HOUSTON WIRE & CABLE COMPANY
2018 ANNUAL REPORT
ELECTRICAL AND MECHANICAL WIRE & CABLE AND FASTENERS
FOR INDUSTRY AND INFRASTRUCTURE
FINANCIAL HIGHLIGHTS
(Dollars in thousands except per share data)
2018
2017
2016*
2015 **
Net Sales
$ 356,858
$ 317,697
$ 261,644
$ 308,133
Sales Per Employee
840
782
733
856
Operating Income (loss)
13,898
4,604
(3,290)
9,435
Operating Margin
Net Income (loss)
Diluted Earnings (loss) Per Share
3.89%
1.45%
(1.26)%
3.06%
8,636
0.52
(222)
(0.01)
(3,308)
5,171
(0.21)
0.30
Total Assets
203,057
194,039
175,870
159,113
Long-term Obligations
71,894
74,995
60,904
39,463
Stockholders’ Equity
100,678
90,744
90,131
100,001
* 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.
James L. Pokluda III
President, CEO and Director
Dear Shareholders:
Our plan is working. In 2018 Houston Wire & Cable Company [HWCC] made
great progress in improving performance in every major area of the Company.
Financial performance improved, operational execution improved, and
customer penetration improved. End market strength and customer demand
continued to grow across all geographies, sales from new products and
services reached new highs, and operational execution was outstanding.
The following are financial highlights from 2018:
• Revenue grew to $357 million, which was a 12.3% increase over the
prior year, and two to three times above the industry average.
• Gross margin increased to 23.9%, which was an improvement of 100
basis points over 2017, and the highest level achieved since 2007.
• Operating expenses as a percentage of sales improved to 20.0%, which
was down 140 basis points from 2017, and 270 basis points better
than 2016.
• Net income grew to $8.6 million which was an $8.9 million increase over
2017, a $14.6 million increase over 2016, and a $6.6 million increase
over 2015.
• Financial leverage defined as Debt/EBITDA improved to 4.4 from 10.0
in 2017 and was the lowest level since 2015.
You may recall that in last year’s shareholder letter I commented that we were
energized, we had momentum, and our outlook was optimistic. Flash forward
to today, and our view remains unchanged. Although we are mindful that
certain economic indicators may foreshadow slowing growth, we believe that
like 2018, 2019 will be a continued year of improved financial performance.
Given our unique Master Distribution value proposition, our products and
services tend to fulfill late-cycle demand, and as such our performance
generally lags broad economic trends by two to three quarters. At present,
our end markets are performing well, and customer demand has continued
to improve over the prior year.
My past letters tended to focus mostly on our Company’s end markets. This
year I would like to transition a bit, and provide some high-level insights on key
elements of our operating plan. I think this is important, because I believe our
STEEL WIRE ROPE & HARDWARE
AUTOMATION CABLE
2
performance in 2018 represented far more than a rising tide raising all ships and
that our results were largely the output from our well-executed operating plan.
We see 2019 as an opportunity to continue our success from 2018, and below I
will share four strategic objectives of our operating plan for the current year.
ITEM 1: GROW REVENUE AT A RATE EQUAL TO OR ABOVE TWO TIMES GROWTH
IN GROSS DOMESTIC PRODUCT [GDP] GDP is a broad economic indicator, but
many in our industry find it a good proxy for growth, and we agree. Generally
speaking, our industry grows at the same rate as GDP but our goal is to exceed
that, and, in recovering economic conditions, we have an excellent track
record of doing so.
In 2018 we grew our business slightly over 12%, substantially more than the
industry average. Although we were pleased that end market strength and cus-
tomer demand had improved over prior periods, we believe our robust business
development plans which target Maintenance Repair and Operations [MRO] as
well as Project demand in the targeted end markets of Industrials, Utility Power
Generation, and Infrastructure, are what really made the difference. Well-defined
goals and controls at all reporting units, strong management oversight, and pay
for performance compensation plans all contributed to our success.
The results have been good, and the fourth quarter of 2018 marked the eighth
consecutive quarter with year-over year revenue growth.
ITEM 2: IMPROVE GROSS MARGIN
I am really proud of the fantastic progress our Company has made in improv-
ing gross margin. This is one of the most difficult metrics for distributors to
improve as pricing is very elastic, and the distribution industry is extremely
competitive. Distribution markets are highly efficient, so, said simply: if you
don’t have a good model, you won’t be able to increase price. Success in this
area has always been a great indicator of where one resides in the value chain.
Last year we posted a 100 basis point improvement in gross margin over the
prior year, and if you were to look back over the past few years, you would
note that 2018 was up 370 basis points from the low set in 2016. Given the
relatively high fixed cost of our business model, the benefits of improving gross
margin are especially evident when you look further down the income state-
ment and see that we “pulled” 74% of our incremental year-over-year gross
margin gains “through” to operating income last year. This outstanding
“pull-through” was a key driver of our financial results for the year, and a great
indicator of what our model can produce in an improving economic environment.
Given our increasing mix of revenues realized from synthetic and steel wire
rope fabrication, rentals, engineering services, fasteners, and other high-value
SKUs, continuous improvements in gross margin remain a key element of our
strategic operating plan.
ITEM 3: REDUCE OPERATING EXPENSES AS A PERCENTAGE OF SALES
Operating expense as a percentage of sales was 20% in 2018 versus 21.4%
in 2017. This was an outstanding improvement, as a 140 basis point reduction
underscores the high degree of operating leverage our Company can produce
from increased revenue.
VARIABLE FREQUENCY DRIVE CABLE
INDUSTRIAL CABLE
VERTEX FASTENERS
2018 ANNUAL REPORT
Over the years you have heard me say that “we are laser focused on cost
control and expense reduction.” The bottom line is that there is no room for
waste in a distribution model, especially a Master Distribution model like ours.
While we are pleased that in 2018 we made great strides in cost control, we
feel we still have more room for improvement, and that was the driving force
behind our Company-wide adoption of LEAN in 2018.
LEAN, and its principles and processes have now become part of our
continuous improvement and cost-conscious culture. We made super gains
last year, but I really feel that we are just getting started. LEAN is a journey, not
a destination and this initiative is an important part of our go-forward strategy.
ITEM 4: ALLOCATE CAPITAL WISELY
Capital allocation, executed wisely over an extended period of time, is a critical
element of our operating plan, and reducing debt is our number one priority in
this area for 2019.
Our near-term Debt-to-EBITDA goal is a ratio of 2.5 to 3.0. In 2018 we made great
progress towards this goal, and reduced the ratio to 4.4 from 10.0 in 2017. We
expect ongoing improvement in this ratio as we move further into 2019 through a
combination of inventory leverage and increased net income from higher revenue,
and increased operating cash flow that will allow us to retire debt.
As we make progress in debt reduction, we also increase our optionality for other
uses of capital. Key to our capital allocation strategy will be rewarding our long-
term shareholders and keeping the best interests of all our shareholders in mind.
CONCLUSION
I will close this letter by summarizing a few key points.
DATA CABLE
2018 was a solid recovery year and many thanks to all of our valued team
members and great customers who helped produce these results. We have
good momentum exiting 2018 and our outlook for 2019 is optimistic.
MEDIUM VOLTAGE CABLE
We don’t have any silver bullets, or a flash-in-the-pan operating plan. We are
not that type of company. What we do have is a strategic plan that applies our
unique Master Distribution value proposition to target customers in target end
markets – and it is working. It is a well-constructed and tightly-controlled plan
designed to drive revenue growth through multiple strategic initiatives, increase
gross margin via a targeted approach, reduce expenses and improve cost
control through the principles of LEAN, and allocate capital wisely, always with
the best long-term interests of our shareholders in mind.
On behalf of our Board of Directors, and all my Houston Wire & Cable Company
coworkers, I thank you for your continued support and the confidence you
have placed in our Company.
Sincerely,
James L. Pokluda III
HAZARDOUS LOCATION ARMORED CABLE
4
HOUSTON WIRE & CABLE COMPANY
FORM 10-K 2018
HWC-027-Annual-2018-10K-3-19-19.indd 1
3/19/19 5:20 PM
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
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2018
or
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 Each 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 Regulation 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, a smaller reporting company, or
emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company”
in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer Accelerated Filer Non-Accelerated Filer Smaller reporting company Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES
NO
The aggregate market value of the voting stock (common stock) held by non-affiliates of the registrant as of June 30, 2018 was $136,842,163.
At March 1, 2019, there were 16,613,012 shares of the registrant’s common stock, $.001 par value per share, outstanding.
Part III of this report incorporates by reference specific portions of the registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders
to be held on May 7, 2019.
DOCUMENTS INCORPORATED BY REFERENCE
HOUSTON WIRE & CABLE COMPANY
Form 10-K
For the Fiscal Year Ended December 31, 2018
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 and synthetic products through
rigging wholesalers, fastener products through industrial distributors, and fabricated steel wire rope and synthetic lifting and hardware
products to distributors and end users. We provide our customers with a single-source solution by offering a large selection of in-stock items,
exceptional customer service and high levels of product expertise.
Our wide product selection and specialized services support our position in the supply chain between manufacturers and the customer.
The breadth and depth of wire and cable, fasteners, lifting products and related hardware that we offer requires significant warehousing
resources and a large number of SKUs (stock-keeping units). While manufacturers may have the space and capabilities to maintain a large
supply of inventory, we do not believe that any single manufacturer has the breadth and depth of product that we offer. More importantly,
manufacturers historically have not offered the services that our customers need, such as complimentary custom cutting, cable coiling, custom
manufactured slings and harnesses, paralleling, bundling, striping, cable management for large capital projects, and same day shipment, and
do not have multiple distribution centers across the nation.
Our Cable Management Program addresses our customers’ requirement for sophisticated and efficient just-in-time product management
for large capital projects. This program entails purchasing and storing dedicated inventory so our customers have immediate product
availability for the duration of their projects. Advantages of this program include extra pre-allocated safety stock, firm pricing, zero cable
surplus and just-in-time delivery. Used on large construction and capital expansion projects, our Cable Management Program combines the
expertise of our cable specialists with dedicated project inventory and superior logistics to allow complex projects to be completed on time,
within budget and with minimal residual waste.
History
We were founded in 1975 and have a long history of exceptional customer service, broad product selection and high levels of product
expertise. In 1987, we completed our first initial public offering and were subsequently purchased in 1989 by ALLTEL Corporation and in
1997 by investment funds affiliated with Code, Hennessy & Simmons LLC. In 2006, we completed our second initial public offering. In
2010, we purchased Southwest Wire Rope LP (“Southwest”), its general partner Southwest Wire Rope GP LLC and its wholly owned
subsidiary, Southern Wire (“Southern”), and subsequently merged the acquired businesses into our operating subsidiary. 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 expanded our product offerings to the industrial marketplace that purchases our wire
and cable products.
Products
We offer products in most categories of wire and cable, including: continuous and interlocked armor cable; control and power cable;
electronic wire and cable; flexible and portable cord; instrumentation and thermocouple cable; lead and high temperature cable; medium
voltage cable; premise and category wire and cable, primary and secondary aluminum distribution cable, steel wire rope and wire rope slings,
as well as synthetic fiber rope slings, chain, shackles, related hardware and corrosion resistant products including inch and metric bolts,
screws, nuts, washers, rivets and hose clamps. We also offer private branded products, including our proprietary brand LifeGuard, a low-
smoke, zero-halogen cable. Our products are used in repair and replacement work, also referred to as Maintenance, Repair and Operations
("MRO"), and related projects, larger-scale projects in the utility, industrial and infrastructure markets and a diverse range of industrial
applications including communications, energy, engineering and construction, general manufacturing, marine construction and marine
transportation, mining, infrastructure, oilfield services, petrochemical, transportation, utility, wastewater treatment and food and beverage.
Targeted Markets
Our business is driven, in part, by the strength, growth prospects and activity in the end-markets in which our products are used, which
are primarily in the continental United States, where we target the utility, industrial and infrastructure markets.
Industrial Market. The industrial market is one of the largest segments of the U.S. economy and is comprised of a diverse base of
manufacturing and production companies. The largest driver of our success in this market results from the level of U.S. investment in
upstream, midstream and downstream oil and gas exploration, transportation and production. We provide a wide variety of products
specifically designed for use in manufacturing, metal/mineral, and oil and gas markets.
2
Utility Market. The utility market includes large investor-owned utilities, rural cooperatives and municipal power authorities. We are
not a significant distributor of power lines used for the transmission of electricity but have products in our portfolio that are used in this sector.
We sell our core products for the construction of power plants and the related pollution control equipment used to comply with environmental
standards as well as plant modernizations implemented to extend the life of power generation facilities. Our customers utilize our cable
management services to supply the wire and cable required in the construction of new power plants and upgrading of existing power plants.
Infrastructure Market. Investments in the development, construction and maintenance of infrastructure markets (including commercial
buildings, education and health care; air, ground and rail transportation; telecommunications, and wastewater) are opportunities for our
product and service offerings.
Distribution Logistics
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-one 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,
cross-dock shipments and customer pick-up. Freight costs are typically borne by our customers. Due to our shipment volume, we have
preferred pricing relationships with our contract carriers.
Customers
During 2018, we served approximately 10,500 customers, shipping approximately 46,000 SKUs to approximately 14,000 customer
locations nationwide. No customer represented 10% or more of our 2018 sales.
Suppliers
We obtain products from leading suppliers and believe we have strong relationships with our top suppliers. We source a portion of our
products from offshore. While alternative sources are available for the majority of our products, we have strategically concentrated our
purchases with our top suppliers in order to maximize product quality, delivery dependability, purchasing efficiencies, and vendor rebates.
As a result, in 2018, approximately 46% 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 2018 were AmerCable Incorporated, Belden Inc., General Cable Corporation, Nexans Energy USA, Inc. and
Southwire Company.
Sales
We market our products and related services through an inside sales force situated in our regional offices, a field sales force focused on
key geographic markets, and regional sales agencies. By operating under a decentralized structure, region managers are able to adapt quickly
to market-specific occurrences, allowing us to compete effectively with local competitors. We believe the knowledge, experience and tenure
of our sales force are critical to serving our fragmented and diverse customer and end-user base.
Competition
The industrial products market remains very competitive and fragmented, with several hundred electrical wire and cable, steel wire rope,
and fastener competitors serving this market. The product offerings and levels of service from the other providers of product with which we
compete vary widely at the national, regional or local levels. In addition to the direct competition with other product providers, we also face,
on a varying basis, competitors that sell products directly or through multiple distribution channels to end-users or other resellers.
In the markets that we sell our industrial products, competition is primarily based on product line breadth, quality, product availability,
service capabilities and price.
Employees
At December 31, 2018, we had 427 employees. Our sales and marketing staff accounted for 189 employees, including 32 field sales
personnel, 11 representative sales agencies, and 121 inside sales and technical support personnel.
Fifteen warehouse employees at our Attleboro, Massachusetts location are represented by a labor union. We believe that our employee
relations are good.
3
Website Access
We maintain an internet website at www.houwire.com. We make available, under the “Investor Relations” tab on our website, our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and if applicable, amendments to those reports, as well
as proxy and information statements, as soon as reasonably practicable after such documents are electronically filed with or furnished to the
Securities and Exchange Commission (the “SEC”). Information contained on our website is not part of, and should not be construed as being
incorporated by reference into, this Annual Report on Form 10-K.
Government Regulation
We are subject to regulation by various federal, state and local agencies. We believe we are in compliance in all material respects with
existing applicable statutes and regulations affecting environmental issues and our employment, workplace health and workplace safety
practices.
4
ITEM 1A. RISK FACTORS
In addition to other information in this Annual Report on Form 10-K, the following risk factors should be carefully considered in
evaluating our business, because such factors may have a significant impact on our business, operating results, cash flows and financial
condition. As a result of the risks set forth below and elsewhere in this Annual Report, actual results could differ materially from those
projected in any forward-looking statements.
Downturns in capital spending and cyclicality in the markets we serve have had and could continue to have a material adverse effect on
our financial condition and results of operations.
The majority of our products are used in the construction, maintenance, repair and operation of facilities, plants and projects in the
communications, energy, engineering and construction, general manufacturing, infrastructure, oil and gas, marine construction, marine
transportation, mining, oilfield services, transportation, utility, wastewater treatment and food and beverage industries. The demand for our
products and services depends to a large degree on the capital spending levels of end-users in these markets. Many of these end-users defer
capital expenditures or cancel projects during economic downturns or periods of uncertainty. In addition, certain of the markets we serve are
cyclical, which affects capital spending by end-users in these industries.
We have risks associated with our customers’ access to credit.
Poor credit market conditions may adversely impact the availability of construction and other project financing, upon which many of our
customers depend, resulting in project cancellations or delays. Our utility and industrial customers may also face limitations when trying to
access the credit markets to fund ongoing operations or capital projects. Credit constraints experienced by our customers may result in lost
revenues, reduced gross margins for us and, in some cases, higher than expected bad debt losses.
We have risks associated with inventory.
Our business requires us to maintain substantial levels of inventory. We must identify the right mix and quantity of products to keep in
our inventory to fulfill customer orders. Failure to do so could adversely affect our sales and earnings. However, if our inventory levels are
too high, we are at risk that unexpected changes in circumstances, such as a shift in market demand, drop in prices or loss of a customer,
could have a material adverse impact on the net realizable value of our inventory.
Our operating results are affected by fluctuations in commodity prices.
Copper, steel, aluminum, nickel and petrochemical products are components of the products we sell. Fluctuations in the costs of these
and other commodities have historically affected our operating results. If commodity prices decline, the net realizable value of our existing
inventory could be reduced, and our gross profit could be adversely affected. To the extent higher commodity prices result in increases in the
costs we pay for our products, we attempt to reflect the increase in the prices we charge our customers. While we historically have been able
to pass most of these cost increases on to our customers, to the extent we are unable to do so in the future, it could have a material adverse
effect on our operating results. In addition, if commodity costs increase, our customers may delay or decrease their purchases of our products.
Our sales are impacted by the level of oil and gas drilling activity.
We estimate that approximately one-third of our sales directly depend upon the level of capital and operating expenditures in the oil and
gas industry, including capital and other expenditures in connection with exploration, drilling, production, gathering, transportation, refining
and processing operations. Demand for the products we distribute is sensitive to the level of exploration, development and production activity
of, and the corresponding capital and other expenditures by, oil and gas companies. A material decline in oil or gas prices, inability to access
capital, and consolidation within the industry could all depress levels of exploration, development and production activity and, therefore,
could lead to a decrease in our sales due to curtailed capital and MRO expenditures.
If we are unable to maintain our relationships with our customers, it could have a material adverse effect on our financial results.
We rely on customers to purchase our industrial products. The number, size, business strategy and operations of these customers vary
widely from market to market. Our success depends heavily on our ability to identify and respond to our customers’ needs.
5
In 2018, our ten largest customers accounted for approximately 36% of our sales. If we were to lose one or more of our large customers,
or if one or more of our large customers were to significantly reduce their purchases from us, and we were unable to replace the lost sales on
similar terms, we could experience a significant loss of revenue and profits. In addition, if one or more of our key customers failed or were
unable to pay, we could experience a write-off or write-down of the related receivables, which could adversely affect our earnings. We
participate with national marketing groups and engage in joint promotional sales activities with the members of those groups. Any exclusion
of us from, or refusal to allow us to participate in, such national marketing groups could have a material adverse effect on our sales and our
results of operations.
An inability to obtain the products that we distribute could result in lost revenues and reduced profits and damage our relationships with
customers.
In 2018, we sourced products from approximately 319 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 2018 approximately 46% of our purchases came from five suppliers. If any of these suppliers changes its sales strategy or decides
to terminate its business relationship with us, our sales and earnings could be adversely affected unless and until we were able to establish
relationships with suppliers of comparable products. In addition, if we are not able to obtain the products we distribute from either our current
suppliers or other competitive sources, we could experience a loss of revenue, reduction in profits and damage to our relationships with our
customers. Supply shortages may occur as a result of unanticipated demand or production cutbacks, shortages of raw materials, labor disputes
or weather conditions affecting products or shipments, transportation disruptions or other reasons beyond our control. When shortages occur,
suppliers often allocate products among their customers, and our allocations might not be adequate to meet our customers' needs.
Loss of key personnel or our inability to attract and retain new qualified personnel could hurt our ability to operate and grow successfully.
Our success is highly dependent upon the services of James L. Pokluda III, our President and Chief Executive Officer, and Christopher
M. Micklas, our Chief Financial Officer. Our success will continue to depend to a significant extent on our executive officers, key management
and sales personnel. We do not have key man life insurance covering any of our executive officers. We may not be able to retain our executive
officers, key personnel or attract additional qualified management and sales personnel. The loss of any of our executive officers or our other
key management and sales personnel or our inability to recruit and retain qualified personnel could hurt our ability to operate and make it
difficult to maintain our market share and to execute our growth strategies.
A change in vendor rebate programs could adversely affect our gross margins and results of operations.
The terms on which we purchase products from many of our suppliers entitle us to receive a rebate based on the volume of our purchases.
These rebates effectively reduce our costs for products. If suppliers adversely change the terms of some or all of these programs, the changes
may lower our gross margins on products we sell and may have an adverse effect on our operating results.
If we encounter difficulties with our management information systems, including cyber-attacks, we would experience problems managing
our business.
We believe our management information systems are a competitive advantage in maintaining a leadership position in the industrial supply
industry. We rely upon our management information systems to manage and replenish inventory, determine pricing, fill and ship orders on a
timely basis and coordinate our sales and marketing activities. If we experience problems with our management information systems, we
could experience product shortages, diminished inventory control or an increase in accounts receivable. Any failure by us to maintain our
management information systems could adversely impact our ability to attract and serve customers and would cause us to incur higher
operating costs and experience reduced profitability.
An increase in competition could decrease sales or earnings.
We operate in a highly competitive industry. We compete directly with national, regional and local providers of industrial products.
Competition is primarily focused in the local service area and is generally based on product line breadth, quality, product availability, service
capabilities and price. Some of our existing competitors have, and new market entrants may have, greater financial and marketing resources
than we do. To the extent existing or future competitors seek to gain or retain market share by reducing prices, we may be required to lower
our prices, thereby adversely affecting our financial results. Existing or future competitors also may seek to compete with us for acquisitions,
which could have the effect of increasing the price and reducing the number of suitable acquisitions. Other companies, including our current
customers, could seek to compete directly with our private branded products, which could adversely affect our sales of those products and
ultimately our financial results. Our existing customers, as well as suppliers, could seek to compete with us by offering services similar to
ours, 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 Southwest reporting unit had an impairment
of intangibles in 2018 and goodwill in 2015, and the Southern reporting unit had impairments of intangibles in 2013 and 2016 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, which would adversely affect our results of operations.
We may be subject to product liability claims that could be costly and time consuming.
We sell industrial products. As a result, from time to time we have been named as a defendant in lawsuits alleging that these products
caused physical injury or injury to property. We rely on product warranties and indemnities from the product manufacturers, as well as
insurance that we maintain, to protect us from these claims. However, if manufacturers' warranties and indemnities and our insurance coverage
are not available or inadequate to cover every claim, it could have an adverse effect on our operating results.
Changes to the U.S. tax, tariff and import/export regulations may have a negative effect on our results of operations.
We import a relatively small but growing percentage of our wire and cable products, as well as a significant portion of our hardware
products, from foreign manufacturers. Changes resulting from the 2017 Tax Cuts and Jobs Act could disrupt supply chains on imported goods
which could result in limited availability of supply, or cost competiveness of supply. In addition, recent tariff proposals have created
uncertainty about future trade policies and any changes in import tariffs or other trade regulations, could have a negative impact on our cash
flow, and require us to change our sourcing and supply chain strategies, and adversely affect our profitability.
7
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Facilities
We operate out of twenty-one distribution centers strategically located throughout the United States with approximately 1,019,000 square
feet of distribution space. We own three facilities in Houston, Texas, including our corporate headquarters, and two facilities in Louisiana.
All of the other facilities are leased, except for our three third-party logistics providers, which are provided under service agreements. Nineteen
of the facilities, in addition to containing inventory for re-sale, house knowledgeable sales staff. We believe that our properties are in good
operating condition and adequately serve our current business operations.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in lawsuits that are brought against us in the normal course of business. We are not currently a party
to any legal proceedings that we expect, either individually or in the aggregate, to have a material adverse effect on our business or financial
condition. 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
Christopher M. Micklas
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 of the Company from
April 2007 until May 2011.
Chief Financial Officer, Treasurer and Secretary
since April 2018. Prior thereto, Chief Financial
Officer and Chief Accounting Officer at Par Pacific
Holdings, Inc. from December 2013 until April 2017.
Age
54
51
8
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our common stock is listed on The NASDAQ Global Market under the symbol “HWCC”. As of January 10, 2019, there were 1,630
holders of record, including participants in security position listings. This figure does not include those beneficial holders whose shares may
be held by brokerage firms and clearing agencies.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The board authorized a stock repurchase program of $25 million in March 2014. The program has no expiration date. Purchases under
the stock repurchase program were suspended in November 2016. At December 31, 2018, there was $9.2 million available under the program
to repurchase stock.
Dividend Policy
Holders of our common stock are entitled to receive dividends when, as and if declared by our Board of Directors. We paid a quarterly
cash dividend from August 2007 until August 2016. The Board of Directors determined to suspend the regular dividend in November 2016,
to redeploy funds for other purposes, including the Vertex acquisition.
As a holding company, our only source of funds to pay dividends is distributions from our operating subsidiaries. Our loan agreement
does not limit the amount of dividends we may pay or stock we may repurchase, as long as we are not in default under the loan agreement
and we maintain defined levels of fixed charge coverage and/or availability.
Securities Authorized for Issuance under Equity Compensation Plans
The information called for by this Item regarding securities available for issuance is provided in response to Item 12.
9
ITEM 6. SELECTED FINANCIAL DATA
You should read the following selected financial information together with our consolidated financial statements and the related notes
and the "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Form 10-K.
We have derived the consolidated statement of operations data for each of the years ended December 31, 2018, 2017 and 2016, and the
consolidated balance sheet data at December 31, 2018 and 2017, 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, 2015 and 2014, and the consolidated
balance sheet data at December 31, 2016, 2015 and 2014 from our audited financial statements, which are not included in this Form 10-K.
2018
Year Ended December 31,
2017
2015
2016
(Dollars in thousands, except share data)
2014
$
356,858 $
271,650
85,208
317,697 $
245,035
72,662
261,644 $
208,694
52,950
308,133 $
242,223
65,910
390,011
304,073
85,938
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
38,110
30,962
2,178
60
71,310
36,570
28,716
2,772
—
68,058
29,369
24,714
3,018
2,384
59,485
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
Operating income (loss)
Interest expense
13,898
2,907
4,604
2,073
(6,535 )
845
Income (loss) before income taxes
Income tax expense (benefit)
10,991
2,355
2,531
2,753
(7,380 )
(1,374 )
Net income (loss)
$
8,636 $
(222 ) $
(6,006 ) $
2,044 $
14,972
Earnings (loss) per share:
Basic
Diluted
$
$
0.53 $
0.52 $
(0.01 ) $
(0.01 ) $
(0.37 ) $
(0.37 ) $
0.12 $
0.12 $
0.85
0.85
Weighted average common shares outstanding :
Basic
Diluted
16,389,876 16,269,611 16,345,679 17,012,560 17,605,290
16,523,599 16,269,611 16,345,679 17,067,593 17,683,931
10
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Total assets
Book overdraft (1)
Total debt
Stockholders’ equity
2018
2017
As of December 31,
2016
(Dollars in thousands)
2015
2014
$
$
$
$
$
$
$
1,393 $
59,793 $
94,325 $
203,057 $
— $
71,316 $
100,678 $
— $
57,396 $
88,115 $
194,039 $
3,028 $
73,555 $
90,744 $
— $
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
(1) Our book overdraft is funded by our revolving credit facility as soon as the related checks clear our disbursement accounts.
11
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our consolidated financial statements and related notes appearing
elsewhere in this Form 10-K. In addition to historical information, this discussion contains forward-looking statements that involve risks,
uncertainties and assumptions that could cause actual results to differ materially from our expectations. Factors that could cause such
differences include those described in “Risk Factors” and elsewhere in this Form 10-K. Certain tabular information may not foot due to
rounding.
Overview
Since our founding 43 years ago, we have grown to be a large provider of industrial products to the U.S. market. Today, we serve
approximately 10,500 customers. Our products are used in MRO activities and related projects, as well as for larger-scale projects in the
utility, industrial and infrastructure markets and a diverse range of industrial applications including communications, energy, engineering and
construction, general manufacturing, mining, marine construction and marine transportation, infrastructure, oilfield services, petrochemical,
transportation, utility, wastewater treatment and food and beverage. In the past few years, activity in the MRO market has fluctuated, while
the level of competition has increased.
Our revenue is driven in part by the level of capital spending within the end-markets we serve. Because many of these end-markets defer
capital expenditures during periods of economic downturns, our business has experienced cyclicality. Our revenue has been and will continue
to be impacted by fluctuations in capital spending and by our ability to drive demand through our sales and marketing initiatives and the
continued development and marketing of our private branded products, such as LifeGuardTM. The recent increased levels of economic activity
and commodity prices have impacted sales and the level of demand.
Our direct costs will continue to be influenced significantly by the prices we pay our suppliers to procure the products we distribute to
our customers. Changes in these costs may result, for example, from increases or decreases in raw material costs, changes in our relationships
with suppliers or changes in vendor rebates. Our operating expenses will continue to be affected by our investment in sales, marketing and
customer support personnel and commissions paid to our sales force for revenue and profit generated. Some of our operating expenses are
related to our fixed infrastructure, including rent, utilities, administrative salaries, maintenance, insurance and supplies. To meet our
customers’ needs for an extensive product offering and short delivery times, we will need to continue to maintain adequate inventory levels.
Our ability to obtain this inventory will depend, in part, on our relationships with suppliers.
Critical Accounting Policies and Estimates
Critical accounting policies are those that both are important to the accurate portrayal of a company’s financial condition and results of
operations, and require subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are
inherently uncertain.
In order to prepare financial statements that conform to accounting principles generally accepted in the United States, commonly referred
to as GAAP, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Certain
estimates are particularly sensitive due to their significance to the financial statements and the possibility that future events may be
significantly different from our expectations.
We have identified the following accounting policies as those that require us to make the most subjective or complex judgments in order
to fairly present our consolidated financial position and results of operations. Actual results in these areas could differ materially from
management’s estimates under different assumptions and conditions.
Inventories
Inventories are valued at the lower of cost, using the average cost method, and net realizable value. We continually monitor our inventory
levels at each of our distribution centers. Our reserve for inventory is based on the age of the inventory, movements of our inventory over the
prior twelve months and the experience of our purchasing and sales departments in estimating demand for the product in the succeeding year.
Our inventories are generally not susceptible to technological obsolescence. A 20% change in our estimate at December 31, 2018 would have
resulted in a change in income before income taxes of $0.7 million.
12
Intangible Assets
The Company’s intangible assets, excluding goodwill, represent tradenames and customer relationships acquired in purchase transactions.
Tradenames are not being amortized and are treated as indefinite-lived assets. Tradenames are tested for recoverability in the fourth quarter
of its fiscal year, or when there is a triggering event. Before testing its indefinite-lived assets, the Company considers whether or not to first
assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-
not that the fair value is less than its carrying amount and whether an impairment test is required. If as a result of our qualitative assessment,
we determine that an impairment test is required, or alternatively, if we elect to forego the qualitative assessment, we record an impairment
to intangibles for the difference in the undiscounted cash flows and the carrying value. The results of the annual qualitative test for 2018
indicated that certain of the tradenames at Southwest were impaired. Accordingly, an impairment charge of less than $0.1 million was recorded
for 2018. The annual qualitative test for 2017 showed no indications of impairment.
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.
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, 2018, our goodwill balance was $22.4 million, representing
11.0% of our total assets.
The Company conducts impairment testing for goodwill annually in the fourth quarter of its fiscal year and more frequently, on an interim
basis, when an event occurs or circumstances change that indicate that the fair value of a reporting unit may have declined below its carrying
value. Events or circumstances which could indicate a probable impairment include, but are not limited to, financial performance, industry
and market conditions, macroeconomic conditions, reporting unit-specific events, historical results of goodwill impairment testing and the
timing of the last performance of a quantitative assessment.
The Company tests goodwill at the reporting unit level, which is defined as an operating segment or one level below an operating segment
that constitutes a business for which financial information is available and is regularly reviewed by management. The Company determined
that it has four reporting units for this purpose. Before testing goodwill, the Company considers whether or not to first assess qualitative
factors to determine whether the existence of events or circumstances lead to a determination that it is more-likely-than-not that the fair value
of a reporting unit is less than its carrying amount and whether an impairment test is required.
The goodwill impairment test consists of assessing qualitative factors to determine whether it is more likely than not that the fair value
of a reporting unit is less than its carrying amount, including goodwill. The Company may bypass the qualitative assessment for any reporting
unit in any period and proceed directly to performing the quantitative goodwill impairment test. The quantitative goodwill impairment test,
used to identify both the existence of impairment and the amount of impairment loss, compares the fair value of a reporting unit with its
carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is
considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount
equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.
When performing goodwill impairment testing, the fair values of reporting units are determined based on valuation techniques using the
best available information. Inherent in such fair value determinations are certain judgments and estimates relating to future cash flows,
including our interpretation of current economic indicators and market valuations, and assumptions about our strategic plans. In developing
fair values for our reporting units, we may employ a market multiple or a discounted cash flow methodology, or a combination thereof. The
market multiple methodology compares us to similar companies on the basis of risk characteristics to determine our risk profile relative to
the comparable companies as a group. This analysis generally focuses on quantitative considerations, which include financial performance
and other quantifiable data, and qualitative considerations, which include any factors which are expected to impact future financial
performance. The most significant assumptions affecting the market multiple methodology are the market multiples and control premium. A
control premium represents the value an investor would pay above non-controlling interest transaction prices in order to obtain a controlling
interest in the respective unit.
13
The discounted cash flow methodology establishes fair value by estimating the present value of the projected future cash flows to be
generated from the reporting unit. The discount rate applied to the projected future cash flows to arrive at the present value is intended to
reflect all risks of ownership and the associated risks of realizing the stream of projected future cash flows. The discounted cash flow
methodology uses our projections of financial performance. The most significant assumptions used in the discounted cash flow methodology
are the discount rate and expected future revenue and operating margins, which vary among reporting units. If actual results are not consistent
with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be exposed to future impairment
losses that could be material to our results of operations.
Income Taxes
The Company determines deferred tax assets and liabilities based on differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse. On December 22, 2017, the Tax Cuts and Jobs Act (“the Act”) was signed into
law, making significant changes to the US Internal Revenue Code. As of December 31, 2018, the Company completed its analysis of its
accounting for the income tax effects of tax reform and as a result, no additional adjustments were recorded.
Estimates, judgments and assumptions are required in determining whether deferred tax assets will be fully or partially realized. The
Company establishes a valuation allowance to reduce the deferred tax assets when it is more likely than not that some portion or all of the
deferred tax assets will not be realized. In evaluating the ability to realize deferred tax assets, the Company considers all available positive
and negative evidence, in determining whether, based on the weight of that evidence, a valuation allowance is needed for part or all of the
deferred tax assets. In determining the need for a valuation allowance on the Company’s deferred tax assets, the Company places greater
weight on recent and objectively verifiable current information, as compared to more forward-looking information that is used in valuing
other assets on the balance sheet. The Company has considered taxable income in prior carryback years, future reversals of existing taxable
temporary differences, future taxable income, and tax planning strategies in assessing the need for the valuation allowance.
The Company establishes liabilities for estimated tax issues, and the provisions and benefits resulting from changes to those liabilities
are included in our annual tax provision along with related interest. The Company recognizes interest on any tax issue as a component of
interest expense and any related penalties in other operating expenses.
Sales
Our primary source of revenue is the sale of industrial products based upon purchase orders or contracts with customers, as well as billing
for freight charges. Revenue is recognized at a point in time once we have determined that the customer has obtained control over the product.
Control is typically deemed to have been transferred to the customer when the product is shipped, or delivered (either by customer pickup or
through common carrier. Sales incentives earned by customers are accrued in the same month as the shipment is invoiced and are accounted
for as a reduction in sales.
Cost of Sales
Cost of sales consists primarily of the average cost of the industrial products that we sell. We also incur shipping and handling costs in
the normal course of business. Cost of sales also reflects cash discounts for prompt payment to vendors and vendor rebates generally related
to annual purchase targets, as well as inventory obsolescence charges.
Operating Expenses
Operating expenses include all expenses, excluding freight, incurred to receive, sell and ship product and administer the operations of
the Company.
Salaries and Commissions. Salary expense includes the base compensation, and any overtime earned by hourly personnel, for all sales,
administrative and warehouse employees and stock compensation expense for options and restricted stock granted to employees. Commission
expense is earned by inside sales personnel based on gross profit dollars generated, by field sales personnel from generating sales and meeting
various objectives, by sales, national and marketing managers for driving the sales process, by region managers based on the profitability of
their branches and by corporate managers based primarily on our profitability and also on other operating metrics.
Other Operating Expenses. Other operating expenses include all payroll taxes, health insurance, travel expenses, public company
expenses, advertising, management information system expenses, facility rent and all distribution expenses such as packaging, reels, and
repair and maintenance of equipment and facilities.
14
Depreciation and Amortization. We incur depreciation expense on costs related to capitalized property and equipment on a straight-line
basis over the estimated useful lives of the assets, which range from three to thirty years. We incur amortization expense on leasehold
improvements and 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, 2018, 2017 and 2016.
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)
2018
Year Ended December 31,
2017
2016
100.0 %
76.1 %
23.9 %
100.0 %
77.1 %
22.9 %
100.0 %
79.8 %
20.2 %
10.7 %
8.7 %
0.6 %
0.0 %
20.0 %
3.9 %
0.8 %
3.1 %
0.7 %
2.4 %
11.5 %
9.0 %
0.9 %
0.0 %
21.4 %
1.4 %
0.7 %
0.8 %
0.9 %
(0.1 )%
11.2 %
9.4 %
1.2 %
0.9 %
22.7 %
(2.5 )%
0.3 %
(2.8 )%
(0.5 )%
(2.3 )%
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, 2018 and 2017
Sales
Year Ended
December 31,
(Dollars in millions)
Sales
2018
2017
$
356.9 $
317.7 $
Change
39.2
12.3 %
Our sales in 2018 increased $39.2 million or 12.3% from 2017. The increase in sales was primarily due to improved industrial activity
and disciplined pricing. We estimate sales for our project business, which targets end markets, encompassing Environmental Compliance,
Engineering & Construction, Industrials, Utility Power Generation, and Mechanical Wire Rope, increased 17%, while Maintenance, Repair,
and Operations (MRO) sales increased 11%, as compared to 2017.
Gross Profit
(Dollars in millions)
Gross profit
Gross profit as a percent of sales
2018
2017
$
85.2 $
23.9 %
72.7 $
22.9 %
Change
12.5
17.3 %
Gross profit increased $12.5 million or 17.3% from 2017. The increase in gross profit was primarily due to increased sales. Gross margin
(gross profit as a percentage of sales) increased to 23.9% in 2018 from 22.9% in 2017 primarily due to ongoing pricing discipline and product
mix.
Year Ended
December 31,
16
Operating Expenses
(Dollars in millions)
Operating expenses:
Salaries and commissions
Other operating expenses
Depreciation and amortization
Impairment charge
Total operating expenses
Year Ended
December 31,
2018
2017
Change
$
$
38.1 $
31.0
2.2
0.1
71.3 $
36.6 $
28.7
2.8
—
68.1 $
1.5
2.2
(0.6 )
0.1
3.3
4.2 %
7.8 %
(21.4 )%
100.0 %
4.8 %
Operating expenses as a percent of sales
20.0 %
21.4 %
Note: Due to rounding, numbers may not add up to total operating expenses.
Salaries and Commissions. Salaries and commissions increased $1.5 million or 4.2% primarily due to additional sales and warehouse
personnel, as well as an increase in commissions due to higher sales and gross profit.
Other Operating Expenses. Other operating expenses increased $2.2 million or 7.8% primarily due to additional warehouse distribution
expenses as sales increased and increased administrative expenses due to increased personnel.
Depreciation and Amortization. Depreciation and amortization decreased slightly to $2.2 million in 2018 from $2.8 million in 2017
primarily due to the full amortization of the Southern Wire reporting unit tradenames in 2017.
Impairment Charge. The Company recorded a non-cash impairment charge in 2018 with respect to tradenames at its Southwest Wire
Rope reporting unit. (See Note 3 to our Consolidated Financial Statements)
Operating expenses as a percentage of sales decreased to 20.0% in 2018 from 21.4% in 2017. This decrease primarily relates to the
leverage obtained from increased sales, which rose at a higher rate than the increase in operating expenses.
Interest Expense
Interest expense increased 40.2% to $2.9 million in 2018 from $2.1 million in 2017 due to higher average debt to fund increased working
capital and an increase in the average effective interest rate. Average debt was $76.8 million in 2018 compared to $71.8 million in 2017. The
average effective interest rate increased to 3.7% in 2018 from 2.8% in 2017.
Income Tax
Income tax expense decreased 14.5% to $2.4 million in 2018 from $2.8 million in 2017. The effective income tax rate was 21.4% in
2018 compared to 108.8% in 2017. The 2018 tax rate included a benefit of (9.5%) for the release of the valuation allowance on our net
deferred tax assets and 1.2% for share-based compensation. This compares to the 2017 tax rate which included a 41.0% charge for the
establishment of a valuation allowance on our net deferred tax assets, 15.2% for share-based compensation expense and a 12.9% charge for
deferred tax assets in respect of the tax reform rate change.
Net Income (Loss)
We achieved net income of $8.6 million in 2018 compared to a net loss of $0.2 million in 2017.
17
Comparison of Years Ended December 31, 2017 and 2016
Sales
(Dollars in millions)
Sales
Year Ended
December 31,
2017
2016
Change
$
317.7
$
261.6
$
56.1
21.4 %
Our sales in 2017 increased $56.1 million or 21.4% from 2016. The increase in sales was primarily attributable to an increase in sales of
$31.3 million, or 12.5%, together with the inclusion of a full year of Vertex’s sales, which was $24.7 million more than sales of Vertex
included in the 2016 financial statements, following its acquisition on October 3, 2016. We estimate sales for our project business, which
targets end markets, encompassing Environmental Compliance, Engineering & Construction, Industrials, Utility Power Generation, and
Mechanical Wire Rope, increased 3%, while MRO sales increased 15%, as compared to 2016.
Gross Profit
(Dollars in millions)
Gross profit
Gross profit as a percent of sales
2017
2016
$
$
72.7
22.9 %
$
53.0
20.2 %
Change
19.7
37.2 %
Gross profit increased $19.7 million or 37.2% from 2016. The increase was primarily attributable to the increase in sales, including a full
year of Vertex’s sales, higher product margins and the higher margins generated by Vertex.
Year Ended
December 31,
Operating Expenses
(Dollars in millions)
Operating expenses:
Salaries and commissions
Other operating expenses
Depreciation and amortization
Impairment charge
Total operating expenses
Year Ended
December 31,
2017
2016
Change
$
$
36.6
28.7
2.8
—
68.1
$
$
29.4
24.7
3.0
2.4
59.5
$
$
7.2
4.0
(0.2 )
(2.4 )
8.6
24.5 %
16.2 %
(8.2 )%
(100.0 )%
14.4 %
Operating expenses as a percent of sales
21.4 %
22.7 %
Note: Due to rounding, numbers may not add up to total operating expenses.
Salaries and Commissions. Salaries and commissions increased $7.2 million or 24.5%, which included Vertex’s salaries and commissions
for a full year, an increase in commissions due to higher sales and profitability and higher distribution labor costs due to higher activity levels.
Other Operating Expenses. Other operating expenses increased $4.0 million or 16.2%, which included operating expenses of Vertex for
a full year and additional warehouse distribution expenses as sales increased.
Depreciation and Amortization. Depreciation and amortization decreased slightly to $2.8 million in 2017 from $3.0 million in 2016.
Impairment Charge. The Company recorded a non-cash impairment charge in 2016 with respect to goodwill at its HWC reporting unit
and tradenames at its Southern Wire reporting unit. (See Note 3 to our Consolidated Financial Statements)
Operating expenses as a percentage of sales decreased to 21.4% in 2017 from 22.7% in 2016. This decrease primarily relates to the
leverage obtained from increased sales, which rose at a higher rate than operating expenses, and the absence of an impairment charge in 2017.
18
Interest Expense
Interest expense increased 145.3% to $2.1 million in 2017 from $0.8 million in 2016 due to higher average debt primarily as a result of
borrowing to finance the Vertex acquisition. Average debt was $71.8 million in 2017 compared to $40.0 million in 2016. The average effective
interest rate increased to 2.8% in 2017 from 2.0% in 2016.
Income Tax
We recorded an income tax charge of $2.8 million in 2017, compared to an income tax benefit of $1.4 million in 2016. The effective
income tax rate was 108.8% in 2017 compared to an income tax benefit of 18.6% in 2016. The 2017 tax rate included a 41.0% charge for the
establishment of a valuation allowance on our net deferred tax assets, 15.2% for share-based compensation expense and a 12.9% charge for
deferred tax assets in respect of the tax reform rate change.
Net Loss
We sustained a net loss of $0.2 million in 2017 compared to a net loss of $6.0 million in 2016.
Impact of Inflation and Commodity Prices
Our results of operations are affected by changes in the inflation rate and commodity prices. Moreover, because copper, steel, aluminum,
nickel and petrochemical products are components of the industrial products we sell, fluctuations in the costs of these and other commodities
have historically affected our operating results. To the extent commodity prices decline, the net realizable value of our existing inventory
could also decline, and our gross profit can be adversely affected because of either reduced selling prices or lower of cost or net realizable
value adjustments in the carrying value of our inventory. We turn our inventory approximately three times a year, therefore, the impact of
changes in commodity prices in any particular quarter would primarily affect the results of the succeeding two calendar quarters. If we are
unable to pass on to our customers future cost increases due to inflation or rising commodity prices, our operating results could be adversely
affected.
Liquidity and Capital Resources
Our primary capital needs are for working capital obligations, capital expenditures, and other general corporate purposes, including
acquisitions. Our primary sources of working capital are cash from operations supplemented by bank borrowings.
Liquidity is defined as the ability to generate adequate amounts of cash to meet the current need for cash. We assess our liquidity in terms
of our ability to generate cash to fund our operating activities. Significant factors which could affect liquidity include the following:
•
•
•
•
•
the adequacy of available bank lines of credit;
cash flows generated from operating activities;
capital expenditures;
acquisitions; and
the ability to attract long-term capital with satisfactory terms
Comparison of Years Ended December 31, 2018 and 2017
Our net cash provided by operating activities was $5.3 million in 2018 compared to net cash used in operating activities of $11.3 million
in 2017. We had net income of $8.6 million in 2018 compared to a net loss of $0.2 million in 2017.
Changes in our operating assets and liabilities resulted in cash used in operating activities of $6.2 million in 2018. Inventories increased
$6.8 million in alignment with the increase in sales volume. Accounts receivable increased $2.5 million, primarily due to increased sales in
2018. Partially offsetting these uses of cash was the decrease in book overdraft of $3.0 million, an increase in accounts payable of $2.8 million,
an increase in accrued and other current liabilities of $2.5 million primarily due to increased inventory and customer volume discounts and a
decrease in prepaid expenses of $1.2 million.
Net cash used in investing activities was $1.5 million in 2018 compared to $1.6 million in 2017.
Net cash used in financing activities was $2.5 million in 2018 compared to net cash provided by financing activities of $12.9 million in
2017. Net payments under our revolver of $2.2 million and the purchase of treasury stock of $0.2 million were the main components
of financing activities in 2018.
19
Comparison of Years Ended December 31, 2017 and 2016
Our net cash used in operating activities was $11.3 million compared to net cash provided by operating activities of $17.2 million
in 2016. We had a net loss of $0.2 million in 2017 compared to net loss of $6.0 million in 2016.
Changes in our operating assets and liabilities resulted in cash used in operating activities of $16.7 million in 2017. Accounts receivable
increased $12.7 million, primarily due to increased sales in 2017. Inventories increased $7.9 million in alignment with the increase in sales.
Partially offsetting these uses of cash was the increase in accrued and other current liabilities of $3.6 million primarily due to increased
customer volume discounts.
Net cash used in investing activities was $1.6 million in 2017 compared to $33.7 million in 2016. The decrease from the prior year
was primarily due to the Vertex acquisition in October 2016.
Net cash provided by financing activities was $12.9 million in 2017 compared to $16.4 million in 2016. Net borrowings under
our revolver of $13.2 million to fund higher working capital requirements and the purchase of treasury stock of $0.2 million were the
main components of financing activities in 2017.
Indebtedness
Our principal source of liquidity at December 31, 2018 was working capital of $126.2 million compared to $119.6 million
at December 31, 2017. We also had available borrowing capacity of approximately $28.7 million at December 31, 2018 and $23.0
million at December 31, 2017 under our loan agreement.
We believe that we will have adequate availability of capital to fund our present operations, meet our commitments on our existing debt,
and fund anticipated growth over the next twelve months, including expansion in existing and targeted market areas. We continually seek
potential acquisitions and from time to time hold discussions with acquisition candidates. If suitable acquisition opportunities or working
capital needs arise that would require additional financing, we believe that our financial position and earnings history provide a solid base for
obtaining additional financing resources at competitive rates and terms. Additionally, based on market conditions, we may decide to
issue additional shares of common or preferred stock to raise funds.
Loan and Security Agreement
HWC Wire & Cable Company, Vertex, and Bank of America, N.A., as agent and lender, are parties to the Fourth Amended and Restated
Loan and Security Agreement (the “Loan Agreement”), as amended on October 3, 2016. The Loan Agreement provides a $100
million revolving credit facility and expires on September 30, 2020. As of March 12, 2019, the expiration date has been extended to March
12, 2024. Under certain circumstances we may request an increase in the commitment by an additional $50 million. Borrowings under
the Loan Agreement bear interest at the British Bankers Association LIBOR Rate plus 100 to 150 basis points based on availability, if a
LIBOR loan, or at a fluctuating rate equal to the greatest of the agent’s prime rate, the federal funds rate plus 50 basis points, or LIBOR for a
30-day interest period plus 150 basis points, if a base rate loan. The unused commitment fee is 25 basis points. Availability under the
Loan Agreement is limited to a borrowing base equal to 85% of the value of eligible accounts receivable, plus the lesser of 70% of the value
of eligible inventory or 90% of the net orderly liquidation value percentage of the value of eligible inventory, in each case less
certain reserves. The Loan Agreement is secured by substantially all of our property, other than real estate.
Covenants in the Loan Agreement require us to maintain a specified minimum fixed charge coverage ratio, unless certain availability
levels exist. Repaid amounts can be re-borrowed subject to the borrowing base. As of December 31, 2018, we met the availability-
based covenant.
Capital Expenditures
We made capital expenditures of $1.5 million, $1.8 million and $1.3 million in the years ended December 31, 2018, 2017 and 2016,
respectively.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements, other than operating leases.
Financial Derivatives
We have no financial derivatives.
20
Climate Risk
Our operations are subject to inclement weather conditions, which could potentially be related to global warming, including hurricanes,
earthquakes and abnormal weather events. Our previous experience from these events has had a minimal effect on our operations.
Factors Affecting Future Results
This Annual Report on Form 10-K contains statements that may be considered forward-looking. These statements can be identified
by the fact that they do not relate strictly to historical or current facts. They use words such as "aim," "anticipate," "believe," "could,"
"estimate," "expect," "intend," "may," "plan," "project," "should," "will be," "will continue," "will likely result," "would" and other words
and terms of similar meaning in conjunction with a discussion of future operating or financial performance. You should read statements that
contain these words carefully, because they discuss our future expectations, contain projections of our future results of operations or of our
financial position or state other "forward-looking" information. Actual results could differ materially from the results indicated by these
statements, because the realization of those results is subject to many risks and uncertainties. Some of these risks and uncertainties are
discussed in greater detail under Item 1A, "Risk Factors."
All forward-looking statements are based on current management expectations and speak only as of the date of this filing. Except as
required under federal securities laws and the rules and regulations of the SEC, we do not have any intention, and do not undertake, to
update any forward-looking statements to reflect events or circumstances arising after the date of this Form 10-K.
ITEM 7A. – Not applicable and has been omitted.
21
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Houston Wire & Cable Company
Index to consolidated financial statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
Page
F-1
F-2
F-3
F-4
F-5
F-6
22
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Houston Wire & Cable Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Houston Wire & Cable Company (the Company) as of December 31,
2018 and 2017, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2018, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and
2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity
with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, 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 15, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts
and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable
basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1997.
Houston, Texas
March 15, 2019
F-1
Houston Wire & Cable Company
Consolidated Balance Sheets
Assets
Current assets:
Cash
Accounts receivable, net
Trade
Other
Inventories, net
Income tax receivable
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
Deferred income taxes
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: 16,611,651 and 16,491,181 shares outstanding at December 31, 2018 and 2017,
respectively
Additional paid-in capital
Retained earnings
Treasury stock
Total stockholders’ equity
December 31,
2018
2017
(In thousands, except
share data)
$
1,393
$
—
$
$
52,946
6,847
94,325
435
737
156,683
11,456
11,179
22,353
930
456
203,057
—
11,253
19,232
30,485
71,316
—
578
102,379
$
$
51,031
6,365
88,115
449
1,938
147,898
11,355
12,015
22,353
—
418
194,039
3,028
8,449
16,823
28,300
73,555
414
1,026
103,295
—
—
21
53,514
105,975
(58,832 )
100,678
21
54,006
97,336
(60,619 )
90,744
Total liabilities and stockholders’ equity
$
203,057
$
194,039
The accompanying notes are an integral part of these consolidated financial statements.
F-2
Houston Wire & Cable Company
Consolidated Statements of Operations
2018
Year Ended December 31,
2017
(In thousands, except share and per share data)
2016
$
356,858
271,650
85,208
$
317,697
245,035
72,662
$
261,644
208,694
52,950
38,110
30,962
2,178
60
71,310
13,898
2,907
10,991
2,355
8,636
0.53
0.52
$
$
$
36,570
28,716
2,772
—
68,058
4,604
2,073
2,531
2,753
(222 )
(0.01 )
(0.01 )
$
$
$
29,369
24,714
3,018
2,384
59,485
(6,535 )
845
(7,380 )
(1,374 )
(6,006 )
(0.37 )
(0.37 )
$
$
$
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
16,389,876
16,523,599
16,269,611
16,269,611
16,345,679
16,345,679
Dividends declared per share
$
—
$
—
$
0.15
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
Amount
Additional
Paid-In
Capital
Retained
Earnings
Treasury Stock
Shares
Amount
Total
Stockholders'
Equity
Balance at January 1, 2016
Net loss
Repurchase of treasury shares
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
Balance at December 31, 2016
Net loss
Repurchase of treasury shares
Amortization of unearned
stock compensation
Impact of forfeited awards
Impact of released vested
restricted stock units
Issuance of restricted stock
awards
Dividends accrual reversal
Balance at December 31, 2017
Net income
Repurchase of treasury shares
Amortization of unearned
stock compensation
Amortization of reclassed
liability awards
Impact of forfeited awards
Impact of released vested
restricted stock units
Issuance of restricted stock
awards
Dividend accrual reversal
Balance at December 31, 2018
$
20,988,952
—
—
—
—
—
—
—
20,988,952
—
—
—
—
—
—
—
20,988,952
—
—
—
—
—
—
—
—
20,988,952
$
21
—
—
—
—
—
—
—
21
—
—
—
—
—
—
—
21
—
—
—
—
—
—
—
—
21
$
(In thousands, except share data)
$ 106,048
54,621
(6,006 )
—
—
—
—
(376,860 )
(4,276,326 ) $ (60,689 ) $
856
387
(284 )
—
—
—
(1,756 )
—
—
(2,492 )
—
(28,295 )
20,416
129,638
—
—
(2,228 )
—
(387 )
284
1,756
—
53,824
—
—
1,004
361
(372 )
(811 )
—
54,006
—
—
1,059
411
179
(353 )
97,550
(222 )
—
(4,531,427 )
—
(27,156 )
(61,264 )
—
(177 )
—
—
—
—
8
—
(26,707 )
27,519
60,000
—
—
(361 )
372
811
—
97,336
8,636
—
(4,497,771 )
—
(25,368 )
(60,619 )
—
(175 )
—
—
—
—
—
—
(13,332 )
26,185
132,985
—
—
—
(179 )
353
1,788
—
(4,377,301 ) $ (58,832 ) $
(1,788 )
—
53,514
—
3
$ 105,975
$
100,001
(6,006 )
(2,228 )
856
—
—
—
(2,492 )
90,131
(222 )
(177 )
1,004
—
—
—
8
90,744
8,636
(175 )
1,059
411
—
—
—
3
100,678
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 (loss) to net cash provided by (used
in) 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
Income taxes
Prepaid expenses
Book overdraft
Trade accounts payable
Accrued and other current liabilities
Other operating activities
Net cash provided by (used in) operating activities
Investing activities
Expenditures for property and equipment
Proceeds from disposals of property and equipment
Cash refunded (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
Purchase of treasury stock
Net cash (used in) provided by financing activities
Net change in cash
Cash at beginning of year
Cash at end of year
Supplemental disclosures
Cash paid during the year for interest
Cash paid during the year for income taxes
2018
Year Ended December 31,
2017
(In thousands)
2016
$
8,636
$
(222 )
$
(6,006 )
60
2,178
1,298
73
615
(1,344 )
62
(2,507 )
(6,825 )
14
1,201
(3,028 )
2,804
2,460
(359)
5,338
(1,503 )
20
—
(1,483 )
367,513
(369,752 )
—
(48 )
(175 )
(2,462 )
—
2,772
1,176
68
34
1,314
222
(12,719 )
(7,942 )
1,499
(1,368 )
(153 )
38
3,571
368
(11,342 )
(1,769 )
8
193
(1,568 )
333,301
(320,133 )
—
(81 )
(177 )
12,910
1,393
—
1,393
2,811
3,696
$
$
$
—
—
—
1,961
64
$
$
$
$
$
$
2,384
3,018
856
285
93
6
(116 )
4,019
10,483
(1,016 )
124
(517 )
896
2,587
147
17,243
(1,319 )
5
(32,370 )
(33,684 )
302,898
(281,698 )
—
(2,495 )
(2,264 )
16,441
—
—
—
728
233
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Houston Wire & Cable Company
Notes to Consolidated Financial Statements
1. Organization and Summary of Significant Accounting Policies
Description of Business
Houston Wire & Cable Company (the “Company”), through its wholly owned subsidiaries, provides industrial products to the U.S.
market through twenty-one locations in fourteen states throughout the United States. The Company has no other business activity.
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries and have been prepared following
accounting principles generally accepted in the United States (“GAAP”) and the requirements of the Securities and Exchange Commission
(“SEC”). The financial statements include all normal and recurring adjustments that are necessary for a fair presentation of the Company’s
financial position and operating results. All significant inter-company balances and transactions have been eliminated.
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes. The most significant estimates are those relating to the
allowance for doubtful accounts, the refund liability, the inventory obsolescence reserve, vendor rebates, the realization of deferred tax assets
and the valuation of goodwill and indefinite-lived assets. Actual results could differ materially from the estimates and assumptions used for
the preparation of the financial statements.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.
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:
Denominator:
Weighted average common shares for basic earnings per share
Effect of dilutive securities
Denominator for diluted earnings per share
16,389,876
133,723
16,523,599
16,269,611
—
16,269,611
16,345,679
—
16,345,679
2018
Year Ended December 31,
2017
2016
Stock awards to purchase 298,406, 808,391 and 685,054 shares of common stock were not included in the diluted net income (loss) per
share calculation for 2018, 2017 and 2016, respectively, as their inclusion would have been anti-dilutive. In 2017 and for the first quarter of
2018, the Company calculated earnings per share using the “two-class” method, whereby unvested share-based payment awards that contained
non-forfeitable rights to dividends or dividend equivalents were considered “participating securities”, as discussed in Note 8, and therefore,
these participating securities were treated as a separate class in computing earnings per share.
Accounts Receivable
Accounts receivable consists primarily of receivables from customers, less an allowance for doubtful accounts of $0.2 million at
December 31, 2018 and 2017, and a reserve for returns and allowances of $0.4 million at December 31, 2017. In 2018, the reserve for returns
and allowances has been reclassified to accrued liabilities as a refund liability as a result of the adoption of the new revenue recognition
standard. 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
2018
$
$
172
73
(63 )
182
2017
(In thousands)
151
68
(47 )
172
2016
$
$
132
285
(266 )
151
$
$
Inventories are carried at the lower of cost, using the average cost method, and net realizable value and consist primarily of goods
purchased for resale, less a reserve for obsolescence and unusable items and unamortized vendor rebates. The reserve for inventory is based
upon a number of factors, including the experience of the purchasing and sales departments, age of the inventory, new product offerings, and
other factors. The reserve for inventory may periodically require adjustment as the factors identified above change.
The following table summarizes the changes in the inventory reserves for the past three years:
Balance at beginning of year
Provision for inventory write-downs
Deduction for inventory write-offs
Balance at end of year
Vendor Rebates
2018
$
$
3,925
615
(831 )
3,709
2017
(In thousands)
4,366
34
(475 )
3,925
2016
$
$
4,829
93
(556 )
4,366
$
$
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 $1.4 million for the each of the years ended December 31, 2018 and 2017, and $1.3 million
for the year ended December 31, 2016.
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, 2018, the goodwill balance was $22.4 million, representing
11.0% of the Company’s total assets.
F-7
The Company conducts impairment testing for goodwill annually in the fourth quarter of its fiscal year and more frequently, on an interim
basis, when an event occurs or circumstances change that indicate that the fair value of a reporting unit may have declined below its carrying
value. Events or circumstances which could indicate a probable impairment include, but are not limited to, financial performance, industry
and market conditions, macroeconomic conditions, reporting unit-specific events, historical results of goodwill impairment testing and the
timing of the last performance of a quantitative assessment.
The Company tests goodwill at the reporting unit level, which is defined as an operating segment or one level below an operating segment
that constitutes a business for which financial information is available and is regularly reviewed by management. The Company determined
that it has four reporting units for this purpose. Before testing goodwill, the Company considers whether or not to first assess qualitative
factors to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value
of a reporting unit is less than its carrying amount and whether an impairment test is required. If as a result of the qualitative assessment, the
Company determines that an impairment test is required, or alternatively, if the Company elects to forego the qualitative assessment, the
Company records an impairment to goodwill to the extent the carrying amount of the reporting unit, including goodwill, exceeds the fair
value of the reporting unit.
Intangibles
Intangible assets, from the acquisition of Southwest and Southern in 2010 and the 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 reportable segment, sales of industrial products, including electrical and mechanical
wire and cable, industrial fasteners, hardware and related services to the U.S. market. The Company’s chief operating decision maker
(“CODM”) is its Chief Executive Officer. The CODM makes operational and resource decisions based on company-wide sales and margin
performance compared to the established strategic goals of the Company.
Revenue Recognition, Returns & Allowances
The Company’s primary source of revenue is the sale of industrial products based upon purchase orders or contracts with customers.
Revenue is recognized at a point in time once the Company has determined that the customer has obtained control over the product. Control
is typically deemed to have been transferred to the customer when the product is shipped, or delivered (either by customer pickup or through
common carrier). It is not normal Company practice to grant extended payment terms. Revenue is recognized net of any sales taxes collected,
which are subsequently remitted to the appropriate taxing authorities. The Company treats its transportation costs (shipping and handling) as
fulfillment costs and not as a separate performance obligation. These transportation costs are recorded in cost of sales.
The amount of revenue recognized reflects the consideration the Company expects to be entitled to receive in exchange for products sold.
Revenue is recorded at the transaction price net of estimates of variable consideration, which may include product returns, trade discounts
and allowances. The Company accrues for variable consideration using the expected value method. Estimates of variable consideration are
included in revenue to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur.
Customers are permitted to return product only on a case-by-case basis. Product exchanges are handled as a credit, with any replacement
item being re-invoiced to the customer. Customer returns are recorded as an adjustment to sales. As a result of the adoption of the new revenue
recognition standard, the reserve for returns and allowances has been reclassified from a contra-accounts receivable account to a liability
account. The Company has no installation obligations.
The Company may offer sales incentives, which are accrued monthly as an adjustment to sales.
F-8
Shipping and Handling
The Company incurs shipping and handling costs in the normal course of business. Freight amounts invoiced to customers are included
as sales, and freight charges are included as a component of cost of sales.
Credit Risk
No single customer accounted for 10% or more of the Company’s sales in 2018, 2017 or 2016. 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 $0.5 million for each of the years ended December 31, 2018
and 2017 and $0.4 million for the year ended December 31, 2016.
Financial Instruments
The carrying values of accounts receivable, trade accounts payable and accrued and other current liabilities approximate fair value, due
to the short maturity of these instruments.
Stock-Based Compensation
Restricted stock awards, units and cash awards are valued at the closing price of the Company’s stock on the grant date and are granted
under the Company’s 2017 Stock Plan. Stock options issued under the Company’s now-expired 2006 Stock Plan had an exercise price equal
to the fair value of the Company’s stock on the grant date. The Company recognizes compensation expense ratably over the vesting period.
The Company’s stock-based compensation expense is included in salaries and commissions expense for employees and in other operating
expenses for non-employee directors in the accompanying consolidated statements of operations.
The Company receives a tax deduction for certain stock option exercises in the period in which the options are exercised, generally for
the excess of the market price on the date of exercise over the exercise price of the options. The Company reports excess tax benefits from
the award of equity instruments as 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. A valuation allowance for deferred tax assets is recognized when it is more likely than not that
some or all of the benefit from the deferred tax assets will not be realized. To assess that likelihood, the Company uses its current financial
position, results of operations, both actual and forecasted, the reversal of deferred tax liabilities, and tax planning strategies to determine
whether a valuation allowance is required.
Recently Adopted Accounting Standards
The Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) is the sole source of authoritative
GAAP other than SEC issued rules and regulations that apply only to SEC registrants. The FASB issues an Accounting Standard Update
(“ASU”) to communicate changes to the codification. The Company considers the applicability and impact of all ASUs. The following are
those recent ASUs that were recently adopted by the Company.
In 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 amendments in the ASU were effective for annual and interim
periods beginning after December 15, 2017. The Company adopted this ASU effective January 1, 2018, using the modified retrospective
method, and adoption did not have a material impact on the Company’s consolidated financial statements. See above for the Company’s
updated revenue recognition policy.
F-9
In May 2017, the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification
Accounting.” The amendments in this update provide guidance about which changes to the terms and conditions of a share-based payment
award require the application of modification accounting. This update was effective for public companies for annual periods beginning after
December 15, 2017. The Company adopted this ASU in the first quarter of 2018 and the adoption did not have a material impact on the
Company’s consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of
Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The new guidance requires that an employer disaggregate the
service cost component from the other components of net benefit cost. This update was effective for public companies for annual periods
beginning after December 15, 2017. The Company adopted this ASU in the first quarter of 2018 and the adoption did not have a material
impact on the Company’s consolidated financial statements.
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 amends prior guidance and simplifies the accounting for goodwill impairment for all entities by
requiring impairment charges to be based on the first step in the two-step impairment test under ASC 350. ASU No. 2017-04 is effective for
annual and interim impairment tests 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 elected to early adopt this ASU in the first quarter of 2018
and the adoption did not have a material impact on the Company’s consolidated financial statements.
In March 2018, the FASB issued ASU 2018-05, “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff
Accounting Bulletin No. 118 (SEC Update).” This ASU added the SEC guidance released on December 22, 2017 regarding the income tax
accounting implication of the Tax Cuts and Jobs Act to ASC Topic 740. At December 31, 2018, the Company has not made a material
adjustment to the tax provision recorded under this ASU at December 31, 2017. The Company has completed its accounting for all of the tax
effects of the Tax Cuts and Jobs Act.
Recent Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the
Disclosure Requirements for Fair Value Measurement.” The amendments in this update eliminate, add and modify certain disclosure
requirements for fair value measurements as part of its disclosure framework project. The guidance is effective for public companies beginning
in the first quarter of 2020 and early adoption is permitted. The Company is currently assessing the impact of this ASU on its consolidated
financial statements and evaluating the timing of adoption.
In August 2018, the FASB issued ASU 2018-14, “Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit
Plans.” The amendments in this update eliminate, add and modify certain disclosure requirements for defined benefit pension plans. The
guidance is effective for public companies beginning in the first quarter of 2020 and early adoption is permitted. The Company is currently
assessing the impact of this ASU on its consolidated financial statements and evaluating the timing of adoption.
In August 2018, the FASB issued ASU 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40);
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The amendments
in this update require implementation costs incurred by customers in cloud computing arrangements (i.e., hosting arrangements) to be
capitalized under the same premises of authoritative guidance for internal-use software, and deferred over the non-cancellable term of the
cloud computing arrangement plus any option renewal periods that are reasonably certain to be exercised by the customer or for which the
exercise is controlled by the service provider. The guidance is effective for public companies beginning in the first quarter of 2020 and early
adoption is permitted. The Company is currently assessing the impact of this ASU on its consolidated financial statements and evaluating the
timing of adoption.
In June 2018, the FASB issued ASU No. 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee
Share-Based Payment Accounting” that simplifies the accounting for share-based payment arrangements with nonemployees for goods and
services. Under the ASU, the guidance on such payments to nonemployees is aligned with the accounting for share-based payments granted
to employees, including the measurement of equity-classified awards, which is fixed at the grant date under the new guidance. The ASU
supersedes Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees and is effective for public entities for interim and annual
reporting periods beginning after December 15, 2018. The Company is assessing ASU 2018-07 and does not expect it to have a material
impact on its accounting and disclosures.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Under the new guidance, a lessee will be required to
recognize a right-to-use asset and a lease liability 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. In August 2018, the FASB amended the
ASU with an additional (and optional) transition method to adopt the new leases standard. Under the new transition method, an entity initially
applies the new leases standard at the adoption date and recognizes a cumulative effect adjustment to the opening balance of retained earnings
F-10
in the period of adoption and the comparative periods presented in the financial statements continue to be in accordance with current GAAP.
The Company will elect to use the package of practical expedients available under this amendment and will not elect the use of hindsight
during transition. The Company has identified its leases or other contracts impacted by the new standard and is currently in the process of (i)
finalizing the implementation of a software solution to account for leases under the new standard and (ii) updating its business processes and
related policies, systems and controls to support recognition and disclosure under the new standard. The Company is still evaluating the
impact that adopting this guidance will have on its consolidated financial statements.
2. Detail of Selected Balance Sheet Accounts
Property and Equipment
Property and equipment are stated at cost and consist of:
Land
Buildings
Machinery and equipment
Less accumulated depreciation
Total
Intangible assets
Intangible assets consist of:
Tradenames
Customer relationships
Less accumulated amortization:
Tradenames
Customer relationships
$
$
$
At December 31,
2018
2017
(In thousands)
2,476
8,501
14,867
25,844
14,388
11,456
$
$
2,476
8,207
14,165
24,848
13,493
11,355
At December 31,
2018
2017
(In thousands)
$
5,936
18,620
24,556
—
13,377
13,377
5,996
18,620
24,616
—
12,601
12,601
Total
$
11,179
$
12,015
Intangible assets include customer relationships which are being amortized over 6 to 9 year useful lives. Tradenames have an indefinite
life and are not amortized; however, they are tested annually for impairment. As of December 31, 2018, accumulated amortization on the
acquired intangible assets was $13.4 million, and amortization expense was $0.8 million in the year ended December 31, 2018, $1.4 million
in the year ended December 31, 2017 and $1.7 million in the year ended December 31, 2016. Future amortization expense to be recognized
on the acquired intangible assets is expected to be as follows:
2019
2020
2021
2022
2023
2024
2025
$
Annual
Amortization
Expense
(In thousands)
777
777
777
777
777
777
583
F-11
Goodwill
Balance at beginning of year
Less purchase price adjustment
Balance at end of year (1)
(1) The balance is net of $12.6 million of accumulated impairment losses.
Accrued and Other Current Liabilities
Accrued and other current liabilities consist of:
Customer rebates
Payroll, commissions, and bonuses
Accrued inventory purchases
Property taxes
Freight
Refund liability
Professional fees
Accrued interest
Other
Total
At December 31,
2018
2017
(In thousands)
22,353
—
22,353
$
$
22,770
417
22,353
At December 31,
2018
2017
(In thousands)
6,163
3,047
5,140
1,041
689
435
415
259
2,043
19,232
$
$
5,648
3,056
4,796
943
318
—
448
206
1,408
16,823
$
$
$
$
3.
Impairment of Goodwill and Intangible Assets
The annual goodwill and indefinite-lived intangibles impairment test was performed as of October 1, 2018 for the Southern, Southwest
and Vertex reporting units. This quantitative test indicated that goodwill was not impaired. The fair values of the reporting units were estimated
using a discounted cash flow model (income approach) and a guideline public company method (market approach), giving 50% weight to
each. The material assumptions used included cash flows based on future expected performance for the reporting units, weighted average
costs of capital ranging from 11.5% to 15%, a long-term growth rate of 3% for the income approach and a control premium of 25.0% for
the guideline public company method. The results of the test indicated that certain of the tradenames at Southwest were impaired.
Accordingly, a charge of less than $0.1 million was recorded for 2018.
During the second quarter of 2016 and prior to the annual impairment test of goodwill in October 2016, 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. There were no such impairment indicators for the Southern
Wire 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 measured the goodwill 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 calculated implied fair value of goodwill in the same manner
as if the reporting unit was being acquired in a business combination and recording the deferred tax impact. Any excess of the carrying value
of the reporting unit’s goodwill over the implied fair value of the reporting unit’s goodwill was 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.
F-12
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.
The Company is still anticipating significant growth in the businesses acquired in 2010 and in 2016. If this projected growth is not
achieved and or there are future reductions in our market capitalization or market multiples, further goodwill and intangible assets impairments
may result.
4. Debt
HWC Wire & Cable Company, the Company, Vertex, and Bank of America, N.A., as agent and lender, are parties to the Fourth Amended
and Restated Loan and Security Agreement dated as of October 3, 2016 (the “Loan Agreement”). The 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 Loan Agreement is limited to a borrowing base equal to 85% of the value of eligible accounts receivable, plus the
lesser of 70% of the value of eligible inventory or 90% of the net orderly liquidation value percentage of the value of eligible inventory, in
each case less certain reserves. The Loan Agreement is secured by substantially all of the property of the Company, other than real estate.
The 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 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 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, 2018, the Company was in compliance with the availability-based covenants governing its indebtedness.
The carrying amount of long term debt approximates fair value as it bears interest at variable rates. The fair value is a Level 2 measurement
as defined in ASC Topic 820, “Fair Value Measurement.”
The Company’s borrowings at December 31, 2018 and 2017 were $71.3 million and $73.6 million, respectively. The weighted average
interest rates on outstanding borrowings were 4.1% and 3.2% at December 31, 2018 and 2017, respectively.
During 2018, the Company had an average available borrowing capacity of approximately $24.0 million. This average was computed
from the monthly borrowing base certificates prepared for the lender. At December 31, 2018, the Company had available borrowing capacity
of $28.7 million under the terms of the Loan Agreement. The Company paid $0.1 million for each of the years ended December 31, 2018 and
2017 and $0.2 million for the year ended December 31, 2016, for the unused facility.
Principal repayment obligations for succeeding fiscal years are as follows:
2019
2020
Total
5.
Income Taxes
(In thousands)
$
$
—
71,316
71,316
On December 22, 2017, the United States enacted significant changes to the U.S. tax law following the passage and signing of H.R.1,
“An Act to Provide the Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018”
(previously known as “The Tax Cuts and Jobs Act”). In March 2018, the FASB issued ASU 2018-05, “Income Taxes (Topic 740):
Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (SEC Update).” This ASU added the SEC guidance
released on December 22, 2017 regarding the income tax accounting implication of the Tax Cuts and Jobs Act to ASC Topic 740. During
2017, the Company recorded income tax expense of $0.3 million to reflect the reduction in the U.S. corporate income tax rate from 35% to
21%. As of December 31, 2018, the Company completed its analysis of its accounting for the income tax effects of tax reform and as a result
no additional adjustments were recorded.
F-13
The provision (benefit) for income taxes consists of:
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Total
2018
Year Ended December 31,
2017
(In thousands)
2016
$
$
3,041
658
3,699
(1,246 )
(98 )
(1,344 )
1,280
159
1,439
1,259
55
1,314
$
(1,285 )
(95 )
(1,380 )
13
(7 )
6
$
2,355
$
2,753
$
(1,374 )
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
Non-deductible items
Valuation allowance
Tax reform rate change
Other
Total effective tax rate
2018
Year Ended December 31,
2017
2016
21.0 %
4.3
0.1
1.2
2.1
(9.5 )
—
2.2
21.4 %
35.0 %
4.2
—
15.2
4.6
41.0
12.9
(4.1 )
108.8 %
35.0 %
1.7
(6.6 )
(9.0 )
(3.9 )
—
—
1.4
18.6 %
The share-based compensation 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.
F-14
Significant components of the Company’s deferred taxes were as follows:
Deferred tax assets:
Uniform capitalization adjustment
Inventory valuation
Accounts receivable allowance
Stock compensation expense
Property and equipment
Other
Total deferred tax assets
Deferred tax liabilities
Goodwill
Intangibles
Other
Total deferred tax liabilities
Less: Valuation allowance
Net deferred tax assets/(liabilities)
Year Ended
December 31,
2018
2017
(In thousands)
$
$
1,469
1,179
45
681
31
548
3,953
649
2,315
59
3,023
$
—
930
$
1,272
1,334
51
725
62
134
3,578
460
2,385
109
2,954
1,038
(414 )
A valuation allowance for deferred tax assets is recognized when it is more likely than not that some or all of the benefit from the deferred
tax assets will not be realized. To assess that likelihood, the Company uses its current financial position, results of operations, both actual
and forecasted, the reversal of deferred tax liabilities, and tax planning strategies, to determine whether a valuation allowance is required.
The result of the Company’s assessment is that it is more likely than not that the Company will generate sufficient taxable income to utilize
the deferred tax assets. Therefore, the Company no longer requires a valuation allowance.
The Company does not have any unrecognized tax benefits recorded at December 2018, 2017 and 2016. 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, 2018, 2017
and 2016, the Company recorded no provision for interest or penalties related to uncertain tax positions. The tax years 2014 through 2018
remain open to examination by the major taxing jurisdictions to which the Company is subject.
6. 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.
Under the terms of the 2017 Stock Plan, the Company acquired 25,368 shares that were surrendered by the holders to pay withholding
taxes in 2018. Under the terms of the 2006 Stock Plan, the Company acquired 27,156 shares that were surrendered by the holders to pay
withholding taxes in 2017.
The Company paid a quarterly cash dividend from August 2007 until August 2016, resulting in aggregate dividends in 2016 of $2.5
million.
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.
F-15
7. Retirement-related Benefits
Defined Contribution Plan
The Company maintains a combination profit-sharing plan and salary deferral plan for the benefit of its employees who are 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 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, 2018, 2017 and 2016 was $0.2 million for each year.
Defined Benefit Plan
The Company has a non-contributory defined benefit pension plan for those current and former employees of Vertex who are subject to
a collective bargaining agreement. Currently, there are fifteen active employees, sixteen retired and six 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 approximate the benefit payments made each year. A total contribution of less
than $0.1 million was made during each of the years ended December 31, 2018, 2017 and 2016.
The current projected benefit obligation was $1.1 million and $1.0 million as of December 31, 2018 and 2017, respectively. The discount
rate used to determine the projected benefit obligation was 4.18% and 3.77% in 2018 and 2017, respectively.
The Company’s investment policy is to maximize the expected return for an acceptable level of risk. The expected long-term rate of
return on plan assets, which was 5%, is based on a target allocation of assets with the goal of earning the highest rate of return while
maintaining risk at acceptable levels. The target asset allocations for the defined benefit plan were 68% and 69% equity securities and 32%
and 31% debt securities as of December 31, 2018 and 2017, respectively.
The fair value of the assets of the defined benefit plan were as follows:
At December 31,
2018
2017
Equity mutual funds
Fixed income – corporate bonds
Total fair value of assets
$
$
(In thousands)
701
326
1,027
$
$
740
326
1,066
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 2019 and expects the annual benefit
payments to be approximately $0.1 million per year.
8.
Incentive Plans
On August 4, 2017, the Board of Directors approved the Houston Wire & Cable Company 2017 Stock Plan (the “2017 Plan”). The 2017
Plan was approved by the stockholders at the 2018 Annual Meeting on May 8, 2018. The 2017 Plan provides for discretionary grants of stock
options, stock awards, stock units and stock appreciation rights (SARs) to employees and directors up to a total of 1,000,000 shares. Shares
issuable under the 2017 Plan may be authorized but unissued shares or treasury shares. If any award granted under the 2017 Plan expires,
terminates or is forfeited or cancelled for any reason, the shares subject to the award will again be available for issuance. Any shares subject
to an award that are delivered to the Company or withheld by the Company on behalf of a participant as payment for the award (including
the exercise price of a stock option or SAR) or as payment for any withholding taxes due in connection with the award, or that are purchased
by the Company with proceeds received from a stock option exercise, will not again be available for issuance. The 2017 Plan’s purpose is to
attract and retain outstanding individuals as employees and directors of the Company and its subsidiaries and to provide them with additional
incentive to expand and improve the Company's profits by giving them the opportunity to acquire or increase their proprietary interest in the
Company.
F-16
The 2017 Plan succeeded the Company’s 2006 Stock Plan (the “2006 Plan”), which expired on May 1, 2017. The types of equity
awards previously authorized under the 2006 Plan did not significantly differ from those permitted under the 2017 Plan.
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 2018, 2017 or 2016.
All granted stock options have vested, with the last grant having an expiration date of December 20, 2021. The following summarizes
stock option activity and related information:
2018
Options
(in 000’s)
Weighted
Average
Exercise Price
Aggregate
Intrinsic
Value
223 $
—
—
(30 )
(39 )
154
154
13.10 $
—
—
11.17
13.42
13.40 $
13.40 $
—
—
—
Weighted
Average
Remaining
Contractual Life
(in years)
2.84
2.52
2.52
Outstanding-Beginning of year
Granted
Exercised
Forfeited
Expired
Outstanding-End of year
Exercisable-End of year
There was no excess tax benefit for the years ended December 31, 2018, 2017 and 2016.
There were no options exercised in the years ended December 31, 2018, 2017 and 2016. There is no intrinsic value of options outstanding
and exercisable as of December 31, 2018 as the closing stock price at the end of 2018 creates a negative intrinsic value.
The total grant-date fair value of options vested during 2018 was $0, as all the options vested as of December 31, 2017. The total grant-
date fair value of options vested during the years ended December 31, 2017 and 2016 was $0.2 million and $0.3 million, respectively.
Restricted Stock Awards, Restricted Stock Units and Cash Awards
As a result of the approval of the 2017 Plan by the stockholders at the 2018 Annual Meeting, all cash/liability awards granted prior to
stockholder approval of the 2017 Plan were reclassified to restricted stock units (equity) effective May 8, 2018. The total liability reclassified
to additional paid-in-capital was $0.4 million. This modification resulted in an increase in total fair value of $0.1 million, recognized over the
terms of the grants, which range from 1 to 5 years.
On December 4, 2018, the Board of Directors granted to the Company’s President and CEO 48,387 voting shares of restricted stock and
to the CFO, 12,097 voting shares of restricted stock under the 2017 Plan. The shares vest in one-third increments on the first, second and third
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 if and when the related shares or units vest.
The Board of Directors also granted 44,357 voting shares of restricted stock under the 2017 Plan to members of management on December
4, 2018. The 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 if and when the related shares or units vest.
F-17
On November 6, 2018 and June 1, 2018, the Company awarded restricted stock units with a grant date value of $30,000 and $55,000 for
a total of 4,950 and 6,667 restricted stock units, respectively, to its newly appointed non-employee directors. These awards of restricted stock
units vest at the date of the 2019 Annual Meeting of Stockholders. Each grant entitles the non-employee director 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.
Following the Annual Meeting of Stockholders on May 8, 2018, the Company approved the award of restricted stock units with a grant
date value of $60,000 to each non-employee director who was re-elected, for an aggregate of 31,372 restricted stock units. Each award of
restricted stock units vests at the date of the 2019 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.
Also on May 8, 2018, the Company granted 28,144 voting shares of restricted stock to new members of the management team. Of the
28,144 shares granted, 26,144 shares vest in one third increments on the first, second and third anniversaries of the date of grant and the
remaining 2,000 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 if and when the related shares vest.
Restricted common shares and restricted stock units 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, 2018:
Shares
(in 000’s)
Shares
Units
2018
Weighted
Average
Market
Value at
Grant Date
238
133
(99 )
(13 )
—
—
259
$
$
7.33
6.51
7.61
7.63
—
—
6.78
Shares
(in 000’s)
Weighted
Average
Market
Value at
Grant Date
40
43
(60 )
(5 )
—
197
215
$
$
7.50
7.47
7.65
7.65
—
7.65
7.59
Non-vested -Beginning of year
Granted
Vested
Cancelled/Forfeited
Expired
Cash awards converted to equity
Non-vested -End of year
Total stock-based compensation cost was $1.3 million for the year ended December 31, 2018, $1.2 million for the year ended December
31, 2017, of which $1.0 million was for equity awards and $0.2 million was for liability awards, and $0.9 million for the year ended
December 31, 2016. Total income tax benefit recognized for equity awards stock-based compensation arrangements was $0.2 million for
each of the years ended December 31, 2018 and 2017 and $0.3 million for the year ended December 31, 2016.
As of December 31, 2018, there was $2.0 million of total unrecognized compensation cost related to non-vested, stock-based
compensation arrangements. The cost is expected to be recognized over a weighted average period of approximately 29 months. There are
627,283 shares available for future grants under the 2017 Plan at December 31, 2018.
9. Commitments and Contingencies
The Company has entered into operating leases, primarily for distribution centers and office facilities. These operating leases frequently
include renewal options at the fair rental value at the time of renewal. For leases with step rent provisions, whereby the rental payments
increase incrementally over the life of the lease, the Company recognizes the total minimum lease payments on a straight line basis over the
minimum lease term. Facility rent expense was approximately $3.7 million in 2018, $3.5 million in 2017 and $2.6 million in 2016.
F-18
Future minimum lease payments under non-cancelable operating leases with initial terms of one year or more consisted of the
following at December 31, 2018:
2019
2020
2021
2022
2023
Thereafter
Total minimum lease payments
(In thousands)
3,868
3,026
2,698
2,550
1,410
1,575
15,127
$
$
The Company had aggregate purchase commitments for fixed inventory quantities of approximately $54.5 million at December 31,
2018.
As a result of unfavorable lease terms relative to market for one of the leases acquired as part of the Vertex acquisition in 2016, there is
a remaining additional liability of $0.2 million that is being amortized over the remaining term of the lease, which was 54 months at December
31, 2018.
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 as the sole remedy.
It is not clear whether the alleged injuries occurred as a result of the wire and cable in question or whether the Company, in fact, distributed
the wire and cable alleged to have caused any injuries. The Company maintains general liability insurance that, to date, has covered the
defense of and all costs associated with these claims. In addition, the Company did not manufacture any of the wire and cable at issue, and
the Company would rely on any warranties from the manufacturers of such cable if it were determined that any of the wire or cable that the
Company distributed contained asbestos which caused injury to any of these plaintiffs. In connection with ALLTEL's sale of the Company
in 1997, ALLTEL provided indemnities with respect to costs and damages associated with these claims that the Company believes it could
enforce if its insurance coverage proves inadequate.
There are no legal proceedings pending against or involving the Company that, in management’s opinion, based on the current known
facts and circumstances, are expected to have a material adverse effect on the Company’s consolidated financial position, cash flows, or
results from operations.
10. Subsequent Events
On March 12, 2019, the Company, as guarantor, HWC Wire & Cable Company and Vertex, as borrowers, and Bank of America, N.A.,
as lender and agent entered into a Second Amendment to Fourth Amended and Restated Loan and Security Agreement, extending the
expiration date of the Company’s $100 million revolving credit facility until March 12, 2024, substantially, on the same terms as currently
in effect.
F-19
11. Select Quarterly Financial Data (unaudited)
The following table presents the Company’s unaudited quarterly results of operations for each of the last eight quarters in the period
ended December 31, 2018. The unaudited information has been prepared on the same basis as the audited consolidated financial statements.
Sales
Gross profit
Operating income
Net income
Earnings per share:
Basic
Diluted
Sales
Gross profit
Operating income (loss)
Net income (loss)
Earnings (loss) per share:
Basic
Diluted
Year Ended December 31, 2018
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
(in thousands, except per share data)
$
$
$
$
$
$
87,906
20,979
3,190
1,628
0.10
0.10
$
$
$
$
$
$
90,074
21,393
3,046
2,455
0.15
0.15
$
$
$
$
$
$
93,852
22,347
4,392
2,606
0.16
0.16
$
$
$
$
$
$
85,026
20,489
3,270
1,947
0.12 (1)
0.12 (1)
Fourth
Quarter
Year Ended December 31, 2017
Third
Quarter
Second
Quarter
(in thousands, except per share data)
First
Quarter
$
$
$
$
$
$
82,146
20,843
2,969
1,996
0.12 (1)
0.12 (1)
$
$
$
$
$
$
81,196
18,570
2,047
(1,711 )
(0.11 )
(0.11 )
$
$
$
$
$
$
75,646
16,318
(162 )
(54 )
(0.00 )
(0.00 )
$
$
$
$
$
$
78,709
16,931
(250 )
(453 )
(0.03 )
(0.03 )
(1) The “two-class” method was used to calculate earnings per share which resulted in the same value.
F-20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In accordance with Exchange Act Rules 13a-15 and 15a-15, we carried out an evaluation, under the supervision and with the participation
of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were effective as of December 31, 2018.
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, 2018. 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 24 and 25 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, 2018 that
has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
23
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, 2018 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, 2018 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 25.
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.
cial reporting included testing and evaluating the design
The Company’s assessment of the effectiveness of its internal control over finan
and operating effectiveness of its internal controls. In management’s opinion, the Company has maintained effective internal control over
financial reporting as of December 31, 2018, based on criteria established in the COSO Framework.
/s/ James L. Pokluda III
James L. Pokluda III
President and Chief Executive Officer
/s/ Christopher M. Micklas
Christopher M. Micklas
Chief Financial Officer, Treasurer
and Secretary (Chief Accounting Officer)
24
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Houston Wire & Cable Company
Opinion on Internal Control over Financial Reporting
We have audited Houston Wire & Cable Company’s internal control over financial reporting as of December 31, 2018, 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). In our opinion, Houston Wire & Cable Company (the Company) maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB),
the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and our report
dated March 15, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The 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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
/s/ Ernst & Young LLP
Houston, Texas
March 15, 2019
25
ITEM 9B. OTHER INFORMATION
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The information called for by Item 10 relating to directors and nominees for election to the Board of Directors is incorporated herein by
reference to the “Election of Directors” section of the registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders
to be held on May 7, 2019. 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 7, 2019.
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 7, 2019.
The information called for by Item 10 relating to the procedures by which security holders may recommend nominees to the Board of
Directors is incorporated herein by reference to the “Corporate Governance and Board Committees - Stockholder Recommendations for
Director Nominations” section of the registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders to be held on
May 7, 2019.
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 7, 2019.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated herein by reference to the “Executive Compensation” and “Director Compensation”
sections of the registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 7, 2019.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information called for by Item 12 is incorporated herein by reference to the “Stock Ownership of Certain Beneficial Owners and
Management” and “Equity Compensation Plan Information” sections of the registrant’s definitive Proxy Statement relating to the Annual
Meeting of Stockholders to be held on May 7, 2019.
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 7, 2019.
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 7, 2019.
26
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, 2018 and 2017
Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
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
27
EXHIBIT
NUMBER
INDEX TO EXHIBITS
EXHIBIT
3.1
3.2
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10
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, as amended
(incorporated herein by reference to Exhibit 10.1 to Houston Wire & Cable Company’s Current Report on Form 8-K
filed March 13, 2015 and Exhibit 10.12 to Houston Wire & Cable Company’s Annual Report on Form 10-K for the
year ended December 31, 2016)
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)
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)
Form of Performance Stock Unit Award Agreement under Houston Wire & Cable Company’s 2006 Stock Plan
(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, 2016)
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)
28
10.11
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
21.1
23.1
31.1
31.2
32.1
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)
Houston Wire & Cable Company 2017 Stock Plan (incorporated herein by reference to Exhibit 10.1 to Houston Wire
& Cable Company’s Current Report on Form 8-K filed August 8, 2017)
Form of Restricted Stock Unit Award Agreement for Non-Employee Directors (incorporated herein by reference to
Exhibit 10.2 to Houston Wire & Cable Company’s Current Report on Form 8-K filed August 8, 2017)
Form of Restricted Stock Unit Award Agreement for Key Employees (incorporated herein by reference to Exhibit
10.3 to Houston Wire & Cable Company’s Current Report on Form 8-K filed August 8, 2017)
Form of Stock Appreciation Agreement (incorporated herein by reference to Exhibit 10.4 to Houston Wire & Cable
Company’s Current Report on Form 8-K filed August 8, 2017)
Form of Stock Award Agreement for Key Employees (incorporated by reference to Exhibit 10.1 to Houston Wire &
Cable Company’s Current Report on Form 8-K filed May 14, 2018)
Retirement and Consulting Agreement dated April 17, 2018 between Houston Wire & Cable Company and Nicol G.
Graham. (incorporated by reference to Exhibit 10.1 to Houston Wire & Cable Company’s Current Report on Form
8-K filed April 27, 2018)
Letter Agreement dated April 5, 2018 between Houston Wire & Cable Company and Christopher M. Micklas
(incorporated by reference to Exhibit 10.1 to Houston Wire & Cable Company’s Current Report on Form 8-K filed
April 13, 2018)
Houston Wire & Cable Company Nonemployee Directors’ Deferred Compensation Plan (incorporated by reference
to Exhibit 10.1 to Houston Wire & Cable Company’s Current Report on Form 8-K filed December 14, 2017)
Subsidiaries of Houston Wire & Cable Company **
Consent of Ernst & Young, LLP **
Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 **
Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 **
Certifications of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 **
* Management contract or compensatory plan or arrangement
** Filed herewith
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 15, 2019
HOUSTON WIRE & CABLE COMPANY
(Registrant)
By:
/s/ CHRISTOPHER M. MICKLAS
Christopher M. Micklas
Chief Financial Officer, Treasurer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE
TITLE
DATE
President, Chief Executive Officer and Director
March 15, 2019
/s/ JAMES L. POKLUDA III
James L. Pokluda III
/s/ CHRISTOPHER M. MICKLAS
Christopher M. Micklas
Chief Financial Officer, Treasurer and
Secretary (Principal Accounting Officer)
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
March 15, 2019
/s/ WILLIAM H. SHEFFIELD
William H. Sheffield
Chairman of the Board
/s/ MICHAEL T. CAMPBELL
Michael T. Campbell
Director
/s/ ROY W. HALEY
Roy W. Haley
/s/ ROBERT L. REYMOND
Robert Reymond
/s/ SANDFORD W. ROTHE
Sandford W. Rothe
/s/ G. GARY YETMAN
G. Gary Yetman
Director
Director
Director
Director
30
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-224026) pertaining to the Houston Wire &
Cable Company 2017 Stock Plan of our reports dated March 15, 2019, with respect to the consolidated financial statements of Houston
Wire & Cable Company, and the effectiveness of internal control over financial reporting of Houston Wire & Cable Company, included in
this Annual Report (Form 10-K) for the year ended December 31, 2018.
Exhibit 23.1
/s/ Ernst & Young LLP
Houston, Texas
March 15, 2019
31
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. I have reviewed this annual report on Form 10-K for the year ended December 31, 2018 of Houston Wire & Cable Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 15, 2019
/s/ James L. Pokluda III
James L. Pokluda III
Chief Executive Officer
32
Exhibit 31.2
Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Christopher M. Micklas, certify that:
1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2018 of Houston Wire & Cable Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 15, 2019
/s/ Christopher M. Micklas
Christopher M. Micklas
Chief Financial Officer
33
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, 2018 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 Christopher M. Micklas, as Chief Financial Officer of the Corporation, each hereby certifies,
pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, to the best of their knowledge,
that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of
the Corporation.
Date:
March 15, 2019
Date:
March 15, 2019
/s/ James L. Pokluda III
James L. Pokluda III
Chief Executive Officer
/s/ Christopher M. Micklas
Christopher M. Micklas
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.
34
DIRECTORS
James L. Pokluda III
President & Chief Executive Officer of
Houston Wire & Cable Company
G. Gary Yetman
Former Chief Executive Officer & President of
Coleman Cable, Inc.
Michael T. Campbell
Independent Director
Roy W. Haley
Former Chairman of the Board of
WESCO International, Inc.
Robert “Bob” Reymond
President of the Oil, Gas and Chemical
Division & a Director of Burns & McDonnell
Sandford “Sandy” Rothe
Former Partner of Deloitte LLP
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 7, 2019, 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
Phone: 713-609-2100
Houston, Texas 77029
Fax: 713-609-2205