HOUSTON WIRE & CABLE COMPANY
Consolidated Balance Sheets
(In thousands, except share data)
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June 30,
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December 31,
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2014
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2013
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(unaudited)
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Assets
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Current assets:
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Accounts receivable, net
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$
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63,954
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$
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60,408
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Inventories, net
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87,368
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96,107
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Deferred income taxes
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2,784
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2,591
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Income taxes
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696
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420
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Prepaids
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1,432
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762
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Total current assets
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156,234
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160,288
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Property and equipment, net
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8,280
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7,974
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Intangible assets, net
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9,367
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10,234
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Goodwill
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17,520
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17,520
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Other assets
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172
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159
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Total assets
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$
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191,573
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$
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196,175
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Liabilities and stockholders' equity
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Current liabilities:
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Book overdraft
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$
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2,418
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$
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4,594
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Trade accounts payable
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11,630
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13,637
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Accrued and other current liabilities
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13,004
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18,772
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Total current liabilities
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27,052
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37,003
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Debt
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53,161
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47,952
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Other long term obligations
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96
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97
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Deferred income taxes
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303
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429
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Total liabilities
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80,612
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85,481
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Stockholders' equity:
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Preferred stock, $0.001 par value; 5,000,000 shares authorized, none issued and outstanding
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—
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—
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Common stock, $0.001 par value; 100,000,000 shares
authorized: 20,988,952 shares issued: 17,679,771 and 17,954,032 outstanding at June 30, 2014 and December 31, 2013,
respectively
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21
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21
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Additional paid-in-capital
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55,563
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55,642
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Retained earnings
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108,267
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104,607
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Treasury stock
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(52,890
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)
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(49,576
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)
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Total stockholders' equity
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110,961
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110,694
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Total liabilities and stockholders' equity
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$
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191,573
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$
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196,175
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The accompanying Notes are an integral part
of these Consolidated Financial Statements.
HOUSTON WIRE & CABLE COMPANY
Consolidated Statements of Income
(Unaudited)
(In thousands, except share and per share
data)
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2014
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2013
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2014
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2013
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Sales
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$
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103,461
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$
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99,332
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$
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203,760
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$
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193,636
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Cost of sales
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81,022
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77,607
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159,617
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150,532
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Gross profit
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22,439
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21,725
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44,143
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43,104
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Operating expenses:
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Salaries and commissions
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8,061
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7,785
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16,184
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15,752
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Other operating expenses
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6,728
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6,315
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13,220
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12,596
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Depreciation and amortization
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762
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758
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1,503
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1,503
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Total operating expenses
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15,551
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14,858
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30,907
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29,851
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Operating income
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6,888
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6,867
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13,236
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13,253
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Interest expense
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345
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252
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613
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|
525
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Income before income taxes
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6,543
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6,615
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12,623
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12,728
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Income taxes
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2,512
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2,562
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4,847
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4,813
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Net income
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$
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4,031
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$
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4,053
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$
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7,776
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$
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7,915
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Earnings per share:
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Basic
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$
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0.23
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$
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0.23
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$
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0.44
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$
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0.45
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Diluted
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$
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0.23
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$
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0.23
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$
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0.44
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$
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0.44
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Weighted average common shares outstanding:
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Basic
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17,647,936
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17,800,056
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17,748,863
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17,776,500
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Diluted
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17,713,021
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17,898,911
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17,821,479
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17,872,307
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Dividend declared per share
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$
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0.12
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$
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0.11
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$
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0.23
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$
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0.20
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The accompanying Notes are an integral part
of these Consolidated Financial Statements.
HOUSTON WIRE & CABLE COMPANY
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
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Six Months
Ended June 30,
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2014
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2013
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Operating activities
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Net income
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$
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7,776
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$
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7,915
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Adjustments to reconcile net income to net cash provided by operating activities:
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Depreciation and amortization
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1,503
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1,503
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Amortization of unearned stock compensation
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450
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433
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Provision for inventory obsolescence
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704
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226
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Deferred income taxes
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(319
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)
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(183
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)
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Other non-cash items
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89
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(15
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)
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Changes in operating assets and liabilities:
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Accounts receivable
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(3,626
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)
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1,399
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Inventories
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8,035
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|
604
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Book overdraft
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(2,176
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)
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6,529
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Trade accounts payable
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(2,007
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)
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(175
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)
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Accrued and other current liabilities
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(5,880
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)
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(1,783
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)
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Income taxes
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(289
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)
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(661
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)
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Other operating activities
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(693
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)
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(433
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)
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Net cash provided by operating activities
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3,567
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15,359
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Investing activities
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Expenditures for property and equipment
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(942
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)
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(600
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)
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Net cash used in investing activities
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(942
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)
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(600
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)
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Financing activities
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Borrowings on revolver
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204,327
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192,540
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Payments on revolver
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(199,118
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)
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(204,479
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)
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Payment of dividends
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(4,077
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)
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(3,552
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)
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Purchase of treasury stock
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(3,852
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)
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(6
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)
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Other financing activities
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|
95
|
|
|
|
464
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|
Net cash used in financing activities
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(2,625
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)
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(15,033
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)
|
|
|
|
|
|
|
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Net change in cash
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|
—
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|
|
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(274
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)
|
Cash at beginning of period
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—
|
|
|
|
274
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|
|
|
|
|
|
|
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Cash at end of period
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$
|
—
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$
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—
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|
The accompanying Notes are an integral part
of these Consolidated Financial Statements.
HOUSTON WIRE & CABLE COMPANY
Notes to Consolidated Financial Statements
(Unaudited)
(in thousands, except share data)
1. Basis of Presentation and Principles of Consolidation
Houston Wire & Cable Company (the “Company”),
through its wholly owned subsidiaries, HWC Wire & Cable Company, Advantage Wire & Cable and Cable Management Services Inc.,
provides wire and cable, hardware and related services to the U.S. market through twenty-three locations in fourteen states throughout
the United States. The Company has no other business activity.
The consolidated financial statements as
of June 30, 2014 and for the three and six months ended June 30, 2014 and 2013 have been prepared following accounting principles
generally accepted in the United States (“GAAP”) for interim financial information and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion
of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation of
the results of these interim periods have been included. The results of operations for the interim periods are not necessarily
indicative of the results that may be expected for the full year. All significant inter-company balances and transactions have
been eliminated. The Company has evaluated subsequent events through the time these financial statements in this Form 10-Q were
filed with the Securities and Exchange Commission (the “SEC”).
The preparation of the financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. The most significant estimates are those relating to the
inventory obsolescence reserve, the reserve for returns and allowances, vendor rebates and asset impairments. Actual results could
differ materially from the estimates and assumptions used for the preparation of the financial statements.
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, 2013 filed with the SEC.
Recent Accounting Pronouncements
In May 2014, the FASB issued
Accounting Standards Update (“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 ASU also requires additional disclosure about the nature, amount, timing and uncertainty of
revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets
recognized from costs incurred to obtain or fulfill a contract. The amendments in the ASU must be applied using one of two
retrospective methods and are effective for annual and interim periods beginning after December 15, 2016. Early adoption is
not permitted. The Company is still evaluating the impact of this ASU.
2. Earnings per Share
Basic earnings per share is calculated
by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share include the
dilutive effects of stock options and unvested restricted stock awards and units.
The following reconciles the denominator
used in the calculation of diluted earnings per share:
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Three Months Ended
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Six Months Ended
|
|
|
|
June 30,
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June 30,
|
|
|
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2014
|
|
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2013
|
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2014
|
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|
2013
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|
Denominator:
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|
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Weighted average common shares for basic earnings per share
|
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|
17,647,936
|
|
|
|
17,800,056
|
|
|
|
17,748,863
|
|
|
|
17,776,500
|
|
Effect of dilutive securities
|
|
|
65,085
|
|
|
|
98,855
|
|
|
|
72,616
|
|
|
|
95,807
|
|
Weighted average common shares for diluted earnings per share
|
|
|
17,713,021
|
|
|
|
17,898,911
|
|
|
|
17,821,479
|
|
|
|
17,872,307
|
|
The weighted average common shares for
diluted earnings per share exclude stock options to purchase 521,747 and 497,045 shares for the three months ended June 30, 2014
and 2013, respectively, and 484,949 and 549,525 shares for the six months ended June 30, 2014 and 2013, respectively. These options
have been excluded from the calculation, as including them would have an anti-dilutive effect on earnings per share for the respective
periods.
3. 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. At June 30, 2014 the Company’s goodwill balance was $17,520, representing 9.2% of total assets.
4.
Debt
On September 30, 2011, HWC Wire & Cable
Company, as borrower, entered into the Third Amended and Restated Loan and Security Agreement (“2011 Loan Agreement”),
with certain lenders and Bank of America, N.A., as agent, and the Company, as guarantor, executed a Second Amended and Restated
Guaranty of the borrower’s obligations thereunder. The 2011 Loan Agreement provides for a $100 million revolving credit facility,
bears interest at the agent’s base rate, with a London Interbank Offered Rate (“LIBOR”) option and expires on
September 30, 2016. The 2011 Loan Agreement is secured by a lien on substantially all the property of the Company, other than
real estate. Availability under the 2011 Loan Agreement is limited to a borrowing base equal to 85% of the value of eligible accounts
receivable, plus 65% of the value of eligible inventory, less certain reserves.
Portions of the loan may be converted
to LIBOR loans in minimum amounts of $1,000 and integral multiples of $100. LIBOR loans bear interest at the British Bankers Association
LIBOR Rate plus 125 to 200 basis points based on availability, and loans not converted to LIBOR loans bear interest at a fluctuating
rate equal to the greatest of the agent’s prime rate, the federal funds rate plus 50 basis points, or 30-day LIBOR plus 150
basis points. Unused commitment fees are 25 or 30 basis points, depending on the amount of the unused commitment.
The 2011 Loan Agreement includes, among other things, covenants
that require the Company to maintain a specified minimum fixed charge coverage ratio and availability levels. Additionally, the
2011 Loan Agreement allows for the unlimited payment of dividends and repurchases of stock, subject to the absence of events of
default and maintenance of a fixed charge coverage ratio and minimum level of availability. The 2011 Loan Agreement contains certain
provisions that may cause the debt to be classified as a current liability, in accordance with GAAP, if availability falls below
certain thresholds, even though the ultimate maturity date under the loan agreement remains as September 30, 2016. Availability
has remained above these thresholds. At June 30, 2014, the Company was in compliance with the financial covenants governing its
indebtedness.
The carrying amount of long term debt approximates
fair value as it bears interest at variable rates, which is a Level 2 measurement as defined in Accounting Standards Codification
(“ASC”) Topic 820, Fair Value Measurement.
5. Stockholders’ Equity
During the first and second quarter of
2014, the Board of Directors approved quarterly dividends of $0.11 per share and $0.12 per share, respectively, payable to stockholders. Dividends
paid were $4,077 and $3,552 during the six months ended June 30, 2014 and 2013, respectively.
6. Stock Based Compensation
Stock Option Awards
There were no stock options granted during
the first six months of 2014.
Restricted Stock Awards and
Restricted Stock Units
Following the Annual Meeting
of Stockholders on May 6, 2014, the Company awarded restricted stock units with a value of $50 to each
non-employee director who was elected or re-elected, for an aggregate of 25,422 restricted stock units. Each award of
restricted stock units vests at the date of the 2015 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.
Total stock-based compensation cost was
$237 and $188 for the three months ended June 30, 2014 and 2013, respectively and $450 and $433 for the six months ended June 30,
2014 and 2013, respectively, and is included in salaries and commissions.
7. Commitments and Contingencies
As part of an acquisition 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 $96 at June 30, 2014 relates to the cost of the monitoring, which the Company estimates will
be incurred over approximately the next 4 years, and also the cost to plug the wells. Remediation work was completed prior to the
acquisition in accordance with the requirements of the Louisiana Department of Environmental Quality.
The Company, along with many other defendants,
has been named in a number of lawsuits in the state courts of Illinois, Minnesota, North Dakota, and South Dakota alleging that
certain wire and cable which may have contained asbestos caused injury to the plaintiffs who were exposed to this wire and cable.
These lawsuits are individual personal injury suits that seek unspecified amounts of money damages as the sole remedy. It is not
clear whether the alleged injuries occurred as a result of the wire and cable in question or whether the Company, in fact, distributed
the wire and cable alleged to have caused any injuries. The Company maintains general liability insurance that, to date,
has covered the defense of and all costs associated with these claims. In addition, the Company did not manufacture any of the
wire and cable at issue, and the Company would rely on any warranties from the manufacturers of such cable if it were determined
that any of the wire or cable that the Company distributed contained asbestos which caused injury to any of these plaintiffs. In
connection with ALLTEL’s sale of the Company in 1997, ALLTEL provided indemnities with respect to costs and damages associated
with these claims that the Company believes it could enforce if its insurance coverage proves inadequate.
There are no legal proceedings pending
against or involving the Company that, in management’s opinion, based on the current known facts and circumstances, are expected
to have a material adverse effect on the Company’s consolidated financial position, cash flows, or results from operations.
8. Subsequent Events
On August 5, 2014, the Board of Directors
approved a dividend on the shares of common stock of the Company in the amount of $0.12 per share, payable on August 29, 2014,
to stockholders of record at the close of business on August 17, 2014.
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, 2013.
Overview
We are one of the largest distributors
of wire and cable and related services to the U.S. market. We provide our customers with a single-source solution for wire and
cable, hardware and related services by offering a large selection of in-stock items, exceptional customer service and high levels
of product expertise.
Critical Accounting Policies
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 allowance for doubtful
accounts, the reserve for returns and allowances, the inventory reserve, intangible assets, vendor rebates and goodwill. 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, 2013 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
six months ended June 30, 2014.
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, 2013, 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 income, expressed as a percentage of net sales for the periods
presented.
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
78.3
|
%
|
|
|
78.1
|
%
|
|
|
78.3
|
%
|
|
|
77.7
|
%
|
Gross profit
|
|
|
21.7
|
%
|
|
|
21.9
|
%
|
|
|
21.7
|
%
|
|
|
22.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and commissions
|
|
|
7.8
|
%
|
|
|
7.8
|
%
|
|
|
7.9
|
%
|
|
|
8.1
|
%
|
Other operating expenses
|
|
|
6.5
|
%
|
|
|
6.4
|
%
|
|
|
6.5
|
%
|
|
|
6.5
|
%
|
Depreciation and amortization
|
|
|
0.7
|
%
|
|
|
0.8
|
%
|
|
|
0.7
|
%
|
|
|
0.8
|
%
|
Total operating expenses:
|
|
|
15.0
|
%
|
|
|
15.0
|
%
|
|
|
15.2
|
%
|
|
|
15.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
6.7
|
%
|
|
|
6.9
|
%
|
|
|
6.5
|
%
|
|
|
6.8
|
%
|
Interest expense
|
|
|
0.3
|
%
|
|
|
0.3
|
%
|
|
|
0.3
|
%
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
6.3
|
%
|
|
|
6.7
|
%
|
|
|
6.2
|
%
|
|
|
6.6
|
%
|
Income taxes
|
|
|
2.4
|
%
|
|
|
2.6
|
%
|
|
|
2.4
|
%
|
|
|
2.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
3.9
|
%
|
|
|
4.1
|
%
|
|
|
3.8
|
%
|
|
|
4.1
|
%
|
Note:
Due to rounding, percentages may not add
up to total operating expenses, operating income, income before income taxes or net income.
Comparison of the Three Months Ended June 30, 2014 and 2013
Sales
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
(Dollars in millions)
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
Sales
|
|
$
|
103.5
|
|
|
$
|
99.3
|
|
|
$
|
4.1
|
|
|
|
4.2
|
%
|
Our sales for the second quarter increased
4.2% to $103.5 million in 2014 from $99.3 million in 2013. These results reflect continued improved regional performances, including
contributions from some regions that under-performed in 2013. We estimate that, when adjusted for the fluctuation in metal prices,
sales for 2014 were up 7% compared to 2013. Our project business, which includes our key growth initiatives encompassing Environmental
Compliance, Engineering & Construction, Industrials, Utility Power Generation, and Mechanical increased 8%, or
approximately 11% on a metals adjusted basis, over 2013. Maintenance, Repair, and Operations (“MRO”) grew 2%, or approximately 5%
on a metals adjusted basis over 2013.
Gross Profit
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
(Dollars in millions)
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
Gross profit
|
|
$
|
22.4
|
|
|
$
|
21.7
|
|
|
$
|
0.7
|
|
|
|
3.3
|
%
|
Gross margin
|
|
|
21.7
|
%
|
|
|
21.9
|
%
|
|
|
(0.2
|
)%
|
|
|
|
|
Gross profit increased 3.3% to $22.4 million
in 2014 from $21.7 million in 2013. The increase in gross profit was primarily attributed to the higher sales in 2014. Gross margin
(gross profit as a percentage of sales) decreased to 21.7% in 2014 from 21.9% in 2013. This decrease was primarily due to an increase
in the inventory reserve and lower vendor rebates partially offset by a slight increase in the gross margin on our products.
Operating Expenses
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
(Dollars in millions)
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and commissions
|
|
$
|
8.1
|
|
|
$
|
7.8
|
|
|
$
|
0.3
|
|
|
|
3.5
|
%
|
Other operating expenses
|
|
|
6.7
|
|
|
|
6.3
|
|
|
|
0.4
|
|
|
|
6.5
|
%
|
Depreciation and amortization
|
|
|
0.8
|
|
|
|
0.8
|
|
|
|
0.0
|
|
|
|
0.5
|
%
|
Total operating expenses
|
|
$
|
15.6
|
|
|
$
|
14.9
|
|
|
$
|
0.7
|
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses as a percent of sales
|
|
|
15.0
|
%
|
|
|
15.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
Note: Due to rounding, numbers may not add up to
total operating expenses.
Salaries and commissions increased $0.3
million primarily due to higher operations salary expense.
Other operating expenses increased $0.4
million primarily due to the addition of three new operating locations and higher property taxes in 2014.
Depreciation and amortization remained
consistent between the periods.
Operating expenses as a percentage of sales
remained consistent between the periods.
Interest Expense
Interest expense increased $0.1 million
or 36.9% due to higher average debt levels. Average debt was $61.2 million in 2014 compared to $46.1 million in 2013. The average
effective interest rate remained unchanged between the periods at 2.1%.
Income Taxes
Income tax expense decreased $0.1 million
in 2014 compared to 2013. The effective income tax rate decreased to 38.4% in 2014 from 38.7% in 2013 due to a higher state tax
rate in 2013.
Net Income
We achieved net income of $4.0 million
in 2014 compared to $4.1 million in 2013, a decrease of 0.5%.
Comparison of the Six Months Ended June 30, 2014 and 2013
Sales
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
(Dollars in millions)
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
Sales
|
|
$
|
203.8
|
|
|
$
|
193.6
|
|
|
$
|
10.1
|
|
|
|
5.2
|
%
|
Sales in the six month period
ended June 30, 2014 increased 5.2% to $203.8 million from $193.6 million in the comparable 2013 period. We estimate sales
increased approximately 7% when adjusted for metals price fluctuations. Sales in our core MRO sector were up 2% or 4% on a
metals adjusted basis, as business conditions improved in select geographies. Our project business which includes our key
growth initiatives encompassing Environmental Compliance, Engineering & Construction, Industrials, Utility Power
Generation and Mechanical, were up approximately 12% compared to the sluggish first six months of 2013. When adjusted for
metals price fluctuation, we estimate our project sales were up 14% through the first six months of the year.
Gross Profit
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
(Dollars in millions)
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
Gross profit
|
|
$
|
44.1
|
|
|
$
|
43.1
|
|
|
$
|
1.0
|
|
|
|
2.4
|
%
|
Gross margin
|
|
|
21.7
|
%
|
|
|
22.3
|
%
|
|
|
(0.6
|
)%
|
|
|
|
|
Gross profit increased 2.4% to $44.1 million
in 2014 from $43.1 million in 2013. The increase in gross profit was attributed to the increase in sales. Gross margin (gross profit
as a percentage of sales) decreased to 21.7% in 2014 from 22.3% in 2013. This decrease is primarily attributed to an increase the
inventory reserve, lower vendor rebates and higher freight costs.
Operating Expenses
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
(Dollars in millions)
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and commissions
|
|
$
|
16.2
|
|
|
$
|
15.8
|
|
|
$
|
0.4
|
|
|
|
2.7
|
%
|
Other operating expenses
|
|
|
13.2
|
|
|
|
12.6
|
|
|
|
0.6
|
|
|
|
5.0
|
%
|
Depreciation and amortization
|
|
|
1.5
|
|
|
|
1.5
|
|
|
|
0.0
|
|
|
|
0.0
|
%
|
Total operating expenses
|
|
$
|
30.9
|
|
|
$
|
29.9
|
|
|
$
|
1.1
|
|
|
|
3.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses as a percent of sales
|
|
|
15.2
|
%
|
|
|
15.4
|
%
|
|
|
(0.2
|
)%
|
|
|
|
|
Note: Due to rounding, numbers may not add up to
total operating expenses.
Salaries and commissions increased
primarily due to higher operations salary expense.
Other operating expenses increased $0.6
million or 5.0% primarily due to three new operating locations and professional fees.
Depreciation and amortization remained
consistent between periods.
Operating expenses as a percentage of sales
decreased to 15.2% in 2014 from 15.4% in 2013 due to the operating leverage from higher sales.
Interest Expense
Interest expense increased 16.8% to $0.6
million in 2014 from $0.5 million in 2013 due to higher average debt levels. Average debt was $58.1 million in 2014 compared to
$49.7 million in 2013. The average effective interest rate remained consistent between periods at 2.0%.
Income Taxes
Income tax expense remained consistent
at $4.8 million between 2014 and 2013. The effective income tax rate increased to 38.4% in 2014 from 37.8% in 2013 due to a $0.2
million adjustment for an over accrual of state income taxes from a prior period that was recorded in 2013.
Net Income
We achieved net income of $7.8 million
in 2014 compared to $7.9 million in 2013, a decrease of 1.8%.
Impact of Inflation and Commodity Prices
Our results of operations are affected
by changes in the inflation rate and commodity prices. Moreover, because copper, petrochemical, aluminum and steel products are
components of the wire and cable and related hardware 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 four times a year, the impact of changes
in commodity prices in any particular quarter would primarily affect the results of the succeeding calendar quarter. 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, dividend payments, our stock repurchase program 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;
|
|
·
|
additional stock repurchases;
|
|
·
|
payment of dividends;
|
|
·
|
acquisitions; and
|
|
·
|
the ability to attract long-term capital with satisfactory terms
|
Comparison of the Six Months Ended June 30, 2014 and 2013
Our net cash provided by operating
activities was $3.6 million for the six months ended June 30, 2014 compared to $15.4 million in 2013. Our net
income decreased by $0.1 million or 1.8% to $7.8 million in 2014 from $7.9 million in 2013.
Changes in our operating assets
and liabilities resulted in cash used in operating activities of $6.6 million in the first half of 2014. Accrued and other
current liabilities decreased $5.9 million due to lower accrued wire purchases and volume rebates to our customers.
Accounts receivable increased $3.6 million due to higher sales. Book overdraft, which is funded by our revolving credit
facility as soon as the related vendor checks clear our disbursement account, decreased $2.2 million and accounts payable
decreased by $2.0 million due to lower inventory. Partially offsetting these uses of cash was an $8.0 million
reduction of inventory.
Net cash used in investing activities was
$0.9 million in 2014 compared to $0.6 million in 2013. The increase was primarily attributable to the purchase of machinery and
equipment used in operations and the renovation of a facility purchased in December 2013 which will be used to consolidate four
existing Southwest Wire Rope locations later in 2014.
Net cash used in financing activities
was $2.6 million in 2014 compared to $15.0 million in 2013. Net borrowings on the revolver of $5.2 million, the payment of
dividends of $4.1 million and the purchase of treasury stock of $3.9 million were the main components of financing activities
in 2014.
Indebtedness
Our principal source of liquidity at June
30, 2014 was working capital of $129.2 million compared to $123.3 million at December 31, 2013. We also had additional available
borrowing capacity of approximately $46.8 million at June 30, 2014 and $50.7 million at December 31, 2013 under our loan agreement.
We believe that we will have
adequate availability of capital to fund our present operations, meet our commitments on our existing debt, continue to fund
our dividend payments and stock repurchase program, 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.
Loan and Security Agreement
On September 30, 2011, we entered into
a Third Amended and Restated Loan and Security Agreement (the “2011 Loan Agreement”) with certain lenders and Bank
of America, N.A., as agent. The 2011 Loan Agreement provides for a $100 million revolving credit facility and expires on September
30, 2016. Availability under the 2011 Loan Agreement is limited to a borrowing base equal to 85% of the value of eligible accounts
receivable, plus 65% of the value of eligible inventory, less certain reserves. The 2011 Loan Agreement is secured by a lien on
substantially all our property, other than real estate.
Portions of the loan under the 2011 Loan
Agreement may be converted to LIBOR loans in minimum amounts of $1.0 million and integral multiples of $0.1 million. LIBOR loans
bear interest at the British Bankers Association LIBOR Rate plus 125 to 200 basis points based on availability, and loans not converted
to LIBOR loans bear interest at a fluctuating rate equal to the greatest of the agent’s prime rate, the federal funds rate
plus 50 basis points, or 30-day LIBOR plus 150 basis points. Additionally, we are obligated to pay an unused facility fee on the
unused portion of the loan commitment. Unused commitment fees are 25 or 30 basis points, depending on the amount of the unused
commitment.
Covenants in the 2011 Loan Agreement require
us to maintain certain minimum financial ratios and availability levels. Repaid amounts can be re-borrowed subject to the borrowing
base. As of June 30, 2014, we were in compliance with all financial covenants.
Contractual Obligations
The following table summarizes our loan
commitment at June 30, 2014:
In thousands
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More
than
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
53,161
|
|
|
$
|
—
|
|
|
$
|
53,161
|
|
|
$
|
—
|
|
|
$
|
—
|
|
There were no material changes in operating
lease obligations or non-cancellable purchase obligations since December 31, 2013.