Notes to Consolidated Financial Statements
1.
|
Organization and Summary of Significant Accounting Policies
|
Description of Business
Houston Wire & Cable Company (the “Company”), through its wholly owned subsidiaries, provides
industrial products to the U.S. market through twenty-two locations in fourteen states throughout the United States. 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 refund liability, the inventory obsolescence reserve, vendor rebates, the realization of deferred tax assets and the valuation of goodwill and indefinite-lived assets. Actual results could differ materially from the estimates and assumptions used for the preparation of the financial statements.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.
Accounts Receivable
Accounts receivable consists primarily of receivables from customers, less an allowance for doubtful accounts of $0.2 million at December 31, 2019 and 2018. The Company has no contractual repurchase arrangements with its customers. Credit losses have been within management’s expectations.
Inventories
Inventories are carried at the lower of cost, using the average cost method, and net realizable value 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.
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 operations. 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. At year end, the Company recalculates
the rebates earned based on actual purchases made.
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 10 years
|
Leasehold improvements are depreciated over their estimated life or the term of the lease, whichever is shorter.
Total depreciation expense was approximately $1.7 million for the year ended December 31, 2019, and $1.4 million for each of the years ended December 31, 2018 and 2017.
Goodwill
Goodwill represents the excess of the amount 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, 2019, the goodwill balance was $22.4 million, representing 9.3% of the Company’s total assets.
The Company conducts impairment testing for goodwill annually in the fourth quarter of its fiscal year and more frequently, on an interim basis, when an event occurs or circumstances change that indicate that the fair value of a reporting unit may have declined below its carrying value. Events or circumstances which could indicate a probable impairment include, but are not limited to, 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.
The Company tests goodwill at the reporting unit level, which is defined as an operating segment or one
level below an operating segment that constitutes a business for which financial information is available and is regularly reviewed
by management. The Company determined that it has four reporting units for this purpose. Before testing goodwill, the Company considers
whether or not to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination
that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount and whether an impairment
test is required. If as a result of the qualitative assessment, the Company determines that an impairment test is required, or
alternatively, if the Company elects to forego the qualitative assessment, the Company performs a quantitative assessment and records
an impairment to goodwill to the extent the carrying amount of the reporting unit, including goodwill, exceeds the fair value of
the reporting unit. See Note 4 for more details.
Intangibles
Intangible assets, from the acquisition of Southwest and Southern in 2010 and the acquisition of Vertex
in 2016, consist of customer relationships and tradenames. The customer relationships are amortized over 6 to 9 year useful lives.
If events or circumstances were to indicate that any of the Company’s definite-lived intangible assets might be impaired,
the Company would assess recoverability based on the estimated undiscounted future cash flows to be generated from the applicable
intangible asset. If the undiscounted cash flows were less than the carrying value, then the intangible assets would be written
down to their fair value. Tradenames have an indefinite life and are not being amortized and are tested for impairment on an annual
basis. See Note 4 for more details.
Leases
At the inception of
a contract, the Company assesses whether the contract is, or contains, a lease. The assessment is based on (1) whether the contract
involves the use of a distinct identified asset, (2) whether the Company obtains the right to substantially all the economic benefit
from the use of the asset throughout the period, and (3) whether the Company has the right to direct the use of the asset. All
significant lease arrangements are recognized at lease commencement. Leases with a lease term of 12 months or less at inception
are not recorded on the Consolidated Balance Sheets and are expensed on a straight-line basis over the lease term in the Consolidated
Statements of Operations. The Company determines the lease term by assuming the exercise of renewal options that are reasonably
certain. As most of the leases do not provide an implicit interest rate, the Company uses the incremental borrowing rate which
approximates to a collateralized rate at the commencement date to determine the present value of future payments that are reasonably
certain. See Note 11 for more details.
Self Insurance
The Company retains certain self-insurance risks for health benefits. 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 reportable segment, sales of industrial products, including electrical and mechanical wire and cable, industrial fasteners, hardware and related services to the U.S. market. The Company’s chief operating decision maker (“CODM”) is its Chief Executive Officer. The CODM makes operational and resource decisions based on company-wide sales and margin performance compared to the established strategic goals of the Company.
Revenue Recognition, Returns & Allowances
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). It is not normal Company practice to grant extended payment terms. Revenue is recognized net of any sales 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 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.
Customers are permitted to return product only on a case-by-case basis. Product exchanges are handled
as a credit, with any replacement item being re-invoiced to the customer. Customer returns are recorded as a refund liability,
included in accrued and other liabilities, with a corresponding reduction to sales. 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
No single customer accounted for 10% or more of the Company’s sales in 2019, 2018 or 2017. The Company performs periodic credit evaluations of its customers and generally does not require collateral.
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.
Stock-Based Compensation
Restricted stock awards, units and cash awards are valued at the closing price of the Company’s stock on the grant date and are granted under the Company’s 2017 Stock Plan. Stock options issued under the Company’s now-expired 2006 Stock Plan have an exercise price equal to the fair value of the Company’s stock on the grant date. The Company recognizes compensation expense ratably over the vesting period. The Company’s stock-based compensation expense is included in salaries and commissions expense for employees and in other operating expenses for non-employee directors in the accompanying consolidated statements of operations.
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 operating 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. 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 to determine whether
a valuation allowance is required.
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 were recently adopted by the Company.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Under the new guidance
as amended, a lessee is required to recognize a right-of use asset and a lease liability for leases greater than 1 year, both finance
and operating leases. This update was effective for public companies for fiscal years beginning after December 15, 2018. Under
the transition rules, an entity initially applies the new leases standard at the adoption date, and recognizes a cumulative effect
adjustment to the opening balance of retained earnings in the period of adoption and the comparative periods presented in the financial
statements continue to be in accordance with previously-existing GAAP. The Company adopted this ASU effective January 1, 2019.
See Note 11 for detailed information.
In June 2018, the FASB issued ASU No. 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,” which simplifies the accounting for share-based payment arrangements with nonemployees for goods and services. Under the ASU, the guidance on such payments to nonemployees is aligned with the accounting for share-based payments granted to employees, including the measurement of equity-classified awards, which is fixed at the grant date under the new guidance. The ASU superseded Subtopic 505-50, “Equity - Equity-Based Payments to Non-Employees,” and was effective for public entities for interim and annual reporting periods beginning after December 15, 2018. The Company adopted this ASU in the first quarter of 2019, and the adoption did not have a material impact on the Company’s consolidated financial statements.
Recent Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework
– Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments in this update eliminate, add
and modify certain disclosure requirements for fair value measurements as part of the FASB’s disclosure framework project.
The guidance is effective for public companies beginning in the first quarter of 2020. The Company is currently assessing the impact
of this ASU on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, “Intangibles – Goodwill and Other – Internal-Use
Software (Subtopic 350-40); Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That
Is a Service Contract.” The amendments in this update require implementation costs incurred by customers in cloud computing
arrangements (i.e., hosting arrangements) to be capitalized under the same premises of authoritative guidance for internal-use
software, and deferred over the non-cancellable term of the cloud computing arrangement plus any option renewal periods that are
reasonably certain to be exercised by the customer or for which the exercise is controlled by the service provider. The guidance
is effective for public companies beginning in the first quarter of 2020. The Company is currently assessing the impact of this
ASU on its consolidated financial statements.
In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments
- Credit Losses. This ASU, among other narrow-scope improvements, clarifies guidance around how to report expected recoveries.
This ASU permits organizations to record expected recoveries on assets purchased with credit deterioration. In addition to
other narrow technical improvements, the ASU also reinforces existing guidance that prohibits organizations from recording negative
allowances for available-for-sale debt securities. The effective date and transition methodology are the same as in ASU 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The FASB
deferred the effective dates of this ASU for smaller reporting companies (“SRC”) to fiscal years beginning after December
15, 2022. As of December 31, 2019, the Company qualifies as a SRC and will adopt this ASU in the first quarter of 2023.
In December 2019, the FASB issued ASU
2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU removes specific exceptions to the
general principles in Topic 740 in GAAP. It eliminates the need for an organization to analyze whether certain exceptions
apply in a given period. This ASU also improves financial statement preparers’ application of income tax-related guidance
and simplifies GAAP for: a) Franchise taxes that are partially based on income; b) Transactions with a government that result in
a step up in the tax basis of goodwill; c) Separate financial statements of legal entities that are not subject to tax; and d)
Enacted changes in tax laws in interim periods. For public business entities, ASU 2019-12 is effective for fiscal years beginning
after December 15, 2020, and interim periods within those fiscal years. The Company is currently assessing the impact of
this ASU on its consolidated financial statements.
|
2.
|
Earnings
(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:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares for basic earnings per share
|
|
|
16,433,644
|
|
|
|
16,389,876
|
|
|
|
16,269,611
|
|
Effect of dilutive securities
|
|
|
119,222
|
|
|
|
133,723
|
|
|
|
—
|
|
Denominator for diluted earnings per share
|
|
|
16,552,866
|
|
|
|
16,523,599
|
|
|
|
16,269,611
|
|
Stock
awards to purchase 369,325, 298,406 and 808,391 shares of common stock were not included in the diluted net income (loss) per
share calculation for 2019, 2018 and 2017, respectively, as their inclusion would have been anti-dilutive. In 2017 and for
the first quarter of 2018, the Company calculated earnings per share using the “two-class” method, whereby
unvested share-based payment awards that contained non-forfeitable rights to dividends or dividend equivalents were
considered “participating securities”, as discussed in Note 9, and therefore, these participating securities were
treated as a separate class in computing earnings per share.
3.
|
Detail of Selected Balance Sheet Accounts
|
Accounts Receivable
The following table summarizes the changes in the allowance for doubtful accounts for the past three years:
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Balance at beginning of year
|
|
$
|
182
|
|
|
$
|
172
|
|
|
$
|
151
|
|
Bad debt expense
|
|
|
119
|
|
|
|
73
|
|
|
|
68
|
|
Write-offs, net of recoveries
|
|
|
(90
|
)
|
|
|
(63
|
)
|
|
|
(47
|
)
|
Balance at end of year
|
|
$
|
211
|
|
|
$
|
182
|
|
|
$
|
172
|
|
Inventories
The following table summarizes the changes in the inventory reserves for the past three years:
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Balance at beginning of year
|
|
$
|
3,709
|
|
|
$
|
3,925
|
|
|
$
|
4,366
|
|
Provision for inventory write-downs
|
|
|
515
|
|
|
|
615
|
|
|
|
34
|
|
Deduction for inventory write-offs
|
|
|
(640
|
)
|
|
|
(831
|
)
|
|
|
(475
|
)
|
Balance at end of year
|
|
$
|
3,584
|
|
|
$
|
3,709
|
|
|
$
|
3,925
|
|
Property and Equipment, net
Property and equipment are stated at cost and consist of:
|
|
At December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands)
|
|
Land
|
|
$
|
2,476
|
|
|
$
|
2,476
|
|
Buildings
|
|
|
8,712
|
|
|
|
8,501
|
|
Machinery and equipment (1)
|
|
|
19,199
|
|
|
|
14,867
|
|
|
|
|
30,387
|
|
|
|
25,844
|
|
Less accumulated depreciation
|
|
|
(15,798
|
)
|
|
|
(14,388
|
)
|
Total
|
|
$
|
14,589
|
|
|
$
|
11,456
|
|
|
(1)
|
This includes finance leases. See Note 11 for more details.
|
Intangible assets
Intangible assets consist of:
|
|
At December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands)
|
|
Tradenames
|
|
$
|
5,816
|
|
|
$
|
5,936
|
|
Customer relationships
|
|
|
18,620
|
|
|
|
18,620
|
|
|
|
|
24,436
|
|
|
|
24,556
|
|
Less accumulated amortization:
|
|
|
|
|
|
|
|
|
Tradenames
|
|
|
—
|
|
|
|
—
|
|
Customer relationships
|
|
|
(14,154
|
)
|
|
|
(13,377
|
)
|
|
|
|
(14,154
|
)
|
|
|
(13,377
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,282
|
|
|
$
|
11,179
|
|
As of December 31, 2019, accumulated amortization on the acquired intangible assets was $14.2 million,
and amortization expense was $0.8 million in the years ended December 31, 2019 and 2018 and $1.4 million in the year ended December
31, 2017. Future amortization expense to be recognized on the acquired intangible assets is expected to be as follows:
|
|
Annual
Amortization
Expense
|
|
|
|
(In thousands)
|
|
2020
|
|
$
|
777
|
|
2021
|
|
|
777
|
|
2022
|
|
|
777
|
|
2023
|
|
|
777
|
|
2024
|
|
|
777
|
|
2025
|
|
|
583
|
|
Goodwill
|
|
At December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands)
|
|
Balance at beginning of year
|
|
$
|
22,353
|
|
|
$
|
22,353
|
|
Less purchase price adjustment
|
|
|
—
|
|
|
|
—
|
|
Balance at end of year (1)
|
|
$
|
22,353
|
|
|
$
|
22,353
|
|
(1) The balance is net of $12.6 million of accumulated impairment losses, of which none were recorded in 2019
or 2018.
Accrued and Other Current Liabilities
Accrued and other current liabilities consist of:
|
|
At December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands)
|
|
Customer rebates
|
|
$
|
4,979
|
|
|
$
|
6,163
|
|
Payroll, commissions, and bonuses
|
|
|
1,930
|
|
|
|
3,047
|
|
Accrued inventory purchases
|
|
|
11,122
|
|
|
|
5,140
|
|
Property taxes
|
|
|
977
|
|
|
|
1,041
|
|
Freight
|
|
|
464
|
|
|
|
689
|
|
Refund liability
|
|
|
1,182
|
|
|
|
435
|
|
Professional fees
|
|
|
399
|
|
|
|
415
|
|
Accrued interest
|
|
|
248
|
|
|
|
259
|
|
Lease obligations
|
|
|
593
|
|
|
|
71
|
|
Other
|
|
|
1,367
|
|
|
|
1,972
|
|
Total
|
|
$
|
23,261
|
|
|
$
|
19,232
|
|
4.
|
Impairment of Goodwill and Intangible Assets
|
The annual goodwill and indefinite-lived intangibles impairment test was performed using the qualitative
assessment option as of October 1, 2019 for the Southern, Southwest and Vertex reporting units, resulting in a conclusion that
it was more-likely-than-not that the fair value of the reporting units exceeded their respective carrying values except for certain
tradenames of the Southwest reporting unit for which a quantitative test was necessary and an impairment charge of $0.1 million
was recorded in 2019.
In 2018, a quantitative assessment was performed in which the
fair values of the reporting units were estimated using a discounted cash flow model (income approach) and a guideline public company
method (market approach), giving 50% weight to each. The material assumptions used included cash flows based on future expected
performance for the reporting units, weighted average costs of capital ranging from 11.5% to 15.0%, a long-term growth rate of
3% for the income approach and a control premium of 25.0% for the guideline public company method. The results of the test indicated
that certain of the tradenames at Southwest were impaired. Accordingly, a charge of less than $0.1 million was recorded for 2018.
The Company is still anticipating significant growth in the businesses acquired in 2010 and in 2016. If this projected growth is not achieved and or there are future reductions in our market capitalization or market multiples, further goodwill and intangible assets impairments may result.
On March 12, 2019 and December 10, 2019, the Company, as guarantor, HWC Wire & Cable Company and Vertex,
as borrowers, and Bank of America, N.A., as agent and lender, entered into the Second and Third Amendments, respectively, to the
Fourth Amended and Restated Loan and Security Agreement (such agreement, as so amended, the “Loan Agreement”). The
Second Amendment extends the expiration date until March 12, 2024 and the Third Amendment increases the revolving credit facility
to $115 million. Under certain circumstances the Company may request an increase in the commitment by an additional $50 million.
Portions of the loan may be converted to LIBOR loans in minimum amounts of $1.0 million and integral multiples of $0.1 million. LIBOR loans bear interest at the British Bankers Association LIBOR Rate plus 100 to 150 basis points based on availability, and loans not converted to LIBOR loans bear interest at a fluctuating rate equal to the greatest of the agent’s prime rate, the federal funds rate plus 50 basis points, or 30-day LIBOR plus 150 basis points. The unused commitment fee is 25 basis points.
Availability under the Loan Agreement is limited to a borrowing base equal to 85% of the value of eligible accounts receivable, plus the lesser of 70% of the value of eligible inventory or 90% of the net orderly liquidation value percentage of the value of eligible inventory, in each case less certain reserves. The Loan Agreement is secured by substantially all of the property of the Company, other than real estate.
The Loan Agreement includes, among other things, covenants that require the Company to maintain a specified minimum fixed charge coverage ratio, unless certain availability levels exist. Additionally, the Loan Agreement allows for the unlimited payment of dividends and repurchases of stock, subject to the absence of events of default and maintenance of a fixed charge coverage ratio and minimum level of availability. The Loan Agreement contains certain provisions that may cause the debt to be classified as a current liability, in accordance with GAAP, if availability falls below certain thresholds, even though the ultimate maturity date under the Loan Agreement remains March 12, 2024. At December 31, 2019, the Company was in compliance with the availability-based covenant and fixed coverage ratio 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.”
The Company’s borrowings at December 31, 2019 and 2018 were $83.5 million and $71.3 million, respectively. The weighted average interest rates on outstanding borrowings were 3.4% and 4.1% at December 31, 2019 and 2018, respectively.
At December 31, 2019, the Company had available borrowing capacity of $22.8 million under the terms
of the Loan Agreement. The Company paid $0.1 million for each of the years ended December 31, 2019, 2018, and 2017, for the unused
facility.
Principal repayment obligations for succeeding fiscal years are as follows:
|
|
(In thousands)
|
|
2020
|
|
$
|
—
|
|
2021
|
|
|
—
|
|
2022
|
|
|
—
|
|
2023
|
|
|
—
|
|
2024
|
|
|
83,500
|
|
Total
|
|
$
|
83,500
|
|
The provision (benefit) for income taxes consists of:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
719
|
|
|
$
|
3,041
|
|
|
$
|
1,280
|
|
State
|
|
|
125
|
|
|
|
658
|
|
|
|
159
|
|
Total current
|
|
|
844
|
|
|
|
3,699
|
|
|
|
1,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
400
|
|
|
|
(1,246
|
)
|
|
|
1,259
|
|
State
|
|
|
31
|
|
|
|
(98
|
)
|
|
|
55
|
|
Total deferred
|
|
|
431
|
|
|
|
(1,344
|
)
|
|
|
1,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,275
|
|
|
$
|
2,355
|
|
|
$
|
2,753
|
|
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,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
|
|
35.0
|
%
|
State taxes, net of federal benefit
|
|
|
3.4
|
|
|
|
4.3
|
|
|
|
4.2
|
|
Impairment, non-deductible portion
|
|
|
—
|
|
|
|
0.1
|
|
|
|
—
|
|
Share-based compensation
|
|
|
3.7
|
|
|
|
1.2
|
|
|
|
15.2
|
|
Non-deductible items
|
|
|
5.4
|
|
|
|
2.1
|
|
|
|
4.6
|
|
Valuation allowance
|
|
|
—
|
|
|
|
(9.5
|
)
|
|
|
41.0
|
|
Tax reform rate change
|
|
|
—
|
|
|
|
—
|
|
|
|
12.9
|
|
Other
|
|
|
(0.2
|
)
|
|
|
2.2
|
|
|
|
(4.1
|
)
|
Total effective tax rate
|
|
|
33.3
|
%
|
|
|
21.4
|
%
|
|
|
108.8
|
%
|
Significant components of the Company’s deferred taxes were as follows:
|
|
Year Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
3,425
|
|
|
$
|
—
|
|
Inventory reserve
|
|
|
1,072
|
|
|
|
1,179
|
|
Uniform capitalization adjustment
|
|
|
1,633
|
|
|
|
1,469
|
|
Stock compensation expense
|
|
|
666
|
|
|
|
681
|
|
Accrued commission
|
|
|
124
|
|
|
|
348
|
|
Other
|
|
|
199
|
|
|
|
276
|
|
Total deferred tax assets
|
|
|
7,119
|
|
|
|
3,953
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
|
(3,316
|
)
|
|
|
—
|
|
Goodwill
|
|
|
(838
|
)
|
|
|
(649
|
)
|
Intangible assets
|
|
|
(2,230
|
)
|
|
|
(2,315
|
)
|
Other
|
|
|
(135
|
)
|
|
|
(59
|
)
|
Total deferred tax liabilities
|
|
|
(6,519
|
)
|
|
|
(3,023
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
600
|
|
|
$
|
930
|
|
On December 22, 2017, the United States
enacted significant changes to the U.S. tax law following the passage and signing of H.R.1, “An Act to Provide the Reconciliation
Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (previously known as “The
Tax Cuts and Jobs Act”). In March 2018, the FASB issued ASU 2018-05, “Income Taxes (Topic 740): Amendments to SEC Paragraphs
Pursuant to SEC Staff Accounting Bulletin No. 118 (SEC Update).” This ASU added the SEC guidance released on December 22,
2017 regarding the income tax accounting implication of the Tax Cuts and Jobs Act to ASC Topic 740. During 2017, the Company recorded
income tax expense of $0.3 million to reflect the reduction in the U.S. corporate income tax rate from 35% to 21%. As of December 31,
2018, the Company completed its analysis of its accounting for the income tax effects of tax reform and as a result no additional
adjustments were recorded.
The Company does not have any unrecognized tax benefits recorded at December 2019, 2018 and 2017. 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, 2019, 2018 and 2017, the Company recorded no provision for interest or penalties related to uncertain tax positions. The tax years 2015 through 2019 remain open to examination by the major taxing jurisdictions to which the Company is subject.
On March 7, 2014, the Board of Directors adopted a 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 are held as treasury shares and may be used to satisfy the exercise of options, issuance of restricted stock, to fund acquisitions or for other uses as authorized by the Board of Directors. In November 2016, the Board of Directors suspended purchases under the stock repurchase program. In August 2019, the plan was reactivated. During 2019, the Company made repurchases under the stock repurchase program of 235,500 shares for a total cost of $1.1 million.
Under the terms of the 2017 Stock Plan, the Company acquired 26,731 shares and 25,368 shares that were surrendered by the holders to pay withholding taxes in 2019 and 2018, respectively.
The Company paid a quarterly cash dividend from August 2007 until August 2016. The Company has not paid a cash dividend since 2016.
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.
8.
|
Retirement-related Benefits
|
Defined Contribution Plan
The Company maintains a combination profit-sharing plan and salary deferral plan for the benefit of its employees who are not covered by a collective bargaining agreement. 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 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 matches 100% of the first 1% of the employee’s contribution. The Company’s match for the years ended December 31, 2019, 2018 and 2017 was $0.2 million for each year.
Defined Benefit Plan
The Company has a non-contributory defined benefit pension plan for those current and former employees
of Vertex who are subject to a collective bargaining agreement. Effective November 30, 2019, there are no active employees in the
plan as the plan was frozen with the closure of Vertex’s Massachusetts facility. The benefit provisions to participants of
the defined benefit plan were calculated based on the number of years of service and an annual negotiated plan benefit per year
of service. Annual compensation (or future compensation increases) is not used in calculating the benefit or future plan contributions.
It is the Company’s policy to fund amounts for pensions sufficient to meet the minimum funding requirements set forth in
applicable employee benefit laws, which currently approximate the benefit payments made each year. A total contribution of less
than $0.1 million was made during each of the years ended December 31, 2019, 2018 and 2017.
The current projected benefit obligation was $1.3 million and $1.1 million as of December 31, 2019 and
2018, respectively. The discount rate used to determine the projected benefit obligation was 3.2% and 4.2% in 2019 and 2018, respectively.
The fair value of the assets of the defined benefit plan was $1.3 million and $1.0 million in 2019 and
2018, respectively. The plan assets are all classified
as Level 1 and as such have readily observable prices and therefore a reliable fair market value.
As of November 30, 2019, the defined benefit plan is inactive, with no additional incremental benefits
being accrued and no contributions being made.
On August 4, 2017, the Board of Directors approved the Houston Wire & Cable Company 2017 Stock Plan (the “2017 Plan”). The 2017 Plan was approved by the stockholders at the 2018 Annual Meeting on May 8, 2018. The 2017 Plan provides for discretionary grants of stock options, stock awards, stock units and stock appreciation rights (SARs) to employees and directors up to a total of 1,000,000 shares. Shares issuable under the 2017 Plan may be authorized but unissued shares or treasury shares. If any award granted under the 2017 Plan expires, terminates or is forfeited or cancelled for any reason, the shares subject to the award will again be available for issuance. Any shares subject to an award that are delivered to the Company or withheld by the Company on behalf of a participant as payment for the award (including the exercise price of a stock option or SAR) or as payment for any withholding taxes due in connection with the award, or that are purchased by the Company with proceeds received from a stock option exercise, will not again be available for issuance. The 2017 Plan’s purpose is to attract and retain outstanding individuals as employees and directors of the Company and its subsidiaries and to provide them with additional incentive to expand and improve the Company’s profits by giving them the opportunity to acquire or increase their proprietary interest in the Company.
The 2017 Plan succeeded the Company’s 2006 Stock Plan (the “2006 Plan”), which expired on May 1, 2017. The types of equity awards previously authorized under the 2006 Plan did not significantly differ from those permitted under the 2017 Plan.
Stock Option Awards
The Company may grant options to purchase its common stock to employees and directors of the Company under the 2006 Plan and 2017 Plan 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. Each plan contains 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.
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 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 2019, 2018 or 2017.
All granted stock options have vested, with the last grant having an expiration date of December 20, 2021. The following summarizes stock option activity and related information:
|
|
|
Options
(in 000’s)
|
|
|
Weighted
Average
Exercise Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Weighted
Average
Remaining
Contractual Life
(in years)
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Outstanding-Beginning of year
|
|
|
|
154
|
|
|
|
223
|
|
|
|
13.40
|
|
|
|
13.10
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
2.52
|
|
|
|
2.84
|
|
Granted
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
(22
|
)
|
|
|
(30
|
)
|
|
|
13.04
|
|
|
|
11.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
(10
|
)
|
|
|
(39
|
)
|
|
|
10.32
|
|
|
|
13.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding-End of year
|
|
|
|
122
|
|
|
|
154
|
|
|
|
13.72
|
|
|
|
13.40
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
1.75
|
|
|
|
2.52
|
|
Exercisable-End of year
|
|
|
|
122
|
|
|
|
154
|
|
|
|
13.72
|
|
|
|
13.40
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
1.75
|
|
|
|
2.52
|
|
There was no excess tax benefit for the years ended December 31, 2019, 2018 and 2017.
There were no options exercised in the years ended December 31, 2019, 2018 and 2017. There is no intrinsic value of options outstanding and exercisable as of December 31, 2019 as the closing stock price at the end of 2019 creates a negative intrinsic value.
The total grant-date fair value of options vested during 2019 was $0, as all the options vested as of December 31, 2018. The total grant-date fair value of options vested during the year ended December 31, 2017 was $0.2 million.
Restricted Stock Awards, Restricted Stock Units and Cash Awards
As a result of the approval of the 2017 Plan by the stockholders at the 2018 Annual Meeting, all cash/liability awards granted prior to stockholder approval of the 2017 Plan were reclassified to restricted stock units (equity) effective May 8, 2018. The total liability reclassified to additional paid-in-capital was $0.4 million. This modification resulted in an increase in total fair value of $0.1 million, recognized over the terms of the grants, which range from 1 to 5 years.
On December 3, 2019, the Board of Directors granted to the Company’s President and CEO 78,125 voting shares of restricted stock and to the CFO, 19,531 voting shares of restricted stock under the 2017 Plan. The shares vest in one-third increments on the first, second and third anniversaries of the date of grant, in each case as long as the recipient is then employed by the Company. Any dividends declared will be accrued and paid if and when the related shares or units vest.
Also, on December 3, 2019, the Board of Directors granted 250,000 shares of restricted stock to the Company’s President and CEO and 125,000 shares of restricted stock to the CFO. Each grant vests if there is a Change in Control of the Company (as defined in the 2017 Plan) on or before December 2, 2024, as long as the recipient remained in continuous employment with the Company or a Subsidiary until the Change in Control or if the recipient was terminated by the Company without cause within one year before the Change in Control. Any dividends declared will be accrued and paid to the grantee if and when the related shares vest.
The Board of Directors also granted 39,719 voting shares of restricted stock under the 2017 Plan to members of management in December 2019. The shares vest in one-third increments on the third, fourth and fifth anniversaries of the date of grant, in each case as long as the recipient is then employed by the Company. Any dividends declared will be accrued and paid if and when the related shares or units vest.
Following the Annual Meeting of Stockholders on May 7, 2019, the Company granted restricted stock units with a grant date value of $60,000 to each nonemployee director who was elected, for an aggregate of 58,920 restricted stock units. Each award of restricted stock units vests at the date of the 2020 Annual Meeting of Stockholders. Each non-employee director is entitled to receive a number of shares of the Company’s common stock equal to the number of vested restricted stock units, together with dividend equivalents from the date of grant, at such time as the director’s service on the board terminates for any reason.
On March 12, 2019, the Board of Directors
granted 52,910 performance stock units to the Company’s President and CEO and 13,228 performance stock units to the CFO.
Each grant of performance stock units vests on December 31, 2021, based on and subject to the Company’s achievement of cumulative
EBITDA and stock price performance goals over a three-year period, as long as the grantee is then employed by the Company, and
upon vesting will be settled in shares of our common stock. Any dividends declared will be accrued and paid to the grantee if and
when the related shares vest.
On December 4, 2018,
the Board of Directors granted to the Company’s President and CEO 48,387 voting shares of restricted stock and to the CFO,
12,097 voting shares of restricted stock under the 2017 Plan. The shares vest in one-third increments on the first, second and
third anniversaries of the date of grant, in each case as long as the recipient is then employed by the Company. Any dividends
declared will be accrued and paid if and when the related shares or units vest.
The Board of Directors
also granted 44,357 voting shares of restricted stock under the 2017 Plan to members of management on December 4, 2018. The shares
vest in one-third increments on the third, fourth and fifth anniversaries of the date of grant, in each case as long as the recipient
is then employed by the Company. Any dividends declared will be accrued and paid if and when the related shares or units vest.
On November 6, 2018
and June 1, 2018, the Company awarded restricted stock units with a grant date value of $30,000 and $55,000 for a total of 4,950
and 6,667 restricted stock units, respectively, to its newly appointed non-employee directors. These awards of restricted stock
units vest at the date of the 2019 Annual Meeting of Stockholders. Each grant entitles the non-employee director 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 May 8, 2018, the
Company approved the award of restricted stock units with a grant date value of $60,000 to each non-employee director who was re-elected,
for an aggregate of 31,372 restricted stock units. Each award of restricted stock units vests at the date of the 2019 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.
Also on May 8, 2018,
the Company granted 28,144 voting shares of restricted stock to new members of the management team. Of the 28,144 shares granted,
26,144 shares vest in one third increments on the first, second and third anniversaries of the date of grant and the remaining
2,000 shares vest in one third increments on the third, fourth and fifth anniversaries of the date of grant, in each case as long
as the recipient is then employed by the Company. Any dividends declared will be accrued and paid if and when the related shares
vest.
Restricted common shares and restricted stock units 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 years ended December 31, 2019 and 2018:
|
|
Shares
|
|
|
|
2019
|
|
|
2018
|
|
|
|
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
|
|
|
259
|
|
|
$
|
6.78
|
|
|
|
238
|
|
|
$
|
7.33
|
|
Granted
|
|
|
511
|
|
|
|
3.84
|
|
|
|
133
|
|
|
|
6.51
|
|
Vested
|
|
|
(107
|
)
|
|
|
7.24
|
|
|
|
(99
|
)
|
|
|
7.61
|
|
Cancelled/Forfeited
|
|
|
(9
|
)
|
|
|
6.34
|
|
|
|
(13
|
)
|
|
|
7.63
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Cash awards converted to equity
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Non-vested -End of year
|
|
|
654
|
|
|
$
|
5.18
|
|
|
|
259
|
|
|
|
6.78
|
|
|
|
Units
|
|
|
|
2019
|
|
|
2018
|
|
|
|
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
|
|
|
215
|
|
|
$
|
7.59
|
|
|
|
40
|
|
|
$
|
7.50
|
|
Granted
|
|
|
125
|
|
|
|
5.88
|
|
|
|
43
|
|
|
|
7.47
|
|
Vested
|
|
|
(60
|
)
|
|
|
7.59
|
|
|
|
(60
|
)
|
|
|
7.65
|
|
Cancelled/Forfeited
|
|
|
(3
|
)
|
|
|
7.65
|
|
|
|
(5
|
)
|
|
|
7.65
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Cash awards converted to equity
|
|
|
—
|
|
|
|
—
|
|
|
|
197
|
|
|
|
7.65
|
|
Non-vested -End of year
|
|
|
277
|
|
|
|
6.83
|
|
|
|
215
|
|
|
|
7.59
|
|
Total stock-based compensation cost was $1.5 million for the year ended December 31, 2019, $1.3 million for the year ended December 31, 2018, and $1.2 million for the year ended December 31, 2017, of which $1.0 million was for equity awards and $0.2 million was for liability awards. Total income tax benefit recognized for equity awards stock-based compensation arrangements was $0.2 million for each of the years ended December 31, 2019, 2018 and 2017.
As of December 31, 2019, there was $1.8 million of total unrecognized compensation cost related to non-vested, stock-based compensation arrangements. The cost is expected to be recognized over a weighted average period of approximately 26 months. There are 5,148 shares available for future grants under the 2017 Plan at December 31, 2019.
10.
|
Commitments and Contingencies
|
The Company had aggregate purchase commitments for fixed inventory quantities of approximately $59.0 million
at December 31, 2019.
The Company had outstanding under the Loan Agreement letters of credit totaling $1.8 million to certain vendors as of December 31, 2019.
From time to time, we are involved in lawsuits that are brought against us in the normal course of business.
We are not currently a party to any legal proceedings that we expect, either individually or in the aggregate, to have a material
adverse effect on the Company’s consolidated financial position, cash flows, or results from operations.
Effective January 1, 2019, the Company adopted ASU No. 2016-02, “Leases (Topic 842)” and the series of related ASUs that followed (collectively referred to as “Topic 842”). The most significant changes under the new guidance include clarification of the definition of a lease, and the requirements for lessees to recognize a right-of-use (ROU) asset and a lease liability for all qualifying leases with terms longer than twelve months in the consolidated balance sheet. In addition, under Topic 842, additional disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.
The Company elected the practical expedient available under ASU 2018-11 “Leases: Targeted Improvements,” which allows the Company to apply the transition provision for Topic 842 at the Company’s adoption date instead of at the earliest comparative period presented in the Company’s financial statements. Therefore, the Company recognized and measured leases existing at January 1, 2019 but without retrospective application. The Company also elected all other available practical expedients except the hindsight practical expedient. In electing the practical expedients, the Company utilized the transition practical expedient package whereby the Company did not reassess (i) whether any of the Company’s expired or existing contracts contain a lease, (ii) the classification for any expired or existing leases and (iii) initial direct costs for any existing leases.
The impact of Topic 842 on the Company’s consolidated balance sheet as of January 1, 2019 was the recognition of ROU assets and lease liabilities for operating leases, while the Company’s accounting for finance leases remained substantially unchanged. The Company’s finance leases were immaterial prior to the adoption of Topic 842, and no change was made to the classification of these leases. As a result of the adoption of Topic 842, beginning retained earnings was impacted by $0.1 million and there was no impact to the income statement.
The Company leases property including warehouse space, offices, vehicles and equipment. The Company determines if an arrangement is a lease at inception. As part of the transition to the new standard,
the Company reviewed agreements with suppliers, vendors, customers, and other outside parties to determine if any agreements met
the definition of an embedded lease. This is based on the nature of the contracts reviewed, and various factors, including identified
assets included in the agreement to which the Company has exclusive rights of control as described by Topic 842. The Company concluded
that these are not material agreements with parties that would constitute an embedded lease. For purposes of calculating operating
lease liabilities, lease terms may be deemed to include options to extend or terminate the lease when it is reasonably certain
that the Company will exercise that option.
Beginning January 1, 2019, operating ROU assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Operating leases in effect prior to January 1, 2019 were recognized at the present value of the remaining lease payments over the remaining lease term as of January 1, 2019. The Company is required to determine a discount rate in order to calculate the present value of lease payments. If the rate is not included in the lease or cannot be readily determined, the Company uses its incremental secured borrowing rate based on lease term information available at the commencement date of the lease in determining the present value of lease payments. The Company recognizes lease components and non-lease components together and not as separate parts of a lease for all leases. The Company will exercise this practical expedient in the future by asset class.
The expenses generated by the lease activity of the Company as lessee for the twelve months ended December 31, 2019 were as follows:
Lease Type
|
|
Income Statement Classification
|
|
|
Amount
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Consolidated operating lease expense
|
|
Operating expenses
|
|
|
$
|
5,887
|
|
|
|
|
|
|
|
|
|
Consolidated financing lease amortization
|
|
Depreciation
and amortization
|
|
|
|
305
|
|
Consolidated financing lease interest
|
|
Interest expense
|
|
|
|
61
|
|
Consolidating financing lease expense
|
|
|
|
|
|
366
|
|
|
|
|
|
|
|
|
|
Net lease cost
|
|
|
|
|
$
|
6,253
|
|
Rent expense
was approximately $3.7 million and $3.5 million in 2018 and 2017, respectively.
The value of the net assets and liabilities generated by the leasing activity of the Company as lessee as of December 31, 2019 were as follows:
Lease Type
|
|
Balance Sheet Classification
|
|
|
Amount
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Total ROU operating lease assets (1)
|
|
Operating lease right-of-use assets, net
|
|
|
$
|
13,481
|
|
Total ROU financing lease assets (2)
|
|
Property and equipment, net
|
|
|
|
2,430
|
|
Total lease assets
|
|
|
|
|
$
|
15,911
|
|
|
|
|
|
|
|
|
|
Total current operating lease obligation
|
|
Operating lease liabilities
|
|
|
$
|
2,742
|
|
Total current financing lease obligation
|
|
Accrued and other current liabilities
|
|
|
|
593
|
|
Total current lease obligation
|
|
|
|
|
$
|
3,335
|
|
|
|
|
|
|
|
|
|
Total long term operating lease obligation
|
|
Operating lease long term liabilities
|
|
|
$
|
11,182
|
|
Total long term financing lease obligation
|
|
Other long term liabilities
|
|
|
|
1,860
|
|
Total long term lease obligation
|
|
|
|
|
$
|
13,042
|
|
(1) Operating lease assets are recorded net of accumulated amortization of $2.3 million as of December 31, 2019
(2) Financing lease assets are recorded net of accumulated amortization of $0.4 million as of December 31, 2019
The future minimum lease payments for finance and operating lease liabilities of the Company as lessee as of December 31, 2019 were as follows:
Maturity Date of Lease Liabilities
|
|
Operating Leases
|
|
|
Financing Leases
|
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Year one
|
|
$
|
3,391
|
|
|
|
708
|
|
|
|
4,099
|
|
Year two
|
|
|
3,298
|
|
|
|
661
|
|
|
|
3,959
|
|
Year three
|
|
|
3,169
|
|
|
|
599
|
|
|
|
3,768
|
|
Year four
|
|
|
2,509
|
|
|
|
517
|
|
|
|
3,026
|
|
Year five
|
|
|
2,181
|
|
|
|
256
|
|
|
|
2,437
|
|
Subsequent years
|
|
|
1,266
|
|
|
|
—
|
|
|
|
1,266
|
|
Total lease payments
|
|
|
15,814
|
|
|
|
2,741
|
|
|
|
18,555
|
|
Less: Interest
|
|
|
1,900
|
|
|
|
289
|
|
|
|
2,189
|
|
Present value of lease liabilities
|
|
$
|
13,914
|
|
|
|
2,452
|
|
|
|
16,366
|
|
The weighted average remaining lease terms and discount rates of the leases held by the Company as of December 31, 2019 were as follows:
Lease Type
|
|
|
Weighted Average
Term in Years
|
|
Weighted Average
Interest Rate
|
|
Operating leases
|
|
|
4.9
|
|
5.3
|
|
Financing leases
|
|
|
4.2
|
|
5.3
|
|
The cash outflows of the leasing activity of the Company as lessee for the twelve months ended December
31, 2019 were as follows:
Cash Flow Source
|
|
Classification
|
|
|
Amount
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Operating cash outflows from operating leases
|
|
Operating activities
|
|
|
$
|
6,140
|
|
Operating cash outflows from financing leases
|
|
Operating activities
|
|
|
|
54
|
|
Financing cash outflows from financing leases
|
|
Financing activities
|
|
|
|
293
|
|
During
the year ended December 31, 2019, the Company recorded non-cash ROU financing lease assets and corresponding financing lease obligations
totaling $2.5 million primarily related to warehouse machinery and IT infrastructure lease agreements.
During the year ended December 31, 2019, the Company modified certain terms of the lease agreement with
the landlord of Vertex’s Massachusetts facility, including early termination of the lease on November 30, 2019 and Vertex
subleasing a portion of the space until the end of November. In connection with the modification, the Company recognized expense
related to the early termination of approximately $2.2 million.
The Company has entered into two operating leases during 2020, with significant rights and obligations
that total $0.8 million. All other leases are not material.
12.
|
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, 2019. The unaudited information has been prepared on the same basis as the audited consolidated financial statements.
|
|
Year Ended December 31, 2019
|
|
|
|
Fourth
Quarter
|
|
|
Third
Quarter
|
|
|
Second
Quarter
|
|
|
First
Quarter
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
82,287
|
|
|
$
|
85,403
|
|
|
$
|
85,326
|
|
|
$
|
85,270
|
|
Gross profit
|
|
$
|
18,695
|
|
|
$
|
19,431
|
|
|
$
|
20,537
|
|
|
$
|
21,259
|
|
Operating (loss) income
|
|
$
|
76
|
|
|
$
|
(87
|
)
|
|
$
|
3,030
|
|
|
$
|
3,863
|
|
Net (loss) income
|
|
$
|
(656
|
)
|
|
$
|
(721
|
)
|
|
$
|
1,643
|
|
|
$
|
2,284
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
0.10
|
|
|
$
|
0.14
|
|
Diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
0.10
|
|
|
$
|
0.14
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
Fourth
Quarter
|
|
|
Third
Quarter
|
|
|
Second
Quarter
|
|
|
First
Quarter
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
87,906
|
|
|
$
|
90,074
|
|
|
$
|
93,852
|
|
|
$
|
85,026
|
|
Gross profit
|
|
$
|
20,979
|
|
|
$
|
21,393
|
|
|
$
|
22,347
|
|
|
$
|
20,489
|
|
Operating income
|
|
$
|
3,190
|
|
|
$
|
3,046
|
|
|
$
|
4,392
|
|
|
$
|
3,270
|
|
Net income
|
|
$
|
1,628
|
|
|
$
|
2,455
|
|
|
$
|
2,606
|
|
|
$
|
1,947
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.10
|
|
|
$
|
0.15
|
|
|
$
|
0.16
|
|
|
$
|
0.12
|
(1)
|
Diluted
|
|
$
|
0.10
|
|
|
$
|
0.15
|
|
|
$
|
0.16
|
|
|
$
|
0.12
|
(1)
|
(1)
|
The “two-class” method was used to calculate earnings per share which resulted in the same value.
|