Houston Wire & Cable Company
Houston Wire & Cable CO (Form: 10-Q, Received: 05/10/2011 17:02:23)

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 March 31, 2011
 
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

[logo]
(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  
YES ¨       NO ¨

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

Large Accelerated Filer    ¨
Accelerated Filer    x
Non-Accelerated Filer    ¨
Smaller Reporting Company     ¨

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 May 2, 2011 there were 17,763,237 outstanding shares of the registrant’s common stock, $0.001 par value per share.

 
 

 

HOUSTON WIRE & CABLE COMPANY
Form 10-Q
For the Quarter Ended March 31, 2011

INDEX

PART I. FINANCIAL INFORMATION
 
   
Item 1.  Financial Statements (Unaudited)
 
Consolidated Balance Sheets
2
Consolidated Statements of Income
3
Consolidated Statements of Cash Flows
4
Notes to Consolidated Financial Statements
5
   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
8
Overview
8
Results of Operations
10
Impact of Inflation and Commodity Prices
11
Liquidity and Capital Resources
12
Contractual Obligations
13
Cautionary Statement for Purposes of the “Safe Harbor ”
13
   
Item 3.   Quantitative and Qualitative Disclosures about Market Risk
13
   
Item 4.   Controls and Procedures
13
   
PART II. OTHER INFORMATION
14
   
Item 1.
Legal Proceedings
14
Item 1A.
Risk Factors
14
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
14
Item 3.
Defaults Upon Senior Securities
14
Item 4.
(Removed and reserved)
14
Item 5.
Other Information
14
Item 6.
Exhibits
15
   
Signature Page
16
 
 
1

 

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

   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
(unaudited)
       
Assets
           
Current assets:
           
Accounts receivable, net
  $ 64,558     $ 67,838  
Inventories, net
    73,817       67,503  
Deferred income taxes
    2,517       2,399  
Prepaids
    634       763  
Total current assets
    141,526       138,503  
                 
Property and equipment, net
    6,202       6,255  
Intangible assets, net
    15,090       15,557  
Goodwill
    25,082       25,082  
Other assets
    79       93  
Total assets
  $ 187,979     $ 185,490  
                 
Liabilities and stockholders' equity
               
Current liabilities:
               
Book overdraft
  $ 1,761     $ 3,055  
Trade accounts payable
    18,324       19,987  
Accrued and other current liabilities
    14,687       19,781  
Income taxes payable
    3,243       1,036  
Total current liabilities
    38,015       43,859  
                 
Debt
    59,403       54,825  
Other long term obligations
    137       141  
Deferred income taxes
    712       945  
Total liabilities
    98,267       99,770  
                 
Stockholders' equity:
               
Preferred stock, $0.001 par value; 5,000,000 shares authorized, none issued and outstanding
           
Common stock, $0.001 par value; 100,000,000 shares authorized: 20,988,952 shares issued: 17,763,237 and 17,748,487 outstanding at March 31, 2011 and December 31, 2010, respectively
    21       21  
Additional paid-in-capital
    59,075       58,642  
Retained earnings
    83,504       80,187  
Treasury stock
    (52,888 )     (53,130 )
Total stockholders' equity
    89,712       85,720  
Total liabilities and stockholders' equity
  $ 187,979     $ 185,490  

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

 
2

 


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

   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
             
Sales
  $ 99,727     $ 61,168  
Cost of sales
    77,475       48,661  
Gross profit
    22,252       12,507  
                 
Operating expenses:
               
Salaries and commissions
    7,304       5,119  
Other operating expenses
    6,063       4,395  
Depreciation and amortization
    727       142  
Total operating expenses
    14,094       9,656  
                 
Operating income
    8,158       2,851  
Interest expense
    333       76  
Income before income taxes
    7,825       2,775  
Income taxes
    3,007       1,070  
Net income
  $ 4,818     $ 1,705  
                 
Earnings per share:
               
Basic
  $ 0.27     $ 0.10  
Diluted
  $ 0.27     $ 0.10  
Weighted average common shares outstanding:
               
Basic
    17,664,890       17,652,881  
Diluted
    17,775,598       17,703,953  
                 
Dividend declared per share
  $ 0.085     $ 0.085  

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

 
3

 


HOUSTON WIRE & CABLE COMPANY
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)

   
Three Months
Ended March 31,
 
   
2011
   
2010
 
             
Operating activities
           
Net income
  $ 4,818     $ 1,705  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    727       142  
Amortization of capitalized loan costs
    14       9  
Amortization of unearned stock compensation
    554       562  
Provision for doubtful accounts
    34       60  
Provision for returns and allowances
    69       (62 )
Provision for inventory obsolescence
    (148 )     137  
Deferred income taxes
    (351 )     (213 )
Changes in operating assets and liabilities:
               
Accounts receivable
    3,177       3,075  
Inventories
    (6,166 )     4,925  
Prepaids
    129       2,789  
Book overdraft
    (1,294 )     (484 )
Trade accounts payable
    (1,663 )     (1,764 )
Accrued and other current liabilities
    (4,751 )     (1,993 )
Income taxes payable
    2,207       1,191  
Other long term obligations
    (4 )      
Net cash provided by (used in) operating activities
    (2,648 )     10,079  
                 
Investing activities
               
Expenditures for property and equipment
    (207 )     (109 )
Cash paid for acquisition
    (343 )      
Net cash used in investing activities
    (550 )     (109 )
                 
Financing activities
               
Borrowings on revolver
    104,302       53,825  
Payments on revolver
    (99,724 )     (62,304 )
Proceeds from exercise of stock options
    92       9  
Excess tax benefit for stock options
    29        
Payment of dividends
    (1,501 )     (1,500 )
Net cash provided by (used in) financing activities
    3,198       (9,970 )
                 
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.

 
4

 

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 and related services to the U.S. market through nineteen locations in twelve states throughout the United States. On June 25, 2010, the Company purchased Southwest Wire Rope LP (“SWWR”), its general partner Southwest Wire Rope GP LLC (“GP”) and SWWR’s wholly owned subsidiary, Southern Wire (“SW”) (collectively “the acquired companies”, or “the acquisition”). On January 1, 2011, the acquired companies were merged into HWC Wire & Cable Company. The Company has no other business activity.

The consolidated financial statements as of March 31, 2011 and for the three months ended March 31, 2011 and 2010 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 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. 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 allowance for doubtful accounts, 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 that we use for the preparation of our 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, 2010 filed with the SEC.

2. 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 include the dilutive effects of stock option and restricted stock awards.

The following reconciles the denominator used in the calculation of earnings per share:

   
Three Months Ended
 
   
March 31,
 
   
2011
 
2010
 
Denominator:
         
Weighted average common shares for basic earnings per share
 
17,664,890
   
17,652,881
 
Effect of dilutive securities
 
110,708
   
51,072
 
Weighted average common shares for diluted earnings per share
 
17,775,598
   
17,703,953
 

The weighted average common shares for diluted earnings per share exclude stock options to purchase 802,500 and 825,000 shares for the three months ended March 31, 2011 and 2010, respectively. These options have been excluded from the calculation of diluted securities, as including them would have an anti-dilutive effect on earnings per share for the respective periods.

3.   Business Combination

On June 25, 2010, the Company completed the acquisition of SWWR, GP and SWWR’s subsidiary, SW, from Teleflex Incorporated. The acquisition has been accounted for in accordance with Accounting Standards Codification (“ASC ”) Topic 805, Business Combinations. Accordingly, the total purchase price has been allocated to the assets acquired and liabilities assumed based on their fair values as of the acquisition date. The SWWR and SW businesses provide mechanical wire rope and related hardware to the industrial market; GP’s sole activity was to serve as the general partner of SWWR. Under the terms of the acquisition agreement, the purchase price was $50 million, subject to an adjustment based on the net working capital of the acquired companies as of the date of closing. The adjustment was $1.5 million making the total purchase price $51.5 million, of which $51.2 million was paid in 2010. The Company has elected to treat the acquisition as a stock purchase for tax purposes. The amount of goodwill deductible for tax purposes is $5,993. The acquisition was funded from the Company’s loan agreement. This acquisition expands the Company’s product offerings to the industrial marketplace that purchases its electrical wire and cable products.

 
5

 

Intangible assets, from the acquisition, consist of customer relationships - $11,630, trade names - $4,610, and non-compete agreements - $250. Customer relationships and non-compete agreements will be amortized over a 7 ½ and 1 year useful life, respectively. The weighted average amortization period for intangible assets is 7.1 years. Trade names are not amortized. As of March 31, 2011, accumulated amortization on the acquired intangible assets was $1,400, including amortization expense in the quarter of $467. Amortization expense to be recognized on the acquired intangible assets is expected to be $1,616 per year in 2012 through 2016.

The purchase accounting with respect to deferred taxes has not yet been finalized as the Company is still awaiting receipt from the seller of the tax basis of the acquired assets.

Under ASC Topic 805-10, acquisition related costs (e.g. legal, valuation and advisory) were not included as a component of consideration paid, but were accounted for as expenses in the periods in which the costs were incurred.

The results of operations of the acquired companies are included in the consolidated statement of operations prospectively from June 25, 2010. The unaudited pro forma combined historical results of the Company, giving effect to the acquisition assuming the transaction was consummated on January 1, 2010, are as follows:
   
Three Months ended
March 31, 2010
 
Sales
  $ 76,708  
Net income
    1,946  
Basic earnings per share
    0.11  
Diluted earnings per share
    0.11  

The unaudited pro forma combined historical results do not reflect any cost savings or other synergies that might result from the transaction. They are provided for informational purposes only and are not necessarily indicative of the combined results of operations for future periods or the results that actually would have been realized had the acquisition occurred as of January 1, 2010.

4.  Debt

On September 21, 2009, HWC Wire & Cable Company, as borrower, entered into the Second Amended and Restated Loan and Security Agreement (“Loan Agreement”), with the lenders thereunder and Bank of America, N.A., as agent, and the Company, as guarantor, delivered its Amended and Restated Guaranty of the borrowers’ obligations thereunder. The Loan Agreement provides for a $75 million revolving loan at the agent’s base interest rate and matures on September 21, 2013. An amendment dated April 27, 2011 has temporarily increased the credit facility to $85 million for a 120-day period. The agent has a security interest in all of the assets of the Company with the exception of the real property. Availability under the Loan Agreement is calculated as a percentage of qualifying accounts receivable and inventory. The Company was in compliance with the financial covenants governing its indebtedness at March 31, 2011.

The Loan Agreement contains certain provisions that may cause the debt to be classified as a current liability, in accordance with GAAP, if availability falls below certain thresholds, even though the ultimate maturity date under the Loan Agreement would remain as September 21, 2013. Availability has remained above these thresholds through March 31, 2011. This temporary increase mentioned above was necessary due to the recent need to build working capital for the increased and anticipated business activity. Based on current projections, the Company believes it will have adequate availability subsequent to the expiration of the temporary increase.


 
6

 

5.  Stockholders’ Equity

In 2007, the Board of Directors approved a stock repurchase program, where the Company is authorized to purchase up to $75 million of its outstanding shares of common stock, depending on market conditions, trading activity, business conditions and other factors. The program was initially scheduled to expire on December 31, 2009 but has been extended through December 31, 2011. Shares of stock purchased under the program are currently being held as treasury stock and may be issued upon the exercise of options, as restricted stock, to fund acquisitions, or for other uses as authorized by the Board of Directors. During the quarters ended March 31, 2011 and 2010, the Company did not repurchase any of its outstanding shares.

During the first quarter of 2011, the Board of Directors approved a quarterly dividend of $0.085 per share payable to stockholders. Dividends paid were $1,501 and $1,500 during the three months ended March 31, 2011 and 2010, respectively.

6. Stock Based Compensation

Stock Option Awards

There were no options granted during the first quarter of 2011 or 2010.

Restricted Stock Awards

On March 11, 2011, the Company granted 2,500 voting shares of restricted stock under the 2006 Plan to a recently promoted member of the management team. These shares vest in five equal annual installments on the first five anniversaries of the date of the grant, as long as the recipient is then employed by the Company. Any dividends declared will be accrued and paid to the recipient when the related shares vest.

Restricted common shares, under fixed plan accounting, are measured at fair value on the date of grant based on the number of shares granted, estimated forfeitures and the quoted price of the common stock. Such value is recognized as compensation expense over the corresponding vesting period which ranges from one to five years.

Total stock-based compensation cost was $554 and $562 for the three months ended March 31, 2011 and 2010, respectively. Total income tax benefit recognized for stock-based compensation arrangements was $213 and $217 for the three months ended March 31, 2011 and 2010, respectively.

As of March 31, 2011, there was $2,982 of total unrecognized stock compensation cost related to nonvested share-based compensation arrangements. The cost is expected to be recognized over a weighted average period of approximately twenty-seven months.

7. Commitments and Contingencies

As part of the June 2010 acquisition, the Company assumed the liability for the post-remediation monitoring of the water quality at one of the acquired facilities in Louisiana. The liability, estimated at $137 as of March 31, 2011, relates entirely to the cost of the monitoring, which the Company estimates will be incurred over approximately the next six 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 Commission 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 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, 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 wire and 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.

As of December 31, 2010, the Company had a past due account receivable of $4,800. The customer had withheld payment due to a product dispute. That dispute has been resolved, and the Company received payment of the account receivable in the first quarter of 2011.

 
7

 

There are no legal proceedings pending against or involving the Company that, in management's opinion, based on the current known facts and circumstances, are expected to have a material adverse effect on the Company's consolidated financial position, cash flows, or results of operations.

8.  Subsequent Events

On May 3, 2011, the Board of Directors approved a dividend on the shares of common stock of the Company in the amount of $0.09 per share, payable on May 27, 2011, to stockholders of record at the close of business on May 13, 2011.
 
Following the Annual Meeting of Stockholders on May 3, 2011, the Company awarded restricted stock units with a value of $50,000 to each non-employee director who was re-elected, for an aggregate of 18,204 restricted stock units. Each award of restricted stock units vests at the date of the 2012 Annual Meeting of Stockholders. Upon vesting, the non-employee directors are entitled to receive an equal number of shares of the company's common stock, together with dividend equivalents from the date of grant, at such time as the director’s service on the board terminates for any reason.
 
On April 27, 2011, HWC Wire & Cable Company, the lenders and Bank of America, N.A., as agent, entered into an amendment to the Loan Agreement temporarily increasing the amount of available funds by an additional $10 million for 120 days, through August 31, 2011. The increase was necessary to fund the recent buildup in working capital for the increased and anticipated business activity. As a result of increased borrowings, in April 2011, availability under the Loan Agreement fell below the minimum thresholds set out in the Loan Agreement which would cause the debt to be classified as a current liability in accordance with GAAP. The April 27 amendment also contained the lenders’ waiver of the rights that could have caused the debt to be classified as a current liability.

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, 2010.

Overview

We are one of the largest distributors of wire and cable and related services in the U.S. industrial distribution market. The June 25, 2010 purchase of SWWR, GP, and SW allowed the Company to expand its product offerings to include mechanical wire and cable and related hardware. 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

Critical accounting policies are those that both are important to the accurate portrayal of a company's financial condition and results of operations, 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, current economic conditions 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 $0.1 million per year. A 20% change in our estimate at March 31, 2011 would have resulted in a change in income before income taxes of $0.1 million.

 
8

 

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 March 31, 2011 would have resulted in a change in income before income taxes of $0.1 million.
 
Inventories

Inventories are valued at the lower of cost, using the average cost method, or market. We continually monitor our inventory levels at each of our distribution centers. 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 March 31, 2011 would have resulted in a change in income before income taxes of $0.6 million.

Intangible Assets

The Company’s intangible assets, excluding goodwill, represent purchased trade names, customer relationships, and non-compete agreements. Trade names are not being amortized and are treated as indefinite lived assets. Trade names are tested for recoverability on an annual basis in October of each year. This test was performed in October 2010 and no impairment was deemed necessary. The Company assigns useful lives to its intangible assets based on the periods over which it expects the assets to contribute directly or indirectly to the future cash flows of the Company. Customer relationships and non-compete agreements are being amortized over a 7 ½ year and 1 year useful life, respectively. If events or circumstances were to indicate that any of the Company’s definite-lived intangible assets might be impaired, the Company would assess recoverability based on the estimated undiscounted future cash flows to be generated from the applicable intangible asset.

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 and therefore as a reduction of 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 estimate of purchases to date relative to the purchase levels that mark our progress toward earning the rebates. We continually revise these estimates to reflect actual rebates earned based on actual purchase levels and all estimated rebate amounts are reconciled. A 20% change in our estimate of total rebates earned during the three months ended March 31, 2011 would have resulted in a change in income before income taxes of $0.3 million.

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 March 31, 2011, our goodwill balance was $25.1 million, representing 13.3% of our total assets.

We test goodwill for impairment annually, or more frequently if indications of possible impairment exist, by applying a fair value-based test. In October 2010, we performed our annual goodwill impairment test 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 market 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.

 
9

 

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
 
   
March 31,
 
   
2011
   
2010
 
             
Sales
    100.0 %     100.0 %
Cost of sales
    77.7 %     79.6 %
Gross profit
    22.3 %     20.4 %
                 
Operating expenses:
               
Salaries and commissions
    7.3 %     8.4 %
Other operating expenses
    6.1 %     7.2 %
Depreciation and amortization
    0.7 %     0.2 %
Total operating expenses:
    14.1 %     15.8 %
                 
Operating income
    8.2 %     4.7 %
Interest expense
    0.3 %     0.1 %
                 
Income before income taxes
    7.8 %     4.5 %
Income taxes
    3.0 %     1.7 %
                 
Net income
    4.8 %     2.8 %

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

Comparison of the Three Months Ended March 31, 2011 and 2010

Sales

   
Three Months Ended
 
   
March 31,
 
(Dollars in millions)
 
2011
 
2010
   
Change
 
Sales
 
$
99.7
 
$
61.2
   
$
38.6
     
63.0
%

Sales in the first quarter of 2011 increased 63% to $99.7 million from $61.2 million in the first quarter of 2010. The primary reasons for this increase were $17.4 million in sales from the businesses acquired in June of 2010 and a 34.5% increase in organic sales. Continued broad market recovery increased demand in our core business sectors of capital projects and Repair and Replacement, also referred to as Maintenance, Repair and Operations (“MRO”). Project activity within our five long term internal growth initiatives encompassing Emission Controls, Engineering & Construction, Industrials, LifeGuard™ (and other private branded products) and Utility Power Generation was up approximately 50 - 55% due to improving economic conditions and previously booked backlog demand. MRO sales also benefited from the stronger economy and the release of formerly delayed work during the prior year period. We estimate organic MRO sales increased approximately 20 - 25% in the first quarter of 2011 versus the first quarter of 2010. Project backlog for our growth initiatives in the first quarter of 2011 remained solid as a result of our continued penetration into these markets. 
 
Gross Profit
 
   
Three Months Ended
 
        
March 31,
 
(Dollars in millions)
 
2011
   
2010
   
Change
 
Gross profit
  $ 22.3     $ 12.5     $ 9.7       77.9 %
Gross profit as a percent of sales
    22.3 %     20.4 %     1.9 %        
 
 
10

 

Gross profit increased 77.9% to $22.3 million in 2011 from $12.5 million in 2010.  The increase in gross profit was attributed to an increase in our pre-acquisition business and the contribution from the acquired operations. Gross profit as a percentage of sales (gross margin) increased to 22.3% in 2011 from 20.4% in 2010 due to increased demand, rising commodity prices, a better macroeconomic business environment and the acquisition.

Operating Expenses
 
   
Three Months Ended
 
   
March 31,
 
(Dollars in millions)
 
2011
   
2010
   
Change
 
Operating expenses:
                       
Salaries and commissions
  $ 7.3     $ 5.1     $ 2.2       42.7 %
Other operating expenses
    6.1       4.4       1.7       38.0 %
Depreciation and amortization
    0.7       0.1       0.6       412.0 %
Total operating expenses
  $ 14.1     $ 9.7     $ 4.4       46.0 %
                                 
Operating expenses as a percent of sales
    14.1 %     15.8 %     (1.7 )%        
 
Note:  Due to rounding, numbers may not add up to total operating expenses.

Salaries and commissions increased primarily due to the additional personnel from the acquisition and increases in commissions associated with higher organic sales volumes and related profitability.
 
Other operating expenses increased primarily due to the additional operations obtained from the acquisition and increased operational expenses associated with higher sales.

The depreciation and amortization increase is primarily attributable to the assets acquired in the acquisition.

Operating expenses as a percentage of sales decreased to 14.1% in 2011 from 15.8% in 2010. This decrease is attributed to the ongoing cost control initiatives and operating leverage from our legacy business, partially offset by the acquisition.

Interest Expense

Interest expense increased 338.2% to $0.3 million in 2011 from $0.1 million in 2010 due to higher debt levels as the acquisition was funded entirely from the Company’s loan agreement. Average debt was $55.4 million in 2011 compared to $12.6 million in 2010. The average effective interest rate increased slightly to 2.3% in 2011 from 2.2% in 2010. This increase was primarily due to a larger applicable LIBOR spread as a result of the higher debt-to-EBITDA ratio caused by the acquisition.

Income Taxes

Income tax expense increased $1.9 million or 181.0% to $3.0 million in 2011 as our income before taxes increased 182.0%. The effective income tax rate decreased to 38.4% in 2011 from 38.6% in 2010.
 
Net Income

We achieved net income of $4.8 million in 2011 compared to $1.7 million in 2010, an increase of 182.6%.

Impact of Inflation and Commodity Prices

Our results of operations are affected by changes in the inflation rate and commodity prices. Moreover, because copper, steel 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. If we were to turn our inventory approximately four times a year, the impact of severe fluctuations in copper and steel prices would primarily affect the results of the succeeding calendar quarter.

 
11

 

Liquidity and Capital Resources

Our primary capital needs are for working capital obligations, dividend payments, the stock repurchase program and other general corporate purposes, including acquisitions and capital expenditures. 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;
 
the ability to attract long-term capital with satisfactory terms;
 
additional stock repurchases;
 
cash flows generated from (used in) operating activities;
 
payment of dividends;
 
capital expenditures; and
 
acquisitions.

Comparison of the Three Months Ended March 31, 2011 and 2010

Our net cash used in operating activities was $2.6 million in 2011 compared to cash provided by operating activities of $10.1 million in 2010. Our net income increased by $3.1 million or 182.6% to $4.8 million in 2011 from $1.7 million in 2010.

Changes in our operating assets and liabilities resulted in cash used in operating activities of $8.4 million in 2011. Inventories increased $6.2 million in order to support the increased and anticipated sales activity. Accrued and other current liabilities decreased $4.8 million primarily due to a reduction in volume rebates payable to our customers, lower prepayments on cable management projects as many of these projects were shipping in 2011 and reduced payroll related accruals. The decrease in accounts receivable of $3.2 million was attributed to the receipt of an amount outstanding since 2009 due to a product dispute, partially offset by higher receivables from increased sales.

Net cash used in investing activities was $0.6 million in 2011 compared to $0.1 million in 2010. The increase was attributable to the final payment due on the acquisition of $0.3 million and capital expenditures associated with the acquired businesses.

Net cash provided by financing activities was $3.2 million in 2011 compared to cash used in financing activities of $10.0 million in 2010. Net borrowings on the revolver of $4.6 million and the payment of dividends of $1.5 million were the main components of financing activities in 2011.

Indebtedness

Our principal source of liquidity at March 31, 2011 was working capital of $103.5 million compared to $94.6 million at December 31, 2010. We also had available borrowing capacity of approximately $15.6 million at March 31, 2011 and $20.2 million at December 31, 2010 under our $75 million 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 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 further suitable acquisition opportunities or working capital needs arise that would require increased financing, we believe that our financial position and earnings history provide a solid base for obtaining such financing resources at competitive rates and terms. Additionally, based on market conditions, we may issue more shares of common or preferred stock to raise funds.
 
Loan and Security Agreement

We have a Loan Agreement with certain lenders and Bank of America, N.A., as agent, that provides for a $75 million revolving loan. We amended and restated the Loan Agreement in September 2009 to extend the maturity through September 21, 2013 and amended the Loan Agreement in April 2011 to increase the facility to $85 million for a 120-day period. This temporary increase was necessary due to the recent need to build working capital for the increased and anticipated business activity. Based on current projections, the Company believes it will have adequate availability subsequent to the expiration of the temporary increase.

 
12

 

The Loan Agreement does not limit the amount of dividends we may pay or stock we may repurchase, as long as we are not in default under the Loan Agreement and we maintain defined levels of fixed charge coverage and minimum levels of availability. The agent has a security interest in all of our assets except for the real property. The loan bears interest at the agent’s base interest rate.  Portions of the outstanding loan may be converted to LIBOR loans in minimum amounts of $1.0 million and integral multiples of $0.1 million. Upon such conversion, interest is payable at LIBOR plus a margin ranging from 1.25% to 1.75%, depending on the Company’s debt-to-EBITDA ratio. 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. The Loan Agreement contains certain provisions that may cause the debt to be classified as a current liability, in accordance with GAAP, if availability falls below certain thresholds, even though the ultimate maturity date under the Loan Agreement would remain as September 21, 2013.
 
Contractual Obligations

The following table summarizes our loan commitment at March 31, 2011:
In thousands
 
Total
   
Less than
  year
   
1-3 years
   
3-5 years
   
More
than
5 years
 
                               
Total debt
  $ 59,403     $     $ 59,403     $     $  

There were no new material changes in operating lease obligations or non-cancellable purchase obligations since December 31, 2010.

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, 2010, 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

There were no material changes to our market risk as set forth in Items 7A and 7 of our Annual Report on Form 10-K for the year ended December 31, 2010.

Item 4. Controls and Procedures

As of March 31, 2011, 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 March 31, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 
13

 

Part II. Other Information

Item 1 – Not applicable and has been omitted.

Item 1A.  Risk Factors

There were no material changes in the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information about our purchases of common stock for the three months ended March 31, 2011 pursuant to the Company’s stock repurchase program.

Period
 
Total number
of shares
purchased
   
Average  price
paid  per
share
   
Total number
of shares
purchased as
part of publicly
announced
plans    or
programs  (1)
   
Maximum
dollar value
that may yet
be used for
purchases
under the
plan
 
January 1 – 31, 2011
        $           $ 19,385,303  
February 1 – 28, 2011
                      19,385,303  
March 1 – 31, 2011
                    $ 19,385,303  
                                 
Total
        $                

(1)
The board authorized a stock repurchase program of $30 million in August 2007. This amount was increased to $50 million in September 2007 and to $75 million effective January 2008. There were no purchases made under the Company’s stock repurchase program in the first quarter of 2011.

Item 3 – Not applicable and has been omitted.

Item 4 – (Removed and reserved)

Item 5 – Not applicable and has been omitted.  

 
14

 

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.
 
 
15

 

Signature

 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:  May 10, 2011
HOUSTON WIRE & CABLE COMPANY
   
 
BY:
/s/ Nicol G. Graham
 
Nicol G. Graham, Chief Financial Officer
 
 
16

 
 
EXHIBIT INDEX

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.
 
 
17

 

Exhibit 31.1

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

I, Charles A. Sorrentino, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011 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;

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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)
Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 
(c)
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

 
(d)
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; and

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 persons 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:   May 10, 2011
/s/ Charles A. Sorrentino
 
Charles A. Sorrentino
 
Chief Executive Officer
 
 
 

 

Exhibit 31.2
 
Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Nicol G. Graham, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011 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;

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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))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)
Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 
(c)
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

 
(d)
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; and

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 persons 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:   May 10, 2011
/s/ Nicol G. Graham
 
Nicol G. Graham
 
Chief Financial Officer

 
 

 

Exhibit 32.1
 
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 March 31, 2011 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.

Date:   May 10, 2011
/s/ Charles A. Sorrentino
 
Charles A. Sorrentino
 
Chief Executive Officer
   
Date:   May 10, 2011
/s/ Nicol G. Graham
 
Nicol G. Graham
 
Chief Financial Officer
 
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.