HOUSTON WIRE & CABLE COMPANY
Consolidated Balance Sheets
(In thousands, except share data)
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September 30,
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December 31,
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|
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2012
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|
|
2011
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|
|
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(unaudited)
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|
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Assets
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|
|
|
|
|
|
|
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Current assets:
|
|
|
|
|
|
|
|
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Accounts receivable, net
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|
$
|
67,076
|
|
|
$
|
59,731
|
|
Inventories, net
|
|
|
89,117
|
|
|
|
69,517
|
|
Deferred income taxes
|
|
|
2,342
|
|
|
|
2,268
|
|
Income taxes
|
|
|
148
|
|
|
|
1,693
|
|
Prepaids
|
|
|
869
|
|
|
|
828
|
|
Total current assets
|
|
|
159,552
|
|
|
|
134,037
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|
|
|
|
|
|
|
|
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Property and equipment, net
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|
|
5,853
|
|
|
|
6,029
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|
Intangible assets, net
|
|
|
12,400
|
|
|
|
13,700
|
|
Goodwill
|
|
|
25,082
|
|
|
|
25,082
|
|
Other assets
|
|
|
200
|
|
|
|
305
|
|
Total assets
|
|
$
|
203,087
|
|
|
$
|
179,153
|
|
|
|
|
|
|
|
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Liabilities and stockholders' equity
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Current liabilities:
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|
|
|
|
|
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Book overdraft
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$
|
3,498
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|
|
$
|
2,270
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|
Trade accounts payable
|
|
|
13,260
|
|
|
|
10,099
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|
Accrued and other current liabilities
|
|
|
13,395
|
|
|
|
19,101
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|
Total current liabilities
|
|
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30,153
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|
|
|
31,470
|
|
|
|
|
|
|
|
|
|
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Debt
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64,993
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|
|
|
47,967
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|
Other long term obligations
|
|
|
111
|
|
|
|
128
|
|
Deferred income taxes
|
|
|
1,690
|
|
|
|
2,250
|
|
Total liabilities
|
|
|
96,947
|
|
|
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81,815
|
|
|
|
|
|
|
|
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Stockholders' equity:
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|
|
|
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Preferred stock, $0.001 par value; 5,000,000 shares authorized, none issued and outstanding
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0
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|
|
0
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|
Common stock, $0.001 par value; 100,000,000 shares authorized: 20,988,952 shares issued: 17,830,595 and 17,811,806 outstanding at September 30, 2012 and December 31, 2011, respectively
|
|
|
21
|
|
|
|
21
|
|
Additional paid-in-capital
|
|
|
56,281
|
|
|
|
55,760
|
|
Retained earnings
|
|
|
101,476
|
|
|
|
93,588
|
|
Treasury stock
|
|
|
(51,638
|
)
|
|
|
(52,031
|
)
|
Total stockholders' equity
|
|
|
106,140
|
|
|
|
97,338
|
|
Total liabilities and stockholders' equity
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|
$
|
203,087
|
|
|
$
|
179,153
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|
The accompanying Notes are an integral part
of these Consolidated Financial Statements.
HOUSTON WIRE & CABLE COMPANY
Consolidated Statements of Income
(Unaudited)
(In thousands, except share and per share
data)
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Three Months Ended
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Nine Months Ended
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|
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September 30,
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September 30,
|
|
|
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2012
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|
|
2011
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2012
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|
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2011
|
|
|
|
|
|
|
|
|
|
|
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Sales
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$
|
96,113
|
|
|
$
|
105,782
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|
|
$
|
288,657
|
|
|
$
|
308,929
|
|
Cost of sales
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|
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74,501
|
|
|
|
82,776
|
|
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223,655
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|
|
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239,951
|
|
Gross profit
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|
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21,612
|
|
|
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23,006
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|
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65,002
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|
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68,978
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|
|
|
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Operating expenses:
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Salaries and commissions
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7,478
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7,823
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22,402
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|
|
|
20,542
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|
Other operating expenses
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|
|
6,256
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|
|
|
6,071
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|
|
|
18,918
|
|
|
|
18,114
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|
Depreciation and amortization
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|
|
722
|
|
|
|
726
|
|
|
|
2,194
|
|
|
|
2,251
|
|
Total operating expenses
|
|
|
14,456
|
|
|
|
14,620
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|
|
|
43,514
|
|
|
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40,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Operating income
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|
|
7,156
|
|
|
|
8,386
|
|
|
|
21,488
|
|
|
|
28,071
|
|
Interest expense
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|
|
334
|
|
|
|
371
|
|
|
|
929
|
|
|
|
1,099
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|
Income before income taxes
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|
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6,822
|
|
|
|
8,015
|
|
|
|
20,559
|
|
|
|
26,972
|
|
Income taxes
|
|
|
2,590
|
|
|
|
3,050
|
|
|
|
7,890
|
|
|
|
10,347
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|
Net income
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|
$
|
4,232
|
|
|
$
|
4,965
|
|
|
$
|
12,669
|
|
|
$
|
16,625
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|
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Earnings per share:
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Basic
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$
|
0.24
|
|
|
$
|
0.28
|
|
|
$
|
0.71
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|
|
$
|
0.94
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|
Diluted
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|
$
|
0.24
|
|
|
$
|
0.28
|
|
|
$
|
0.71
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|
|
$
|
0.93
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|
Weighted average common shares outstanding:
|
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|
|
|
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|
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Basic
|
|
|
17,732,715
|
|
|
|
17,685,211
|
|
|
|
17,719,005
|
|
|
|
17,677,514
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|
Diluted
|
|
|
17,814,499
|
|
|
|
17,814,181
|
|
|
|
17,811,844
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|
|
|
17,802,021
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|
|
|
|
|
|
|
|
|
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|
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|
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Dividend declared per share
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|
$
|
0.09
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|
|
$
|
0.09
|
|
|
$
|
0.27
|
|
|
$
|
0.265
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|
The accompanying Notes are an integral part
of these Consolidated Financial Statements.
HOUSTON WIRE & CABLE COMPANY
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
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Nine Months
Ended September 30,
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|
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2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
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Net income
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|
$
|
12,669
|
|
|
$
|
16,625
|
|
Adjustments to reconcile net income to net cash used in operating activities:
|
|
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|
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Depreciation and amortization
|
|
|
2,194
|
|
|
|
2,251
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|
Amortization of capitalized loan costs
|
|
|
14
|
|
|
|
61
|
|
Amortization of unearned stock compensation
|
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|
809
|
|
|
|
(968
|
)
|
Provision for doubtful accounts
|
|
|
(19
|
)
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|
|
41
|
|
Provision for returns and allowances
|
|
|
(44
|
)
|
|
|
108
|
|
Provision for inventory obsolescence
|
|
|
563
|
|
|
|
778
|
|
Deferred income taxes
|
|
|
(640
|
)
|
|
|
135
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(7,282
|
)
|
|
|
(2,270
|
)
|
Inventories
|
|
|
(20,163
|
)
|
|
|
(7,062
|
)
|
Prepaids
|
|
|
(41
|
)
|
|
|
(343
|
)
|
Other assets
|
|
|
91
|
|
|
|
(139
|
)
|
Book overdraft
|
|
|
1,228
|
|
|
|
(525
|
)
|
Trade accounts payable
|
|
|
3,161
|
|
|
|
(6,459
|
)
|
Accrued and other current liabilities
|
|
|
(5,706
|
)
|
|
|
(1,384
|
)
|
Income taxes
|
|
|
1,542
|
|
|
|
(1,584
|
)
|
Other long term obligations
|
|
|
(17
|
)
|
|
|
(10
|
)
|
Net cash used in operating activities
|
|
|
(11,641
|
)
|
|
|
(745
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Expenditures for property and equipment
|
|
|
(718
|
)
|
|
|
(749
|
)
|
Cash paid for acquisition
|
|
|
0
|
|
|
|
(343
|
)
|
Net cash used in investing activities
|
|
|
(718
|
)
|
|
|
(1,092
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Borrowings on revolver
|
|
|
302,142
|
|
|
|
317,572
|
|
Payments on revolver
|
|
|
(285,116
|
)
|
|
|
(311,197
|
)
|
Proceeds from exercise of stock options
|
|
|
137
|
|
|
|
112
|
|
Excess tax benefit for stock options
|
|
|
34
|
|
|
|
37
|
|
Payment of dividends
|
|
|
(4,781
|
)
|
|
|
(4,684
|
)
|
Purchase of treasury stock
|
|
|
(57
|
)
|
|
|
(3
|
)
|
Net cash provided by financing activities
|
|
|
12,359
|
|
|
|
1,837
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
—
|
|
|
|
—
|
|
Cash at beginning of period
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
—
|
|
|
$
|
—
|
|
The accompanying Notes are an integral part
of these Consolidated Financial Statements.
HOUSTON WIRE & CABLE COMPANY
Notes to Consolidated Financial Statements
(Unaudited)
(in thousands, except share data)
1. Basis of Presentation and Principles of Consolidation
Houston Wire & Cable Company (the “Company”),
through its wholly owned subsidiaries, HWC Wire & Cable Company, Advantage Wire & Cable and Cable Management Services Inc.,
provides wire and cable and related services to the U.S. market through eighteen locations in twelve states throughout the United
States. The Company has no other business activity.
The consolidated financial statements as
of September 30, 2012 and for the three and nine months ended September 30, 2012 and 2011 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 inter-company 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 inventory obsolescence reserve, the reserve for returns and allowances, vendor rebates and asset impairments. Actual results
could differ materially from the estimates and assumptions used in 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, 2011 filed with the SEC.
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 stock option and unvested restricted stock awards and units.
The following reconciles the denominator
used in the calculation of earnings per share:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares for basic earnings per share
|
|
|
17,732,715
|
|
|
|
17,685,211
|
|
|
|
17,719,005
|
|
|
|
17,677,514
|
|
Effect of dilutive securities
|
|
|
81,784
|
|
|
|
128,970
|
|
|
|
92,839
|
|
|
|
124,507
|
|
Weighted average common shares for diluted earnings per share
|
|
|
17,814,499
|
|
|
|
17,814,181
|
|
|
|
17,811,844
|
|
|
|
17,802,021
|
|
The weighted average common shares for
diluted earnings per share exclude stock options to purchase 602,410 and 802,500 shares for the three months ended September 30,
2012 and 2011, respectively, and 500,325 and 802,500 shares for the nine months ended September 30, 2012 and 2011, respectively.
These options have been excluded from the calculation of diluted securities, as including them would have an anti-dilutive effect
on earnings per share for the respective periods.
3.
Debt
On September 30, 2011, HWC Wire & Cable
Company, as borrower, entered into the Third Amended and Restated Loan and Security Agreement (“2011 Loan Agreement”),
with certain lenders and Bank of America, N.A., as agent, and the Company, as guarantor, executed a Second Amended and Restated
Guaranty of the borrower’s obligations thereunder. The 2011 Loan Agreement provides for a $100 million revolving credit facility,
bears interest at the agent’s base rate, with a LIBOR rate option and expires on September 30, 2016. The 2011 Loan Agreement
is secured by a lien on substantially all the property of the Company, other than real estate. Availability under the 2011 Loan
Agreement is limited to a borrowing base equal to 85% of the value of eligible accounts receivable, plus 65% of the value of eligible
inventory, less certain reserves.
Portions of the loan may be converted to
LIBOR loans in minimum amounts of $1,000 and integral multiples of $100. LIBOR loans bear interest at the British Bankers Association
LIBOR Rate plus 125 to 200 basis points based on availability, and loans not converted to LIBOR loans bear interest at a fluctuating
rate equal to the greatest of the agent’s prime rate, the federal funds rate plus 50 basis points, or 30-day LIBOR plus 150
basis points. Unused commitment fees are 25 or 30 basis points, depending on the amount of the unused commitment.
The 2011 Loan Agreement includes, among
other things, covenants that require the Company to maintain a specified minimum fixed charge coverage ratio and availability levels.
Additionally, the 2011 Loan Agreement allows for the unlimited payment of dividends and repurchases of stock, subject to the absence
of events of default and maintenance of a fixed charge coverage ratio and minimum level of availability. The 2011 Loan Agreement
contains certain provisions that may cause the debt to be classified as a current liability, in accordance with GAAP, if availability
falls below certain thresholds, even though the ultimate maturity date under the loan agreement remains as September 30, 2016.
Availability has remained above these thresholds. At September 30, 2012, the Company was in compliance with the financial covenants
governing its indebtedness.
The carrying amount of long term debt approximates
fair value as it bears interest at variable rates, which is a Level 2 measurement as defined in Accounting Standards Codification
(“ASC”) Topic 820, Fair Value Measurement.
4. Stockholders’ Equity
In 2007, the Board of Directors approved
a stock repurchase program, where the Company is authorized to purchase up to $75,000 of its outstanding shares of common stock,
depending on market conditions, trading activity, business conditions and other factors. The program was scheduled to expire on
December 31, 2009 but was initially extended through December 31, 2011 and on November 4, 2011 was further extended through December
31, 2012. Shares of stock purchased under the program are currently being held as treasury stock and may be used to satisfy the
exercise of options, as restricted stock, to fund acquisitions, or for other uses as authorized by the Board of Directors. During
the nine months ended September 30, 2012 and 2011, the Company did not repurchase any of its stock under the stock repurchase program.
During each of the first three quarters
of 2012, the Board of Directors approved a quarterly dividend of $0.09 per share payable to stockholders. Dividends paid were
$4,781 and $4,684 during the nine months ended September 30, 2012 and 2011, respectively.
5. Stock Based Compensation
Stock Option Awards
On May 8, 2012, the Company granted options
under the 2006 Stock Plan to purchase 10,000 shares of its common stock with an exercise price equal to the fair market value of
the Company’s stock at the close of trading on May 8, 2012 to new members of the management team. These options have a contractual
life of ten years and vest in five equal annual installments on the first five anniversaries of the date of the grant.
Restricted Stock Awards and Restricted Stock Units
Following the Annual Meeting of
Stockholders on May 8, 2012, the Company awarded restricted stock units with a grant date award value of $50 to each
non-employee director who was re-elected, for an aggregate of 25,044 restricted stock units. Each award of restricted
stock units vests at the date of the 2013 Annual Meeting of Stockholders. Upon vesting, the non-employee directors are
entitled to receive a number of shares of the Company's common stock equal to the number of restricted stock units,
together with dividend equivalents from the date of grant, at such time as the director’s service on the board
terminates for any reason.
Total share-based compensation cost
(benefit) was $272 and $257 for the three months ended September 30, 2012 and 2011, respectively, and $809 and $(968) for the
nine months ended September 30, 2012 and 2011, respectively. Total income tax benefit (expense) recognized for stock-based
compensation arrangements was $103 and $98 for the three months ended September 30, 2012 and 2011, respectively, and $310 and
$(375) for the nine months ended September 30, 2012 and 2011, respectively. The credit for share-based compensation for the
2011 period was due to the reversal of $2.0 million in June 2011 (of which $1.7 million was recognized prior to January 1,
2011) of compensation expense attributed to the change in the estimated forfeiture rate to 100% of non-vested options
previously awarded to our former chief executive officer, who left the Company effective December 31, 2011.
6. Commitments and Contingencies
As part of the June 25, 2010 acquisition
of Southwest Wire Rope and Southern Wire (“acquired businesses”), the Company assumed the liability for the post-remediation
monitoring of the water quality at one of the acquired facilities in Louisiana. Remediation work was completed prior to the acquisition
in accordance with the requirements of the Louisiana Department of Environmental Quality. The expected liability of $111 at September
30, 2012 relates to the cost of the monitoring, which the Company estimates will be incurred over approximately the next 5 years
and also the cost to plug the wells.
The Company, along with many other defendants,
has been named in a number of lawsuits in the state courts of Illinois, Minnesota, North Dakota, and South Dakota alleging that
certain wire and cable which may have contained asbestos caused injury to the plaintiffs who were exposed to this wire and cable.
These lawsuits are individual personal injury suits that seek unspecified amounts of money damages as the sole remedy. It is not
clear whether the alleged injuries occurred as a result of the wire and cable in question or whether the Company, in fact, distributed
the wire and cable alleged to have caused any injuries. The Company maintains general liability insurance that, to date, has covered
the defense of and all costs associated with these claims. In addition, the Company did not manufacture any of the wire and cable
at issue, and the Company would rely on any warranties from the manufacturers of such cable if it were determined that any of the
wire or cable that the Company distributed contained asbestos which caused injury to any of these plaintiffs. In connection with
ALLTEL's sale of the Company in 1997, ALLTEL provided indemnities with respect to costs and damages associated with these claims
that the Company believes it could enforce if its insurance coverage proves inadequate.
There are no legal proceedings pending
against or involving the Company that, in management’s opinion, based on the current known facts and circumstances, are expected
to have a material adverse effect on the Company’s consolidated financial position, cash flows, or results from operations.
7. Subsequent Events
On November 7, 2012, the Board of Directors
approved a dividend on the shares of common stock of the Company in the amount of $0.09 per share, payable on November 29, 2012,
to stockholders of record at the close of business on November 17, 2012.
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 Form 10-K for the year ended December 31, 2011.
Overview
We are one of the largest distributors
of wire and cable and related services in the U.S. market. We provide our customers with a single-source solution for wire and
cable, hardware and related services by offering a large selection of in-stock items, exceptional customer service and high levels
of product expertise.
Critical Accounting Policies
Critical accounting policies are those
that both are important to the accurate portrayal of a company's financial condition and results of operations, and require subjective
or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
In order to prepare financial statements
that conform to accounting principles generally accepted in the United States, commonly referred to as GAAP, we make estimates
and assumptions that affect the amounts reported in our financial statements and accompanying notes. Certain estimates are particularly
sensitive due to their significance to the financial statements and the possibility that future events may be significantly different
from our expectations.
We have identified the following accounting
policies as those that require us to make the most subjective or complex judgments in order to fairly present our consolidated
financial position and results of operations. Actual results in these areas could differ materially from management's estimates
under different assumptions and conditions.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts
receivable for estimated losses resulting from the inability of our customers to make required payments. We perform periodic credit
evaluations of our customers and typically do not require collateral. Consistent with industry practices, we require payment from
most customers within 30 days of invoice date. We have an estimation procedure, based on historical data, current economic conditions
and recent changes in the aging of these receivables, which we use to record reserves throughout the year. In the last five years,
write-offs against our allowance for doubtful accounts have averaged $0.1 million per year. A 20% change in our estimate at September
30, 2012 would have resulted in a change in income before income taxes of less than $0.1 million.
Reserve for Returns and Allowances
We estimate the gross profit impact of
returns and allowances for previously recorded sales. This reserve is calculated on historical and statistical returns and allowances
data and adjusted as trends in the variables change. A 20% change in our estimate at September 30, 2012 would have resulted in
a change in income before income taxes of $0.1 million.
Inventories
Inventories are valued at the lower of
cost, using the average cost method, or market. We continually monitor our inventory levels at each of our distribution centers.
Our reserve for inventory obsolescence is based on the age of the inventory, movements of our inventory over the prior twelve months
and the experience of our purchasing and sales departments in estimating demand for the product in the succeeding year. Our inventories
are generally not susceptible to technological obsolescence. A 20% change in our estimate at September 30, 2012 would have resulted
in a change in income before income taxes of $0.7 million.
Intangible Assets
The Company’s intangible assets,
excluding goodwill, represent purchased trade names and customer relationships. Trade names are not being amortized and are treated
as indefinite lived assets. Trade names are tested for recoverability on an annual basis in October of each year. In October 2012,
we began our annual test which is still in process. If this test indicates that an impairment has occurred, we will recognize the
loss in operating income. The Company assigns useful lives to its intangible assets based on the periods over which it expects
the assets to contribute directly or indirectly to the future cash flows of the Company. Customer relationships are amortized over
6 or 7 year useful lives. If events or circumstances were to indicate that any of the Company’s definite-lived intangible
assets might be impaired, the Company would assess recoverability based on the estimated undiscounted future cash flows to be generated
from the applicable intangible asset.
Vendor Rebates
Many of our arrangements with our vendors
entitle us to receive a rebate of a specified amount when we achieve any of a number of measures, generally related to the volume
of purchases from the vendor. We account for such rebates as a reduction of the prices of the vendor's products and therefore as
a reduction of inventory until we sell the product, at which time such rebates reduce cost of sales. Throughout the year, we estimate
the amount of rebates earned based on purchases to date relative to the total purchase levels expected to be achieved during the
rebate period. We continually revise these estimates to reflect rebates expected to be earned based on actual purchase levels and
forecasted purchase volumes for the remainder of the rebate period. A 20% change in our estimate of total rebates earned during
the nine months ended September 30, 2012 would have resulted in a change in income before income taxes of $1.1 million.
Goodwill
Goodwill represents the excess of the amount
we paid to acquire businesses over the estimated fair value of tangible assets and identifiable intangible assets acquired, less
liabilities assumed. At September 30, 2012, our goodwill balance was $25.1 million, representing 12.4% of our total assets.
We test goodwill for impairment annually,
or more frequently if indications of possible impairment exist, by applying a fair value-based test. Because the acquired businesses
were not meeting the internal performance expectations used in the October 2011 annual impairment test,
an
interim goodwill impairment test was performed as of July 31, 2012. This test was performed using the same methodology as used
for the annual test and the result indicated that no impairment had occurred.
In October 2012, we began our annual goodwill
impairment test which is still in process. If this test indicates that our fair market value has fallen below book value, we will
compare the estimated fair value of the goodwill to its carrying value. If the carrying value of goodwill exceeds the estimated
fair value of goodwill, we will recognize the difference as an impairment loss in operating income. We are still anticipating significant
growth in the acquired businesses, but if this growth is not achieved a goodwill impairment may result.
Results of Operations
The following table shows, for the periods
indicated, information derived from our consolidated statements of income, expressed as a percentage of net sales for the periods
presented.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
77.5
|
%
|
|
|
78.3
|
%
|
|
|
77.5
|
%
|
|
|
77.7
|
%
|
Gross profit
|
|
|
22.5
|
%
|
|
|
21.7
|
%
|
|
|
22.5
|
%
|
|
|
22.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and commissions
|
|
|
7.8
|
%
|
|
|
7.4
|
%
|
|
|
7.8
|
%
|
|
|
6.6
|
%
|
Other operating expenses
|
|
|
6.5
|
%
|
|
|
5.7
|
%
|
|
|
6.6
|
%
|
|
|
5.9
|
%
|
Depreciation and amortization
|
|
|
0.8
|
%
|
|
|
0.7
|
%
|
|
|
0.8
|
%
|
|
|
0.7
|
%
|
Total operating expenses:
|
|
|
15.0
|
%
|
|
|
13.8
|
%
|
|
|
15.1
|
%
|
|
|
13.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
7.4
|
%
|
|
|
7.9
|
%
|
|
|
7.4
|
%
|
|
|
9.1
|
%
|
Interest expense
|
|
|
0.3
|
%
|
|
|
0.4
|
%
|
|
|
0.3
|
%
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
7.1
|
%
|
|
|
7.6
|
%
|
|
|
7.1
|
%
|
|
|
8.7
|
%
|
Income taxes
|
|
|
2.7
|
%
|
|
|
2.9
|
%
|
|
|
2.7
|
%
|
|
|
3.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
4.4
|
%
|
|
|
4.7
|
%
|
|
|
4.4
|
%
|
|
|
5.4
|
%
|
Note: Due to rounding, percentages may not add up to total operating
expenses, operating income, income before taxes or net income.
Comparison of the Three Months Ended September 30, 2012 and
2011
Sales
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
(Dollars in millions)
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
Sales
|
|
$
|
96.1
|
|
|
$
|
105.8
|
|
|
$
|
(9.7
|
)
|
|
|
(9.1
|
)%
|
Sales in the third quarter of 2012
decreased 9.1% to $96.1 million from $105.8 million in the third quarter of 2011. We estimate sales were negatively impacted approximately
6% due to metals deflation in copper and steel. Project business in our long term internal growth initiatives encompassing Environmental
Compliance, Engineering & Construction, Industrials, LifeGuard™ (and other private branded products) and Utility Power
Generation, decreased approximately 11% as new inflow of multiple smaller projects was unable to offset record prior year mega
project sales. Maintenance, Repair and Operations sales decreased approximately 8% due to continued post-recession weakness in
certain regional markets.
Gross Profit
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
(Dollars in millions)
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
Gross profit
|
|
$
|
21.6
|
|
|
$
|
23.0
|
|
|
$
|
(1.4
|
)
|
|
|
(6.1
|
)%
|
Gross profit as a percent of sales
|
|
|
22.5
|
%
|
|
|
21.7
|
%
|
|
|
0.8
|
%
|
|
|
|
|
Gross profit decreased 6.1% to $21.6 million
in 2012 from $23.0 million in 2011. The decrease in gross profit was primarily attributed to the reduction in sales. Gross profit
as a percentage of sales (gross margin) increased to 22.5% in 2012 from 21.7% in 2011. This increase is attributed to an increased
focus on higher gross margin products and reduced customer rebates due to lower sales.
Operating Expenses
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
(Dollars in millions)
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and commissions
|
|
$
|
7.5
|
|
|
$
|
7.8
|
|
|
$
|
(0.3
|
)
|
|
|
(4.4
|
)%
|
Other operating expenses
|
|
|
6.3
|
|
|
|
6.1
|
|
|
|
0.2
|
|
|
|
3.0
|
%
|
Depreciation and amortization
|
|
|
0.7
|
|
|
|
0.7
|
|
|
|
(0.0
|
)
|
|
|
(0.6
|
)%
|
Total operating expenses
|
|
$
|
14.5
|
|
|
$
|
14.6
|
|
|
$
|
(0.2
|
)
|
|
|
(1.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses as a percent of sales
|
|
|
15.0
|
%
|
|
|
13.8
|
%
|
|
|
1.2
|
%
|
|
|
|
|
Note: Due to rounding, numbers
may not add up to total operating expenses.
Salaries and commissions decreased 4.4%
to $7.5 million in 2012 from $7.8 million in 2011. The decrease was due to lower commissions relating to the reduced levels of
profitability and sales, partially offset by increased salaries resulting from the additional headcount.
Other operating expenses increased slightly,
primarily due to costs associated with the additional headcount.
Depreciation and amortization remained
consistent between the periods at $0.7 million.
Operating expenses as a percentage of sales
increased to 15.0% in 2012 from 13.8% in 2011 due to increased operating expenses combined with a reduction in sales.
Interest Expense
Interest expense decreased 10.0% to $0.3
million in 2012 from $0.4 million in 2011 due to lower LIBOR interest rates and a higher percentage of the debt in LIBOR borrowings.
Average debt was $62.6 million in 2012 compared to $61.9 million in 2011. The average effective interest rate decreased to 2.0%
in 2012 from 2.3% in 2011. This decrease was primarily due to a lower applicable LIBOR spread as a result of the higher availability
under the loan agreement in 2012.
Income Taxes
Income tax expense decreased $0.5 million
or 15.1% to $2.6 million in 2012 compared to $3.1 million in 2011. The effective income tax rate decreased slightly to 38.0% in
2012 from 38.1% in 2011.
Net Income
We achieved net income of $4.2 million
in 2012 compared to $5.0 million in 2011, a decrease of 14.8%.
Comparison of the Nine Months Ended September 30, 2012 and
2011
Sales
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
(Dollars in millions)
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
Sales
|
|
$
|
288.7
|
|
|
$
|
308.9
|
|
|
$
|
(20.3
|
)
|
|
|
(6.6
|
)%
|
Sales in the nine month period ended September
30, 2012 decreased 6.6% to $288.7 million from $308.9 million in the nine month period ended September 30, 2011. We
estimate sales were negatively impacted approximately 3% due to metal deflation in copper and steel. Our project business encompassing
our five long term internal growth initiatives, Emission Controls, Engineering & Construction, Industrials,
LifeGuard™ (and other private branded products) and Utility Power Generation was down approximately 7%, primarily due to
the absence of mega projects in the current period. MRO business also decreased approximately 6% due to continued post-recession
weakness in certain regional markets.
Gross Profit
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
(Dollars in millions)
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
Gross profit
|
|
$
|
65.0
|
|
|
$
|
69.0
|
|
|
$
|
(4.0
|
)
|
|
|
(5.8
|
)%
|
Gross profit as a percent of sales
|
|
|
22.5
|
%
|
|
|
22.3
|
%
|
|
|
0.2
|
%
|
|
|
|
|
Gross profit decreased 5.8% to $65.0 million
in 2012 from $69.0 million in 2011. The decrease in gross profit was primarily attributed to the reduction in sales. Gross profit
as a percentage of sales (gross margin) increased slightly to 22.5% in 2012 from 22.3% in 2011.
Operating Expenses
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
(Dollars in millions)
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and commissions
|
|
$
|
22.4
|
|
|
$
|
20.5
|
|
|
$
|
1.9
|
|
|
|
9.1
|
%
|
Other operating expenses
|
|
|
18.9
|
|
|
|
18.1
|
|
|
|
0.8
|
|
|
|
4.4
|
%
|
Depreciation and amortization
|
|
|
2.2
|
|
|
|
2.3
|
|
|
|
(0.1
|
)
|
|
|
(2.5
|
)%
|
Total operating expenses
|
|
$
|
43.5
|
|
|
$
|
40.9
|
|
|
$
|
2.6
|
|
|
|
6.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses as a percent of sales
|
|
|
15.1
|
%
|
|
|
13.2
|
%
|
|
|
1.9
|
%
|
|
|
|
|
Note: Due to rounding, numbers may
not add up to total operating expenses.
Salaries and commissions increased 9.1%
primarily due to a one time reversal during 2011 relating to $1.7 million of salary expense recognized prior to January 1, 2011
attributed to the change in the estimated forfeiture rate to 100% of non-vested options previously awarded to our former chief
executive officer. The additional headcount in 2012 also contributed to the increased salary expense but was partially offset by
lower commissions relating to lower profitability.
Other operating expenses increased primarily
due to costs associated with a higher headcount and increased property taxes. There was also an increase in consulting and professional
fees during the 2012 period.
Depreciation and amortization decreased
slightly to $2.2 million in 2012 from $2.3 million in 2011.
Operating expenses as a percentage of sales
increased to 15.1% in 2012 from 13.2% in 2011 due to increased operating expenses combined with a reduction in sales. Excluding
the reversal of salary expense relating to the forfeited non-vested options, operating expense as a percent of sales in 2011 would
have been 13.8%.
Interest Expense
Interest expense decreased 15.5% to $0.9
million in 2012 from $1.1 million in 2011 due to lower average debt and LIBOR interest rates. Average debt was $57.0 million in
2012 compared to $60.4 million in 2011. The average effective interest rate decreased to 2.1% in 2012 from 2.3% in 2011. This decrease
was primarily due to a lower applicable LIBOR spread as a result of the higher availability under the loan agreement in 2012.
Income Taxes
Income tax expense decreased $2.5 million
or 23.7% to $7.9 million in 2012 compared to $10.3 million in 2011. The effective income tax rate remained consistent between periods
at 38.4%.
Net Income
We achieved net income of $12.7 million
in 2012 compared to $16.6 million in 2011, a decrease of 23.8%. Excluding the after tax impact of the forfeited non-vested options
of $1.0 million, the decrease was 18.7%.
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 and petrochemical products are components
of the wire and cable we sell, fluctuations in the costs of these and other commodities have historically affected our operating
results. To the extent we are unable to pass on to our customers cost increases due to inflation or rising commodity prices, it
could adversely affect our operating results. To the extent commodity prices decline, the net realizable value of our existing
inventory could be reduced, and our gross profits could be adversely affected. If we turn our inventory approximately four
times a year, the impact of severe fluctuations in copper and steel prices would primarily affect the results of the succeeding
calendar quarter.
Liquidity and Capital Resources
Our primary capital needs are for working
capital obligations, capital expenditures, dividend payments and other general corporate purposes, including acquisitions and the
stock repurchase program. Our primary sources of working capital are cash from operations supplemented by bank borrowings.
Liquidity is defined as the ability to
generate adequate amounts of cash to meet the current need for cash. We assess our liquidity in terms of our ability to generate
cash to fund our operating activities. Significant factors which could affect liquidity include the following:
|
•
|
the adequacy of available bank lines of credit;
|
|
•
|
the ability to attract long-term capital with satisfactory terms;
|
|
•
|
cash flows generated from operating activities;
|
|
•
|
capital expenditures;
|
|
•
|
payment of dividends;
|
|
•
|
acquisitions; and
|
|
•
|
additional stock repurchases.
|
Comparison of the Nine Months Ended September 30, 2012 and
2011
Our net cash used in operating activities
was $11.6 million in 2012 compared to $0.7 million in 2011. Our net income decreased by $4.0 million or 23.8% to $12.7 million
in 2012 from $16.6 million in 2011.
Changes in our operating assets and liabilities
resulted in cash used in operating activities of $27.2 million in 2012. Inventories increased $20.2 million to support anticipated
sales activity, the geographic expansion of product lines and the addition of new product lines. The increase in accounts receivable
of $7.3 million is due to higher sales partially offset by lower days sales outstanding. Accrued and other current liabilities
decreased $5.7 million due to lower prepayments on cable management orders as most of these projects shipped in 2012, a reduction
in volume rebates payable to our customers and reduced payroll related accruals.
Offsetting these uses of cash was an increase
in accounts payable of $3.2 million due to the purchase of additional inventory, a decrease in income taxes receivable of $1.5
million and an increase in the book overdraft, which increased $1.2 million and is funded by our revolving credit facility as soon
as the related vendor checks clear our disbursement account.
Net cash used in investing activities was
$0.7 million in 2012 compared to $1.1 million in 2011. The decrease was primarily due to the cash paid for acquisition of $0.3
million in 2011.
Net cash provided by financing activities
was $12.4 million in 2012 compared to $1.8 million in 2011. Net borrowings of $17.0 million and the payment of dividends of $4.8
million were the main components of financing activities in 2012.
Indebtedness
Our principal source of liquidity at September
30, 2012 was working capital of $129.4 million compared to $102.6 million at December 31, 2011. We also had available borrowing
capacity of approximately $35.0 million at September 30, 2012 and at December 31, 2011 under our loan agreement.
We believe that we will have adequate availability
of capital to fund our present operations, meet our commitments on our existing debt, continue the stock repurchase program, continue
to fund our dividend payments, and fund anticipated growth over the next twelve months, including expansion in existing and targeted
market areas. We continually seek potential acquisitions and from time to time hold discussions with acquisition candidates. If
further suitable acquisition opportunities or working capital needs arise that would require additional financing, we believe that
our financial position and earnings history provide a solid base for obtaining additional financing resources at competitive rates
and terms. Additionally, based on market conditions, we may decide to issue additional shares of common or preferred stock to raise
funds.
Loan and Security Agreement
On September 30, 2011, we entered into
a Third Amended and Restated Loan and Security Agreement (the “2011 Loan Agreement”) with certain lenders and Bank
of America, N.A., as agent. The 2011 Loan Agreement provides for a $100 million revolving credit facility and expires on September
30, 2016. Availability under the 2011 Loan Agreement is limited to a borrowing base equal to 85% of the value of eligible accounts
receivable, plus 65% of the value of eligible inventory, less certain reserves. The 2011 Loan Agreement is secured by a lien on
substantially all our property, other than real estate.
Portions of the loan under the 2011 Loan
Agreement may be converted to LIBOR loans in minimum amounts of $1.0 million and integral multiples of $0.1 million. LIBOR loans
bear interest at the British Bankers Association LIBOR Rate plus 125 to 200 basis points based on availability, and loans not converted
to LIBOR loans bear interest at a fluctuating rate equal to the greatest of the agent’s prime rate, the federal funds rate
plus 50 basis points, or 30-day LIBOR plus 150 basis points. Additionally, we are obligated to pay an unused facility fee on the
unused portion of the loan commitment. Unused commitment fees are 25 or 30 basis points, depending on the amount of the unused
commitment.
Covenants in the 2011 Loan Agreement require
us to maintain certain minimum financial ratios and availability levels. Repaid amounts can be re-borrowed subject to the borrowing
base. As of September 30, 2012, we were in compliance with all financial covenants.
Contractual Obligations
The following table summarizes our loan commitment at September
30, 2012:
In thousands
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More
than
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
64,993
|
|
|
$
|
—
|
|
|
$
|
64,993
|
|
|
$
|
—
|
|
|
$
|
—
|
|
There were no material changes in operating
lease obligations or non-cancellable purchase obligations since December 31, 2011.
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, 2011, as well as any 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.