UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2019March 31, 2020

 

or

 

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                              to

 

Commission File Number: 000-52046

 

(Exact  (Exact name of registrant as specified in its charter)

 

Delaware 36-4151663
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
   
10201 North Loop East  
Houston, Texas 77029
(Address of principal executive offices) (Zip Code)

 

(713) 609-2100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

 

Title of each classTrading symbolName of each exchange on which registered
Common stock, par value $0.001 per shareHWCCThe Nasdaq Stock Market

 

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See definition 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 ☒

 

At AugustMay 1, 20192020 there were 16,645,18216,584,460 outstanding shares of the registrant’s common stock, $0.001 par value per share.

 

 

 

HOUSTON WIRE & CABLE COMPANY

Form 10-Q

For the Quarter Ended June 30, 2019March 31, 2020

 

INDEX

 

PART I. FINANCIAL INFORMATION 
   
Item 1.Financial Statements (Unaudited) 
 Consolidated Balance Sheets2
 Consolidated Statements of Operations3
 Consolidated Statements of Stockholders’ Equity4
 Consolidated Statements of Cash Flows5
 Notes to Consolidated Financial Statements6
   
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview11 9
 Overview11 9
 Cautionary Statement for Purposes of the “Safe Harbor”11 9
 Results of Operations12  10
 Impact of Inflation and Commodity Prices14  11
 Liquidity and Capital Resources15  11
 Contractual Obligations15 12
   
Item 3.Quantitative and Qualitative Disclosures about Market Risk16  13
   
Item 4.Controls and Procedures16  13
   
PART II. OTHER INFORMATION 13
   
Item 1.Legal Proceedings16  13
Item 1A.Risk Factors16  13
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds16  13
Item 3.Defaults Upon Senior Securities16  13
Item 4.Mine Safety Disclosures16  13
Item 5.Other Information16  13
Item 6.Exhibits17  14
  
Signature Page18  15

1 


HOUSTON WIRE & CABLE COMPANY

Consolidated Balance Sheets

(In thousands, except share data)

 

 June 30, December 31,  March 31, December 31, 
 2019 2018  2020  2019 
  (unaudited)      (unaudited)     
Assets                
Current assets:                
Cash $—  $1,393  $3,536  $4,096 
Accounts receivable, net:                
Trade  55,877   52,946   55,054   50,325 
Other  3,313   6,847   2,114   6,640 
Inventories, net  106,273   94,325   109,383   114,069 
Income taxes  577   435   1,017   1,353 
Prepaids  2,108   737 
Other current assets  490   — 
Prepaids and other current assets  3,157   1,833 
Total current assets  168,638   156,683   174,261   178,316 
                
Property and equipment, net  12,033   11,456   15,399   14,589 
Intangible assets, net  10,790   11,179   9,888   10,282 
Goodwill  22,353   22,353   22,353   22,353 
Deferred income taxes  704   600 
Operating lease right-of-use assets, net  11,176   —   12,962   13,481 
Deferred income taxes  571   930 
Other assets  490   456   506   527 
Total assets $226,051  $203,057  $236,073  $240,148 
                
Liabilities and stockholders’ equity                
Current liabilities:                
Book overdraft $330  $— 
Trade accounts payable  13,359   11,253  $14,651  $13,858 
Accrued and other current liabilities  21,612   19,232   15,332   23,261 
Operating lease liabilities  2,961   —   2,783   2,742 
Total current liabilities  38,262   30,485   32,766   39,861 
                
Debt  73,107   71,316   85,920   83,500 
Operating lease long term liabilities  8,628   —   10,652   11,182 
Other long term liabilities  706   578   2,234   1,977 
Total liabilities  120,703   102,379   131,572   136,520 
                
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: 16,645,182 and 16,611,651 outstanding at June 30, 2019 and December 31, 2018, respectively  21   21 
Common stock, $0.001 par value; 100,000,000 shares authorized: 20,988,952 shares issued: 16,584,460 and 16,556,950 outstanding at March 31, 2020 and December 31, 2019, respectively  21   21 
Additional paid-in-capital  53,620   53,514   52,276   52,304 
Retained earnings  110,003   105,975   109,171   108,626 
Treasury stock  (58,296)  (58,832)  (56,967)  (57,323)
Total stockholders’ equity  105,348   100,678   104,501   103,628 
Total liabilities and stockholders’ equity $226,051  $203,057  $236,073  $240,148 

 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

 


HOUSTON WIRE & CABLE COMPANY

Consolidated Statements of Operations

(Unaudited)

(In thousands, except share and per share data)

 

 Three Months Ended Six Months Ended  Three Months Ended 
 June 30, June 30,  March 31, 
 2019 2018 2019 2018  2020  2019 
              
Sales $85,326  $93,852  $170,596  $178,878  $83,533  $85,270 
Cost of sales  64,789   71,505   128,800   136,042   63,941   64,011 
Gross profit  20,537   22,347   41,796   42,836   19,592   21,259 
                        
Operating expenses:                        
Salaries and commissions  9,244   9,906   18,424   19,100   9,474   9,180 
Other operating expenses  7,729   7,508   15,392   14,988   7,565   7,663 
Depreciation and amortization  534   541   1,087   1,086   767   553 
Impairment charge  200   — 
Total operating expenses  17,507   17,955   34,903   35,174   18,006   17,396 
                        
Operating income  3,030   4,392   6,893   7,662   1,586   3,863 
Interest expense  738   773   1,479   1,417   813   741 
Income before income taxes  2,292   3,619   5,414   6,245   773   3,122 
Income tax expense  649   1,013   1,487   1,692   228   838 
Net income $1,643  $2,606  $3,927  $4,553  $545  $2,284 
                        
Earnings per share:                        
Basic $0.10  $0.16  $0.24  $0.28  $0.03  $0.14 
Diluted $0.10  $0.16  $0.24  $0.28  $0.03  $0.14 
Weighted average common shares outstanding:                        
Basic  16,504,471   16,387,112   16,491,236   16,368,610   16,387,460   16,477,855 
Diluted  16,597,496   16,489,671   16,571,113   16,459,736   16,436,293   16,577,126 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

3

HOUSTON WIRE & CABLE COMPANY

Consolidated Statements of Stockholders’ Equity

(Unaudited)

     Additional        Total 
  Common Stock  Paid-In  Retained  Treasury Stock  Stockholders’ 
  Shares  Amount  Capital  Earnings  Shares  Amount  Equity 
  (In thousands, except share data) 
    
Balance at December 31, 2019  20,988,952  $21  $52,304  $108,626   (4,432,002) $(57,323) $103,628 
                             
Net income  —   —   —   545   —   —   545 
Amortization of unearned stock compensation  —   —   328   —   —   —   328 
Impact of released restricted stock units  —   —   (356)  —   27,510   356   — 
Balance at March 31, 2020  20,988,952  $21  $52,276  $109,171   (4,404,492) $(56,967) $104,501 

     Additional        Total 
  Common Stock  Paid-In  Retained  Treasury Stock  Stockholders’ 
  Shares  Amount  Capital  Earnings  Shares  Amount  Equity 
  (In thousands, except share data) 
    
Balance at December 31, 2018  20,988,952  $21  $53,514  $105,975   (4,377,301) $(58,832) $100,678 
                             
Net income  —   —   —   2,284   —   —   2,284 
Repurchase of treasury shares  —   —   —   —   (1,506)  (8)  (8)
Amortization of unearned stock compensation  —   —   342   —   —   —   342 
Impact of released deferred restricted stock units  —   —   —   —   2,251   16   16 
Impact of adoption of ASU 2016-02 (Note 7)  —   —   —   101   —   —   101 
Balance at March 31, 2019  20,988,952  $21  $53,856  $108,360   (4,376,556) $(58,824) $103,413 

The accompanying notes are an integral part of these consolidated financial statements.

4 

HOUSTON WIRE & CABLE COMPANY

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

  

Three Months

Ended March 31,

 
  2020  2019 
       
Operating activities        
Net income $545  $2,284 
Adjustments to reconcile net income to net cash used in operating activities:        
 Impairment charge  200   — 
Depreciation and amortization  767   553 
Amortization of unearned stock compensation  328   342 
Non-cash lease expense  904   986 
Provision for refund liability  18   559 
Provision for inventory obsolescence  173   170 
Deferred income taxes  (104)  284 
Other non-cash items  62   34 
Changes in operating assets and liabilities:        
Accounts receivable  (253)  (723)
Inventories  4,513   (1,170)
Prepaids  (1,238)  (1,005)
Other assets  (77)  (549)
Lease payments  (907)  (982)
Trade accounts payable  793   (3,424)
Accrued and other current liabilities  (8,281)  (6,460)
Income taxes  336   534 
Other operating activities  257   93 
Net cash used in operating activities  (1,964)  (8,474)
         
Investing activities        
Expenditures for property and equipment  (857)  (278)
Net cash used in investing activities  (857)  (278)
         
Financing activities        
Borrowings on revolver  85,653   94,333 
Payments on revolver  (83,233)  (86,709)
Release of treasury stock/stock surrendered on vested awards  —   8 
Lease payments  (159)  (17)
Net cash provided by financing activities  2,261   7,615 
         
Net change in cash  (560)  (1,137)
Cash at beginning of period  4,096   1,393 
         
Cash at end of period $3,536  $256 
Supplemental disclosures of non-cash activities        
Purchase of assets under finance leases $526  $11 

 

The accompanying Notes are an integral part of these Consolidated Financial Statements.


HOUSTON WIRE & CABLE COMPANY

Consolidated Statements of Stockholders’ Equity

(Unaudited)

     Additional        Total 
  Common Stock  Paid-In  Retained  Treasury Stock  Stockholders’ 
  Shares  Amount  Capital  Earnings  Shares  Amount  Equity 
  (In thousands, except share data) 
    
Balance at December 31, 2018  20,988,952  $21  $53,514  $105,975   (4,377,301) $(58,832) $100,678 
                             
Net income  —   —   —   2,284   —   —   2,284 
Repurchase of treasury shares  —   —   —   —   (1,506)  (8)  (8)
Amortization of unearned stock compensation  —   —   342   —   —   —   342 
Settlement of director’s deferred compensation  —   —   —   —   2,251   16   16 
Cumulative effect of accounting change (Note 7)  —   —   —   101   —   —   101 
Balance at March 31, 2019  20,988,952  $21  $53,856  $108,360   (4,376,556) $(58,824) $103,413 
                             
Net income  —   —   —   1,643   —   —   1,643 
Repurchase of treasury shares  —   —   —   —   (11,951)  (73)  (73)
Amortization of unearned stock compensation  —   —   365   —   —   —   365 
Impact of released vested restricted stock units  —   —   (601)  —   44,737   601   — 
Balance at June 30, 2019  20,988,952  $21  $53,620  $110,003   (4,343,770) $(58,296) $105,348 
                             

     Additional        Total 
  Common Stock  Paid-In  Retained  Treasury Stock  Stockholders’ 
  Shares  Amount  Capital  Earnings  Shares  Amount  Equity 
  (In thousands, except share data) 
    
Balance at December 31, 2017  20,988,952  $21  $54,006  $97,336   (4,497,771) $(60,619) $90,744 
                             
Net income  —   —   —   1,947   —   —   1,947 
Repurchase of treasury shares  —   —   —   —   (8,798)  (63)  (63 
Amortization of unearned stock compensation  —   —   158   —   —   —   158 
Balance at March 31, 2018  20,988,952  $21  $54,164  $99,283   (4,506,569) $(60,682) $92,786 
                             
Net income  —   —   —   2,606   —   —   2,606 
Repurchase of treasury shares  —   —   —   —   (10,273)  (75)  (75)
Amortization of unearned stock compensation  —   —   304   —   —   —   304 
Amortization of reclassed liability awards  —   —   411   —   —   —   411 
Impact of released vested restricted stock units  —   —   (353)  —   26,185   353   — 
Issuance of restricted stock award  —   —   (379)  —   28,144   379   — 
Balance at June 30, 2018  20,988,952  $21  $54,147  $101,889   (4,462,513) $(60,025) $96,032 

The accompanying notes are an integral part of these consolidated financial statements.


HOUSTON WIRE & CABLE COMPANY

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

  

Six Months

Ended June 30,

 
  2019  2018 
       
Operating activities        
Net income $3,927  $4,553 
Adjustments to reconcile net income to net cash used in operating activities:        
Depreciation and amortization  1,087   1,086 
Amortization of unearned stock compensation  707   703 
Non-cash lease expense  1,968   — 
Provision for refund liability  471   108 
Provision for inventory obsolescence  459   191 
Deferred income taxes  460   (82)
Other non-cash items  83   21 
Changes in operating assets and liabilities:        
Accounts receivable  75   (5,403)
Inventories  (12,407)  105 
Prepaids  (1,371)  196 
Other assets  (550)  (12)
Lease payments  (1,963)  — 
Book overdraft  330   (1,716)
Trade accounts payable  2,106   (439)
Accrued and other current liabilities  2,235   (4,483)
Income taxes  (142)  (399)
Other operating activities  359   (104)
Net cash used in operating activities  (2,166)  (5,675)
         
Investing activities        
Expenditures for property and equipment  (875)  (741)
Net cash used in investing activities  (875)  (741)
         
Financing activities        
Borrowings on revolver  175,417   179,994 
Payments on revolver  (173,626)  (173,401)
Payment of dividends  (30)  (39)
Purchase of treasury stock/stock surrendered on vested awards  (65)  (138)
Lease payments  (48)  — 
Net cash provided by financing activities  1,648   6,416 
         
Net change in cash  (1,393)  — 
Cash at beginning of period  1,393   — 
         
Cash at end of period $—  $— 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

5 

HOUSTON WIRE & CABLE COMPANY

Notes to Consolidated Financial Statements

(Unaudited)

 

1.Basis of Presentation and Principles of Consolidation

1.     Basis of Presentation and Principles of Consolidation

 

Houston Wire & Cable Company (the “Company”), through its wholly owned subsidiaries, provides industrial products including Electrical Wire and Cable, Steel Wire Rope and Hardware, and Fasteners to the U.S. market through twenty-onetwenty-two locations in fourteen states throughout the United States. The Company has no other business activity.

 

The consolidated financial statements as of June 30, 2019March 31, 2020 and for the three and six months ended June 30,March 31, 2020 and 2019 and 2018 have been prepared following accounting principles generally accepted in the United States (“GAAP”) for interim financial information and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation of the results of these interim periods have been included. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year. All significant intercompany balances and transactions have been eliminated. The Company has evaluated subsequent events through the time these financial statements in this Form 10-Q were filed with the Securities and Exchange Commission (the “SEC”).

 

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.

 

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 20182019 filed with the SEC.

 

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 ASUs that were recently adopted by the Company.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Under the new guidance as amended, a lessee is required to recognize a right-of-use asset and a lease liability for leases greater than 1 year, both finance and operating leases. This update was effective for public companies for fiscal years beginning after December 15, 2018. Under the transition rules, 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 in the period of adoption and the comparative periods presented in the financial statements continue to be in accordance with previously-existing GAAP. The Company adopted this ASU effective January 1, 2019. See Note 7 for detailed information.

In June 2018, the FASB issued ASU No. 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,” which 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 superseded Subtopic 505-50, “Equity - Equity-Based Payments to Non-Employees,” and was effective for public entities for interim and annual reporting periods beginning after December 15, 2018. The Company adopted this ASU in the first quarter of 2019, and the adoption did not have a material impact on the Company’s consolidated financial statements.

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 the FASB’s disclosure framework project. The guidance is effective for public companies beginningCompany adopted this ASU in the first quarter of 2020. The Company is currently assessing2020, and the adoption did not have a material impact of this ASU on itsthe Company’s consolidated financial statements.

 

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. The Company is currently assessing the impact of this ASU on its consolidated financial statements.


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 beginningCompany adopted this ASU in the first quarter of 2020. The Company is currently assessing2020, and the adoption did not have a material impact of this ASU on itsthe Company’s consolidated financial statements.

 

Recent Accounting Pronouncements

In June 2016,November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. This ASU, among other narrow-scope improvements, clarifies guidance around how to report expected recoveries. This ASU permits organizations to record expected recoveries on assets purchased with credit deterioration. In addition to other narrow technical improvements, the ASU also reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities. The effective date and transition methodology are the same as in ASU 2016-13, “FinancialFinancial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments inFASB deferred the effective dates of this update amend the guidance of the impairment of financial instruments and add an impairment model, known as the current expected credit loss (CECL) model. The CECL model is designedASU for smaller reporting companies (“SRC”) to capture expected credit losses through the establishment of an allowance account, which will be presented as an offset to the amortized cost basis of the related financial asset. The guidance is effective for interim and annual periodsfiscal years beginning after December 15, 2019.2022. As of March 31, 2020, the Company qualifies as a SRC and will adopt this ASU in the first quarter of 2023.


In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU removes specific exceptions to the general principles in Topic 740 in GAAP. It eliminates the need for an organization to analyze whether certain exceptions apply in a given period. This ASU also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for: a) Franchise taxes that are partially based on income; b) Transactions with a government that result in a step up in the tax basis of goodwill; c) Separate financial statements of legal entities that are not subject to tax; and d) Enacted changes in tax laws in interim periods. For public business entities, ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

 

2.Earnings per Share

2.     Earnings per Share

 

Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share include the dilutive effects of options and unvested restricted stock awards and units.

 

The following reconciles the denominator used in the calculation of diluted earnings (loss) per share:

 

 Three Months Ended Six Months Ended  Three Months Ended 
 June 30, June 30,  March 31, 
 2019 2018 2019 2018  2020 2019 
Denominator:              
Weighted average common shares for basic earnings per share  16,504,471   16,387,112   16,491,236   16,368,610 
Weighted average common shares outstanding for basic earnings per share  16,387,460   16,477,855 
Effect of dilutive securities  93,025   102,559   79,877   91,126   48,833   99,271 
Weighted average common shares for diluted earnings per share  16,597,496   16,489,671   16,571,113   16,459,736 
Weighted average common shares outstanding for diluted earnings per share  16,436,293   16,577,126 

 

Stock awards to purchase 275,494553,547 shares and 300,117356,890 shares of common stock for the three months ended June 30, 2019 and 2018, respectively, and 286,141 and 286,121 shares for the six months ended June 30, 2019 and 2018, respectively, were not included in the diluted net income per share calculation for the three months ended March 31, 2020 and 2019, respectively, as their inclusion would have been anti-dilutive.

 

3.Debt

3.Debt

  

On March 12, 2019 and December 10, 2019, the Company, as guarantor, HWC Wire & Cable Company and Vertex, as borrowers, and Bank of America, N.A., as agent and lender, entered into athe Second Amendmentand Third Amendments, respectively, to the Fourth Amended and Restated Loan and Security Agreement (such agreement, as so amended, the “Loan Agreement”). The Second Amendment extendsextended the expiration date ofuntil March 12, 2024 and the Company’s $100 millionThird Amendment increased the revolving credit facility until March 12, 2024.to $115 million. 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 March 12, 2024. At June 30, 2019,March 31, 2020, 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.”

 

4.Income Taxes

4.     Impairment of Goodwill and Intangible Assets

 

The Company calculatestests goodwill and indefinite lived intangibles for impairment at least annually or more frequently whenever events or circumstances occur indicating that it might be impaired. During the first quarter of 2020, the Company’s market capitalization declined significantly, driven by current macroeconomic and geopolitical conditions due in large part to the COVID-19 outbreak, which has contributed to decline in demand for the Company’s products, a decline in overall financial performance, partially due to the decline in oil prices, and decline in industry and market conditions. Based on these events, the Company concluded that it was more-likely-than-not that the fair value of certain of its provision for income taxes duringreporting units were less than their carrying values. Therefore, the Company performed an interim goodwill impairment test.


Goodwill impairment is evaluated at each of the four reporting periods by applyingunits. The Company determined the estimated annualfair values of two reporting units with goodwill and certain of its indefinite lived intangibles exceeded their respective carrying values. Additionally, the Company determined the fair value of its Southwest reporting unit’s tradenames was below its carrying value, and as a result, recorded an impairment charge of $0.2 million in March 2020.

5.     Income Taxes

The effective tax rate for the full fiscal yearthree months ended March 31, 2020 was 29.5% compared to pre-tax income or loss, excluding discrete items,26.8% for the reporting period.same period in 2019. Compared to the U.S. statutory rate, the effective tax rate was impacted by state income taxes and nondeductible expenses. Due to the continuing uncertainty in the Company’s industry, the Company has utilized the method of recording income taxes on a year-to-date effective tax rate for the three months ended March 31, 2020. The Company will evaluate its use of this method each quarter until such time as a return to the annualized estimated effective tax rate method is deemed appropriate.

The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020. The CARES Act contains several tax law changes for corporations, including modifications for net operating loss carrybacks, the refundability of prior-year minimum tax liability, limitations on business interest and limitations on charitable contribution deductions. These benefits did not impact the Company’s tax provision for the three months ended March 31, 2020.

 

5.6.Incentive Plans

 

Stock Option Awards

  

There were no stock option awards granted during the first sixthree months of 20192020 or 2018.2019.

 

Restricted Stock Awards and Restricted Stock Units

Following the Annual Meeting of Stockholders on May 7, 2019, the Company grantedThere were no restricted stock awards or units with a grant date valuegranted during the first three months of $60,000 to each non-employee director who was elected and re-elected, for an aggregate of 58,920 restricted stock units. Each award of restricted stock units vests at the date of the 2020 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.2020.

On March 12, 2019, the Board of Directors granted 52,910 performance stock units to the Company’s President and CEO and 13,228 performance stock units to the CFO. Each grant of performance stock units vests on December 31, 2021, based on and subject to the Company’s achievement of cumulative EBITDA and stock price performance goals over a three-year period, as long as the grantee is then employed by the Company, and upon vesting will be settled in shares of our common stock. Any dividends declared will be accrued and paid to the grantee if and when the related shares vest.

 

Total stock-based compensation cost was $0.4$0.3 million for each of the three months ended June 30,March 31, 2020 and 2019, and 2018, and $0.7 million for each of the six months ended June 30, 2019 and 2018,respectively, and is included in salaries and commissions for employees, and in other operating expenses for non-employee directors.

 

6.7.Commitments and Contingencies

As a result of unfavorable lease terms relative to market for a facility in Massachusetts 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 48 months at June 30, 2019. See Note 8.

  

The Company had outstanding under the Loan Agreement letters of credit totaling $1.7$0.7 million to certain vendors as of June 30, 2019.March 31, 2020.

  

ThereFrom time to time, the Company is involved in lawsuits that are nobrought against us in the normal course of business. The Company is not currently a party to any legal proceedings pending againstthat it expects, either individually or involvingin the Company that, in management’s opinion, based on the current known facts and circumstances, are expectedaggregate, to have a material adverse effect on the Company’s consolidated financial position, cash flows, or results offrom operations.

7.Leases

Effective January 1, 2019, the Company adopted ASU No. 2016-02, “Leases (Topic 842)” and the series of related ASUs that followed (collectively referred to as “Topic 842”). The most significant changes under the new guidance include clarification of the definition of a lease, and the requirements for lessees to recognize a right-of-use (ROU) asset and a lease liability for all qualifying leases with terms longer than twelve months in the consolidated balance sheet. In addition, under Topic 842, additional disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.

The Company elected the practical expedient available under ASU 2018-11 “Leases: Targeted Improvements,” which allows the Company to apply the transition provision for Topic 842 at the Company’s adoption date instead of at the earliest comparative period presented in the Company’s financial statements. Therefore, the Company recognized and measured leases existing at January 1, 2019 but without retrospective application. The Company also elected all other available practical expedients except the hindsight practical expedient. In electing the practical expedients, the Company utilized the transition practical expedient package whereby the Company did not reassess (i) whether any of the Company’s expired or existing contracts contain a lease, (ii) the classification for any expired or existing leases and (iii) initial direct costs for any existing leases.


The impact of Topic 842 on the Company’s consolidated balance sheet as of January 1, 2019 was the recognition of ROU assets and lease liabilities for operating leases, while the Company’s accounting for finance leases remained substantially unchanged. The Company’s finance leases were immaterial prior to the adoption of Topic 842, and no change was made to the classification of these leases. As a result of the adoption of Topic 842, beginning retained earnings was impacted by $0.1 million and there was no impact to the income statement.

The Company leases property including warehouse space, offices, vehicles and office equipment. The Company determines if an arrangement is a lease at inception. As part of the transition to the new standard, the Company reviewed agreements with suppliers, vendors, customers, and other outside parties to determine if any agreements met the definition of an embedded lease. This is based on the nature of the contracts reviewed, and various factors, including identified assets included in the agreement to which the Company has exclusive rights of control as described by Topic 842. The Company concluded that these are not material agreements with parties that would constitute an embedded lease. For purposes of calculating operating lease liabilities, lease terms may be deemed to include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

Beginning January 1, 2019, operating ROU assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Operating leases in effect prior to January 1, 2019 were recognized at the present value of the remaining lease payments over the remaining lease term as of January 1, 2019. The Company is required to determine a discount rate in order to calculate the present value of lease payments. If the rate is not included in the lease or cannot be readily determined, the Company uses its incremental secured borrowing rate based on lease term information available at the commencement date of the lease in determining the present value of lease payments. The Company recognizes lease components and non-lease components together and not as separate parts of a lease for all leases. The Company will exercise this practical expedient in the future by asset class.

The expenses generated by the lease activity of the Company as lessee for the three months and six months ended June 30, 2019 were as follows:

    Three Months
Ended		  Six Months
Ended		 
Lease Type Income Statement Classification June 30, 2019 
(Dollars in thousands)        
Consolidated operating lease expense Operating expenses $982  $1,968 
           
Consolidated financing lease amortization Operating expenses  33   50 
Consolidated financing lease interest Interest expense  4   6 
Consolidating financing lease expense    37   56 
           
Net lease cost Operating expenses $1,019  $2,024 

The value of the net assets and liabilities generated by the leasing activity of the Company as lessee as of June 30, 2019 were as follows:

Lease Type Balance Sheet Classification Amount 
(Dollars in thousands)      
Total ROU operating lease assets(1) Operating lease right-of-use assets, net $11,176 
Total ROU financing lease assets(2) Property and equipment, net  609 
Total lease assets   $11,785 
       
Total current operating lease obligation Operating lease liabilities $2,961 
Total current financing lease obligation Accrued and other current liabilities  169 
Total current lease obligation   $3,130 
       
Total long term operating lease obligation Operating lease long term liabilities $8,628 
Total long term financing lease obligation Other long term liabilities  451 
Total long term lease obligation   $9,079 

(1)Operating lease assets are recorded net of accumulated amortization of $1.6 million as of June 30, 2019

(2)Financing lease assets are recorded net of accumulated amortization of $0.2 million as of June 30, 2019


The future minimum lease payments for finance and operating lease liabilities of the Company as lessee as of June 30, 2019 were as follows:

Maturity Date of Lease Liabilities Operating Leases  Financing Leases  Total 
(Dollars in thousands)            
Year one $3,504  $192  $3,696 
Year two  2,721   177   2,898 
Year three  2,694   149   2,843 
Year four  2,103   101   2,204 
Year five  795   57   852 
Subsequent years  1,290   —   1,290 
Total lease payments  13,107   676   13,783 
Less: Interest  1,518   56   1,574 
Present value of lease liabilities $11,589  $620  $12,209 

The weighted average remaining lease terms and discount rates of the leases held by the Company as of June 30, 2019 were as follows:

Lease Type

 

Weighted Average
Term in Years

  Weighted Average
Interest Rate		 
Operating leases  4.5   5.5 
Financing leases  3.9   4.3 

The cash outflows of the leasing activity of the Company as lessee for the six months ended June 30, 2019 were as follows:

Cash Flow Source Classification Amount 
(Dollars in thousands)      
Operating cash outflows from operating leases Operating activities $1,957 
Operating cash outflows from financing leases Operating activities  6 
Financing cash outflows from financing leases Financing activities  48 

During the six months ended June 30, 2019, the Company recorded non-cash ROU financing lease assets and corresponding financing lease obligations totaling $0.4 million related to new and modified lease agreements. Any operating leases, new or modified,as well as any sublease incomefor the six months ended June 30, 2019, are not material. 

 

8.Subsequent Events

The COVID-19 pandemic has spread throughout the United States and the countries in which our offshore suppliers are located. Governments in affected regions have implemented, and may continue to implement, safety precautions which include quarantines, travel restrictions, business closures, cancellations of public gatherings and other measures as they deem necessary. Many organizations and individuals, including the Company and its employees are taking additional steps to avoid or reduce infection, including limiting travel and working remotely. The Company continues to monitor its operations and government recommendations and has made modifications to its normal operations because of the pandemic, including requiring most of its non-essential employees to work remotely. The Company has maintained a substantial portion of its operational capacity at its warehouses across the continental United States and has instituted several health and safety protocols and procedures to safeguard its employees.

The rapid development and uncertainty of the COVID-19 pandemic precludes any prediction as to the ultimate adverse impact of the COVID-19 outbreak on the Company’s business. However, the outbreak has caused the Company to experience adverse impacts, including reductions in the demand for its products. In response, the Company has implemented several cost savings measures which include furloughing employees, payroll reductions, and other measures to decrease corporate and non-critical expenses. While we cannot reasonably estimate the length or severity of this pandemic, we currently anticipate an adverse impact on our consolidated financial position, consolidated results of operations, and consolidated cash flows in fiscal 2020.

On July 22, 2019,May 4, 2020, the Company modified certain termsreceived a $6.2 million Payroll Protection Program loan from Bank of America, funded under the lease agreement with the landlord of Vertex’s Massachusetts facility, including early termination of the lease on November 30, 2019 and Vertex subleasingCARES Act. The loan has a portion of the space until the end of November. In connection with the modification, the Company will make1.0% interest rate after a payment of approximately $2.5 million to the lessor. The Company will be relieved of $2.8 million of future rent payments, along with other future costs associated with the lease including property taxes, insurance, utilities and maintenance otherwise required in the original lease agreement.

six-month deferment period.  

 


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the Company’s financial position and results of operations. MD&A is provided as a supplement to the Company’s Consolidated Financial Statements (unaudited) and the accompanying Notes to Consolidated Financial Statements (unaudited) and should be read in conjunction with the MD&A included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.

 

Overview

 

We are a provider of industrial products including Electrical Wire and Cable, Steel Wire Rope and Hardware, and Fasteners to the U.S. market. 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.

 

Critical Accounting Policies and Estimates

 

The preparation of our consolidated financial statements requires us to make estimates and judgmentsassumptions that affect the reported amounts of assets and liabilities, revenue and expenses. On an on-going basis, we make and evaluate estimates and judgments,assumptions, including those related to the allowance for doubtful accounts, the refund liability, the inventory obsolescence reserve, vendor rebates, the realization of deferred tax assets and liabilities and the valuation of goodwill and indefinite-lived assets. We base our estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances,circumstances; the results of which form the basis for making judgments about amounts and timing of revenue and expenses, the carrying values of assets and the recorded amounts of liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. We have discussed the development and selection of critical accounting policies and estimates with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed our related disclosures. The critical accounting policies related to the estimates and judgments are discussed in our Annual Report on Form 10-K for the year ended December 31, 20182019 under Management’s Discussion and Analysis of Financial Condition and Results of Operations. There have been no changes to our critical accounting policies and estimates during the three and six months ended June 30, 2019.March 31, 2020.   

Impact of the COVID-19 Pandemic

The rapid development and uncertainty of the COVID-19 pandemic precludes any prediction as to the ultimate adverse impact of the COVID-19 outbreak on the Company’s business. However, the outbreak has caused the Company to experience adverse impacts, including reductions in the demand for its products. In response, the Company has implemented several cost savings measures which include furloughing employees, payroll reductions, and other measures to decrease corporate and non-critical expenses. While we cannot reasonably estimate the length or severity of this pandemic, we currently anticipate an adverse impact on our consolidated financial position, consolidated results of operations, and consolidated cash flows in fiscal 2020.

 

Cautionary Statement for Purposes of the “Safe Harbor”

 

Forward-looking statements in this report are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements may relate to, but are not limited to, information or assumptions about our sales and marketing strategy, sales (including pricing), income, operating income or gross margin improvements, working capital, cash flow, interest rates, impact of changes in accounting standards, future economic performance, management’s plans, goals and objectives for future operations, performance and growth or the assumptions relating to any of the forward-looking statements.  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.  The Company cautions that forward-looking statements are not guarantees because there are inherent difficulties in predicting future results.  Actual results could differ materially from those expressed or implied in the forward-looking statements.  The factors listed under “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018,2019 and in Part II, Item 1A of this report, as well as any other cautionary language in this report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements.

 


Results of Operations

 

The following table shows, for the periods indicated, information derived from our consolidated statements of operations, expressed as a percentage of net sales for the periods presented.

 

 Three Months Ended Six Months Ended  Three Months Ended 
 June 30, June 30,  March 31, 
 2019 2018 2019 2018  2020 2019 
              
Sales  100.0%  100.0%  100.0%  100.0%  100.0%  100.0%
Cost of sales  75.9%  76.2%  75.5%  76.1%  76.5%  75.1%
Gross profit  24.1%  23.8%  24.5%  23.9%  23.5%  24.9%
                        
Operating expenses:                        
Salaries and commissions  10.8%  10.6%  10.8%  10.7%  11.3%  10.8%
Other operating expenses  9.1%  8.0%  9.0%  8.4%  9.1%  9.0%
Depreciation and amortization  0.6%  0.6%  0.6%  0.6%  0.9%  0.6%
Total operating expenses  20.5%  19.1%  20.5%  19.7%
Impairment charge  0.3%  — 
Total operating expenses:  21.6%  20.4%
                        
Operating income  3.6%  4.7%  4.0%  4.3%  1.9%  4.5%
Interest expense  0.9%  0.8%  0.9%  0.8%  1.0%  0.9%
                        
Income before income taxes  2.7%  3.9%  3.2%  3.5%  0.9%  3.7%
Income tax expense  0.8%  1.1%  0.9%  0.9%  0.3%  1.0%
                        
Net income  1.9%  2.8%  2.3%  2.5%  0.7%  2.7%

 

Note:Due to rounding, percentages may not add up to total operating expenses, operating income, income before income taxes or net income.

 

Comparison of the Three Months Ended June 30,March 31, 2020 and 2019 and 2018

 

Sales

 

 Three Months Ended  Three Months Ended 
 June 30,  March 31, 
(Dollars in millions) 2019 2018 Change  2020 2019 Change 
Sales $85.3  $93.9  $(8.5)  (9.1)% $83.5  $85.3  $(1.7)  (2.0)%

 

Our sales for the secondfirst quarter decreased from $93.9were slightly down at $83.5 million in 20182020 compared to $85.3 million in 2019. The decrease in sales was2019, primarily due to reduced industrial market demand, in oil and gas geographies, reduced demand for fasteners and reduced availabilityas a result of inventory due to supply chain disruptions resulting fromcurrent economic conditions caused by the on-going trade discussions between the United States and China.COVID-19 pandemic. We estimate sales for our project business, which targets end markets for Environmental Compliance, Engineering & Construction, Industrials, Utility Power Generation, and Mechanical Wire Rope, increased 2%decreased 5%, while Maintenance, Repair, and Operations (MRO) sales decreased 11%1.0%, as compared to 2018.2019.

 

Gross Profit

 

 Three Months Ended  Three Months Ended 
 June 30,  March 31, 
(Dollars in millions) 2019 2018 Change  2020 2019 Change 
Gross profit $20.5  $22.3  $(1.8)  (8.1)% $19.6  $21.3  $(1.7)  (7.8)%
Gross margin  24.1%  23.8%          23.5%  24.9%        

 


Gross profit decreased 8.1%7.8% to $20.5$19.6 million in 20192020 from $22.3$21.3 million in 2018.2019. The decrease in gross profit was primarily attributable to reducedthe reduction in sales from oil and gas geographies and fasteners.lower product margins. Gross margin (gross profit as a percentage of sales) increased slightlydecreased to 24.1%23.5% in 20192020 from 23.8%24.9 % in 20182019 primarily due to product mix and pricing discipline.a decline in copper prices.

10

 

Operating Expenses

 

 Three Months Ended  Three Months Ended 
 June 30,  March 31, 
(Dollars in millions) 2019 2018 Change  2020 2019 Change 
Operating expenses:                                
Salaries and commissions $9.2  $9.9  $(0.7)  (6.7)% $9.5  $9.2  $0.3   3.2%
Other operating expenses  7.7   7.5   0.2   2.9%  7.6   7.7   (0.1)  (1.3)%
Depreciation and amortization  0.5   0.5   0.0   (1.3)%  0.8   0.6   0.2   38.7%
Impairment charge  0.2   —   0.2   100.0%
Total operating expenses $17.5  $18.0  $0.4   (2.5)% $18.0  $17.4  $0.6   3.5%
                                
Operating expenses as a percent of sales  20.5%  19.1%          21.6%  20.4%        

 

Note:  Due to rounding, numbers may not add up to total operating expenses.

 

Salaries and commissions decreased $0.7increased $0.3 million from the second quarter 2018in 2020 compared to 2019 due to lower commissions resulting fromslightly higher temporary warehouse labor as a result of the reductionwarehouse moves in sales and gross profit, offset by an increase in headcount.the fourth quarter of 2019.

 

Other operating expenses increased slightly duein 2020 were almost flat compared to higher2019, as we focus on expense approximately $0.2 million, frommanagement in light of current economic conditions caused by the computer system upgrade and conversion.COVID-19 pandemic.

 

Depreciation and amortization were flat year over year.

Operating expenses as a percentage of sales increased primarily due to 20.5% in 2019 from 19.1% in 2018, as the reduction in sales changed at a greater rate than the decrease in operating expenses.

Interest Expense

Interest expense decreased slightly from $0.8 million in 2018 to $0.7 million in 2019 as a result of lower average debt, offset by an increase in interest rates. Average debt was $74.3 million in 2019 compared to $82.5 million in 2018. The average effective interest rate was 3.9% in 2019 compared to 3.7% in 2018.

Income Taxes

The income tax expense of $0.6 million decreased from $1.0 milliondepreciation on additional right-of-use assets acquired in the prior year period due to lower pretax income. The effective income tax rate for thefirst quarter was near flat at 28.3 % in 2019 compared to 28.0% in 2018.

Net Incomeof 2020.

 

We achieved net incomerecorded an impairment charge in the first quarter of $1.6 million in 2019 compared2020 with respect to $2.6 million in 2018.

Comparisontradenames at our Southwest reporting unit. (See Note 4 of the Six Months Ended June 30, 2019 and 2018

  Six Months Ended 
  June 30, 
(Dollars in millions) 2019  2018  Change 
Sales $170.6  $178.9  $(8.3)  (4.6)%

Our sales for the six month period decreased 4.6% from $178.9 million in 2018 to $170.6 million in 2019. The primary reasons for the decrease were reduced industrial market demand in oil and gas geographies, reduced demand for fasteners and reduced availability of inventory due to supply chain disruptions resulting from the on-going trade discussions between the United States and China. Our project business, which includes our key growth initiatives encompassing Environmental Compliance, Engineering & Construction, Industrials, Utility Power Generation, and Mechanical Wire Rope, is estimated to have increased 3%, from 2018. MRO decreased 6%, from 2018.


Gross Profit

  Six Months Ended 
  June 30, 
(Dollars in millions) 2019  2018  Change 
Gross profit $41.8  $42.8  $(1.0)  (2.4)%
Gross margin  24.5%  23.9%  0.6%    

Gross profit decreased 2.4% from $42.8 million in 2018 to $41.8 million in 2019. The decrease in gross profit was primarily attributable to the reduction in sales. Gross margin increased slightly to 24.5% in 2019 from 23.9% in 2018, primarily due to product mix and pricing discipline.

Operating Expenses

  Six Months Ended 
  June 30, 
(Dollars in millions) 2019  2018  Change 
Operating expenses:                
Salaries and commissions $18.4  $19.1  $(0.7)  (3.5)%
Other operating expenses  15.4   15.0   0.4   2.7%
Depreciation and amortization  1.1   1.1   0.0   0.1%
Total operating expenses $34.9  $35.2  $(0.3)  (0.8)%
                 
Operating expenses as a percent of sales  20.5%  19.7%  0.8%    

Note: Due to rounding, numbers may not add up to total operating expenses.

Salaries and commissions decreased $0.7 million between the periods due to lower commissions resulting from the reduction in sales and gross profit, offset by a slight increase in headcount.

Other operating expenses increased slightly due to higher expense, approximately $0.2 million, from the computer system upgrade and conversion.

Depreciation and amortization were flat year over year.

Operating expenses as a percentage of sales increased to 20.5% in 2019 from 19.7% in 2018, as sales levels fell at a greater rate than the reduction in operating expenses.Consolidated Financial Statements)

 

Interest Expense

 

Interest expense increased 4.4% to $1.5$0.8 million in 2020 from $0.7 million in 2019 from $1.4 million in 2018 due to higheran increase in the average debt, offset by a lower average effective interest rates.rate. Average debt was $73.9$89.2 million in 20192020 compared to $79.7$73.5 million in 2018.2019. The average effective interest rate rosewas 3.4% in 2020 compared to 3.9% in 2019 from 3.5% in the prior year period.2019.

 

Income Taxes

 

The income tax expense of $1.5$0.2 million decreased from $0.8 million in 2019 decreased from $1.7 million in 2018the prior year period, primarily due to lower pretax income. the decrease in income before income taxes.Due to the continuing uncertainty in our industry, we utilized the method of recording income taxes on a year-to-date effective tax rate for the three months ended March 31, 2020.The actual effective income tax rate for the quarter increased slightly to 27.5%29.5% in 2020 from the estimated rate of 26.8% in 2019 to 27.1% in 2018, primarily due to the release of vested share-based awards.

Net Income

We achieved netstate income of $3.9 million in 2019 compared to $4.6 million in 2018.taxes and nondeductible expenses.

 

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 couldcan be adversely affected because of either reduced selling prices or lower of cost or marketnet realizable value adjustments in the carrying value of our inventory. If weWe 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 the SixThree Months Ended June,March 31, 2020 and 2019 and 2018

 

Our net cash used in operating activities was $2.2$2.0 million for the sixthree months ended June 30, 2019March 31, 2020 compared to $5.7$8.5 million in 2018.2019. We had net income of $3.9$0.5 million in 20192020 compared to $4.6$2.3 million in 2018.2019.

 

Changes in our operating assets and liabilities resulted in cash used in operating activities of $11.3$4.9 million in 2019. An increase2020. A decrease in inventoriesaccrued and other liabilities of $12.4$8.3 million primarily due to incentives offered by certain vendors on high volume inventory, as well as rebalancing inventory levels at regional locations, lease payments of $1.9 million and prepaid expenses of $1.4 million werewas the main uses of cash. Partially offsetting these usesuse of cash, were increases in accounts payable and accrued liabilitiesoffset by a decrease inventory of $2.1 million and $2.2 million, respectively, primarily due to increased inventory purchases in the second quarter of 2019.$4.5 million.

 

Net cash used in investing activities was $0.9$0.8 million in 20192020 compared to $0.7$0.3 million in 2018.2019.

 

Net cash provided by financing activities was $1.6$2.3 million in 20192020 compared to $6.4$7.6 million in 2018.2019. Net borrowings on the revolver of $1.8$2.4 million were the primary source for financing activities in 2019.2020.

 

Indebtedness

 

Our principal source of liquidity at June 30, 2019March 31, 2020 was working capital of $130.4$141.5 million compared to $126.2$138.5 million at December 31, 2018.2019. We also had available borrowing capacity of $25.2$27.4 million at June 30, 2019March 31, 2020 and $28.7$22.8 million at December 31, 20182019 under our loan agreement. The availability at June 30, 2019March 31, 2020 is net of outstanding letters of credit of $1.7$0.7 million.

 

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.

 

Contractual Obligations

 

The following table summarizes our loan commitment at June 30, 2019.March 31, 2020.

 

In thousands Total  

Less than

1 year

  1-3 years  3-5 years  

More

than

5 years

 
                
Total debt $73,107  $—  $—  $73,107  $— 

In thousands

 

Total

 

 

Less than

1 year

 

 

1-3 years

 

 

3-5 years

 

 

More

than

5 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt

 

 $

  85,920

 

 

$

—

 

 

$

—

 

 

$

85,920

 

 

$

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

There were no material changes in operating lease obligations or non-cancellable purchase obligations since December 31, 2018.2019.

12

 


Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

There were no material changes to our market risk as set forth in Items 7A and 7 of our Annual Report on Form 10-K for the year ended December 31, 2018.2019.

 

Item 4. Controls and Procedures

 

As of June 30, 2019,March 31, 2020, an evaluation was performed by the Company’s management, under the supervision and with the participation of the Company’s chief executive officer and chief financial officer, of the effectiveness of the Company’s disclosure controls and procedures. Based on that evaluation, the chief executive officer and the chief financial officer concluded that the Company’s disclosure controls and procedures were effective. There were no changes in the Company’s internal control over financial reporting that occurred during the quarterperiod ended June 30, 2019,March 31, 2020, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Part II. Other Information

 

Item 1 - Not applicable and has been omitted.

 

Item 1A.  Risk Factors

 

ThereThe COVID-19 pandemic, efforts to mitigate or disrupt the pandemic and the related weak, or weakening of, economic or other negative conditions, have impacted our business, and could result in a material adverse effect on our operations, liquidity, financial condition and financial results.

A novel strain of coronavirus (COVID-19) was first identified in Wuhan, China in December 2019 and subsequently declared a pandemic by the World Health Organization. To date, this outbreak, which has surfaced in nearly all regions around the world, and preventative measures taken to contain or mitigate the outbreak have caused, and are continuing to cause, business slowdown or shutdown in affected areas and significant disruption in the financial markets both globally and in the United States, which could lead to a decline in capital spending, and in turn impact, possibly materially, our business, sales, financial condition and results of operations. It is currently not practicable to predict the precise potential impact, as well as the extent of any impact, of the COVID-19 pandemic on our business, and on the global economy as a whole. It is also currently not possible to predict how long the pandemic will last or the time that it will take for economic activity to return to prior levels. A prolonged situation could have a significant adverse effect on economies and financial markets globally, potentially leading to a significant worldwide economic downturn, which could have a significant adverse effect on our business, operating results and financial condition.

The extent to which the COVID-19 pandemic adversely affects our business, results of operations, and financial condition will likely depend on numerous evolving factors which are highly uncertain and cannot be predicted, including but not limited to:

●

Reductions in the demand for our products as a result of downturns in capital spending,

●

Disruption to our distribution centers and our suppliers and other vendors, including through the effects of facility closures,

●

Impacts to our distribution and logistics providers’ ability to operate or increases in their operating costs,

●

Labor shortages,

●

Real time changes in operating procedures and costs, including for additional cleaning and disinfection

●

Significant disruption of global financial markets, which could have a negative impact on our ability to access capital in the future.

We intend to continue to monitor the situation and adjust our current policies and practices as more information and guidance become available.

Other than this item, there were no material changes in the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.2019.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

Our 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 and reactivated in August 2019.

No shares of common stock were purchased during the three months ended March 31, 2020. As of March 31, 2020, $8.1 million remained available under the repurchase authorization.

 

Item 23 - Not applicable and has been omitted.

 

Item 34 - Not applicable and has been omitted.

 

Item 45 - Not applicable and has been omitted.


Item 5 - Not applicable and has been omitted.


Item 6.  Exhibits

 

(a) Exhibits required by Item 601 of Regulation S-K.

 

Exhibit

Number

Document Description

31.1

Certification by James L. Pokluda III pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification by Christopher M. Micklas pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification by James L. Pokluda III and Christopher M. Micklas pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance Document(1)

101.SCH

XBRL Taxonomy Extension Schema

101.CAL

XBRL Taxonomy Extension Calculation Linkbase

101.DEF

XBRL Taxonomy Extension Definition Linkbase

101.LAB

XBRL Taxonomy Extension Label Linkbase

101.PRE

XBRL Taxonomy Extension Presentation Linkbase

 

(1)

Attached as exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets at June 30, 2019March 31, 2020 and December 31, 2018;2019; (ii) the Consolidated Statements of Operations for the three and six month periods ended June 30, 2019March 31, 2020 and 2018;2019; (iii) the Consolidated Statements of Cash Flows for the sixthree month periods ended June 30, 2019March 31, 2020 and 2018;2019; and (vi) Notes to the Consolidated Financial Statements.


Signature

 

Pursuant to the requirements 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.

 

Date:  August 9, 2019May 8, 2020

HOUSTON WIRE & CABLE COMPANY

BY:

/s/ Christopher M. Micklas

Christopher M. Micklas, Chief Financial Officer

18