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 twenty-three locations in fourteen 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 and SWWR’s wholly owned subsidiary, Southern Wire (“SW”) (collectively “the acquired businesses”, or “the 2010 acquisition”). On January 1, 2011, the acquired businesses were merged into our operating subsidiary. The Company has no other business activity.
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries and have been prepared following accounting principles generally accepted in the United States (“GAAP”) and the requirements of the Securities and Exchange Commission (“SEC”). The financial statements include all normal and recurring adjustments that are necessary for a fair presentation of the Company’s financial position and operating results. All significant inter-company balances and transactions have been eliminated.
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The most significant estimates are those relating to the allowance for doubtful accounts, the reserve for returns and allowances, the inventory obsolescence reserve, vendor rebates, and asset impairments. Actual results could differ materially from the estimates and assumptions used for the preparation of the financial statements.
Earnings 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 diluted earnings per share:
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares for basic earnings per share
|
|
|
17,805,464
|
|
|
17,723,277
|
|
|
17,679,524
|
|
Effect of dilutive securities
|
|
|
94,908
|
|
|
92,124
|
|
|
121,610
|
|
Denominator for diluted earnings per share
|
|
|
17,900,372
|
|
|
17,815,401
|
|
|
17,801,134
|
|
Options to purchase
478,458
,
525,846
and
811,939
shares of common stock were not included in the diluted net income per share calculation for 2013, 2012 and 2011, respectively, as their inclusion would have been anti-dilutive. The 2011 amount includes
490,385
options, 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 $
148
and $
213
, and a reserve for returns and allowances of $518 and $491 at December 31, 2013 and 2012, 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:
|
|
2013
|
|
2012
|
|
2011
|
|
Balance at beginning of year
|
|
$
|
213
|
|
$
|
211
|
|
$
|
358
|
|
Bad debt expense
|
|
|
(59)
|
|
|
(19)
|
|
|
(9
|
|
Write-offs, net of recoveries
|
|
|
(6)
|
|
|
21
|
|
|
(138)
|
|
Balance at end of year
|
|
$
|
148
|
|
$
|
213
|
|
$
|
211
|
|
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 $
3,934
and $
3,746
at December 31, 2013 and 2012, 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 $
1,245
, $
1,208
, and $
1,095
for the years ended December 31, 2013, 2012 and 2011, respectively.
Goodwill
Goodwill represents the excess of the amount we paid to acquire businesses over the estimated fair value of tangible assets and identifiable intangible assets acquired, less liabilities assumed.
Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash flows, discount rates and asset lives among other items. At December 31, 2013, our goodwill balance was $
17.5
million, representing
8.9
% of our total assets.
The Company reviews goodwill for impairment annually, or more frequently if indications of possible impairment exist, using a three-step process. The first step is a qualitative evaluation as to whether it is more likely than not that the fair value of any of the reporting units is less than its carrying value using an assessment of relevant events and circumstances. Examples of such events and circumstances include financial performance, industry and market conditions, macroeconomic conditions, reporting unit-specific events, historical results of goodwill impairment testing and the timing of the last performance of a quantitative assessment. If the Company concludes that the goodwill associated with any reporting units is more likely than not impaired, a second step is performed for that reporting unit. This second step, used to quantitatively screen for potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. The third step, employed for any reporting unit that fails the second step, is used to measure the amount of any potential impairment and compares the implied fair value of the reporting unit’s goodwill with the carrying amount of goodwill.
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, 2013 and 2012 was approximately $
50
and $
32
, respectively.
Estimated future amortization expense for capitalized loan costs through the maturity of the loan agreement are $
18
for each of 2014 and 2015 and $
14
in 2016.
Intangibles
Intangible assets, from the 2010 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 2013, 2012 or 2011.
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 $
333
, $
314
, and $
212
for the years ended December 31, 2013, 2012, and 2011, 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,
|
|
|
|
2013
|
|
2012
|
|
Land
|
|
$
|
2,476
|
|
$
|
1,187
|
|
Buildings
|
|
|
4,717
|
|
|
3,466
|
|
Machinery and equipment
|
|
|
10,354
|
|
|
9,646
|
|
|
|
|
17,547
|
|
|
14,299
|
|
Less accumulated depreciation
|
|
|
9,573
|
|
|
8,475
|
|
Total
|
|
$
|
7,974
|
|
$
|
5,824
|
|
The purchase price of the new building in December 2013 has been preliminarily allocated $
1,290
to land and $
1,217
to buildings.
Intangibles assets
Intangibles assets consist of:
|
|
At December 31,
|
|
|
|
2013
|
|
2012
|
|
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
|
|
|
6,006
|
|
|
4,273
|
|
Non-compete agreements
|
|
|
250
|
|
|
250
|
|
|
|
|
6,256
|
|
|
4,523
|
|
Total
|
|
$
|
10,234
|
|
$
|
11,967
|
|
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, 2013, accumulated amortization on the acquired intangible assets was $
6,256
, and amortization expense was $
1,733
for each of the years ended December 31, 2013 and 2012 and $
1,857
for the year ended December 31, 2011. Future amortization expense to be recognized on the acquired intangible assets is expected to be as follows:
|
|
Annual
Amortization
Expense
|
|
2014
|
|
$
|
1,733
|
|
2015
|
|
|
1,733
|
|
2016
|
|
|
1,512
|
|
2017
|
|
|
646
|
|
Goodwill
Changes in goodwill were as follows:
|
|
At December 31,
|
|
|
|
2013
|
|
2012
|
|
Balance at beginning of year
|
|
$
|
25,082
|
|
$
|
25,082
|
|
Impairment of goodwill
|
|
|
(7,562)
|
|
|
|
|
Balance at end of year
|
|
$
|
17,520
|
|
$
|
25,082
|
|
Accrued and Other Current Liabilities
Accrued and other current liabilities consist of:
|
|
At December 31,
|
|
|
|
2013
|
|
2012
|
|
Customer advances
|
|
$
|
522
|
|
$
|
429
|
|
Customer rebates
|
|
|
4,952
|
|
|
4,383
|
|
Payroll, commissions, and bonuses
|
|
|
2,226
|
|
|
2,553
|
|
Accrued inventory purchases
|
|
|
8,161
|
|
|
5,107
|
|
Other
|
|
|
2,911
|
|
|
2,907
|
|
Total
|
|
$
|
18,772
|
|
$
|
15,379
|
|
|
3.
|
Impairment of Goodwill
|
During the third quarter of 2013 and prior to the annual impairment test of goodwill in October, the Company concluded that impairment indicators existed at the SW reporting unit, due to a decline in the overall financial performance and overall market demand.
The Company performed step two of the impairment test and concluded that the fair value of the SW reporting unit was less than its carrying value; therefore, the Company performed step three of the impairment analysis.
Step three of the impairment analysis measures the impairment charge by allocating the reporting unit’s fair value to all of the assets and liabilities of the reporting unit in a hypothetical analysis that calculates implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination and recording the deferred tax impact. Any excess of the carrying value of the reporting unit’s goodwill over the implied fair value of the reporting unit’s goodwill is recorded as an impairment loss.
The fair value of the SW reporting unit was estimated using a discounted cash flow model combined with a market approach, with a weighting of 50% to the discounted cash flow analysis and 50% to the market approach. The material assumptions used for the income approach included a weighted average cost of capital of 13% and a long-term growth rate of 3-4%.
The carrying value of the SW reporting unit’s goodwill was $
20.1
million and its implied fair value resulting from step two of the impairment test was less than the carrying value. As a result, the Company has recorded a non-cash goodwill impairment charge of $
7.6
million during the year ended December 31, 2013.
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 London Interbank Offered Rate (“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, 2013, the Company was in compliance with the financial covenants governing its indebtedness.
The Company’s borrowings at December 31, 2013 and 2012 were $
47,952
and $
58,588
, respectively. The weighted average interest rates on outstanding borrowings were
2.0
% and
1.8
% at December 31, 2013 and 2012, respectively.
During 2013, the Company had an average available borrowing capacity of approximately $
52,091
. This average was computed from the monthly borrowing base certificates prepared for the lender. At December 31, 2013, the Company had available borrowing capacity of $
50,680
under the terms of the 2011 Loan Agreement. During the years ended December 31, 2013, 2012 and 2011, the Company paid $
130
, $
101
, and $
71
, respectively, for the unused facility.
Principal repayment obligations for succeeding fiscal years are as follows:
2014
|
|
$
|
|
|
2015
|
|
|
|
|
2016
|
|
|
47,952
|
|
2017
|
|
|
|
|
Total
|
|
$
|
47,952
|
|
The provision (benefit) for income taxes consists of:
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
8,675
|
|
$
|
10,129
|
|
$
|
10,612
|
|
State
|
|
|
1,021
|
|
|
1,279
|
|
|
1,381
|
|
Total current
|
|
|
9,696
|
|
|
11,408
|
|
|
11,993
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,290)
|
|
|
(703)
|
|
|
258
|
|
State
|
|
|
(195)
|
|
|
(70)
|
|
|
25
|
|
Total deferred
|
|
|
(1,485)
|
|
|
(773)
|
|
|
283
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,211
|
|
$
|
10,635
|
|
$
|
12,276
|
|
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,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State taxes, net of federal benefit
|
|
|
3.9
|
|
|
|
2.8
|
|
|
|
2.8
|
|
Non-deductible items
|
|
|
12.6
|
|
|
|
0.6
|
|
|
|
0.6
|
|
Other
|
|
|
(0.6)
|
|
|
|
|
|
|
|
|
|
Total effective tax rate
|
|
|
50.9
|
%
|
|
|
38.4
|
%
|
|
|
38.4
|
%
|
The
non-deductible items in 2013 include the impact of the
$
5.3
million non-deductible portion of the $
7.6
million impairment charge.
Significant components of the Company’s deferred taxes were as follows:
|
|
Year Ended
December 31,
|
|
|
|
2013
|
|
2012
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Uniform capitalization adjustment
|
|
$
|
1,009
|
|
$
|
796
|
|
Inventory reserve
|
|
|
1,514
|
|
|
1,442
|
|
Allowance for doubtful accounts
|
|
|
57
|
|
|
82
|
|
Stock compensation expense
|
|
|
2,064
|
|
|
1,928
|
|
Property and equipment
|
|
|
102
|
|
|
43
|
|
Other
|
|
|
|
|
|
29
|
|
Total deferred tax assets
|
|
|
4,746
|
|
|
4,320
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
Goodwill
|
|
|
185
|
|
|
834
|
|
Intangibles
|
|
|
2,303
|
|
|
2,701
|
|
Other
|
|
|
96
|
|
|
|
|
Total deferred tax liabilities
|
|
|
2,584
|
|
|
3,535
|
|
Net deferred tax assets
|
|
$
|
2,162
|
|
$
|
785
|
|
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, 2013, 2012 and 2011, the Company made no provisions for interest or penalties related to uncertain tax positions. The tax years 2009 through 2013 remain open to examination by the major taxing jurisdictions to which the Company is subject.
Under the terms of the 2006 Stock Plan, the Company repurchased 4,952 shares that were surrendered by the holders to fund the exercise of the related awards and to pay withholding taxes in 2013.
The Company has paid a quarterly cash dividend since August 2007, resulting in aggregate dividends in 2013, 2012 and 2011 of $
7,466
, $
6,375
and $
6,276
, respectively.
The Company is authorized to issue
5,000,000
shares of preferred stock, par value $.
001
per share. The Board of Directors is authorized to fix the particular preferences, rights, qualifications and restrictions of each series of preferred stock. In connection with the adoption of a
now terminated
stockholder rights plan, the Board of Directors designated
100,000
shares as Series A Junior Participating Preferred Stock. No shares of preferred stock have been issued.
|
7.
|
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.
Through 2013, the
Company adopted the Safe Harbor provisions of the Code, whereby contributions up to the first
3
% of an employee’s compensation were matched
100
% by the Company and the next
2
% were matched
50
% by the Company. The Company’s match for the years ended December 31, 2013, 2012 and 2011 was $
803
, $
735
, and $
727
, respectively. Effective January 1, 2014, the Company adjusted its match and will now match
100
% of the first
1
% of the employee’s contribution. Accordingly, the Company is no longer adopting the Safe Harbor provisions of the Code.
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 options may be either nonqualified stock options or incentive stock options as defined by Section 422 of the Code. Under the 2006 Plan a maximum of
1,800,000
shares may be 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
assuming continued employment
.
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. There were no options granted in 2013. For prior year options granted, the following weighted average assumptions were used:
|
|
Year Ended
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.89
|
%
|
|
|
1.01
|
%
|
Expected dividend yield
|
|
|
3.01
|
%
|
|
|
2.55
|
%
|
Weighted average expected life
|
|
|
5.5 years
|
|
|
|
5.5 years
|
|
Expected volatility
|
|
|
64
|
%
|
|
|
65
|
%
|
Vesting dates range from May 8, 2014 to December 31, 2017, and expiration dates range from December 30, 2015 to May 8, 2022. The following summarizes stock option activity and related information:
|
|
2013
|
|
|
|
Options
(in 000’s)
|
|
Weighted
Average
Exercise Price
|
|
Aggregate
Intrinsic
Value
|
|
Weighted
Average
Remaining
Contractual Life
(in years)
|
|
OutstandingBeginning of year
|
|
|
778
|
|
$
|
14.67
|
|
$
|
656
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(62)
|
|
|
7.90
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(61)
|
|
|
14.53
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OutstandingEnd of year
|
|
|
655
|
|
$
|
15.33
|
|
$
|
563
|
|
|
5.22
|
|
ExercisableEnd of year
|
|
|
505
|
|
$
|
15.82
|
|
$
|
521
|
|
|
4.45
|
|
Weighted average fair value of options granted
during 2013
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted
during 2012
|
|
$
|
5.29
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted
during 2011
|
|
$
|
6.55
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2013, 2012 and 2011, excess tax benefits of $
49
, $
35
and $
37
, respectively, were reflected in financing cash flows.
The total intrinsic value of options exercised during the years ended December 31, 2013, 2012 and 2011 was $
366
, $
258
and $
277
, respectively.
The total fair value of options vested during the years ended December 31, 2013, 2012 and 2011 was $
271
, $
404
and $
3,890
, 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
Following the Annual Meeting of Stockholders on May 7, 2013, the Company awarded restricted stock units with a grant date value of $
50
to each non-employee director who was re-elected, for an aggregate of
21,006
restricted stock units. Each award of restricted stock units vests at the date of the 2014 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.
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 vested at the date of the 2013 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 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.
The Company also granted performance based restricted stock awards to the Company’s President on December 17, 2012 and December 20, 2013 in the amount of 17,953 shares and 11,338 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, 2013 and ending December 31, 2015 for the 2012 grant and the three year period commencing January 1, 2014 and ending December 31, 2016 for the 2013 grant. Each award will vest
after the end of the applicable three year performance period
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.
Restricted common shares are measured at fair value on the date of grant based on the quoted price of the common stock. Such value is recognized as compensation expense over the corresponding vesting period which ranges from one to five years
, based on the number of awards that vest
.
The following summarizes restricted stock activity for the year ended December 31, 2013:
|
|
2013
|
|
|
|
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
|
|
|
166
|
|
$
|
12.19
|
|
|
25
|
|
$
|
11.98
|
|
Granted
|
|
|
11
|
|
|
13.23
|
|
|
21
|
|
|
14.28
|
|
Vested
|
|
|
(22)
|
|
|
12.18
|
|
|
(25)
|
|
|
11.98
|
|
Cancelled/Forfeited
|
|
|
(14)
|
|
|
11.64
|
|
|
|
|
|
|
|
Non-vested End of year
|
|
|
141
|
|
$
|
12.33
|
|
|
21
|
|
$
|
14.28
|
|
Total stock-based compensation cost/(benefit) was $
900
, $
1,040
and $(
707
) for the years ended December 31, 2013, 2012 and 2011, respectively. Total income tax benefit/(expense) recognized for stock-based compensation arrangements
was
$459
,
$
400
and $(274) for the years ended December 31, 2013, 2012 and 2011, 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, 2013, there was $
1,671
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
37
months. There were
509,839 shares
available for future grants under the 2006 Plan at December 31, 2013.
|
9.
|
Commitments and Contingencies
|
The Company has entered into operating leases, primarily for distribution centers and office facilities. These operating leases frequently include renewal options at the fair rental value at the time of renewal. For leases with step rent provisions, whereby the rental payments increase incrementally over the life of the lease, the Company recognizes the total minimum lease payments on a straight line basis over the minimum lease term. Facility rent expense was approximately $
2,697
in 2013, $
2,671
in 2012 and $
2,809
in 2011.
Future minimum lease payments under non-cancelable operating leases with initial terms of one year or more consisted of the following at December 31, 2013:
2014
|
|
$
|
2,772
|
|
2015
|
|
|
1,706
|
|
2016
|
|
|
1,255
|
|
2017
|
|
|
818
|
|
2018
|
|
|
250
|
|
Thereafter
|
|
|
|
|
Total minimum lease payments
|
|
$
|
6,801
|
|
The Company had aggregate purchase commitments for fixed inventory quantities of approximately $
44,288
at December 31, 2013.
As part of
the 2010
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 $
97
at December 31, 2013 relates to the cost of the monitoring, which the Company estimates will be incurred over approximately the next 3 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 10, 2014, the Board of Directors approved a quarterly dividend of $
0.11
per share payable to shareholders of record on February 20, 2014. This dividend totaling
$
1,959
was paid on February 28, 2014.
On March 7, 2014, the Board of Directors adopted a new stock repurchase program under which the Company is authorized to purchase up to $
25
million of its outstanding shares of common stock from time to time, depending on market conditions, trading activity, business conditions and other factors.Shares of stock purchased under the program will be held as treasury shares 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.
|
11.
|
Select Quarterly Financial Data (unaudited)
|
The following table presents the Company’s unaudited quarterly results of operations for each of the last eight quarters in the period ended December 31, 2013. The unaudited information has been prepared on the same basis as the audited consolidated financial statements.
|
|
Year Ended December 31, 2013
|
|
|
|
Fourth
Quarter
|
|
Third
Quarter
|
|
|
Second
Quarter
|
|
First
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
94,442
|
|
$
|
95,214
|
|
|
$
|
99,332
|
|
$
|
94,304
|
|
Gross profit
|
|
$
|
20,633
|
|
$
|
20,922
|
|
|
$
|
21,725
|
|
$
|
21,379
|
|
Operating (loss) income
|
|
$
|
5,408
|
|
$
|
(1,556)
|
|
|
$
|
6,867
|
|
$
|
6,386
|
|
Net income (loss)
|
|
$
|
3,149
|
|
$
|
(3,162)
|
(1)
|
|
$
|
4,053
|
|
$
|
3,862
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.18
|
|
$
|
(0.18)
|
|
|
$
|
0.23
|
|
$
|
0.22
|
|
Diluted
|
|
$
|
0.18
|
|
$
|
(0.18)
|
|
|
$
|
0.23
|
|
$
|
0.22
|
|
(1)
|
During the third quarter of 2013, we recorded a non-cash goodwill impairment charge of $
7,562
, related to the SW reporting unit. See Note 3 for additional information.
|
|
|
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
|
|