total income
tax benefit recognized for stock-based compensation arrangements was $0.3 million for each of the years ended December 31, 2016,
2015 and 2014.
As of December 31, 2016, there was $1.6 million of total unrecognized compensation cost related to non-vested, share-based
compensation arrangements. The cost is expected to be recognized over a weighted average period of approximately 33 months. There
were 807,326 shares available for future grants under the 2006 Plan at December 31, 2016.
10. 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 $2.6 million in 2016, $2.5 million in 2015 and $2.9 million
in 2014.
Future minimum lease payments under non-cancelable operating leases with initial terms of one year or more consisted of the
following at December 31, 2016:
2017
2018
2019
2020
2021
Thereafter
Total minimum lease payments
$
(In thousands)
3,567
2,821
2,104
1,536
1,305
1,645
12,978
$
The Company had aggregate purchase commitments for fixed inventory quantities of approximately $34.0 million at December 31,
2016.
As part of the acquisition of Southwest and Southern in 2010, 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 $0.1 million at December 31, 2016
relates to the cost of the monitoring, which the Company estimates will be incurred in the next year 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 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
F-19
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.
11. Subsequent Events
On January 30, 2017, the Board of Directors granted to the Company’s President and CEO 60,000 voting shares of restricted stock
and performance stock units with respect to an additional 40,000 shares of common stock. Of the 60,000 shares of restricted stock,
20,000 shares vest on December 19, 2017 and 40,000 vest in one-third increments on January 30, 2018, December 31, 2018 and
December 31, 2019, the first, second and third anniversaries of the date of grant, in each case as long as Mr. Pokluda is then employed by
the Company. The performance stock units vest on December 31, 2019 based on and subject to the Company’s achievement of
cumulative EBITDA and stock price performance goals over a three-year period, as long as Mr. Pokluda is then employed by the
Company, and upon vesting will be settled in shares of our common stock. Any dividends declared will be accrued and paid to Mr.
Pokluda if and when the related shares vest.
12. 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, 2016. The unaudited information has been prepared on the same basis as the audited consolidated financial
statements.
Sales
Gross profit
Operating income (loss)
Net income (loss)
Earnings (loss) per share:
Basic
Diluted
Sales
Gross profit
Operating income (loss)
Net income (loss)
Earnings (loss) per share:
Basic
Diluted
Fourth
Quarter
Year Ended December 31, 2016
Third
Quarter
Second
Quarter
(in thousands, except per share data)
First
Quarter
$
69,257
15,076
$
(1,630 ) (1) $
(1,826 ) (1) $
(0.11 ) (1) $
(0.11 ) (1) $
65,222 $
12,045 $
(1,804 ) $
(1,439 ) $
(0.09 ) $
(0.09 ) $
$
62,454
12,430
$
(3,062 ) (2) $
(2,557 ) (2) $
(0.16 ) (2) $
(0.16 ) (2) $
64,711
13,399
(39 )
(184 )
(0.01 )
(0.01 )
Fourth
Quarter
Year Ended December 31, 2015
Third
Quarter
Second
Quarter
(in thousands, except per share data)
First
Quarter
70,314
15,120
$
$
743 (3) $
(199 ) (3) $
(0.01 ) (3) $
(0.01 ) (3) $
78,260 $
16,131 $
1,783 $
676 $
0.04 $
0.04 $
77,959
16,935
$
$
(234 ) (4) $
(619 ) (4) $
(0.04 ) (4) $
(0.04 ) (4) $
81,600
17,724
3,726
2,186
0.13
0.13
$
$
$
$
$
$
$
$
$
$
$
$
(1) During the fourth quarter of 2016, the Company recorded a charge of $483 of additional cost of sales expense that related to the first three
quarters of 2016 and was immaterial to each quarter.
(2) During the second quarter of 2016, the Company recorded a non-cash impairment charge of $2,384. See Note 4 for additional information.
F-20
(3)
During the fourth quarter of 2015, the Company recorded a non-cash impairment charge of $423. See Note 4 for additional information.
(4) During the second quarter of 2015, the Company recorded a non-cash impairment charge of $2,994. See Note 4 for additional information.
F-21
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, except for the delay in filing an amendment to our October 5, 2016 Form 8-K to provide audited
financial statements and pro forma information for Vertex, our disclosure controls and procedures were effective as of December 31,
2016. Our delay was due initially to the expectation, which arose during the process of calculating the post-closing purchase price
adjustment, that the acquisition would not meet the applicable significance test and subsequently due to our inability to obtain certain
information from Vertex’ former owner given the late start to the process. We expect to file the late amendment within the next several
weeks and will revise our timeline for future acquisitions to assure we are able to provide required historical and pro forma financial
information for the acquired business on a timely basis.
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, 2016. 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 26 and 27 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 quarter ended December 31, 2016
that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
25
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, 2016 based on
criteria established by Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 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, 2016 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 27.
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 and conclusion on the effectiveness of its internal control over financial reporting did not include the
internal controls of the Vertex business unit acquired in October 2016, which was included in the 2016 consolidated financial statements
of Houston Wire & Cable Company and constituted 19.1% and 34.9% of total assets and net assets, respectively at December 31, 2016
and 2.7% of sales for the year then ended. Vertex had $0.2 million in net income during the year ended December 31, 2016, as compared
to a consolidated net loss of the Company of $6.0 million for the year ended December 31, 2016. In management’s opinion, the
Company has maintained effective internal control over financial reporting as of December 31, 2016, 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)
26
Report of Independent Registered Public Accounting Firm
The 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, 2016, based
on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 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.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s
assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of
Vertex Corporate Holding, Inc. (“Vertex”), which is included in the 2016 consolidated financial statements of Houston Wire & Cable
Company and constituted 19.1% and 34.9% of total and net assets, respectively, as of December 31, 2016 and 2.7% of sales for the year
then ended. Vertex had $0.2 million in net income during the year ended December 31, 2016, as compared to a consolidated net loss of
Houston Wire & Cable Company of $6.0 million for the year ended December 31, 2016. Our audit of internal control over financial
reporting of Houston Wire & Cable Company also did not include an evaluation of the internal control over financial reporting of
Vertex.
In our opinion, Houston Wire & Cable Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2016, 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 as of December 31, 2016 and 2015, and the related consolidated statements of operations, stockholders’
equity, and cash flows for each of the three years in the period ended December 31, 2016 of Houston Wire & Cable Company and our
report dated March 24, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Houston, Texas
March 24, 2017
27
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information called for by Item 10 relating to directors and nominees for election to the Board of Directors is incorporated herein
by reference to the “Election of Directors” section of the registrant’s definitive Proxy Statement relating to the Annual Meeting of
Stockholders to be held on May 5, 2017. 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 5, 2017.
The information called for by Item 10 relating to the code of ethics is incorporated herein by reference to the “Corporate Governance
and Board Committees – Code of Business Conduct” section of the registrant’s definitive Proxy Statement relating to the Annual
Meeting of Stockholders to be held on May 5, 2017.
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 5, 2017.
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 of Directors – Audit
Committee” section of the registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 5,
2017.
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 5, 2017.
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 5, 2017.
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 Person Transaction Policy” sections of the registrant’s definitive Proxy Statement relating to the
Annual Meeting of Stockholders to be held on May 5, 2017.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information called for by Item 14 is incorporated herein by reference to the “Principal Independent Accounting Fees and
Services” section of the registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 5,
2017.
28
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, 2016 and 2015
• Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014
• Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2016, 2015 and 2014
• Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
• 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
ITEM 16. FORM 10-K SUMMARY
Not applicable
29
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 24, 2017
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.
TITLE
DATE
President, Chief Executive Officer and Director
March 24, 2017
SIGNATURE
/s/ JAMES L. POKLUDA III
James L. Pokluda III
/s/ NICOL G. GRAHAM
Nicol G. Graham
Chief Financial Officer, Treasurer and
Secretary (Principal Accounting Officer)
March 24, 2017
March 24, 2017
March 24, 2017
March 24, 2017
March 24, 2017
March 24, 2017
/s/ WILLIAM H. SHEFFIELD
William H. Sheffield
Chairman of the Board
/s/ MICHAEL T. CAMPBELL
Michael T. Campbell
Director
/s/ IAN STEWART FARWELL
Ian Stewart Farwell
Director
/s/ MARK A. RUELLE
Mark A. Ruelle
/s/ G. GARY YETMAN
G. Gary Yetman
Director
Director
30
EXHIBIT
NUMBER
INDEX TO EXHIBITS
EXHIBIT
3.1
3.2
10.1*
10.2*
10.3*
10.4*
10.5*
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 2006 Stock Plan, as amended and restated effective March 1, 2015 (incorporated
herein by reference to Exhibit 10.1 to Houston Wire & Cable Company’s Current Report on Form 8-K filed March
13, 2015)
Amended and Restated Executive Employment Agreement dated as of January 1, 2015 between James L. Pokluda,
III and Houston Wire & Cable Company (incorporated by reference to Exhibit 10.3 to Houston Wire & Cable
Company’s Annual Report on Form 10-K for the year ended December 31, 2014)
Form of Employee Non-Qualified Stock Option Agreement under Houston Wire & Cable Company’s 2006 Stock
Plan (incorporated herein by reference to Exhibit 10.4 to Houston Wire & Cable Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2015)
Form of Director Non-Qualified Stock Option Agreement 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, 2015)
Form of Stock Award Agreement for Key Employees under Houston Wire & Cable Company’s 2006 Stock Plan
(incorporated herein by reference to Exhibit 10.3 to Houston Wire & Cable Company’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2015)
10.6*
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 10.1 to Houston Wire & Cable Company’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2015)
10.7*
10.8*
10.9*
10.10
Form of Performance Stock Unit Award Agreement under Houston Wire & Cable Company’s 2006 Stock Plan **
Description of Senior Management Bonus Program (incorporated herein by reference to Exhibit 10.7 to Houston
Wire & Cable Company’s Annual Report on Form 10-K for the year ended December 31, 2015)
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)
Fourth Amended and Restated Loan and Security Agreement, dated as of October 1, 2015, as amended, 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 2, 2015 and Exhibit 10.1 to Houston
Wire & Cable Company’s Current Report on Form 8-K filed October 5, 2016)
10.11
Third Amended and Restated Guaranty dated as of October 1, 2015, 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 2, 2015)
10.12*
First Amendment to the Houston Wire & Cable Company Amended and Restated 2016 Stock Plan**
21.1
Subsidiaries of Houston Wire & Cable Company (incorporated herein by reference to Exhibit 21.1 to Houston Wire
& Cable Company’s Registration Statement on Form S-1 (Registration No. 333-132703))
31
31.1
31.2
32.1
Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 **
Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 **
Certifications of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 **
* Management contract or compensatory plan or arrangement
** Filed herewith
32
HOUSTON WIRE & CABLE COMPANY
2006 STOCK PLAN
(As Amended and Restated Effective March 1, 2015)
PERFORMANCE STOCK UNIT AWARD AGREEMENT
Exhibit 10.7
A Performance Stock Unit (“PSU”) Award (the “Award”) is hereby granted by Houston Wire & Cable Company, a Delaware
corporation (the “Company”), to the Key Employee named below (the “Grantee”), relating to the Common Stock of the Company:
Key Employee
Date of Award:
Number of PSUs Subject to Award:
End of Performance Period:
James L. Pokluda III
The Award shall be subject to the following terms and conditions and the provisions of the Houston Wire & Cable Company
2006 Stock Plan, as amended and restated effective March 1, 2015 (the “Plan”), a copy of which is attached hereto and the terms of
which are hereby incorporated by reference:
1.
Grant of Award. The Company hereby grants to the Grantee the Award of PSUs. A PSU is the right, subject to the
terms and conditions of the Plan and this Agreement, to receive, following the end of the Performance Period referred to above, a
distribution of one share of Common Stock for each PSU as described in Section 8 of this Agreement.
2.
Acceptance by Grantee. The receipt of the Award is conditioned upon its acceptance by the Grantee in the space
provided therefor at the end of this Agreement and the return of an executed copy of this Agreement to the Secretary of the Company no
later than ________________. If the Grantee shall fail to return this executed Agreement by the due date, the Grantee’s Award shall be
forfeited to the Company.
3.
PSU Account. The Company shall maintain an account (the “PSU Account”) on its books in the name of the Grantee
which shall reflect the number of PSUs awarded to the Grantee and any dividend equivalents paid to the Grantee as described in Section
4.
4.
Dividend Equivalents. Upon the payment of any dividends on Common Stock occurring during the period beginning
on the date of the Award and ending on the date the PSUs are settled in Common Stock and distributed to the Grantee as described in
Section 8 (or the date the PSUs are forfeited), the Company shall credit the Grantee’s PSU Account with an amount equal in value to the
dividends that the Grantee would have received had the Grantee been the actual owner of the number of shares of Common Stock
represented by the PSUs in the Grantee’s PSU Account on that date. The amount of dividend equivalents credited to the Grantee’s PSU
Account shall be adjusted to reflect the adjusted number of PSUs held by the Grantee as described in Section 7. Such amounts shall be
paid to the Grantee in cash at the time and to the extent the PSU Account is distributed to the Grantee. Any dividend equivalents
relating to PSUs that are forfeited shall also be forfeited.
5.
Nontransferability. Except as set forth in Section 11 of the Plan, neither the Award nor any of the PSUs subject to the
Award may be sold, assigned, pledged, encumbered or otherwise transferred, voluntarily or involuntarily. Any attempted sale,
assignment, pledge, encumbrance or transfer of the Award, other than in accordance with its terms, shall be void and of no effect.
6.
Vesting.
(a)
Except as set forth in (b), (c), (d) and (e) below, the Grantee shall become vested in the Award on the last day
of the Performance Period if the Grantee remains in continuous employment with the Company or a Subsidiary until such date.
(b)
If prior to the last day of the Performance Period the Grantee’s employment with the Company and all
Subsidiaries terminates due to the Grantee’s death or disability, all of the then unvested PSUs subject to the Award shall vest as
of the date of termination of employment. For this purpose “disability” has the meaning, and will be determined, as set forth in
the Company’s long term disability program in which If prior to the last day of the Performance Period the Grantee’s
employment with the Company and all Subsidiaries terminates for any reason other than death or disability as described in
Section 6(b) above or following a Change in Control as described in Section 6(d)(ii) below, PSUs subject to the Award shall be
forfeited to the Company and the Grantee’s rights, title and interest with respect to such forfeited PSUs, shall automatically
lapse and be of no further force or effect. The Grantee hereby irrevocably designates and appoints the Secretary of the
Company as the Grantee’s agent and attorney in fact, to act for or on behalf of the Grantee and in his or her name and stead, for
the limited purpose of executing any documents and instruments to further evidence the forfeiture of the unvested PSUs.
(c)
If prior to the last day of the Performance Period there is a Change in Control of the Company, and the
Grantee has remained in continuous employment with the Company or a Subsidiary until such date:
(i)
unless the PSU Award is continued or assumed by a public company in an equitable manner, all of
the PSUs subject to the Award shall vest as of the date of the Change in Control; and
(ii)
if the PSU Award is continued or assumed by a public company in an equitable manner, all of the
PSUs subject to the Award shall vest at the end of the Performance Period, unless prior to such date and within two
years following the Change in Control (A) the Company terminates the Grantee’s employment other than for Cause or
(B) the Grantee terminates his employment for Good Reason, in which case all of the PSUs subject to the Award shall
vest as of the date of such termination of employment.
For purposes of this Section 6(d), “Cause” and “Good Reason” shall have the meanings ascribed to them in the Amended and Restated
Employment Agreement between the Grantee and the Company dated as of January 1, 2015, or any successor agreement thereto.
(d)
The foregoing provisions of this Section 6 shall be subject to the provisions of any written employment or
severance agreement that has been or may be executed by the Grantee and the Company, and the provisions in such
employment or severance agreement concerning the vesting of an Award shall supersede any inconsistent or contrary provision
of this Section 6.
7.
Adjustment of PSUs.
(a)
The number of PSUs subject to the Award that vest pursuant to Section 6(a) shall be adjusted by the
Committee after the end of the Performance Period based on the level of achievement of the previously established
performance goals, as described in Exhibit A attached hereto.
(b)
The number of PSUs subject to the Award that vest pursuant to Section 6(b) shall not be subject to the
adjustment described in Exhibit A.
(c)
The number of PSUs subject to the Award that vest pursuant to Section 6(d) shall not be subject to the
adjustment described in Exhibit A.
8.
Settlement of Award. If the Grantee becomes vested in his Award in accordance with Section 6, the Company shall
distribute to him, or his personal representative, beneficiary or estate, as applicable, (a) a number of shares of Common Stock equal to
the number of vested PSUs subject to the Award, as adjusted in accordance with Section 7, if applicable and (b) a cash payment equal to
the dividend equivalents that are payable pursuant to Section 4. Such shares and payment shall be delivered (i) in the case of an Award
that vests in accordance with Section 6(a), as soon as practicable after the Committee determines the level of achievement of the
performance goal, but no later than March 15 following the end of the Performance Period; (ii) in the case of an Award that vests earlier
in accordance with Section 6(b) or 6(d)(i), within 30 days following the date of vesting; and (iii) in the case of an Award that vests in
accordance with Section 6(d)(ii), within 30 days following the earlier of the end of the Performance Period or the date of the Grantee’s
termination of employment.
(a)
Withholding Taxes. The Grantee shall pay to the Company an amount sufficient to satisfy all minimum
Federal, state and local withholding tax requirements prior to the delivery of any shares of Common Stock upon settlement of
any vested PSUs covered by the Award. Payment of such taxes may be made by one or more of the following methods: (a) in
cash, (b) in cash received from a broker-dealer to whom the Grantee has submitted a notice and irrevocable instructions to
deliver to the Company proceeds from the sale the Grantee participates.
9.
of a portion of the shares deliverable upon settlement of the Award, (c) by delivery to the Company of other Common
Stock owned by the Grantee that is acceptable to the Company, valued at its then Fair Market Value, and/or (d) by directing the
Company to withhold such number of shares of Common Stock otherwise deliverable upon settlement of the Award with a Fair Market
Value equal to the amount of tax to be withheld.
10.
Share Delivery. Delivery of shares of Common Stock upon settlement of the Award will be by book-entry credit to
an account in the Grantee’s name established by the Company with the Company’s transfer agent; provided that the Company shall,
upon written request from the Grantee (or his estate or personal representative, as the case may be), issue certificates in the name of the
Grantee (or his estate or personal representative) representing such Award shares.
11.
Rights as Stockholder. The Grantee shall not be entitled to any of the rights of a stockholder of the Company with
respect to the Award, including the right to vote and to receive dividends and other distributions, until and to the extent the Award is
settled in shares of Common Stock.
12.
Insider Trading Policy. The sale or transfer of any shares of Common Stock delivered upon settlement of the Award
is subject to the provisions of the Company’s Insider Trading Policy, as in effect from time to time.
13.
Recoupment. Notwithstanding any other provision of this Agreement, to the extent required by applicable law,
including the Dodd-Frank Wall Street Reform and Consumer Protection Act, or pursuant to the Company’s Incentive Recoupment
Policy or any similar policy as may be in effect, the Company shall have the right to seek recoupment of all or any portion of an Award
(including by forfeiture of any outstanding Award or by the Grantee’s remittance to the Company of vested Award shares or of a cash
payment equal to the vested Award shares). The value with respect to which such recoupment is sought shall be determined by the
Committee. The Committee shall be entitled, as permitted by applicable law, to deduct the amount of such payment from any amounts
the Company may owe to the Grantee.
14.
Company.
15.
Employment Status. This Agreement does not give the Grantee the right to be retained as an employee of the
Administration. The Award shall be administered in accordance with such regulations as the Committee shall from
time to time adopt.
16.
Plan Governs. If there is any inconsistency between the terms of this Agreement and the terms of the Plan, the Plan’s
terms shall govern. All capitalized terms shall have the meanings ascribed to them in the Plan, unless specifically set forth otherwise
herein.
17.
Governing Law. This Agreement, and the Award, shall be construed, administered and governed in all respects under
and by the laws of the State of Delaware.
IN WITNESS WHEREOF, this Agreement is executed by the Company this __th day of ________, ____, effective as of the
____ day of _________, ____.
HOUSTON WIRE & CABLE COMPANY
AGREED AND ACCEPTED:
By:
I acknowledge receipt of the Houston Wire & Cable Company 2006 Stock Plan, as amended and restated effective March 1,
2015 (the “Plan”) and hereby accept this Performance Stock Unit Award subject to all the terms and conditions thereof. I agree to
accept as binding, conclusive and final all decisions and interpretations of the Committee regarding any questions arising under the Plan
or this Award Agreement.
GRANTEE
Print Name:
Signature:
Date:
EXHIBIT A
Houston Wire and Cable Company 2006 Stock Plan
(As Amended and Restated Effective March 1, 2015)
Performance Stock Unit Agreement
Performance Stock Unit Goals
FIRST AMENDMENT TO THE
HOUSTON WIRE & CABLE COMPANY
AMENDED AND RESTATED 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 and restated effective March 1, 2015 (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 March _, 2017, as follows:
Section 4.2(d) of the Plan is hereby amended to read in its entirety as follows:
(d)
The maximum aggregate number of shares of Common Stock that a Key Employee may receive upon
settlement of performance-based Stock Awards and Stock Units granted in any calendar year is 150,000. For
purposes of this provision, “performance-based” means Stock Awards and Stock Units intended to qualify as
performance-based compensation within the meaning of Code Section 162(m).
IN WITNESS WHEREOF, this First Amendment has been executed on this 8th day of March, 2017.
HOUSTON WIRE & CABLE COMPANY
By: /s/ Nicol G. Graham
Nicol G. Graham
Chief Financial Officer, Treasurer and Secretary
CH2\19301021.2
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, 2016 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 24, 2017
/s/ James L. Pokluda III
James L. Pokluda III
Chief Executive Officer
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, 2016 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 24, 2017
/s/ Nicol G. Graham
Nicol G. Graham
Chief Financial Officer
Certifications of CEO and CFO Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1
In connection with the Annual Report of Houston Wire & Cable Company (the “Corporation”) on Form 10-K for the fiscal year
ended December 31, 2016 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 24, 2017
Date:
March 24, 2017
/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.
G. Gary Yetman
Michael T. Campbell
James L. Pokluda III
Ian Stewart Farwell
Mark A. Ruelle
William H. Sheffield
DIRECTORS
G. Gary Yetman
Former Chief Executive Officer & President of
Coleman Cable, Inc.
Michael T. Campbell
Independent Director
Wilson B. Sexton
Chairman of the Board of POOLCORP
James L. Pokluda III
President & Chief Executive Officer of
Houston Wire & Cable Company
Ian Stewart Farwell
Independent Director
Mark A. Ruelle
President & Chief Executive Officer of
Westar Energy, Inc.
William H. Sheffield
Chairman of the Board of
Houston Wire & Cable Company
WEBSITE
www.houwire.com
CORPORATE HEADQUARTERS
Houston Wire & Cable Company
10201 North Loop East
Houston, Texas 77029-1415
Telephone (713) 609-2100
ANNUAL MEETING
The Annual Meeting of Shareholders will
be held May 5, 2017, at 8:30 a.m. CDT,
at the Company’s corporate headquarters
in Houston, Texas.
COMMON STOCK LISTING
Ticker Symbol: HWCC
Nasdaq Stock Exchange
TRANSFER AGENT
American Stock Transfer & Trust Company
59 Maiden Lane
New York, New York 10038
INDEPENDENT AUDITORS
Ernst & Young, LLP
1401 McKinney Street, 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 found online at www.houwire.com
or by sending a written request to our
corporate headquarters address,
calling (713) 609-2227 or contacting:
investor.relations@houwire.com
HOUSTON WIRE & CABLE COMPANY
1-800-HOUWIRE
10201 North Loop East
Houston, Texas 77029
Phone: 713-609-2100
Fax: 713-609-2205
ELECTRICAL AND MECHANICAL WIRE & CABLE AND FASTENERS FOR INDUSTRY AND INFRASTRUCTURE