Houston Wire & Cable Company
Houston Wire & Cable CO (Form: 10-Q, Received: 11/02/2007 08:17:16)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2007

or

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from   to ________________

Commission File Number: 000-52046


(Exact name of registrant as specified in its charter)


 
Delaware
 
36-4151663
 
 
(State or other jurisdiction of   incorporation or organization)
 
(I.R.S. Employer   Identification No.)
 
         
 
10201 North Loop East
Houston, Texas
 
77029
 
 
(Address of principal executive offices)
 
(Zip Code)
 

(713) 609-2100
(Registrant’s telephone number, including area code)
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days   YES    x   NO    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act

Large Accelerated Filer    ¨
Accelerated Filer    ¨
Non-Accelerated Filer    x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

YES    ¨ NO    x

At November 2, 2007 there were 19,490,841 outstanding shares of the registrant’s common stock, $ 0 .001 par value per share .
 



 
HOUST ON WIRE & CABLE COMPANY
Form 10-Q
For the Quarter Ended September 30, 2007

INDEX
 
PART I. FINANCIAL INFORMATION
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 


HOU STON WIRE & CABLE COMPANY
Consolidated Balance Sheets
(In thousands, except share data)


   
September 30,
   
December 31,
 
   
2007
   
2006
 
   
(unaudited)
       
Assets
           
Current assets:
           
Accounts receivable, net
  $
68,216
    $
52,128
 
Inventories, net
   
60,310
     
56,329
 
Income taxes receivable
   
93
     
 
Deferred income taxes
   
1,239
     
1,165
 
Prepaid expenses
   
1,019
     
450
 
Total current assets
   
130,877
     
110,072
 
                 
Property and equipment, net
   
3,030
     
2,973
 
Goodwill
   
2,996
     
2,996
 
Deferred income taxes
   
1,010
     
688
 
Other assets
   
135
     
135
 
Total assets
  $
138,048
    $
116,864
 
                 
Liabilities and stockholders' equity
               
Current liabilities:
               
Book overdraft
  $
2,382
    $
1,265
 
Trade accounts payable
   
15,639
     
10,988
 
Accrued and other current liabilities
   
12,583
     
10,358
 
Income taxes payable
   
     
520
 
Total current liabilities
   
30,604
     
23,131
 
                 
Long term obligations
   
28,595
     
12,059
 
                 
Stockholders' equity:
               
Common stock, $0.001 par value; 100,000,000 shares authorized: 20,988,952 shares issued and 19,490,841 outstanding at September 30, 2007 and 20,867,172 issued and outstanding at December 31, 2006
   
21
     
21
 
Additional paid-in-capital
   
53,638
     
50,979
 
Retained earnings
   
53,132
     
30,674
 
Treasury stock
    (27,942 )    
 
Total stockholders' equity
   
78,849
     
81,674
 
Total liabilities and stockholders' equity
  $
138,048
    $
116,864
 


The accompanying Notes are an integral part of these Consolidated Financial Statements


HO USTON WIRE & CABLE COMPANY
Consolidated Statements of Income
(Unaudited)
(In thousands, except share and per share data)


   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2007
   
2006
   
2007
   
2006
 
                         
Sales
 
$
98,922
   
$
89,963
   
$
269,920
   
$
240,575
 
Cost of sales
   
74,116
     
63,760
     
198,781
     
171,854
 
Gross profit
   
24,806
     
26,203
     
71,139
     
68,721
 
                                 
Operating expenses:
                               
Salaries and commissions
   
6,298
     
6,005
     
17,475
     
17,024
 
Other operating expenses
   
4,818
     
4,248
     
13,884
     
11,840
 
Management fee
   
     
     
     
208
 
Depreciation and amortization
   
112
     
93
     
331
     
276
 
Total operating expenses
   
11,228
     
10,346
     
31,690
     
29,348
 
Operating income
   
13,578
     
15,857
     
39,449
     
39,373
 
Interest expense
   
290
     
492
     
661
     
2,666
 
Income before income taxes
   
13,288
     
15,365
     
38,788
     
36,707
 
Income taxes
   
4,994
     
5,897
     
14,776
     
14,183
 
Net income
 
$
8,294
   
$
9,468
   
$
24,012
   
$
22,524
 
                                 
Earnings per share:
                               
Basic
 
$
0.41
   
$
0.45
   
$
1.16
   
$
1.24
 
Diluted
 
$
0.41
   
0.45
   
$
1.15
   
$
1.23
 
Weighted average common shares outstanding:
                               
Basic
   
20,395,199
     
20,867,172
     
20,739,550
     
18,203,902
 
Diluted
   
20,452,695
     
20,984,949
     
20,828,983
     
18,308,748
 


The accompanying Notes are an integral part of these Consolidated Financial Statements
 
 
HOUST ON WIRE & CABLE COMPANY
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)


   
Nine Months Ended
 
   
September 30,
 
   
2007
   
2006
 
             
Operating activities
           
Net income
  $
24,012
    $
22,524
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Depreciation and amortization
   
331
     
276
 
Amortization of capitalized loan costs
   
48
     
242
 
Amortization of unearned stock compensation
   
1,352
     
178
 
Provision for doubtful accounts
    (299 )    
 
Provision for returns and allowances
    (151 )    
211
 
Provision for inventory obsolescence
    (79 )    
345
 
Deferred income taxes
    (396 )     (52 )
Changes in operating assets and liabilities:
               
Accounts receivable
    (15,638 )     (16,785 )
Inventories
    (3,902 )     (23,365 )
Prepaid expenses
    (569 )     (190 )
Other assets
    (48 )     (28 )
Book overdraft
   
1,117
     
1,493
 
Trade accounts payable
   
4,651
     
5,454
 
Accrued and other current liabilities
   
2,225
     
3,500
 
Income taxes payable/receivable
    (613 )    
1,183
 
Net cash provided by (used in) operating activities
   
12,041
      (5,014 )
Investing activities
               
Expenditures for property, plant, and equipment
    (388 )     (334 )
Net cash used in investing activities
    (388 )     (334 )
Financing activities
               
Borrowings on revolver
   
287,453
     
240,651
 
Payments on revolver
    (270,917 )     (274,928 )
Payments on long-term obligations
   
      (10,300 )
Proceeds from exercise of common stock options
   
91
     
6
 
Proceeds from sale of common stock
   
     
51,381
 
Payment of common stock offering costs
   
      (1,482 )
Excess income tax benefit for common stock options
   
1,216
     
20
 
Payment of cash dividends
    (1,554 )    
 
Purchase of treasury stock
    (27,942 )    
 
Net cash provided by (used in) financing activities
    (11,653 )    
5,348
 
Net change in cash
   
     
 
Cash at beginning of period
   
     
 
Cash at end of period
  $
    $
 


The accompanying Notes are an integral part of these Consolidated Financial Statements.


HOU STON WIRE & CABLE COMPANY
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except per share amounts)
1. Basis of Presentation

Houston Wire & Cable Company (“HWC” or the “Company”) through its wholly owned subsidiaries, HWC Wire & Cable Company, Advantage Wire & Cable and Cable Management Services Inc., distributes specialty electrical wire and cable to the U.S. electrical distribution market through eleven locations in ten states throughout the United States.  The Company has no other business activity.

The consolidated financial statements as of September 30, 2007 and for the three and nine months ended September 30, 2007 and 2006 have been prepared in accordance with U.S. generally accepted accounting principles (“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 accruals, 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.

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, returns and allowances, the inventory obsolescence reserve and the accrual for vendor rebates.  These estimates are continually reviewed and adjusted as necessary, but actual results could differ from those estimates.

On May 16, 2006, the Company effected a 1.875-for-1 stock split for its outstanding common stock in the form of a stock dividend.  All stockholder equity balances and disclosures in the accompanying consolidated financial statements have been retroactively restated for such stock split.

For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 filed with the Securities and Exchange Commission (the “SEC”).


Reclassification

Certain prior period amounts have been reclassified to conform to the current year presentation.

Adoption of New Accounting Policy

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 (“FIN 48”).  FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a recognition threshold for tax positions taken or expected to be taken in a tax return.  FIN 48 requires that entities recognize in their financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  Interest and penalties, if incurred, would be recognized as components of interest expense and other operating expenses. The Company’s adoption of FIN 48 on January 1, 2007 had no impact on the Company’s consolidated financial statements. The tax years 2002-2006 remain open to examination by the major taxing jurisdictions to which we are subject.

Recent Accounting Pronouncements

In March 2006, the Emerging Issues Task Force reached a consensus on EITF Issue No. 06-3 (“EITF 06-3”), How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (that is, Gross versus Net Presentation) , which allows companies to adopt a policy of presenting taxes in the income statement on either a gross or net basis. Taxes within the scope of this EITF 06-3 would include taxes that are imposed on a revenue transaction between a seller and a customer, for example, sales taxes, use taxes, value-added taxes, and some types of excise taxes. EITF 06-3 is effective for interim and annual reporting periods beginning after December 15, 2006. The Company presents sales net of sales taxes in its consolidated statement of income. No change in presentation was required as a result of adoption of EITF 06-3.


2. Earnings per Share

In accordance with Statement of Financial Accounting Standards (“SFAS”) 128, Earnings per Share , basic earnings per share is calculated by dividing the net income by the weighted-average number of common shares outstanding. Diluted earnings per share includes the dilutive effects of stock option awards.  The numerator used in the calculation of both basic and diluted net income per share for all periods presented was net income.  The denominator for each period presented was determined as follows:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2007
   
2006
   
2007
   
2006
 
Weighted average common shares for basic earnings per share
   
20,395
     
20,867
     
20,740
     
18,204
 
Effect of dilutive securities
   
58
     
118
     
89
     
105
 
Denominator of diluted earnings per share
   
20,453
     
20,985
     
20,829
     
18,309
 

The weighted average number of stock-based awards not included in the calculation of the dilutive effect of stock based awards was 660 and 50 for the three months ended September 30, 2007 and 2006, respectively, and 541 and 17 for the nine months ended September 30, 2007 and 2006, respectively.

3. Public Offerings

On June 14, 2006, a Registration Statement relating to the Company’s initial public offering of common stock was declared effective by the SEC.  As a result, the Company issued 4,250 shares of common stock which were subsequently sold to the public for $13 per share.  Certain selling stockholders sold an additional 5,525 shares which also were resold to the public for $13 per share. The Company received net proceeds of $49,900 after deducting the underwriting discounts and offering expenses.  The net proceeds were used to repay a portion of the outstanding debt.

In March 2007, the Company registered an offering for its largest stockholder, Code, Hennessy & Simmons II, L.P. and other selling stockholders, who sold approximately 7,500 common shares at $25 per share. All the shares were sold by selling stockholders, including approximately 6,900 common shares from Code, Hennessy & Simmons II, L.P., thus there was no dilution to earnings per share or proceeds to the Company. As a result of the offering, Code, Hennessy & Simmons II, L.P.’s ownership was reduced from 38% to 8%.  Code, Hennessy & Simmons II, L.P. subsequently distributed all of the remaining shares to its partners and no longer holds any shares of common stock.

4.   Long Term Obligations

The Company’s current loan and security agreement provides for a $75,000 revolving loan, bears interest at the agent bank’s base interest rate and matures on May 21, 2010. The balance outstanding at September 30, 2007 is almost entirely due to borrowings in connection with the Company’s stock repurchase program that was approved during the quarter ended September 30, 2007 (see Note 5).  The Company is in compliance with the financial covenants governing its indebtedness.

5.  Retained Earnings

The Board of Directors approved a stock repurchase program to be completed on or before August 30, 2009, where the Company is authorized to purchase up to $50,000 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 currently being held as treasury shares.  During the quarter ended September 30, 2007, the Company repurchased 1,498 shares for a total cost of $27,942.

On August 1, 2007, the Board of Directors approved a quarterly dividend of $0.075 per share payable to shareholders of record on August 15, 2007.  This dividend totaling $1,554 was paid on August 31, 2007.

6. Stock Based Compensation

No options were granted during the quarter ended September 30, 2007.

On May 1, 2007, at the Annual Meeting of Stockholders, upon re-election, the four independent directors each received the annual grant of an option to purchase 5 shares of common stock with an exercise price equal to the fair market value of the Company’s stock at the close of trading on that day. These options have a contractual life of ten years and vest after one year.


On March 9, 2007, the Company granted to the Company’s chief executive officer, an option to purchase 500 shares of its common stock with an exercise price equal to the fair market value of the Company’s stock at the close of trading on March 9, 2007. This option has a contractual life of ten years and vests 50% four years after the date of grant and 50% five years after the date of grant, provided that in the event of the chief executive officer’s death or permanent disability, such option would vest ratably based on the days served from the date of grant.

The fair value of each option awarded is estimated on the date of grant using a Black-Scholes option-pricing model. Expected volatilities are based on historical volatility of the Company's stock and the historical volatility of the stock of similar companies, and other factors. The Company uses historical data to estimate option exercises and employee terminations within the valuation model. The expected life of options granted represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.


The following assumptions (the same as those used as of June 30, 2007 since no options have been granted since that date) were used to calculate the fair value of the Company’s options on the date of grant during the nine months ended September 30, 2007:

 
2007
Expected volatility
42%
Expected life in years
5.5 years
Risk-free interest rate
4.59% - 4.64%
Dividend yield
0%

Total stock-based compensation cost was $497 and $121 for the three months ended September 30, 2007 and 2006, respectively, and $1,352 and $177 for the nine months ended September 30, 2007 and 2006, respectively. Total income tax benefit recognized for stock-based compensation arrangements was $191 and $47 for the three months ended September 30, 2007 and 2006, respectively, and $521 and $68 for the nine months ended September 30, 2007 and 2006, respectively.

As of September 30, 2007, there was $7,016 of total unrecognized compensation cost related to nonvested share-based compensation arrangements. The cost is expected to be recognized over a weighted average period of approximately fifty-one months.

7. Contingencies

HWC, along with many other defendants, has been named in a number of lawsuits in the state courts of Minnesota, North Dakota and South Dakota alleging that certain wire and cable which may have contained asbestos caused injury to the plaintiffs who were exposed to this wire and cable. These lawsuits are individual personal injury suits that seek unspecified amounts of money damages as the sole remedy. It is not clear whether the alleged injuries occurred as a result of the wire and cable in question or whether HWC, in fact, distributed the wire and cable alleged to have caused any injuries. In addition, HWC did not manufacture any of the wire and cable at issue, and HWC would rely on any warranties from the manufacturers of such cable if it were determined that any of the wire or cable that HWC 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 HWC believes it could enforce if its insurance coverage proves inadequate. In addition, HWC maintains general liability insurance that has applied to these claims. To date, all costs associated with these claims have been covered by the applicable insurance policies and all defense of these claims has been handled by the applicable insurance companies.

In addition to the foregoing cases, 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 Event

On October 30, 2007, the Board of Directors approved a dividend on the shares of common stock of the Company in the amount of $0.075 per share, payable on or before November 30, 2007, to stockholders of record at the close of business on November 15, 2007.


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, 2006.


Over view

We are one of the largest distributors of specialty wire and cable and related services to the U.S. electrical distribution market. We serve over 2,700 customers in over 8,000 individual locations, including virtually all of the top 200 electrical distributors in the U.S. We have strong relationships with leading wire and cable manufacturers and provide them with efficient access to the fragmented electrical distribution market. We distribute approximately 22,000 SKUs (stock-keeping units) from eleven strategically located distribution centers in ten states. We are focused on providing our electrical distributor customers with a single-source solution for specialty wire and cable and related services by offering a large selection of in-stock items, exceptional customer service and high levels of product expertise.

We offer products in most categories of specialty wire and cable, including:

 
·
continuous and interlocked armor cable (cable encapsulated in either a seamless or interlocked aluminum protective sheath);
 
·
control and power cable (single or multiple conductor industrial cable);
 
·
electronic wire and cable (computer, audio and signal cable);
 
·
flexible and portable cords (flexible, heavy duty industrial cable);
 
·
instrumentation and thermocouple cable (cables used for transmitting signals for instruments and heat sensing devices);
 
·
lead and high temperature cable (single conductor cable used for low or high temperature applications);
 
·
medium voltage cable (cables used for applications between 2,001 volts and 35,000 volts); and
 
·
premise and category wire and cable (cable used for home and high speed data applications).


We also offer private branded products, including our LifeGuard™ low-smoke, zero-halogen cable. Low-smoke, zero halogen products are made with compounds that produce no halogen gases and very little smoke while under combustion.

In addition to our product offerings, we provide comprehensive value-added services including: standard same day shipment from our extensive inventory and distribution network; application engineering support through our knowledgeable sales and technical support staff; custom cutting of wire and cable to exact specifications; inventory management programs that provide job-specific asset management and just-in-time delivery; job-site delivery and logistics support; 24/7/365 customer service provided by our own employees; and customized internet-based ordering capabilities.

Critical Accounting Policies

Critical accounting policies are those that both are important to the accurate portrayal of a company's financial condition and results, and require subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

In order to prepare financial statements that conform to GAAP, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Certain estimates are particularly sensitive due to their significance to the financial statements and the possibility that future events may be significantly different from our expectations.

We have identified the following accounting policies as those that require us to make the most subjective or complex judgments in order to fairly present our consolidated financial position and results of operations. Actual results in these areas could differ materially from management's estimates under different assumptions and conditions.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts receivable for estimated losses resulting from the inability of our customers to make required payments. We perform periodic credit evaluations of our customers and typically do not require collateral. Consistent with industry practices, we require payment from most customers within 30 days of invoice date. We have an estimation procedure, based on historical data and recent changes in the aging of these receivables, which we use to record reserves throughout the year. In the last five years, write-offs against our allowance for doubtful accounts have averaged approximately $165,000 per year. A 20% change in our estimate at September 30, 2007 would have resulted in a change in income before income taxes of approximately $25,000.


Reserve for Returns and Allowances

We estimate the gross profit impact of returns and allowances for previously recorded sales. This reserve is calculated on historical and statistical returns and allowances data and adjusted as trends in the variables change. A 20% change in our estimate at September 30, 2007 would have resulted in a change in income before income taxes of approximately $106,000.

Inventory Obsolescence

We continually monitor our inventory levels at each of our distribution locations. Our reserve for inventory obsolescence is based on the age of the inventory, movements of our inventory over the prior twelve months and the experience of our purchasing and sales departments in estimating demand for the product in the succeeding year. Our inventories are generally not susceptible to technological obsolescence. A 20% change in our estimate at September 30, 2007 would have resulted in a change in income before income taxes of approximately $370,000.

Vendor Rebates

Many of our arrangements with our vendors entitle us to receive a rebate of a specified amount when we achieve any of a number of measures, generally related to the volume of purchases from the vendor. We account for these rebates as a reduction of the prices of the vendor's products, which reduces inventory until we sell the product, at which time these rebates reduce cost of sales. Throughout the year, we estimate the amount of rebates earned based on our purchases to date and our estimate of purchases to be made for the remainder of the year relative to the purchase levels that mark our progress toward earning the rebates. We continually revise these estimates to reflect actual purchase levels. A 20% change in our estimate of total rebates earned at September 30, 2007 would have resulted in a change in income before income taxes of approximately $1,134,000.

Goodwill
 
Goodwill represents the excess of the amount we paid to acquire businesses over the estimated fair value of tangible assets and identifiable intangible assets acquired, less liabilities assumed. At September 30, 2007, our net goodwill balance was $3.0 million, representing 2.2% of our total assets.

Under the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), we test goodwill for impairment annually, or more frequently if indications of possible impairment exist, by applying a fair value-based test. In October 2007, we performed our annual goodwill impairment tests for goodwill and other indefinite-lived intangible assets, and, as a result of this test, we believe the goodwill on our balance sheet is not impaired.

If circumstances change or events occur to indicate that our fair value has fallen below book value, we will compare the estimated fair value of the goodwill to its carrying value. If the carrying value of goodwill exceeds the estimated fair value of goodwill, we will recognize the difference as an impairment loss in operating income.


Resu lts 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
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2007
   
2006
   
2007
   
2006
 
                         
Sales
    100.0 %     100.0 %     100.0 %     100.0 %
Cost of sales
    74.9 %     70.9 %     73.6 %     71.4 %
Gross profit
    25.1 %     29.1 %     26.4 %     28.6 %
                                 
Operating expenses:
                               
Salaries and commissions
    6.4 %     6.7 %     6.5 %     7.1 %
Other operating expenses
    4.9 %     4.7 %     5.1 %     4.9 %
Management fee
    0.0 %     0.0 %     0.0 %     0.1 %
Depreciation and amortization
    0.1 %     0.1 %     0.1 %     0.1 %
Total operating expenses
    11.4 %     11.5 %     11.7 %     12.2 %
                                 
Operating income
    13.7 %     17.6 %     14.6 %     16.4 %
Interest expense
    0.3 %     0.5 %     0.2 %     1.1 %
                                 
Income before income taxes
    13.4 %     17.1 %     14.4 %     15.3 %
Income taxes
    5.0 %     6.6 %     5.5 %     5.9 %
                                 
Net income
    8.4 %     10.5 %     8.9 %     9.4 %

Note:   Due to rounding, percentages may not add up to operating expenses, operating income, income before taxes or net income.


Comparison of the Three Months Ended September 30, 2007 and 2006

Sales

   
Three Months Ended
 
   
September 30,
 
(in millions)
 
2007
   
2006
   
Change
 
Sales
  $
98.9
    $
90.0
    $
9.0
      10.0 %

Internal growth accounted for the entire increase in sales. Sales in the third quarter increased 10.0% to $98.9 million in spite of a very difficult comparison from last year’s third quarter growth of 54.3%. We continue to penetrate our target markets in the Utility, Infrastructure, and Industrial Sectors which drove sales in all five of our growth initiatives including our LifeGuard TM product. We estimate that nearly all of the sales growth resulted from these new initiatives as our core maintenance, repair and operations (“MRO”) business was flat to slightly negative primarily because of reduced industrial economic activity which we believe lowered discretionary spending.


Gross Profit

   
Three Months Ended
 
   
September 30,
 
(in millions)
 
2007
   
2006
   
Change
 
Gross profit
  $
24.8
    $
26.2
    $ (1.4 )     (5.3 )%
Gross profit as a percent of  sales
    25.1 %     29.1 %     (4.0 )%        

Our gross profit as a percentage of sales (gross margin) decreased to 25.1% in 2007 from 29.1% in 2006, a level that we cautioned last year was likely unsustainable. Our third quarter 2007 gross margin is comparatively lower primarily due to competitive pricing pressures experienced in the current market environment and unfavorable comparisons to the third quarter 2006 gross margin, which had increased 310 basis points over the third quarter of 2005 primarily due to inflation and market conditions in 2006. Reduced customer incentives due to a lower increase in sales from last year’s historic sales increase and better inventory management helped to partially offset the decrease in gross margin, while rising freight costs compressed gross margin.  Gross profit decreased $1.4 million or 5.3% due to lower gross margin, but was partially offset by an increase in sales.

Operating Expenses


   
Three Months Ended
 
   
September 30,
 
(in millions)
 
2007
   
2006
   
Change
 
Operating expenses:
                       
Salaries and commissions
  $
6.3
    $
6.0
    $
0.3
      4.9 %
Other operating expenses
   
4.8
     
4.2
     
0.6
      13.4 %
Management fee
   
     
     
     
%
Depreciation and amortization
   
0.1
     
0.1
     
      20.4 %
Total operating expenses
  $
11.2
    $
10.3
    $
0.9
      8.5 %
                                 
Operating expenses as a % of sales
    11.4 %     11.5 %     (0.1 )%        


Note:  Due to rounding, numbers may not add up to total operating expenses.

The increase in salaries and commissions is attributable to higher stock compensation expense and a higher number of employees. This increase was partially offset by lower commissions. The lower commissions are a result of lower gross profit dollars and lower gross margins.

Other operating expenses primarily increased due to the higher level of business activity and some public company expenses which were not incurred in the comparable period. Additional expenses were also incurred due to the higher number of employees.

There were no management fees in 2007 due to the cancellation of the management services agreement in connection with the IPO in June 2006.

Depreciation and amortization expense was consistent at $0.1 million for both periods.

Operating expenses as a percent of sales decreased slightly from 11.5% in 2006 to 11.4% in 2007.

Interest Expense

Interest expense decreased $0.2 million or 41.1%. Average debt was $14.3 million for the quarter versus $19.6 million for 2006.  Interest rates fell to 7.8% in the 2007 period, from 8.2% in the comparable 2006 period.


Income Taxes

Income taxes decreased $0.9 million or 15.3% as our income before income taxes decreased 13.5%. The effective income tax rate decreased from 38.4% in 2006 to 37.6% in 2007 due to lower estimated state income taxes in 2007.

Net Income

The Company achieved net income of $8.3 million compared to net income of $9.5 million in 2006, a decrease of 12.4%.


Comparison of the Nine Months Ended September 30, 2007 and 2006

Sales

   
Nine Months Ended
 
   
September 30,
 
(in millions)
 
2007
   
2006
   
Change
 
Sales
  $
269.9
    $
240.6
    $
29.3
      12.2 %

Internal growth accounted for the entire increase in sales. We achieved sales growth of 12.2% despite the comparison to a very strong growth rate of 62.5% in the first nine months of 2006, which was propelled by inflation, non-recurring 2006 hurricane sales and a substantial increase in inventory availability. We continue to penetrate our target markets in the Utility, Infrastructure, and Industrial sectors which drove sales in all five of our growth initiatives including our LifeGuard TM product. We estimate that nearly all of the sales growth resulted from these new initiatives as our core MRO business was flat to slightly negative because of non-recurring hurricane sales and reduced industrial economic activity which we believe lowered discretionary spending.


Gross Profit

   
Nine Months Ended
 
   
September 30,
 
(in millions)
 
2007
   
2006
   
Change
 
Gross profit
  $
71.1
    $
68.7
    $
2.4
      3.5 %
Gross profit as a percent of  sales
    26.4 %     28.6 %     (2.2 )%        

Gross margin moderated to 26.4% for the first nine months of 2007 from 28.6% in 2006. Our 2007 gross margin is comparatively lower primarily due to competitive pricing pressures experienced in the current market environment and unfavorable comparisons to 2006 gross margin, which had increased 270 basis points over the comparative period in 2005 due to inflation and market conditions in 2006. Improvements in purchasing leverage and freight management, reduced customer incentives due to a lower increase in sales from last year’s historic sales increase and better inventory management helped offset the decrease in gross margin. Gross profit increased $2.4 million or 3.5% due to improved sales volume, but was partially offset by lower gross margin.


Operating Expenses

   
Nine Months Ended
 
   
September 30,
 
(in millions)
 
2007
   
2006
   
Change
 
Operating Expenses:
                       
Salaries and commissions
  $
17.5
    $
17.0
    $
0.5
      2.6 %
Other operating expenses
   
13.9
     
11.8
     
2.0
      17.3 %
Management fee
   
     
0.2
      (0.2 )     (100.0 )%
Depreciation and amortization
   
0.3
     
0.3
     
0.1
      19.9 %
Total operating expenses
  $
31.7
    $
29.3
    $
2.3
      8.0 %
                                 
Operating expenses as a % of sales
    11.7 %     12.2 %     (0.5 )%        

Note:  Due to rounding, numbers may not add up to total operating expenses.

Salaries and commissions increased $0.5 million or 2.6% from 2006. Salaries increased due to a higher number of employees and an increase in compensation expense related to stock options, but were partially offset by lower commissions due to lower gross margins.

Other operating expenses primarily increased due to the higher level of business activity and public company expenses, which were not incurred in the comparable period. Additional expenses were also incurred due to the higher number of employees.

There were no management fees in 2007 due to the cancellation of the management services agreement in connection with the IPO in June 2006.

Depreciation and amortization expense was consistent at $0.3 million for both periods.

Operating expenses as a percent of sales decreased from 12.2% in 2006 to 11.7% in 2007 as we continue to leverage our existing distribution infrastructure and sales and marketing base to support the sales growth.

Interest Expense

Interest expense decreased $2.0 million or 75.2%, due primarily to the IPO proceeds received in June 2006, partially offset by the treasury stock buy back during the third quarter of 2007. Average debt was $10.7 million for 2007 compared to $38.3 million in the comparable 2006 period.  Interest rates fell to 7.8% in 2007 from 8.3% in 2006.

Income Taxes

Income taxes increased $0.6 million or 4.2% as our income before income taxes increased $2.1 million or 5.7%. The effective income tax rate decreased from 38.6% in 2006 to 38.1% in 2007 due to lower estimated state income taxes in 2007.

Net Income

The Company achieved net income of $24.0 million compared to net income of $22.5 million in 2006, an increase of 6.6%.
 
Impa ct of Inflation and Commodity Prices

Our results of operations are affected by changes in the inflation rate and commodity prices. Moreover, because copper and petrochemical products are components of the wire and cable we sell, fluctuations in the costs of these and other commodities have historically affected our operating results. To the extent we are unable to pass on to our customers cost increases due to inflation or rising commodity prices, it could adversely affect our operating results.  To the extent commodity prices decline, the net realizable value of our existing inventory could be reduced, and our gross profits could be adversely affected. As the Company turns its inventory in excess of four times a year, the impact of decreasing copper prices would primarily affect the results of the succeeding calendar quarter.


Liquid ity and Capital Resources

Our primary capital needs are for working capital obligations and other general corporate purposes and capital expenditures. Our primary sources of working capital are cash from operations supplemented by bank borrowings. During 2007, we have funded our capital expenditures through cash from operations. Our working capital amounted to $100.3 million at September 30, 2007 compared to $86.9 million at December 31, 2006.

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;
 
the ability to attract long-term capital with satisfactory terms;
 
additional stock repurchases;
 
cash flows generated from operating activities;
 
payment of dividends;
 
capital expenditures and
 
acquisitions.


Comparison of the Nine Months Ended September 30, 2007 and 2006
 
Our net cash provided by operations for the nine months ended September 30, 2007 was $12.0 million compared with net cash used by operations of $5.0 million in the prior year period. The primary difference between 2007 and 2006 net cash provided by / (used in) operations was the buildup of inventory in 2007 of $3.9 million versus the $23.4 million in 2006.  The 2006 buildup of inventory was necessary to support the dramatic growth in sales volume during that time period.   Our net income increased to $24.0 million in 2007 from $22.5 million in 2006. Accounts receivable increased $15.6 million due to increased sales. Accounts payable increased $4.7 million due to higher inventory levels. Inventory levels increased $3.9 million due to typical lower year end levels in December and additional stock inventory to support sales. The increase of $2.2 million in accrued and other current liabilities was primarily attributable to an increase in prepaid orders.

Net cash used in investing activities increased slightly to $0.4 million in 2007 compared to $0.3 million in 2006.

Net cash used in financing activities was $11.7 million compared to net cash provided financing activities of $5.3 million in 2006. The principal use of cash in financing activities was to purchase $27.9 million of treasury stock. The net borrowings on the revolver were $16.5 million, reflecting  purchases of treasury stock for $27.9 million net of cash flow from operations of $12.0 million.

Indebtedness

Our principal source of liquidity at September 30, 2007 was working capital of $100.3 million compared to $86.9 million at December 31, 2006. We also had available borrowing capacity of approximately $46.4 million at September 30, 2007 and $32.9 million at December 31, 2006 under our loan and security agreement with a commercial bank syndicate.

We believe that we will have adequate availability of capital to fund our present operations, meet our commitments on our existing debt, continue the stock repurchase program, continue to fund our dividend payments, 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 issue additional shares of common or preferred stock to raise funds.

Loan and Security Agreement

We have a loan and security agreement with a commercial bank syndicate that provides for a revolving loan through May 21, 2010. On September 28, 2007, we increased the facility to $75.0 million to fund the stock repurchase program and fund business growth.   The agreement also allows for the payment of dividends, not to exceed $10 million in the aggregate in any twelve month period; and, prior to August 30, 2009, the repurchase of stock in the aggregate amount of not more than $50 million.  The lenders have a security interest in all of our assets, including accounts receivable and inventory. The loan bears interest at the agent bank’s base interest rate.  Portions of the outstanding loan may be converted to LIBOR loans in minimum amounts ranging between $100,000 to $1.0 million and integral multiples of $100,000. Upon such conversion, interest is payable at LIBOR plus 1.00%.  We have entered into a series of one-month LIBOR loans, which, upon maturity, are either rolled back into the revolving loan or renewed under a new LIBOR contract.


Cont ractual Obligations

The following table describes our loan commitment at September 30, 2007:

   
Total
   
Less than
1 year
   
1-3 years
   
3-5 years
   
More than
5 years
 
   
(In thousands)
 
Term loans and loans payable
  $
28,595
    $
    $
28,595
    $
    $
 

There were no new material changes in operating lease obligations or non-cancellable purchase obligations since December 31, 2006.


Caution ary 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, 2006, 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.

Item 3 . Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

There have been no material changes from what we reported in the Form 10-K for the year ended December 31, 2006.

Foreign Exchange Risk

There have been no material changes from what we reported in the Form 10-K for the year ended December 31, 2006.

Item 4. Controls and Pro cedures

As of September 30, 2007, an evaluation was performed by the Company’s management, under the supervision and with the participation of the Company’s chief executive officer and chief financial officer, of the effectiveness of the Company’s disclosure controls and procedures.  Based on that evaluation, the chief executive officer and the chief financial officer concluded that the Company’s disclosure controls and procedures were effective.  There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


Part II. Other Information
 
Item 1 – Not applicable and has been omitted.


Item 1A.  Risk Factors

There have been no material changes in our risk factors from those disclosed in the Form 10-K for the year ended December 31, 2006.


Item 2.  U nregi stered Sales of Equity Securities and Use of Proceeds

(c)  The following table shows certain information relating to the Company’s purchases of common stock for the three months ended September 30, 2007 pursuant to the Company’s stock repurchase program.

Period
 
(a) Total number of shares purchased
   
(b) Average price paid per share
   
(c) Total number of shares purchased as part of publicly announced plans or programs (1)
   
(d) Maximum dollar value that may yet be used for purchases under the plan
 
July 1 – 31, 2007
   
     
     
     
 
August 1 – 31, 2007
   
1,179,965   
    $
18.39
     
1,179,965   
    $
28,299,839
 
September 1 – 30, 2007
   
318,146
    $
19.62
     
318,146
    $
22,058,389
 
Total
   
1,498,111   
    $
18.65
     
1,498,111  
    $
22,058,389
 

(1)  The Board of Directors approved a stock repurchase program on August 2, 2007 and on September 28, 2007 that the amount it is authorized to repurchase has been increased to $50.0 million.  The current stock repurchase program expires August 30, 2009.  All of the above purchases were made under the Company’s stock repurchase program.

Items 3 – 5 are not applicable and have been omitted.


Item 6.   Exhibits

(a)   Exhibits required by Item 601 of Regulation S-K .
 
Exhibit Number
 
Document Description
     
31.1
 
Certification by Charles A. Sorrentino pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2
 
Certification by Nicol G. Graham pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1
 
Certification by Charles A. Sorrentino and Nicol G. Graham pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


Sig natures 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


Date:  November 2, 2007
HOUSTON WIRE & CABLE COMPANY
   
   
BY: /s/ Nicol G. Graham
   
  Nicol G. Graham, Chief Financial Officer,


EXHIBIT INDEX

Exhibit Number
 
Document Description
     
 
Certification by Charles A. Sorrentino pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
 
Certification by Nicol G. Graham pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
 
Certification by Charles A. Sorrentino and Nicol G. Graham pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
19


Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Charles A. Sorrentino, Chief Executive Officer of Houston Wire & Cable Company, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2007 of Houston Wire & Cable Company;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; and

4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 
(b)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 
(c)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or personal performing the equivalent functions):

 
(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:     November 2, 2007
/s/ Charles A. Sorrentino
 
Charles A. Sorrentino
 
Chief Executive Officer
 
 


Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Nicol G. Graham, Chief Financial Officer of Houston Wire & Cable Company, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2007 of Houston Wire & Cable Company;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; and

4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 
(b)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 
(c)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or personal performing the equivalent functions):

 
(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:     November 2, 2007
/s/ Nicol G. Graham
 
Nicol G. Graham
 
Chief Financial Officer
 
 


Certifications of CEO and CFO Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of Houston Wire & Cable Company (the “Corporation”) for the fiscal quarter ended September 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Charles A. Sorrentino, as Chief Executive Officer of the Corporation, and Nicol G. Graham, as Chief Financial Officer of the Corporation, each hereby certifies, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge, that:

(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

/s/ Charles A. Sorrentino
Charles A. Sorrentino
Chief Executive Officer

November 2, 2007

/s/ Nicol G. Graham
Nicol G. Graham
Chief Financial Officer

November 2, 2007

This certification accompanies the Report pursuant to section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by Houston Wire & Cable Company for purposes of section 18 of the Securities Exchange Act of 1934, as amended.