The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
Notes to Consolidated Financial Statements
(dollars in thousands, except
share and per share data)
|
1.
|
Organization and Summary of Significant Accounting
Policies
|
Description of Business
Houston Wire & Cable Company (the
“Company”), through its wholly owned subsidiaries, HWC Wire & Cable Company, Advantage Wire & Cable and
Cable Management Services Inc., provides wire and cable, hardware and related services to the U.S. market through nineteen
locations in twelve states throughout the United States. On June 25, 2010, the Company purchased Southwest Wire Rope LP
(“SWWR”), its general partner Southwest Wire Rope GP LLC (“GP”) and SWWR’s wholly owned
subsidiary, Southern Wire (“SW”) (collectively “the acquired businesses”, or “the
acquisition”). On January 1, 2011, the acquired businesses were merged into HWC Wire & Cable Company. The Company
has no other business activity.
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include
the accounts of the Company and its subsidiaries and have been prepared following accounting principles generally accepted in the
United States (“GAAP”) and the requirements of the Securities and Exchange Commission (“SEC”). The financial
statements include all normal and recurring adjustments that are necessary for a fair presentation of the Company’s financial
position and operating results. All significant inter-company balances and transactions have been eliminated.
Use of Estimates
The preparation of the financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. The most significant estimates are those relating to the allowance for doubtful accounts, the
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 for the preparation of the financial statements.
Earnings per Share
Basic earnings per share is calculated
by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share include the dilutive
effects of stock option and restricted stock awards.
The following reconciles the denominator
used in the calculation of earnings per share:
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares for basic earnings per share
|
|
|
17,723,277
|
|
|
|
17,679,524
|
|
|
|
17,657,682
|
|
Effect of dilutive securities
|
|
|
92,124
|
|
|
|
121,610
|
|
|
|
52,441
|
|
Denominator for diluted earnings per share
|
|
|
17,815,401
|
|
|
|
17,801,134
|
|
|
|
17,710,123
|
|
Options to purchase 525,846, 811,939
and 882,455 shares of common stock were not included in the diluted net income per share calculation for 2012, 2011 and 2010, respectively,
as their inclusion would have been anti-dilutive. The 2011 and 2010 amounts include 490,385 options and 532,500 options, respectively,
held by the former CEO who retired effective December 31, 2011.
Accounts Receivable
Accounts receivable consists primarily
of receivables from customers, less an allowance for doubtful accounts of $213 and $211, and a reserve for returns and allowances
of $491 and $552 at December 31, 2012 and 2011, respectively. Consistent with industry practices, the Company normally requires
payment from most customers within 30 days. The Company has no contractual repurchase arrangements with its customers. Credit
losses have been within management’s expectations.
The following table summarizes the changes
in the allowance for doubtful accounts for the past three years:
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Balance at beginning of year
|
|
$
|
211
|
|
|
$
|
358
|
|
|
$
|
282
|
|
Acquisition
|
|
|
—
|
|
|
|
—
|
|
|
|
173
|
|
Bad debt expense
|
|
|
(19
|
)
|
|
|
(9
|
)
|
|
|
93
|
|
Write-offs, net of recoveries
|
|
|
21
|
|
|
|
(138
|
)
|
|
|
(190
|
)
|
Balance at end of year
|
|
$
|
213
|
|
|
$
|
211
|
|
|
$
|
358
|
|
Inventories
Inventories are carried at the lower of
cost, using the average cost method, or market and consist primarily of goods purchased for resale, less a reserve for obsolescence
and unusable items and unamortized vendor rebates. The reserve for inventory is based upon a number of factors, including the experience
of the purchasing and sales departments, age of the inventory, new product offerings, and other factors. The reserve for inventory
may periodically require adjustment as the factors identified above change. The inventory reserve was $3,746 and $2,975 at December 31,
2012 and 2011, respectively.
Vendor Rebates
Under many of the Company’s arrangements
with its vendors, the Company receives a rebate of a specified amount of consideration, payable when the Company achieves any of
a number of measures, generally related to the volume level of purchases from the vendors. The Company accounts for such rebates
as a reduction of the prices of the vendors’ products and therefore as a reduction of inventory until it sells the products,
at which time such rebates reduce cost of sales in the accompanying consolidated statements of income. Throughout the year, the
Company estimates the amount of the rebates earned based on purchases to date relative to the total purchase levels expected to
be achieved during the rebate period. The Company continually revises these estimates to reflect rebates expected to be earned
based on actual purchase levels and forecasted purchase volumes for the remainder of the rebate period.
Property and Equipment
The Company provides for depreciation on
a straight-line method over the following estimated useful lives:
Buildings
|
25 to 30 years
|
Machinery and equipment
|
3 to 5 years
|
Leasehold improvements are depreciated
over their estimated life or the term of the lease, whichever is shorter. Total depreciation expense was approximately $1,208,
$1,095, and $805 for the years ended December 31, 2012, 2011 and 2010, respectively.
Goodwill
Goodwill represents the excess of the
amount the Company paid to acquire businesses over the estimated fair value of tangible assets and identifiable intangible
assets acquired, less liabilities assumed. Goodwill is not amortized but is reviewed annually for impairment, 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. The annual test in October 2012 also indicated that no
impairment had occurred. The fair value of the Southern Wire reporting unit exceeded its carrying value by approximately 11%
and its goodwill balance was $20.1 million at December 31, 2012. The Company is still anticipating significant growth in the
acquired businesses, but if this growth is not achieved a goodwill impairment may result.
Other Assets
Other assets include deferred financing
costs on the current loan agreement of $100. The deferred financing costs are amortized on a straight-line basis over the contractual
life of the related loan agreement, which approximates the effective interest method, and such amortization expense is included
in interest expense in the accompanying consolidated statements of income. Accumulated amortization at December 31, 2012 and
2011 was approximately $32 and $14, respectively.
Estimated future amortization expense for
capitalized loan costs through the maturity of the loan agreement are $18 for each of the years 2013 through 2015 and $14 in 2016.
Intangibles
Intangible assets, from the acquisition,
consist of customer relationships, trade names, and non-compete agreements. The customer relationships are amortized over 6 or
7 year useful lives and non-compete agreements were amortized over a 1 year useful life. If events or circumstances were to indicate
that any of the Company’s definite-lived intangible assets might be impaired, the Company would assess recoverability based
on the estimated undiscounted future cash flows to be generated from the applicable intangible asset. Trade names are not being
amortized and are tested for impairment on an annual basis.
Self Insurance
The Company retains certain self-insurance
risks for both health benefits and property and casualty insurance programs. The Company limits its exposure to these self insurance
risks by maintaining excess and aggregate liability coverage. Self insurance reserves are established based on claims filed and
estimates of claims incurred but not reported. The estimates are based on information provided to the Company by its claims administrators.
Segment Reporting
The Company operates in a single operating
and reporting segment, sales of wire and cable, hardware and related services to the U.S. market.
Revenue Recognition, Returns & Allowances
The Company recognizes revenue when the
following four basic criteria have been met:
1. Persuasive
evidence of an arrangement exists;
2. Delivery
has occurred or services have been rendered;
3. The seller’s
price to the buyer is fixed or determinable; and
4. Collectability
is reasonably assured.
The Company records revenue when customers
take delivery of products. Customers may pick up products at any distribution center location, or products may be delivered via
third party carriers. Products shipped via third party carriers are considered delivered based on the shipping terms, which are
generally FOB shipping point. Normal payment terms are net 30 days. Customers are permitted to return product only on a case-by-case
basis. Product exchanges are handled as a credit, with any replacement items being re-invoiced to the customer. Customer returns
are recorded as an adjustment to sales. In the past, customer returns have not been material. The Company has no installation obligations.
The Company may offer sales incentives,
which are accrued monthly as an adjustment to sales.
Shipping and Handling
The Company incurs shipping and handling
costs in the normal course of business. Freight amounts invoiced to customers are included as sales and freight charges are included
as a component of cost of sales.
Credit Risk
The Company’s customers are located
primarily throughout the United States. No single customer accounted for 10% or more of the Company’s sales in 2012, 2011
or 2010. The Company performs periodic credit evaluations of its customers and generally does not require collateral.
Advertising Costs
Advertising costs are expensed when incurred.
Advertising expenses were $314, $212, and $163 for the years ended December 31, 2012, 2011, and 2010, respectively.
Financial Instruments
The carrying values of accounts receivable,
trade accounts payable and accrued and other current liabilities approximate fair value, due to the short maturity of these instruments.
The carrying amount of long term debt approximates fair value as it bears interest at variable rates.
Stock-Based Compensation
Stock options issued under the Company’s
stock plan have an exercise price equal to the fair value of the Company’s stock on the grant date. Restricted stock awards
and units are valued at the closing price of the Company’s stock on the grant date. The Company recognizes compensation expense
ratably over the vesting period. The Company’s compensation expense is included in salaries and commissions expense in the
accompanying consolidated statements of income.
The Company receives a tax deduction for
certain stock option exercises in the period in which the options are exercised, generally for the excess of the market price on
the date of exercise over the exercise price of the options. The Company reports excess tax benefits from the award of equity instruments
as financing cash flows. Excess tax benefits result when a deduction reported for tax return purposes for an award of equity instruments
exceeds the cumulative compensation cost for the instruments recognized for financial reporting purposes.
Income Taxes
Deferred tax assets and liabilities are
determined based on differences between the carrying amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes and are measured using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
|
2.
|
Detail of Selected Balance Sheet Accounts
|
Property and Equipment
Property and equipment are stated at cost and consist
of:
|
|
At December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Land
|
|
$
|
1,187
|
|
|
$
|
1,187
|
|
Buildings
|
|
|
3,466
|
|
|
|
3,411
|
|
Machinery and equipment
|
|
|
9,646
|
|
|
|
8,810
|
|
|
|
|
14,299
|
|
|
|
13,408
|
|
Less accumulated depreciation
|
|
|
8,475
|
|
|
|
7,379
|
|
Total
|
|
$
|
5,824
|
|
|
$
|
6,029
|
|
Intangibles assets
Intangibles assets consist of:
|
|
At December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Trade names
|
|
$
|
4,610
|
|
|
$
|
4,610
|
|
Customer relationships
|
|
|
11,630
|
|
|
|
11,630
|
|
Non-compete agreements
|
|
|
250
|
|
|
|
250
|
|
|
|
|
16,490
|
|
|
|
16,490
|
|
Less accumulated amortization
|
|
|
|
|
|
|
|
|
Trade names
|
|
|
—
|
|
|
|
—
|
|
Customer relationships
|
|
|
4,273
|
|
|
|
2,540
|
|
Non-compete agreements
|
|
|
250
|
|
|
|
250
|
|
|
|
|
4,523
|
|
|
|
2,790
|
|
Total
|
|
$
|
11,967
|
|
|
$
|
13,700
|
|
Intangible assets include
customer relationships which are being amortized over 6 or 7 year useful lives and non-compete agreements which were
amortized over a 1 year useful life. The weighted average amortization period for intangible assets is 6.6 years. Trade names
are not amortized; however, they are tested annually for impairment. As of December 31, 2012, accumulated amortization on the acquired
intangible assets was $4,523, and amortization expense was $1,733 and $1,857 for the years ended December 31, 2012 and 2011
and $933 from the date of the acquisition through December 31, 2010, respectively. Future amortization expense to be
recognized on the acquired intangible assets is expected to be as follows:
|
|
Annual
Amortization
Expense
|
|
2013
|
|
$
|
1,733
|
|
2014
|
|
|
1,733
|
|
2015
|
|
|
1,733
|
|
2016
|
|
|
1,512
|
|
2017
|
|
|
646
|
|
Goodwill
Changes in goodwill were as follows:
|
|
At December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Balance at beginning of year
|
|
$
|
25,082
|
|
|
$
|
25,082
|
|
Current year acquisitions
|
|
|
—
|
|
|
|
—
|
|
Balance at end of year
|
|
$
|
25,082
|
|
|
$
|
25,082
|
|
Accrued and Other Current Liabilities
Accrued and other current liabilities consist
of:
|
|
At December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Customer advances
|
|
$
|
429
|
|
|
$
|
2,539
|
|
Customer rebates
|
|
|
4,383
|
|
|
|
5,112
|
|
Payroll, commissions, and bonuses
|
|
|
2,553
|
|
|
|
3,760
|
|
Accrued inventory purchases
|
|
|
5,107
|
|
|
|
4,324
|
|
Other
|
|
|
2,907
|
|
|
|
3,366
|
|
Total
|
|
$
|
15,379
|
|
|
$
|
19,101
|
|
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 December 31, 2012, the Company was in compliance with the financial covenants
governing its indebtedness.
The Company’s borrowings at December
31, 2012 and 2011 were $58,588 and $47,967, respectively. The weighted average interest rates on outstanding borrowings were 1.8%
and 2.3% at December 31, 2012 and 2011, respectively.
During 2012, the Company had an average
available borrowing capacity of approximately $39,295. This average was computed from the monthly borrowing base certificates prepared
for the lender. At December 31, 2012, the Company had available borrowing capacity of $41,380 under the terms of the 2011
Loan Agreement. During the years ended December 31, 2012, 2011 and 2010, the Company paid $101, $71, and $108, respectively,
for the unused facility.
Principal repayment
obligations for succeeding fiscal years are as follows:
2013
|
|
$
|
—
|
|
2014
|
|
|
—
|
|
2015
|
|
|
—
|
|
2016
|
|
|
58,588
|
|
2017
|
|
|
—
|
|
Total
|
|
$
|
58,588
|
|
The provision (benefit) for income taxes
consists of:
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
10,129
|
|
|
$
|
10,612
|
|
|
$
|
6,392
|
|
State
|
|
|
1,279
|
|
|
|
1,381
|
|
|
|
754
|
|
Total current
|
|
|
11,408
|
|
|
|
11,993
|
|
|
|
7,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(703
|
)
|
|
|
258
|
|
|
|
(1,457
|
)
|
State
|
|
|
(70
|
)
|
|
|
25
|
|
|
|
(146
|
)
|
Total deferred
|
|
|
(773
|
)
|
|
|
283
|
|
|
|
(1,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,635
|
|
|
$
|
12,276
|
|
|
$
|
5,543
|
|
A reconciliation of the U.S. Federal statutory
tax rate to the effective tax rate on income before taxes is as follows:
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State taxes, net of federal benefit
|
|
|
2.8
|
|
|
|
2.8
|
|
|
|
2.8
|
|
Non-deductible items
|
|
|
0.6
|
|
|
|
0.6
|
|
|
|
0.6
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
0.7
|
|
Total effective tax rate
|
|
|
38.4
|
%
|
|
|
38.4
|
%
|
|
|
39.1
|
%
|
Significant components of the Company’s
deferred taxes were as follows:
|
|
Year Ended
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Uniform capitalization adjustment
|
|
$
|
796
|
|
|
$
|
875
|
|
Inventory reserve
|
|
|
1,442
|
|
|
|
1,146
|
|
Allowance for doubtful accounts
|
|
|
82
|
|
|
|
81
|
|
Stock compensation expense
|
|
|
1,928
|
|
|
|
1,685
|
|
Property and equipment
|
|
|
43
|
|
|
|
—
|
|
Other
|
|
|
29
|
|
|
|
31
|
|
Total deferred tax assets
|
|
|
4,320
|
|
|
|
3,818
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
—
|
|
|
|
14
|
|
Goodwill
|
|
|
834
|
|
|
|
613
|
|
Intangibles
|
|
|
2,701
|
|
|
|
3,173
|
|
Total deferred tax liabilities
|
|
|
3,535
|
|
|
|
3,800
|
|
Net deferred tax assets
|
|
$
|
785
|
|
|
$
|
18
|
|
The Company recognizes interest on any
tax issue as a component of interest expense and any related penalties in other operating expenses. As of December 31, 2012, 2011
and 2010, the Company made no provisions for interest or penalties related to uncertain tax positions. The tax years 2008 through
2012 remain open to examination by the major taxing jurisdictions to which the Company is subject.
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 years ended December 31, 2012 and 2011, the Company did not repurchase any of its stock under the stock repurchase program.
As of December 31, 2012, the Company had made total repurchases under the stock repurchase program of 3,391,854 shares for a total
cost of $55,615. This program expired on December 31, 2012.
Under the terms of the 2006 Stock Plan,
the Company repurchased 35,214 shares that were surrendered by the holders to fund the exercise of the related awards and to pay
withholding taxes in 2012. These repurchases were not made under the stock repurchase program.
The Company has paid a quarterly cash dividend
since August 2007, resulting in aggregate dividends in 2012, 2011 and 2010 of $6,375, $6,276 and $6,003, respectively.
The Company is authorized to issue 5,000,000
shares of preferred stock, par value $.001 per share. The Board of Directors is authorized to fix the particular preferences, rights,
qualifications and restrictions of each series of preferred stock. In connection with the adoption of a stockholder rights plan,
which was subsequently terminated, the Board of Directors designated 100,000 shares as Series A Junior Participating Preferred
Stock. No shares of preferred stock have been issued.
|
6.
|
Employee Benefit Plans
|
The Company maintains a combination profit-sharing
plan and salary deferral plan (the “Plan”) for the benefit of its employees. Employees who are eligible to participate
in the Plan can contribute a percentage of their base compensation, up to the maximum percentage allowable not to exceed the limits
of Internal Revenue Code (“Code”) Sections 401(k), 404, and 415, subject to the IRS-imposed dollar limit. Employee
contributions are invested in certain equity and fixed-income securities, based on employee elections. The Company has adopted
the Safe Harbor provisions of the Code, whereby contributions up to the first 3% of an employee’s compensation are matched
100% by the Company and the next 2% are matched 50% by the Company. The Company’s match for the years ended December 31,
2012, 2011 and 2010 was $735, $727, and $599, respectively.
On March 23, 2006, the Company adopted
and on May 1, 2006, the stockholders approved the 2006 Stock Plan (the “2006 Plan”) to provide incentives for certain
key employees and directors through awards of stock options and restricted stock awards and units. The 2006 Plan provides for incentives
to be granted at the fair market value of the Company’s common stock at the date of grant and may be either nonqualified
stock options or incentive stock options as defined by Section 422 of the Code. Under the 2006 Plan a maximum of 1,800,000 shares
may be issued to designated participants. The maximum number of shares available to any one participant in any one calendar year
is 500,000.
The Company also has options outstanding
under a stock option plan adopted in 2000 (the “2000 Plan”). The 2000 Plan provided for options to be granted at the
fair market value of the Company’s common stock at the date of the grant, which options could be either nonqualified stock
options or incentive stock options as defined by Section 422 of the Code. In connection with the adoption of the 2006 Plan, the
Board of Directors resolved that no further options would be granted under the 2000 Plan.
Stock Option Awards
The Company has granted options to purchase
its common stock to employees and directors of the Company under the two stock plans at no less than the fair market value of the
underlying stock on the date of grant. These options are granted for a term not exceeding ten years and may be forfeited in the
event the employee or director terminates his or her employment or relationship with the Company. Options granted to employees
generally vest over three to five years, and options granted to directors generally vest one year after the date of grant. Shares
issued to satisfy the exercise of options may be newly issued shares or treasury shares. Both option plans contain anti-dilutive
provisions that permit an adjustment of the number of shares of the Company’s common stock represented by each option for
any change in capitalization. Compensation cost for options granted is charged to expense on a straight line basis over the term
of the option.
On May 8, 2012, the Company granted options
under the 2006 Stock Plan to purchase 10,000 shares of its common stock with an exercise price equal to the fair market value of
the Company’s stock at the close of trading on May 8, 2012 to new members of the management team. These options have a contractual
life of ten years and vest in five equal annual installments on the first five anniversaries of the date of the grant.
On December 20, 2011, the Company granted
options to purchase 64,330 shares and 8,580 shares of its common stock to the Company’s President (as part of his overall
compensation plan commensurate upon assuming the Chief Executive Officer role effective January 1, 2012) with the exercise price
equal to the fair market value of the Company’s stock at the close of trading on December 20, 2011. The first option
grant has a contractual life of ten years and vests 50% on December 31, 2016 and the remaining 50% on December 31, 2017. The second
grant also has a contractual life of ten years and vests in five equal annual installments on the first five anniversaries of the
date of the grant. Both grants provide that in the event of the Chief Executive Officer’s death or permanent disability,
such options would vest ratably based on the days served from the date of grant.
On December 20, 2011, the Company granted
options to purchase 97,500 shares of its common stock to its managers with the exercise price equal to the fair market value of
the Company’s stock at the close of business on December 20, 2011. This grant has a contractual life of ten years and vests
in five equal annual installments on the first five anniversaries of the date of the grant.
The fair value of each option awarded is
estimated on the date of grant using a Black-Scholes option-pricing model. Expected volatilities are based on historical volatility
of the Company’s stock and other factors. The Company uses
historical data to estimate option exercises and employee terminations within the valuation model. The expected life of options
granted represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within
the life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. For options issued, the following
weighted average assumptions were used:
|
|
Year Ended
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Risk-free interest rate
|
|
|
0.89
|
%
|
|
|
1.01
|
%
|
|
|
1.86
|
%
|
Expected dividend yield
|
|
|
3.01
|
%
|
|
|
2.55
|
%
|
|
|
2.80
|
%
|
Weighted average expected life
|
|
|
5.5 years
|
|
|
|
5.5 years
|
|
|
|
4.5 years
|
|
Expected volatility
|
|
|
64
|
%
|
|
|
65
|
%
|
|
|
64
|
%
|
Vesting dates range from May 8, 2013 to December
31, 2017, and expiration dates range from January 1, 2014 to May 8, 2022. The following summarizes stock option activity and
related information:
|
|
2012
|
|
|
|
Options
(in 000’s)
|
|
|
Weighted
Average
Exercise Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Weighted
Average
Remaining
Contractual Life
(in years)
|
|
Outstanding—Beginning of year
|
|
|
837
|
|
|
$
|
14.25
|
|
|
$
|
1,430
|
|
|
|
|
|
Granted
|
|
|
10
|
|
|
|
11.98
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(54
|
)
|
|
|
9.02
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(11
|
)
|
|
|
12.77
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(4
|
)
|
|
|
0.53
|
|
|
|
|
|
|
|
|
|
Outstanding—End of year
|
|
|
778
|
|
|
$
|
14.67
|
|
|
$
|
656
|
|
|
|
6.17
|
|
Exercisable—End of year
|
|
|
547
|
|
|
$
|
15.38
|
|
|
$
|
558
|
|
|
|
5.22
|
|
Weighted average fair value of options granted during 2012
|
|
$
|
5.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during 2011
|
|
$
|
6.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during 2010
|
|
$
|
5.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2012,
2011 and 2010, tax benefits of $35, $37 and $7, respectively, were reflected in financing cash flows.
The total intrinsic value of options exercised
during the years ended December 31, 2012, 2011 and 2010 was $258, $277 and $77, respectively.
The total fair value of options vested
during the years ended December 31, 2012, 2011 and 2010 was $404, $3,890 and $703, respectively. The December 31, 2011 amount
includes vested options of the retired former chief executive officer in the amount of $2,993. These options expired upon his departure.
Restricted Stock Awards and Restricted Stock Units
On December 17, 2012, the Company granted
56,250 voting shares of restricted stock under the 2006 Plan to management. These shares vest in one third increments, on the third,
fourth and fifth anniversaries of the date of grant. Any dividends declared will be accrued and paid to the recipient if and when
the related shares vest as long as the recipient is still employed by the Company.
Following the Annual Meeting of Stockholders
on May 8, 2012, the Company awarded restricted stock units with a grant date 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.
On December 20, 2011, the Company granted
a restricted stock award to the Company’s President (as part of his overall compensation plan commensurate upon assuming
the Chief Executive Officer role effective January 1, 2012) in the amount of 26,576 shares. The grant vests in two equal amounts
on December 31, 2016 and December 31, 2017.
The Company also granted performance based
restricted stock awards to the Company’s President on December 20, 2011 and December 17, 2012 in the amount of 14,175 shares
and 17,953 shares respectively. These awards are based on the Company achieving at least 85% of a cumulative operating income target
for the three year period commencing January 1, 2012 and ending December 31, 2014 for the 2011 grant and the three year period
commencing January 1, 2013 and ending December 31, 2015 for the 2012 grant. Each award will vest at the 100% level if the Company
achieves 100% or more of the cumulative operating income target and on a sliding scale down to 0% vesting if the Company achieves
less than 85% of the cumulative operating income target. Vesting is dependent upon the recipient being employed and
any dividends declared will be accrued and paid to the recipient when the related shares vest.
Following the Annual Meeting of Stockholders
on May 3, 2011, 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 18,204 restricted stock units. Each award of restricted stock units vests at the date of the
2012 Annual Meeting of Stockholders. Upon vesting, the non-employee directors are entitled to receive an equal number of shares
of the Company's common stock, together with dividend equivalents from the date of grant, at such time as the director’s
service on the Board of Directors terminates for any reason.
On March 11, 2011, the Company granted
2,500 voting shares of restricted stock under the 2006 Plan to a recently promoted member of the management team. These shares
vest in five equal annual installments on the first five anniversaries of the date of grant, as long as the recipient is then employed
by the Company. Any dividends declared will be accrued and paid to the recipient if and when the related shares vest.
Restricted common shares, under fixed plan
accounting, are measured at fair value on the date of grant based on the number of shares granted, estimated forfeitures and the
quoted price of the common stock. Such value is recognized as compensation expense over the corresponding vesting period which
ranges from one to five years.
The following summarizes
restricted stock activity for the year ended December 31, 2012:
|
|
2012
|
|
|
|
Awards
|
|
|
Units
|
|
|
|
Shares
(in 000’s)
|
|
|
Weighted
Average
Market
Value at
Grant Date
|
|
|
Shares
(in 000’s)
|
|
|
Weighted
Average
Market
Value at
Grant Date
|
|
Non-vested —Beginning of year
|
|
|
122
|
|
|
$
|
12.82
|
|
|
|
18
|
|
|
$
|
16.48
|
|
Granted
|
|
|
74
|
|
|
|
11.14
|
|
|
|
25
|
|
|
|
11.98
|
|
Vested
|
|
|
(25
|
)
|
|
|
12.18
|
|
|
|
(18
|
)
|
|
|
16.48
|
|
Cancelled/Forfeited
|
|
|
(5
|
)
|
|
|
12.21
|
|
|
|
—
|
|
|
|
—
|
|
Non-vested —End of year
|
|
|
166
|
|
|
$
|
12.19
|
|
|
|
25
|
|
|
$
|
11.98
|
|
Total stock-based compensation cost/(benefit)
was $1,040, $(707) and $2,260 for the years ended December 31, 2012, 2011 and 2010, respectively. Total income tax benefit/(expense)
recognized for stock-based compensation arrangements was $400, $(274) and $885 for the years ended December 31, 2012, 2011
and 2010, respectively. The credit for share-based compensation for the year ended December 31, 2011 is due to the reversal of
$1.7 million of compensation expense which was recorded prior to January 1, 2011. This reversal resulted from a change in the estimated
forfeiture rate from 0% to 100% of non-vested options previously awarded to the former chief executive officer, who retired from
the Company effective December 31, 2011.
As of December 31, 2012, there was $2,551
of total unrecognized compensation cost related to nonvested share-based compensation arrangements. The cost is expected to be
recognized over a weighted average period of approximately 45 months. There were 467,388 shares available for future grants under
the 2006 Plan at December 31, 2012.
|
8.
|
Commitments and Contingencies
|
The Company has entered into operating
leases, primarily for distribution centers and office facilities. These operating leases frequently include renewal options at
the fair rental value at the time of renewal. For leases with step rent provisions, whereby the rental payments increase incrementally
over the life of the lease, the Company recognizes the total minimum lease payments on a straight line basis over the minimum lease
term. Facility rent expense was approximately $2,671 in 2012, $2,809 in 2011 and $2,602 in 2010.
Future minimum lease payments under non-cancelable
operating leases with initial terms of one year or more consisted of the following at December 31, 2012:
2013
|
|
$
|
2,991
|
|
2014
|
|
|
2,176
|
|
2015
|
|
|
1,223
|
|
2016
|
|
|
967
|
|
2017
|
|
|
818
|
|
Thereafter
|
|
|
223
|
|
Total minimum lease payments
|
|
$
|
8,398
|
|
The Company had aggregate purchase commitments
for fixed inventory quantities of approximately $33,043 at December 31, 2012.
As part of a recent acquisition, the Company
assumed the liability for the post-remediation monitoring of the water quality at one of the acquired facilities in Louisiana.
The expected liability of $103 at December 31, 2012 relates to the cost of the monitoring, which the Company estimates will be
incurred over approximately the next 4 years and also the cost to plug the wells. Remediation work was completed prior to the acquisition
in accordance with the requirements of the Louisiana Department of Environmental Quality.
The Company, along with many other defendants,
has been named in a number of lawsuits in the state courts of Illinois, Minnesota, North Dakota, and South Dakota alleging that
certain wire and cable which may have contained asbestos caused injury to the plaintiffs who were exposed to this wire and cable.
These lawsuits are individual personal injury suits that seek unspecified amounts of money damages as the sole remedy. It is not
clear whether the alleged injuries occurred as a result of the wire and cable in question or whether the Company, in fact, distributed
the wire and cable alleged to have caused any injuries. The Company maintains general liability insurance that, to date, has covered
the defense of and all costs associated with these claims. In addition, the Company did not manufacture any of the wire and cable
at issue, and the Company would rely on any warranties from the manufacturers of such cable if it were determined that any of the
wire or cable that the Company distributed contained asbestos which caused injury to any of these plaintiffs. In connection with
ALLTEL's sale of the Company in 1997, ALLTEL provided indemnities with respect to costs and damages associated with these claims
that the Company believes it could enforce if its insurance coverage proves inadequate.
There are no legal proceedings pending
against or involving the Company that, in management’s opinion, based on the current known facts and circumstances, are expected
to have a material adverse effect on the Company’s consolidated financial position, cash flows, or results from operations.
On February 11, 2013, the Board of Directors
approved a quarterly dividend of $0.09 per share payable to shareholders of record on February 21, 2013. This dividend totaling
$1,596 was paid on February 28, 2013.
|
10.
|
Select Quarterly Financial Data (unaudited)
|
The following table presents the Company’s
unaudited quarterly results of operations for each of the last eight quarters in the period ended December 31, 2012. The unaudited
information has been prepared on the same basis as the audited consolidated financial statements.
|
|
Year Ended December 31, 2012
|
|
|
|
Fourth
Quarter
|
|
|
Third
Quarter
|
|
|
Second
Quarter
|
|
|
First
Quarter
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
104,379
|
|
|
$
|
96,113
|
|
|
$
|
98,082
|
|
|
$
|
94,462
|
|
Gross profit
|
|
$
|
22,017
|
|
|
$
|
21,612
|
|
|
$
|
22,252
|
|
|
$
|
21,138
|
|
Operating income
|
|
$
|
7,438
|
|
|
$
|
7,156
|
|
|
$
|
7,530
|
|
|
$
|
6,802
|
|
Net income
|
|
$
|
4,370
|
|
|
$
|
4,232
|
|
|
$
|
4,421
|
|
|
$
|
4,016
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.25
|
|
|
$
|
0.24
|
|
|
$
|
0.25
|
|
|
$
|
0.23
|
|
Diluted
|
|
$
|
0.25
|
|
|
$
|
0.24
|
|
|
$
|
0.25
|
|
|
$
|
0.23
|
|
|
|
Year Ended December 31, 2011
|
|
|
|
Fourth
Quarter
|
|
|
Third
Quarter
|
|
|
Second
Quarter
|
|
|
First
Quarter
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
87,481
|
|
|
$
|
105,782
|
|
|
$
|
103,420
|
|
|
$
|
99,727
|
|
Gross profit
|
|
$
|
19,917
|
|
|
$
|
23,006
|
|
|
$
|
23,720
|
|
|
$
|
22,252
|
|
Operating income
|
|
$
|
5,306
|
|
|
$
|
8,386
|
|
|
$
|
11,527
|
|
|
$
|
8,158
|
|
Net income
|
|
$
|
3,052
|
|
|
$
|
4,965
|
|
|
$
|
6,842
|
|
|
$
|
4,818
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.17
|
|
|
$
|
0.28
|
|
|
$
|
0.39
|
|
|
$
|
0.27
|
|
Diluted
|
|
$
|
0.17
|
|
|
$
|
0.28
|
|
|
$
|
0.38
|
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|