HOUSTON
WIRE & CABLE COMPANY
Consolidated
Balance Sheets
(In
thousands, except share data)
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|
March 31,
|
|
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December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Accounts receivable, net:
|
|
|
|
|
|
|
|
|
Trade
|
|
$
|
52,829
|
|
|
$
|
51,031
|
|
Other
|
|
|
1,768
|
|
|
|
6,365
|
|
Inventories, net
|
|
|
93,402
|
|
|
|
88,115
|
|
Income taxes
|
|
|
—
|
|
|
|
449
|
|
Prepaids
|
|
|
3,373
|
|
|
|
1,938
|
|
Total current assets
|
|
|
151,372
|
|
|
|
147,898
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
11,457
|
|
|
|
11,355
|
|
Intangible assets, net
|
|
|
11,821
|
|
|
|
12,015
|
|
Goodwill
|
|
|
22,353
|
|
|
|
22,353
|
|
Other assets
|
|
|
327
|
|
|
|
418
|
|
Total assets
|
|
$
|
197,330
|
|
|
$
|
194,039
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders’ equity
|
|
|
|
|
|
|
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Current liabilities:
|
|
|
|
|
|
|
|
|
Book overdraft
|
|
$
|
3,177
|
|
|
$
|
3,028
|
|
Trade accounts payable
|
|
|
8,746
|
|
|
|
8,449
|
|
Income taxes
|
|
|
360
|
|
|
|
—
|
|
Accrued and other current liabilities
|
|
|
10,590
|
|
|
|
16,823
|
|
Total current liabilities
|
|
|
22,873
|
|
|
|
28,300
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
80,183
|
|
|
|
73,555
|
|
Deferred income taxes
|
|
|
277
|
|
|
|
414
|
|
Other long term obligations
|
|
|
1,210
|
|
|
|
1,026
|
|
Total liabilities
|
|
|
104,543
|
|
|
|
103,295
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 5,000,000 shares authorized, none issued and outstanding
|
|
|
—
|
|
|
|
—
|
|
Common stock, $0.001 par value; 100,000,000 shares authorized: 20,988,952 shares issued: 16,482,383 and 16,491,181 outstanding at March 31, 2018 and December 31, 2017, respectively
|
|
|
21
|
|
|
|
21
|
|
Additional paid-in-capital
|
|
|
54,164
|
|
|
|
54,006
|
|
Retained earnings
|
|
|
99,283
|
|
|
|
97,336
|
|
Treasury stock
|
|
|
(60,681
|
)
|
|
|
(60,619
|
)
|
Total stockholders’ equity
|
|
|
92,787
|
|
|
|
90,744
|
|
Total liabilities and stockholders’ equity
|
|
$
|
197,330
|
|
|
$
|
194,039
|
|
The
accompanying Notes are an integral part of these Consolidated Financial Statements.
HOUSTON
WIRE & CABLE COMPANY
Consolidated
Statements of Operations
(Unaudited)
(In
thousands, except share and per share data)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
85,026
|
|
|
$
|
78,709
|
|
Cost of sales
|
|
|
64,537
|
|
|
|
61,778
|
|
Gross profit
|
|
|
20,489
|
|
|
|
16,931
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Salaries and commissions
|
|
|
9,194
|
|
|
|
8,844
|
|
Other operating expenses
|
|
|
7,480
|
|
|
|
7,477
|
|
Depreciation and amortization
|
|
|
545
|
|
|
|
860
|
|
Total operating expenses
|
|
|
17,219
|
|
|
|
17,181
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
3,270
|
|
|
|
(250
|
)
|
Interest expense
|
|
|
644
|
|
|
|
450
|
|
Income (loss) before income taxes
|
|
|
2,626
|
|
|
|
(700
|
)
|
Income tax expense (benefit)
|
|
|
679
|
|
|
|
(247
|
)
|
Net income (loss)
|
|
$
|
1,947
|
|
|
$
|
(453
|
)
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.12
|
|
|
$
|
(0.03
|
)
|
Diluted
|
|
$
|
0.12
|
|
|
$
|
(0.03
|
)
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,349,902
|
|
|
|
16,241,215
|
|
Diluted
|
|
|
16,422,961
|
|
|
|
16,241,215
|
|
The
accompanying Notes are an integral part of these Consolidated Financial Statements.
HOUSTON
WIRE & CABLE COMPANY
Consolidated
Statements of Cash Flows
(Unaudited)
(In
thousands)
|
|
Three Months
Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,947
|
|
|
$
|
(453
|
)
|
Adjustments to reconcile net income (loss) to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
545
|
|
|
|
860
|
|
Amortization of unearned stock compensation
|
|
|
313
|
|
|
|
275
|
|
Provision for inventory obsolescence
|
|
|
224
|
|
|
|
27
|
|
Deferred income taxes
|
|
|
(137
|
)
|
|
|
(16
|
)
|
Other non-cash items
|
|
|
61
|
|
|
|
29
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
2,749
|
|
|
|
(6,810
|
)
|
Inventories
|
|
|
(5,511
|
)
|
|
|
(552
|
)
|
Book overdraft
|
|
|
149
|
|
|
|
(2,363
|
)
|
Trade accounts payable
|
|
|
297
|
|
|
|
224
|
|
Accrued and other current liabilities
|
|
|
(6,204
|
)
|
|
|
(981
|
)
|
Prepaids
|
|
|
(1,435
|
)
|
|
|
(631
|
)
|
Income taxes
|
|
|
809
|
|
|
|
(107
|
)
|
Other operating activities
|
|
|
109
|
|
|
|
21
|
|
Net cash used in operating activities
|
|
|
(6,084
|
)
|
|
|
(10,477
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Expenditures for property and equipment
|
|
|
(452
|
)
|
|
|
(930
|
)
|
Net cash used in investing activities
|
|
|
(452
|
)
|
|
|
(930
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Borrowings on revolver
|
|
|
91,514
|
|
|
|
81,991
|
|
Payments on revolver
|
|
|
(84,886
|
)
|
|
|
(70,530
|
)
|
Payment of dividends
|
|
|
(29
|
)
|
|
|
(30
|
)
|
Purchase of treasury stock/stock surrendered on vested awards
|
|
|
(63
|
)
|
|
|
(24
|
)
|
Net cash provided by financing activities
|
|
|
6,536
|
|
|
|
11,407
|
|
|
|
|
|
|
|
|
|
|
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)
1.
Basis of Presentation and Principles of Consolidation
Houston
Wire & Cable Company (the “Company”), through its wholly owned subsidiaries, provides industrial products to the
U.S. market through twenty-one locations in fourteen states throughout the United States. The Company has no other business activity.
The
consolidated financial statements as of March 31, 2018 and for the three months ended March 31, 2018, and 2017 have been prepared
following accounting principles generally accepted in the United States (“GAAP”) for interim financial information
and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP
for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments,
considered necessary for a fair presentation of the results of these interim periods have been included. The results of operations
for the interim periods are not necessarily indicative of the results that may be expected for the full year. All significant
intercompany balances and transactions have been eliminated. The Company has evaluated subsequent events through the time these
financial statements in this Form 10-Q were filed with the Securities and Exchange Commission (the “SEC”).
The
preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. The most significant estimates are those relating to
the inventory obsolescence reserve, the reserve for returns and allowances, vendor rebates, the realization of deferred tax assets
and the valuation of goodwill and indefinite-lived assets. Actual results could differ materially from the estimates and assumptions
used for the preparation of the financial statements.
For
further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current period presentation.
Recently Adopted Accounting Standards
The
Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) is the sole
source of authoritative GAAP other than SEC issued rules and regulations that apply only to SEC registrants. The FASB issues an
Accounting Standard Update (“ASU”) to communicate changes to the codification. The Company considers the applicability
and impact of all ASUs. The following are those recent ASUs that are relevant to the Company.
In
May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606), which supersedes
the revenue recognition requirements in ASC Topic 605, “Revenue Recognition,” and most industry-specific
guidance. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services. The amendments in the ASU are effective for annual and interim periods beginning after December 15, 2017. The
Company adopted this ASU effective January 1, 2018, using the modified retrospective method, and it had no material impact on
the Company’s consolidated financial statements.
The
Company’s primary source of revenue is the sale of industrial products based upon purchase orders or contracts with
customers. Revenue is recognized at a point in time once the Company has determined that the customer has obtained control
over the product. Control is typically deemed to have been transferred to the customer when the product is shipped, or
delivered (either by customer pickup or through common carrier to the customer’s location). It is not normal
Company practice to grant extended payment terms. Revenue is recognized net of any taxes collected, which are subsequently
remitted to the appropriate taxing authorities. The Company treats its transportation costs (shipping and handling) as
fulfillment costs and not as a separate performance obligation. These transportation costs are recorded in cost of
sales.
The
amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for
products sold. Revenue is recorded at the transaction price net of estimates of variable consideration, which may include product
returns, trade discounts and allowances. The Company accrues for variable consideration using the expected value method. Estimates
of variable consideration are included in revenue to the extent that it is probable that a significant reversal in the amount
of cumulative revenue recognized will not occur.
In
May 2017, the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting.”
The amendments in this update provide guidance about which changes to the terms and conditions of a share-based payment award,
require the application of modification accounting. This update is effective for public companies for annual periods beginning
after December 15, 2017. The Company adopted this ASU in the first quarter of 2018 and the adoption did not have a material impact
on the Company’s consolidated financial statements.
In
March 2017, the FASB issued ASU No. 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation
of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The new guidance requires that an employer disaggregate
the service cost component from the other components of net benefit cost. This update is effective for public companies for annual
periods beginning after December 15, 2017. The Company adopted this ASU in the first quarter of 2018 and the adoption did
not have a material impact on the Company’s consolidated financial statements.
In
January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test
for Goodwill Impairment.” The amendment in this ASU provides final guidance that simplifies the accounting for goodwill
impairment for all entities by requiring impairment charges to be based on the first step in the two-step impairment test under
ASC 350. ASU No. 2017-04 is effective for annual and interim impairment tests performed in periods beginning after December 15,
2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company elected to early adopt this ASU in the first quarter of 2018 and the adoption did not have a material impact on the Company’s consolidated financial statements.
In March 2018, the
FASB issued ASU 2018-05, “Income Taxes (Topic 740): Amendments to SEC Paragraph Pursuant to SEC Staff Accounting
Bulletin No. 118 (SEC Update).” This ASU adds the SEC guidance released on December 22, 2017 regarding the U.S tax
reform to the FASB Accounting Standards Codification. At March 31, 2018, the Company has not made a material adjustment to
the tax provision recorded under this ASU at December 31, 2017. The Company has not completed its accounting for all of the
tax effects of the Tax Cuts and Jobs Act; however, the Company has made reasonable estimates of these effects.
Recent Accounting
Pronouncements
In
February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Under the new guidance, a lessee will be
required to recognize a right to use asset and a lease liability for leases greater than 1 year, both capital and operating
leases. This update is effective for public companies for fiscal years beginning after December 15, 2018 with early adoption
permitted. The Company is currently evaluating the impact that adopting this ASU will have on the Company’s consolidated
financial statements.
2.
Earnings (loss) per Share
Basic
earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding.
Diluted earnings (loss) per share include the dilutive effects of options and unvested restricted stock awards and units.
The
following reconciles the denominator used in the calculation of diluted earnings (loss) per share:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Denominator:
|
|
|
|
|
|
|
Weighted average common shares for basic earnings per share
|
|
|
16,349,902
|
|
|
|
16,241,215
|
|
Effect of dilutive securities
|
|
|
73,059
|
|
|
|
—
|
|
Weighted average common shares for diluted earnings per share
|
|
|
16,422,961
|
|
|
|
16,241,215
|
|
The
Company calculates earnings per share using the “two-class” method, whereby unvested share-based payment awards that
contain nonforfeitable rights to dividends or dividend equivalents are “participating securities”, as discussed in
Note 5, and therefore, these participating securities are treated as a separate class in computing earnings per share. The dilutive
securities for these awards totaled 2,117 shares at March 31, 2018, which had no effect on the diluted earnings per share. Stock
awards to purchase 422,947 shares (of which 195,204 were related to the participating securities) and 697,026 shares of common
stock were not included in the diluted net income (loss) per share calculation for the three months ended March 31, 2018 and 2017,
respectively, as their inclusion would have been anti-dilutive.
3.
Debt
On
October 3, 2016, in connection with the acquisition of Vertex, HWC Wire & Cable Company, the Company, Vertex, and Bank of
America, N.A., as agent and lender, entered into a First Amendment (the “Loan Agreement Amendment”) amending the Fourth
Amended and Restated Loan and Security Agreement (the “2015 Loan Agreement”). The Loan Agreement Amendment adds Vertex
as a borrower (and lien grantor) and provides the terms for inclusion of Vertex’s eligible accounts receivable and eligible
inventory in the borrowing base for the 2015 Loan Agreement. The 2015 Loan Agreement was expanded to include incremental availability
on eligible accounts receivable and inventory up to $5 million, which is being amortized quarterly, starting April 1, 2017, over
two and a half years. The 2015 Loan Agreement provides a $100 million revolving credit facility and expires on September 30, 2020.
Under certain circumstances the Company may request an increase in the commitment by an additional $50 million.
Portions
of the loan may be converted to LIBOR loans in minimum amounts of $1.0 million and integral multiples of $0.1 million. LIBOR loans
bear interest at the British Bankers Association LIBOR Rate plus 100 to 150 basis points based on availability, and loans not
converted to LIBOR loans bear interest at a fluctuating rate equal to the greatest of the agent’s prime rate, the federal
funds rate plus 50 basis points, or 30-day LIBOR plus 150 basis points. The unused commitment fee is 25 basis points.
Availability
under the 2015 Loan Agreement is limited to a borrowing base equal to 85% of the value of eligible accounts receivable, plus the
lesser of 70% of the value of eligible inventory or 90% of the net orderly liquidation value percentage of the value of eligible
inventory, in each case less certain reserves. The 2015 Loan Agreement is secured by substantially all of the property of the
Company, other than real estate.
The
2015 Loan Agreement includes, among other things, covenants that require the Company to maintain a specified minimum fixed charge
coverage ratio, unless certain availability levels exist. Additionally, the 2015 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 2015 Loan Agreement contains certain provisions that may cause the debt to be classified
as a current liability, in accordance with GAAP, if availability falls below certain thresholds, even though the ultimate maturity
date under the loan agreement remains as September 30, 2020. At March 31, 2018, the Company was in compliance with the availability-based
covenants governing its indebtedness.
The
carrying amount of long term debt approximates fair value as it bears interest at variable rates. The fair value is a Level 2
measurement as defined in ASC Topic 820, “Fair Value Measurement.”
4.
Income Taxes
On
December 22, 2017 the Tax Cuts and Jobs Act (the “Act”) was signed into law, making significant changes to the U.S.
Internal Revenue Code. The major provisions include a corporate tax rate decrease from 35% to 21%, effective for years beginning
after December 31, 2017, and changes in business-related exclusions and deductions.
The
Company calculates its provision for income taxes during interim reporting periods by applying the estimated annual effective
tax rate for the full fiscal year to pre-tax income or loss, excluding discrete items, for the reporting period.
A
valuation allowance for deferred tax assets is recognized when it is more likely than not that some or all of the benefit from
the deferred tax assets will not be realized. To assess that likelihood, the Company uses its current financial position, results
of operations, both actual and forecasted, the reversal of deferred tax liabilities, and tax planning strategies, as well as the
current and forecasted business economics, to determine whether a valuation allowance is required.
The
Company has assessed both positive and negative evidence to estimate whether sufficient future taxable income will be generated
and concluded that it is more likely than not that the deferred tax assets will not be realized and, as such, has retained the
same valuation allowance at December 31, 2017 of $1.0 million as of March 31, 2018. Going forward, management will continue to
assess the available evidence to determine whether it is more likely than not that sufficient future taxable income will be generated
to realize the deferred tax assets.
5.
Incentive Plans
Stock
Option Awards
There
were no stock option awards granted during the first three months of 2018 or 2017.
Restricted
Stock Awards and Restricted Stock Units
Until
the 2017 Stock Plan (the “2017 Plan”) has been approved by the Company’s stockholders, each restricted stock
unit may be settled only in cash. Following stockholder approval of the 2017 Plan, instead of a cash payment, upon vesting of
a restricted stock unit, the recipient will be entitled to receive shares of the Company’s common stock. The Company has
submitted the 2017 Plan for approval by stockholders at the 2018 Annual Meeting of Stockholders (See Note 7).
As
long as they can be settled only in cash, the awards granted under the 2017 Plan are liability awards and are required to
be fair valued every quarter and any difference accounted for in the statement of operations. The fair value of these awards
is $0.3 million as of March 31, 2018.
Total
stock-based compensation cost was $0.3 million for the three months ended March 31, 2018, of which $0.2 million was for equity
awards and $0.1 million was for liability awards, and $0.3 million for the three months ended March 31, 2017, of which all were
for equity awards, and is included in salaries and commissions for employees, and in other operating expenses, for non-employee
directors.
6. Commitments and Contingencies
As
part of the acquisition of Southwest Wire Rope and Southern Wire made in 2010, 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 $0.1 million at March
31, 2018 relates to the cost of the monitoring, which the Company estimates will be incurred in the next year, 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.
In
addition, as a result of unfavorable lease terms relative to market for one of the leases acquired as part of the Vertex acquisition
in 2016, there is a remaining additional liability of $0.2 million that is being amortized over the remaining terms of the lease,
which was 63 months at March 31, 2018.
The
Company had outstanding under the 2015 Loan Agreement, letters of credit totaling $1.0 million to certain vendors as of March
31, 2018.
The
Company, along with many other defendants, has been named in a number of lawsuits in the state courts of Minnesota, North Dakota,
and South Dakota alleging that certain wire and cable which may have contained asbestos caused injury to the plaintiffs who were
exposed to this wire and cable. These lawsuits are individual personal injury suits that seek unspecified amounts of money damages
as the sole remedy. It is not clear whether the alleged injuries occurred as a result of the wire and cable in question or whether
the Company, in fact, distributed the wire and cable alleged to have caused any injuries. The Company maintains general liability
insurance that, to date, has covered the defense of and all costs associated with these claims. In addition, the Company did not
manufacture any of the wire and cable at issue, and the Company would rely on any warranties from the manufacturers of such cable
if it were determined that any of the wire or cable that the Company distributed contained asbestos which caused injury to any
of these plaintiffs. In connection with ALLTEL’s sale of the Company in 1997, ALLTEL provided indemnities with respect to
costs and damages associated with these claims that the Company believes it could enforce if its insurance coverage proves inadequate.
There
are no legal proceedings pending against or involving the Company that, in management’s opinion, based on the current known
facts and circumstances, are expected to have a material adverse effect on the Company’s consolidated financial position,
cash flows, or results of operations.
7. Subsequent Events
The
2017 Stock Plan was approved by the stockholders at the 2018 Annual Meeting on May 8, 2018. As a result, all awards outstanding
under the 2017 Stock Plan will entitle the recipient to receive shares of the Company’s common stock.
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, 2017.
Overview
We
are a provider of industrial products to the U.S. market. We provide our customers with a single-source solution by offering a
large selection of in-stock items, exceptional customer service and high levels of product expertise.
Critical
Accounting Policies
The
preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts
of assets and liabilities, revenue and expenses. On an on-going basis, we make and evaluate estimates and judgments, including
those related to the inventory obsolescence reserve, the reserve for returns and allowances, vendor rebates, the realization of
deferred tax assets and liabilities and the valuation of goodwill and indefinite-lived assets. We base our estimates on historical
experience and various other assumptions that we believe are reasonable under the circumstances; the results of which form the
basis for making judgments about amounts and timing of revenue and expenses, the carrying values of assets and the recorded amounts
of liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and such estimates
may change if the underlying conditions or assumptions change. We have discussed the development and selection of critical accounting
policies and estimates with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed our related disclosures.
The critical accounting policies related to the estimates and judgments are discussed in our Annual Report on Form 10-K for the
year ended December 31, 2017 under Management’s Discussion and Analysis of Financial Condition and Results of Operations.
There have been no changes to our critical accounting policies and estimates during the three months ended March 31, 2018.
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, 2017, 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.
Results
of Operations
The
following table shows, for the periods indicated, information derived from our consolidated statements of operations, expressed
as a percentage of net sales for the periods presented.
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
75.9
|
%
|
|
|
78.5
|
%
|
Gross profit
|
|
|
24.1
|
%
|
|
|
21.5
|
%
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Salaries and commissions
|
|
|
10.8
|
%
|
|
|
11.2
|
%
|
Other operating expenses
|
|
|
8.8
|
%
|
|
|
9.5
|
%
|
Depreciation and amortization
|
|
|
0.6
|
%
|
|
|
1.1
|
%
|
Total operating expenses:
|
|
|
20.3
|
%
|
|
|
21.8
|
%
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
3.8
|
%
|
|
|
(0.3
|
)%
|
Interest expense
|
|
|
0.8
|
%
|
|
|
0.6
|
%
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
3.1
|
%
|
|
|
(0.9
|
)%
|
Income tax expense (benefit)
|
|
|
0.8
|
%
|
|
|
(0.3
|
)%
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
2.3
|
%
|
|
|
(0.6
|
)%
|
Note:
Due to rounding, percentages may not add up to total operating expenses, operating income (loss), income (loss)
before income taxes or net income (loss).
Comparison
of the Three Months Ended March 31, 2018 and 2017
Sales
|
|
Three Months Ended
|
|
|
|
March
31,
|
|
(Dollars in millions)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
Sales
|
|
$
|
85.0
|
|
|
$
|
78.7
|
|
|
$
|
6.3
|
|
|
|
8.0
|
%
|
Our
sales for the first quarter increased 8.0% to $85.0 million in 2018 from $78.7 million in 2017. We estimate that higher
metals prices in 2018 represented almost all of the increase in sales. We estimate sales for our project business, which
targets end markets for Environmental Compliance, Engineering & Construction, Industrials, Utility Power Generation, and
Mechanical Wire Rope, increased 34%, while Maintenance, Repair, and Operations (MRO) sales increased 2%, as compared to 2017.
Gross
Profit
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(Dollars in millions)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
Gross profit
|
|
$
|
20.5
|
|
|
$
|
16.9
|
|
|
$
|
3.6
|
|
|
|
21.0
|
%
|
Gross margin
|
|
|
24.1
|
%
|
|
|
21.5
|
%
|
|
|
|
|
|
|
|
|
Gross
profit increased 21.0% to $20.5 million in 2018 from $16.9 million in 2017. The increase in gross profit was primarily attributable
to increased sales and to higher gross margins. Gross margin (gross profit as a percentage of sales) increased to 24.1 % in 2018
from 21.5% in 2017 primarily due to increased product margins.
Operating
Expenses
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(Dollars in millions)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and commissions
|
|
$
|
9.2
|
|
|
$
|
8.8
|
|
|
$
|
0.4
|
|
|
|
4.0
|
%
|
Other operating expenses
|
|
|
7.5
|
|
|
|
7.5
|
|
|
|
—
|
|
|
|
—
|
%
|
Depreciation and amortization
|
|
|
0.5
|
|
|
|
0.9
|
|
|
|
(0.4
|
)
|
|
|
(36.6
|
)%
|
Total operating expenses
|
|
$
|
17.2
|
|
|
$
|
17.2
|
|
|
$
|
—
|
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses as a percent of sales
|
|
|
20.3
|
%
|
|
|
21.8
|
%
|
|
|
|
|
|
|
|
|
Note: Due
to rounding, numbers may not add up to total operating expenses.
Salaries
and commissions increased $0.4 million between the periods primarily due to additional sales and warehouse personnel and increased
commissions due to higher sales and gross profit.
Other
operating expenses remained constant quarter over quarter.
Depreciation
and amortization decreased $0.4 million primarily due to a decrease in the amortization of intangibles, as certain intangibles
became fully amortized.
Operating
expenses as a percentage of sales decreased to 20.3% in 2018 from 21.8% in 2017, as sales growth exceeded the increase in operating
expenses.
Interest
Expense
Interest
expense increased to $0.6 million in 2018 from $0.5 million in 2017 due to higher debt as a result of the additional inventory
investment and to an increase in the average effective interest rate. Average debt was $76.9 million in 2018 compared to $68.0
million in 2017. The average effective interest rate was 3.3% in 2018 compared to 2.6% in 2017.
Income
Taxes
The
income tax expense of $0.7 million fluctuated from a $0.2 million income tax benefit in the prior year period. The effective income
tax rate for the quarter decreased to 25.9% in 2018 from 35.3% in 2017, primarily due to the lower corporate tax rate as a result
of the 2017 Tax Cuts and Jobs Act.
Net
Income
We
achieved net income of $1.9 million in 2018 compared to a net loss of $0.5 million in 2017.
Impact
of Inflation and Commodity Prices
Our
results of operations are affected by changes in the inflation rate and commodity prices. Moreover, because copper, steel, aluminum,
nickel and petrochemical products are components of the industrial products we sell, fluctuations in the costs of these and other
commodities have historically affected our operating results. To the extent commodity prices decline, the net realizable value
of our existing inventory could also decline, and our gross profit could be adversely affected because of either reduced selling
prices or lower of cost or market adjustments in the carrying value of our inventory. If we turn our inventory approximately three
times a year, the impact of changes in commodity prices in any particular quarter would primarily affect the results of the succeeding
two calendar quarters. If we are unable to pass on to our customers future cost increases due to inflation or rising commodity
prices, our operating results could be adversely affected.
Liquidity
and Capital Resources
Our
primary capital needs are for working capital obligations, capital expenditures and other general corporate purposes, including
acquisitions. Our primary sources of working capital are cash from operations supplemented by bank borrowings.
Liquidity
is defined as the ability to generate adequate amounts of cash to meet the current need for cash. We assess our liquidity in terms
of our ability to generate cash to fund our operating activities. Significant factors which could affect liquidity include the
following:
|
●
|
the
adequacy of available bank lines of credit;
|
|
●
|
cash flows generated
from operating activities;
|
|
●
|
capital expenditures;
|
|
●
|
acquisitions; and
|
|
●
|
the ability to
attract long-term capital with satisfactory terms
|
Comparison
of the Three Months Ended March 31, 2018 and 2017
Our
net cash used in operating activities was $6.1 million for the three months ended March 31, 2018 compared to net cash used in
operating activities of $10.5 million in 2017. We had net income of $1.9 million in 2018 compared to a net loss of $0.5 million
in 2017.
Changes
in our operating assets and liabilities resulted in cash used in operating activities of $9.0 million in 2018. An increase of
$5.5 million in inventories, and a decrease in accrued and other liabilities of $6.2 million were the main uses of cash, partially
offset by a decrease in accounts receivable of $2.7 million, a source of cash.
Net
cash used in investing activities was $0.5 million in 2018 compared to $0.9 million in 2017.
Net
cash provided by financing activities was $6.5 million in 2018 compared to $11.4 million in 2017. Net borrowings on the revolver
of $6.6 million were the primary source for financing activities in 2018.
Indebtedness
Our
principal source of liquidity at March 31, 2018 was working capital of $128.5 million compared to $119.6 million at December 31,
2017. We also had available borrowing capacity of $18.8 million at March 31, 2018 and $23.0 million at December 31, 2017 under
our loan agreement. The availability at March 31, 2018 is net of outstanding letters of credit of $1.0 million.
We
believe that we will have adequate availability of capital to fund our present operations, meet our commitments on our existing
debt, and fund anticipated growth over the next twelve months, including expansion in existing and targeted market areas. We continually
seek potential acquisitions and from time to time hold discussions with acquisition candidates. If suitable acquisition opportunities
or working capital needs arise that would require additional financing, we believe that our financial position and earnings history
provide a solid base for obtaining additional financing resources at competitive rates and terms. Additionally, based on market
conditions, we may decide to issue additional shares of common or preferred stock to raise funds.
Contractual
Obligations
The
following table summarizes our loan commitment at March 31, 2018.
In thousands
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More
than
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
$
|
|
|
$
|
—
|
|
|
$
|
80,183
|
|
|
$
|
—
|
|
|
$
|
—
|
|
There
were no material changes in operating lease obligations or non-cancellable purchase obligations since December 31, 2017.